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    Wrigley

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    sotki4
    1) The document discusses capital structure options for Wm. Wrigley Jr. company, including leveraging the balance sheet by borrowing $3 billion to pay a dividend or repurchase shares. 2) Leveraging the balance sheet would lower the cost of capital from 7.15% to 8.26% and increase shareholder value by taking advantage of tax shields on interest payments. 3) Repurchasing shares would have a greater positive effect than paying a dividend by lowering the number of outstanding shares and increasing EPS more substantially. However, leveraging also increases financial risk if earnings were to decline in the future.

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    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd

    Wrigley

    Uploaded by

    sotki4
    1K views14 pages
    1) The document discusses capital structure options for Wm. Wrigley Jr. company, including leveraging the balance sheet by borrowing $3 billion to pay a dividend or repurchase shares. 2) Leveraging the balance sheet would lower the cost of capital from 7.15% to 8.26% and increase shareholder value by taking advantage of tax shields on interest payments. 3) Repurchasing shares would have a greater positive effect than paying a dividend by lowering the number of outstanding shares and increasing EPS more substantially. However, leveraging also increases financial risk if earnings were to decline in the future.

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    1) The document discusses capital structure options for Wm. Wrigley Jr. company, including leveraging the balance sheet by borrowing $3 billion to pay a dividend or repurchase shares. 2) Leveraging the balance sheet would lower the cost of capital from 7.15% to 8.26% and increase shareholder value by taking advantage of tax shields on interest payments. 3) Repurchasing shares would have a greater positive effect than paying a dividend by lowering the number of outstanding shares and increasing EPS more substantially. However, leveraging also increases financial risk if earnings were to decline in the future.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    1K views14 pages

    Wrigley

    Uploaded by

    sotki4
    1) The document discusses capital structure options for Wm. Wrigley Jr. company, including leveraging the balance sheet by borrowing $3 billion to pay a dividend or repurchase shares. 2) Leveraging the balance sheet would lower the cost of capital from 7.15% to 8.26% and increase shareholder value by taking advantage of tax shields on interest payments. 3) Repurchasing shares would have a greater positive effect than paying a dividend by lowering the number of outstanding shares and increasing EPS more substantially. However, leveraging also increases financial risk if earnings were to decline in the future.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 14

    THE WM. WRIGLEY JR.

    COMPANY:
    CAPITAL STRUCTURE, VALUATION, AND COST OF CAPITAL

    3/14/12

    Cliquez pour modifier le style des Jordan Benchetrit Sotir Dimovski Fabrice Galan sous-titres du masque

    Introduct ion

    Interests are at their lowest rate for the past 50 years. Even though the crisis, corporate deleveraging has gone too far and CEOs are missing opportunities to create value. The Wm. Wrigley Jr. company is totally unleveraged. It used to be the worlds largest manufacturer and seller of 3/14/12 chewing gums and has several well

    Overview : Effects of the recapitalization

    Borrow $ 3 billion to pay dividend or to repurchase shares

    Effects :

    On Prices : outstanding shares and book value of equity On Earning Per Share and Price Earning Ratio On debt interest coverage ratio and financial flexibility On the voting control of the Wrigley family On the Cost of Capital
    3/14/12

    Effect of a Leveraged Recapitalization


    Leverage has positive effect on the firm value. It is the benefit of debt tax shields. This savings derives from the deductibility of interest expense from the firms taxable income. According to Modigliani & Miller (M&M), the impact of those tax savings is seen in the second term of this equation:
    3/14/12

    Comparison dividends / shares repurchase


    Dividends Effect on no Market Value Equity Effect on No outstanding Shares Cash change yes for the firm Cash for Yes Shareholders Effect on Share Negative Share repurchase no

    Yes

    yes No Positive
    3/14/12

    Effect on prices (1)

    After After Recapitalizatio Recapitalizatio n - Dividend n - Repurchase Market Value 11.3 Billion 11.3 Billion Equity # of Outstanding 232.441 Million 183.677 Million Shares Add. Cash Received 3 Billion 0
    3/14/12

    Effect on prices (2)

    MV Equity + PV Debt Tax Shield 13.1 Billion + (3 Billion x 40%) = $14.3 Billion 14.3 B/232.441 M = $61.52 per Share MV Equity + PV Debt Tax Shield 13.1 Billion + (3 Billion x 40%) = $14.3 Billion

    Shares repurchased: 3 B/$61.52 = $ 48.764 M Price unchanged MV equity : (232 441 48 764)* 61.52 = $11,3B

    Effect on the stock price: 14,3/232 441m 3B/232 441M = 61,52 12,91 = 48,61$ 3/14/12 per share

    Impact on EPS & PER


    Capitalization EPS Status
    Before $1,36 Recapitalization

    Why
    (EBIT*0,6)/ 232 441M shares

    +/- 10% change in EBIT


    +/- 10% change in EPS +/- 38% change in EPS

    After $0,35 (EBIT*0,6 - 0,13*3B)/ 232 Recapitalization 441M shares Dividends After $0,45 (EBIT*0,6 0,13*3B )/ 183 Recapitalization 684 M shares Repurchase Capitalization PER

    +/- 38% change in EPS

    Status

    Why?

    Before Recapitalization After Recapitalization Repurchase

    $45,19 $137,1

    MV equity/ Net earnings 13,1B/EBIT*0,6 Price/EPS 48,61/0,35

    3/14/12

    Impact on Debt Interest Coverage and Financial Flexibility

    Before Interest Coverage Financial Flexibility n/a

    After

    1,35* (in line with BB/B rating) Good Poor (more than 26% drop of EBIT) company may not be able to meet its debt payments
    3/14/12

    Impact on Voting Control & Book Value


    Before Change in Capital Wrigley Family Shares Voting outstandin rights g 39 858 247 318 287 176 189 800 42 641 232 441 641 232 441 After Dividend Wrigley Fmily Voting rights 39 858 247 318 287 176 141 036 After Share repurchase* Wrigley Family Voting rights Total Voting rights 189 800 426 410 616 210 Total Voting rights 189 800 426 410 616 210 Shares Total outstandi Wrigley Voting ng Shares rights 189 800 42 641 232 441 141 036 426 410 567 446

    Shares outstanding

    Wrigley Shares

    Wrigley Shares 189 800 42

    Class A

    189 800

    189 800

    39 858

    Class B

    42 641

    42 641

    42 641

    247 318

    Total

    232 441

    232 441

    183 677

    287 176

    Wrigley Voting Power

    47%

    47%

    51%

    Book Value of Equity Before Dividends

    Share repurchase 3/14/12

    Impact on Cost of Capital


    Before Recapitalization 100% * 0 n/a 0,75 7,15% 7,54% 10,9% 7,15% After Recapitalization 79%* 21%* 7,8% 0,87 7,98 % 8,38% 11,74% 8,26% 3/14/12

    Weight of Equity Weight of Debt After-tax Cost of Debt Beta Cost of Equitya Cost of Equityb Cost of Equityc WACCa

    Impact on Cost of Capital (calculation)


    BetaL = ,75 (1+ ((1-40%)*(3 B/11,3 B)) = ,87 CAPM with Rf = 20Y US = 5,65% CAPM with Rf =20Y US = 5,65% REUL = 5,65% + .75 (7%) = 10,9% REL = 5,65% + .87(7%) = 11,74% REUL = 1,9% + .75 (7%) = REL = 1,9% + ,87(7%) =

    CAPM with Rf = Average Short term US =1,9% 7,15% CAPM with Rf = Average Short term US =1,9% 7,98% CAPM with Rf = 20Y US 7,54%
    - Maturity Spread = 2,29%

    REUL = 2,29% + ,75 (7%) = = 2,29% + ,87(7%) = 8,38%

    CAPM with Rf =20Y US Maturity Spread = 2,29% REL Excess Market Return = 7%

    WACCBefore = 0 (1-40%) 13% + 100% (10.9%) = 10.9%* 3/14/12 WACCAfter = 0,21% (1-40%) 13% +0,79* (11.74%) = 10.9%*

    Extraordinary Repurchase Dividend Stocks Financial Situation & WACC Same Same

    Conclusi on

    Conclusion

    Same effect/ Possible Financial distress in case of adverse economic situation; WACC may worsen depending on risk-free rate hypothesis Higher EPS for share repurchase, possible positive effect if future earnings growth Same effect With Share repurchase Wrigley's family has the majority voting power Current Shareholders value is the same

    EPS PER Wrigley's Voting Power Value to shareholders

    0,35 137 47% $61.52

    0,45 137 51% $61.52

    If the company takes the debt, it may use if for re-purchasing shares which may be preferred by Wrigleys family. The company may be reluctant to take so much debt because its financial situation can severely deteriorate if earnings fall (but if the assumption of 3/14/12 continuous growth holds the restructuring will have a highly positive effect on the shareholders value).

    Thank you for your attention

    3/14/12

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