wrigley case grp 5
TRANSCRIPT
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The Wm. Wrigley Jr. Company:
Capital Structure, Valuation,
and Cost Capital.
1Wm. Wrigley Jr. Company
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Team Members
JOHN AGYARKO MBAE 11050170
GEORGE GARBRAH HOOPER MBAE 11050224
KOFI DANSO APPIAH RMBA 11060044 DOLORES MARIE B. GYADER RMBA 11060015
AUGUSTINE RASITO AKWETEA RMBA11060175
2Wm. Wrigley Jr. Company
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Presentation Outline
Introduction Central Issue
Effect of Leverage Recapitalization on
Share Value Debt Rating
Cost of Capital (WACC)
Reported EPS
Voting Control
Conclusion & Recommendation
3Wm. Wrigley Jr. Company
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Introduction Founder- William Wrigley Jr.
Wm. Wrigley Jr. Company was founded in1891
Initial Brands are Spearmint and Juicy
Fruits Distributes to 180 countries and has 10,
800 employees
Listed on the New York Stock Exchangeunder the ticker WWY
4Wm. Wrigley Jr. Company
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Introduction (Cont’d) Blanka Dobrynin is a management
Partner of Aurora Borealis Company(Hedge Fund Company)
The company utilizes a strategy called
active investors The strategy aims at affecting stock prices
5Wm. Wrigley Jr. Company
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Central IssuesThe impact of $3.0 billion debt at 13%
per annum maturing after ten (10)years in Wrigley Company on thefollowing?
Share Value Debt Rating
Cost of Capital
Reported Earnings per Share Voting Control
and Aurora Borealis Company’s (HedgeFund Company) decision to invest inWrigley Company. 6Wm. Wrigley Jr. Company
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Impact on Share Value
7Wm. Wrigley Jr. Company
Value of Levered Firm
FCF1 = EBITD
r EU = CAPM =Rf +B(Rm-Rf
)
VU =Value of UnleveredFirm VITS =Value of Interest Tax Shield
VL =Value of Levered Firm
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Impact on Debt Rating
Wm. Wrigley Jr. Company 8
Current debt rating for Wrigley Company
is between BB and B (This is anassumption from the case because thefirm is not levered yet).
Wrigley Company will move from anassumed rating of BB or B to a computeddebt rating of AA.
An AA debt rating will reduce thecost of debt of future borrowings.
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Impact on Cost of Capital
9Wm. Wrigley Jr. Company
r EL = Cost of LeveredEquity r EU = Cost of Unlevered Equity
r D = Cost of Debt MVD= Market Value of Debt
MVE= Market Value of Equity
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Impact on Earnings Per Share
Wm. Wrigley Jr. Company 10
The primary goal of financialmanagers is to maximize the wealth
of the shareholders.
The higher the EPS the better for shareholders wealth.
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Total Shares
Outstanding232,441,000
OrdinaryShares
189,800,000
Others (79%)
149,942,000
Wrigley (21%)
39,858,000
Class BShares
42,641,000
Wrigley (58%)
24,731,780
Other (42%)
17,909,220
Impact on Voting
Wm. Wrigley Jr. Company 11
Voting Control For Wrigley Family 46.60
%
Voting Control For Investors 34.79
%
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onc us on anRecommendation
The deal is favourable for Aurora Boraalis(hedge fund company) should Wrigley accept
the debt proposal. This will increase the price to$292. But from the long-term growthperspective of the firm, the best policy would beto re-invest in the firm for growth in form of sales or pursuing more profitable acquisitions.The share buyback would although raise theprice of the firm, but if control of the firm is notan issue of urgency and the management donot plan an appropriate utilization of theretained earnings and the new debt, then thecompany should refrain from adding onadditional debt. Moreover, using debt to payoutthe dividends would result in decrease of thevalue of the firm and hence the share price
using assuming market to be efficient.Wm. Wrigley Jr. Company 12
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Wm. Wrigley Jr. Company 13