THE WM. WRIGLEY JR. COMPANY: CAPITAL STRUCTURE, VALUATION, AND COST OF CAPITAL
The following questions relate to case no. UVAF-1482 WM Wrigley Jr. Company
1. Discuss the impact of recapitalization for Wrigley’s share price. Why would shareholder expectations and preceptions change? Your answer should refer to control issues, signalling, incentive and clientele effects as well as changes to the present value of future cash flows as a consequence of the recapitalization. You do not need to illustrate your answer with calculations.
2. What will be the effects of issuing $3 billion of new debt and using the proceeds either to pay a dividend or to repurchase shares on the following (your answer should include all calculations and discuss the results):
a. Wrigley’s outstanding shares (price per share and number of shares), given the tax rate of 40%?
b. Wrigley’s book value of equity (per share)?
c. Earnings per share if future operating profits remain at $514, fall to $214, or increase to $1114 (see Exhibit 8 for a proforma)?
3. What is Wrigley’s current (precapitalization) weighted-average cost of capital (WACC), if the risk premium is 7%? How will Wrigley’s WACC change with the capitalisation? Explain why the WACC would change and the implications of this for firm value. Your answer should refer to relevant theories and clearly state any assumptions made.
4. Prepare a powerpoint presentation that summarises the findings from your report. You should assume that the intended audience is the Capital Expenditure Committee and that the presentation should not last longer than 15 minutes.
5. Style and format marks
TOTAL 40 marks
You will need to think carefully about how best to explain your case within the permitted number of words (5000), using, for example, an appropriate mix of text, drawings, diagrams and tables, where relevant, supplemented by information contained in appendices.
The specified word count (5000) refers to the main body of the report and does not include front cover, title page, contents page, executive summary, reference list, bibliography or appendices. The word count does include headings, tables and in-text citations, but not equations or diagrams.
Appendices themselves will not be marked, so make sure that summary calculation tables are included in the main body of your report where applicable. However, inappropriate use of appendices will be taken into consideration when awarding the final mark.