Wrigley Jr. Company

Weighted Average Cost of Capital (WACC) is the combined rate at which a company repays borrowed capital and comes from debit financing and equity capital. WACC can be reduced by cutting debt financing costs, lowering equity costs, and capital restructuring. In order to minimize WACC, companies can issue bonds by lowering the interest rate they offer to investors as well as, cutting down

1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.

According to MM theory, Wrigley’s Beta will increase to 0.87 with the required return on equity to 11.78% (see appendices 1.3 & 1.4) along with the debt rate of 13% (see appendices 1.3 & 1.4). This new rates would change Wrigley’s WACC to 10.91% (see appendix 1.5), which is basically the same as Wrigley’s original WACC. The EPS which would be cut to $0.60, will rise with the reduction of shares. The new EPS would be $0.76 (see appendix 4.0).

The debt interest coverage ratio is EBIT/Debt Interest. The interest on the debt is $390 million as calculated above. The EBIT in 2001 is $527,366,000. So debt coverage ratio is 527,366/390,000=1.35 If Wrigley’s gets a non-investment grade rating then their financial flexibility is severely limited.

It provides an evaluation of the bond issuer’s financial strength and ability to pay back the bond’s principle and interest. The bond rating also provides investors with some sense of security when investing in a particular firm. A higher bond rating implies a lower likelihood for the firm to default. Investors would feel more secured investing in such a bond, thus demanding a relatively lower rate of return. As such, high rated bonds enable the issuer to enjoy a lower cost of borrowing. A lower bond rating, on the other hand, serves as a negative signal to investors on the firm’s ability to repay debt obligations.

WACC (Weighted Average Cost of Capital) is a market weighted average, at target leverage, of the cost of after tax debt and equity.

The weighted-average cost of capital before the recapitalization is 10.9%. WACC= Wd (1-T) Rd +We Re, because the company doesn’t have debt before the debt portion of value of company is 0%, cost of debt rate is 0%, and the cost of equity is 10.9%. After recapitalization, if

The WACC is the weighted average cost of capital. It is a calculation of the firms cost of capital taking into account the relevant weight of equity and debt as a proportion of the total. The cost of equity or KE calculated using a risk free rate example German 5yr government bond, the firm’s beta and the return on the market. The firm’s beta is a calculation of the firms exposure to the market, a beta of less than 1 indicates that the firm is not as influenced by external factors as the average firm in that market. A beta greater than 1 indicates that the firm is more heavily exposed to market factors than the average firm in that market. The formula I will be

The study generally aims to fill the gap in the literature by empirically examining the relationship between the use of debt in the capital structure of companies and the factors related to the capital structure. Specifically the objectives of this research are to achieve the following:-

They argued that in efficient markets the debt-equity choice is irrelevant to the value of the firm and benefits of using debts will compensate with decrease of companies stock. Prior to Modigliani and Miller theory, conventional perspective believed that using financial leverage increases company’s value. In this respect, there is an optimized

Rational investors are likely to infer a higher firm value from a higher debt level. Thus, these investors are likely to bid up a firm’s stock price after the firm has issued debt in order to buy back equity. We say that investors view debt as a signal of firm value. Moreover, corporations can

Change in the capital structure of the company over the 5-year period. Reasons for the change.

WACC means weighted average cost of capital. The company has to bear on average a cost of 10.91 % to finance its operations. However it is significant to note that cost of equity is really high as compared to cost of debt this makes SanDisk a less risky company in respect of debt. But SanDisk can use leverage and geared up its operations by injecting debt as fresh blood in

the financial condition of company will affect their investment directions such as the project with product quality enhancement. So the incentives of investing can be affected by company financial conditions. In addition, the product and input market interactions also can affect company financial condition such as how the firm dealing with product recall and recovering from the recall. Maksimovic and Titman (1991) also argued that debt financing will affect their incentive in investing high quality or enhancement product because the debt financing make company more pressure on cash flow and cutting cost for getting short term profit and in case of bankruptcy. Titman (1984) also mentioned that the relationship between firms and suppliers

Net income approach- According to this approach the cost of debt and the cost of equity remain unchanged when that equity ratio varies. Therefore WACC declines with an increase in that equity ratio. In this approach it is consider that the debt and