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Case 34:The Wm. Wrigley Jr. Company Group member: Ruiqi Ding Xiang Zhang Mengliang Chen Introduction: The decision by William Wrigley Jr. Company to do a $3 billion leveraged recapitalization through a dividend or share repurchase could create significant new value for the company. The purpose of this report is to analyze the impact this will have on the firm’s value, comment on the appropriateness of Wrigley’s debt level in the event of the proposed bond issue and make recommendations as to whether or not the firm should in fact follow through with the issue. The items of interest that will be analyzed include: the impact on share price, cost of capital, earnings per share, agency cost of debt, voting control, signaling &…show more content…
The clientele effect theorizes that a firm’s share price will move according to the demands and goals of investors in reaction to dividend policy. Wrigley’s investors may expect future dividend pay-outs following a $3 billion dividend and sell their stock if the firm does not provide this placing downward pressure on the share price. Rejection of Debt Debt provides tax benefits is conditional to its’ financial engineering. To undertake debt, it increases the risk of insolvency (Altman & Hotchkiss, 1993). With the rejection of debt, the firm has at its disposal more equity in the future if positive NPV projects were to arise. This positions Wrigley to currently have financial flexibility and also endeavor to avoid financial distress. Repurchase Shares With a share repurchase program, the debt raised would be used to repurchase $3 billion in shares from the market. As discussed, the introduction of $3 billion debt to the capital structure would increase the share price. This would theoretically mean the share price would remain at $61.53. However, findings show that there are unexpected positive annual earnings following the share repurchase. This supports the hypothesis that a share repurchase can be a signaling mechanism in a business due to asymmetrical information – where the management knows the firm’s performance exceeds the market’s expectations and thus undervalued which could lead to a further increase in the share price. According to MM theory,

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