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THE WM. WRIGLEY JR.

COMPANY

Team 14
Constantine Brocoum
Courtney Delia
Stephanie Doherty
David Dubois
Radu Oprea
November 19th, 2009

William Wrigley Junior Page i

...................................... 3 f............................... 6 William Wrigley Junior Page ii ....................................................................................................... 2 c............... 6 Appendices............................... 2 Active Investor Strategy ............................................................................................................................................................ 5 Wrigley’s Recapitalization ................................................................................................................................................................................................................................................................................................................... 2 Effects of $3 Billion in New Debt for Dividend or Stock Repurchase .............. 3 e......................................................................................................... 2 b.......... 2 a....................... 2 d......................................................................................Contents Objectives .......................... Book Value of Equity ......... 3 Wrigley’s Current Weighted Average Cost of Capital (WACC).................................................................................................................................................................................................. Outstanding Shares ............................. 1 Management Summary ..................................................... Earnings per Share ....... Outstanding Shares .............................. 3 Debt Proceeds to Pay a Dividend or Repurchase Shares .......................................................................................................................... Debt Interest Coverage Rations and Financial Flexibility .................................................................... Price per Share.............................................................................................

Debt interest coverage ratios and financial flexibility? f. What would you expect to happen to Wrigley’s WACC if it issued $3 billion in debt and used the proceeds to pay a dividend or to repurchase shares? 5.Objectives This report seeks to answer the following five questions about William Wrigley Jr. The price per share of Wrigley stock? d. In the abstract.: 1. Wrigley’s book value of equity? c. Voting control by the Wrigley family? 3. Should Blanka Dobrynin try to convince Wrigley’s directors to undertake the recapitalization? William Wrigley Junior Page 1 . What is Wrigley’s current (pre-re-capitalization) weighted-average cost of capital (WACC)? 4. Wrigley’s outstanding shares? b. what is Blanka Dobrynin hoping to accomplish through her active-investor strategy? 2. Earnings per share? e. 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: a.

Book Value of Equity The net asset value or book value of a company is calculated by total assets minus intangible assets (patents. Outstanding Shares Issuing 3 billion dollars of new debt to buy back shares will reduce the number of outstanding shares. Some investors William Wrigley Junior Page 2 . So as the company issues more debt the book value is not changed since both sides of the balance sheet are increased by $3 Billion.80 Difference $ 156. The market value of a levered firm versus an unlevered firm is as follows: Levered Unlevered In Millions EBIT $ 527. Repurchasing shares of the company stock will not have an effect on the share price directly. This is a significant amount of value that is created due to the leveraging of the firm.200.Management Summary Active Investor Strategy Blanka Dobrynin is a managing partner of the Aurora Borealis Company. placing those shares in the company treasury as treasury stock. Wrigley has virtually no debt.00 Interest $ 390. The book value of the company should not be affected by a dividend payout. significant financial value would be created from the debt tax shelter. If Wrigley were to change the capital structure of the company by increasing its debt/equity ratio.00 $ 527. c.00 $ 527. This strategy created $156 million to be invested for shareholder gain. Paying a dividend with this borrowed money will not affect the number of shares outstanding. Aurora Borealis must convince management and directors that restructuring will benefit the company and its stock holders.00 Tax@40% $ 54.00 $ - EBT $ 137. The company utilizes a strategy called “Active Investor” in which the firm indentifies companies that could benefit from restructuring and then invests heavily in the company’s stock. b.2 billion.00 Borrow Rate 13% PVP $ 1. goodwill) and liabilities. The value of this extra cash flow is shown as the present value of a perpetuity at $1.80 $ 210. Price per Share The price of a share will decrease by the amount of the dividend paid per share.00 Effects of $3 Billion in New Debt for Dividend or Stock Repurchase a.

So debt coverage ratio is 527.000. see share repurchase as a “bullish sign” for the company so the shares may appreciate on that basis.366/390. Dividends affect next years earnings as they are taken out of the EAT. Wrigley’s Current Weighted Average Cost of Capital (WACC) The practice at Aurora Borealis is to use an equity market risk premium of 7. So the EBIT is $137.000.000. Then this is taxed at 40% so the EAT is $82. f. Debt Interest Coverage Rations and Financial Flexibility The debt interest coverage ratio is EBIT/Debt Interest. Outstanding Shares Issuing 3 billion dollars of new debt to pay dividends should not have any effect on the voting control of the Wrigley family. If the number of outstanding shares is reduced by a buyback of shares then the EPS will increase if the EAT remains unchanged. EBIT in 2001 was $527. However the EAT is reduced since there is interest expense. When shares are repurchased they are put in the company treasury and are no longer outstanding. The interest on the debt is $390 million as calculated above. The debt interest would be 13% of $3 billion which is $390 million.000=1. So by taking on more debt the EAT diminishes so the earnings per share will drop dramatically. If the dividend payout remains the same then the dividend paid per share will increase as well. These shares are not affected by the buyback. They also have 58% if the outstanding shares of the Class B shares which have a 10 to 1 voting advantage over the common share class.366. d.000.0 percent. Using that money to buy back shares will have an effect on the voting right of the family.35 If Wrigley’s gets a non-investment grade rating then their financial flexibility is severely limited. Then the Wrigley family’s percent of outstanding shares would rise giving them more voting control.420. therefore this number was used in the WACC calculation. e. Earnings per Share Earnings per share (EPS) = Earnings After Taxes(EAT)/Outstanding Shares.366.366. The EBIT in 2001 is $527. William Wrigley Junior Page 3 .

86% Equity Market Risk Premium 7.000 WACC 10.000% debt/equity 0 Wdebt 0.750 Risk free rate 4.00% Corporate tax rate (tc) 40.0% re 10.110% William Wrigley Junior Page 4 .11% rd (net cost of debt) 0.000 Wequity 1. WACC rD * (1-Tc) * D/V + rE * E/V Unlevered Equity Beta 0.

Similarly.000 0.86% 4.07) = 19.705) = 2.370 WACC 10.00% 7.989% debt/equity Total Market Value of Assets 1. and long term debt.800% debt/equity 0 1.80% Pretax cost of debt .760 Market Value of Debt 3.000 0.07) = 10.Using Exhibit 6 Equity Beta estimate EquityBeta = AssetBeta * (1 + MV D/E) Unlevered EquityBeta = 0.038% WACC rD * (1-Tc) * D/V + rE * E/V Unlevered Levered Equity Beta 0.0% 40.Dobrynin's estimates of obtaining BB .86% Equity Market Risk Premium 7.025375 Risk free rate 4. Therefore.00% Corporate tax rate (tc) 40.025 CAPM Unlevered CAPM = .705 Wdebt 0.0486 + 2.025 (. If the company uses this money to repurchase shares. that which is payable within 12 months.000% 7.B debt The $3 billion in debt would be a liability which would be broken out as short-term debt. there would be an offset as there would be no change on the financial statements as the liabilities and equity would net each other out and assets would remain unchanged.110% Levered CAPM = .750 2.630 Wequity 1.038% rd (net cost of debt) 0.Debt Proceeds to Pay a Dividend or Repurchase Shares Beta Calculations .75 Levered EquityBeta = 0. Wrigley’s WACC would remain the same as long as the William Wrigley Junior Page 5 .11% 19.110% 9.75 * (1 + 0) = 0.75 * (1 + 1. which would be repayable in more than a year.750 (. it would not be necessary to include the cost of debt in the weighted-average cost of capital.00% 7.0% re 10.000 Net cost of debt 13.0486 +. if the proceeds were used to pay a dividend it would have a similar effect because they transaction would have a netted effect.

( I DON’T KNOW IF THIS IS CORRECT) The WACC definitely changes. This can be further supported by the Flow-to Equity Method in which this method states that if a Company’s debt ratio is constant over time. dividends. the same number will result as discounting cash flows at the WACC and subtracting the debt. liability and equity is netted out. Wrigley’s Recapitalization Appendices William Wrigley Junior Page 6 . the WACC will remain unchanged as the debt. and repurchase shares would all have the same effect because they will be netted against each other and WACC will be constant. It decreases after the recapitalization which adds value for the firm. Therefore.