Wrigley's Case Study

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Optimal Capital Restructure
William Wrigley Jr. Company is exploring whether it is optimal to recapitalise with taking on $3 billion of debt. Three options are revised; borrow and repurchase shares, dividend payouts or continue to function with full equity. Debt will provide a tax shield of $1.2 billion given the tax rate is 40%, this should increase the market share price to $61.53 per share. The viable method for the company is to utilize this debt to repurchase shares. The will not only increase Wrigley’s market value, via the debt shield, but also signal to market that management believes Wrigley’s is undervalued, something the dividend payment won’t achieve.
This case study will examine the option for
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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).
Another factor for management to consider would involve the clientele effects. Presently the Wrigley family controls 21% of common shares and 58% of Class B common stock. Assuming the Wrigley family do not sell any shares, the repurchase will raising their voting control from 46.6% to a majority control over voting rights at 50.6% (see appendix2.2). This isn’t deemed significant as the Wrigley family already previously possessed majority of voting rights
Dividend Payout
This option involves distributing the $3 billion to shareholders in dividends. The dividend would be issued as a once-off payment in order to prevent an expectation of receiving recurring dividends. Providing $3billion in dividends will result in the share price declining to $48.63 from $61.53 with the earnings per share (EPS) declining to $0.60 (see appendices 1.2 & 4). Despite this however, investors should be indifferent as the amount received as a dividend would negate

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