CASE STUDY 1:
The Wm. Wrigley Jr. Company
capital structure, valuation, and cost of capital
[10 MARKS OUT OF 100 MARKS TOTAL]
Semester 1, 2013
The term capital structure refers to the way a corporation finances its assets through some combination of equity and debt. Each form has its own benefits and drawbacks and firm managers attempt to find the perfect capital structure in terms of risk / reward payoff for shareholders. See these podcasts:
The Case Study:
You are required to analyse Case 34 The Wm. Wrigley Jr. Company. Read the case carefully and thoroughly so as to familiarise yourself with the background of this company. On October 2008, Wm. Wrigley Jr. Company (NYSE: WWY) completed its merger with Mars Incorporated, in a transaction valued at over $23 billion. The company was consequently delisted from the exchange.
In June 2002, Blanka Dobrynin, managing director of an active hedge fund, was considering the possible gains from increasing a $3billion debt capitalization of the Wm. Wrigley Jr. Company. It is your task to critically analyse and report whether Wrigley should pursue this recapitalization proposal. This will require you to critically assess the following:
1. Do you think Wrigley’s debt level subsequent to the bond issue appropriate? Why or why not?
2. What would you recommend to Wrigley’s board of directors regarding: a) The level of flexibility or reserve?
b) The mix of debt and equity?
c) Any other issues you believe should be brought to the attention of the CEO and the board?
To guide you in your careful analysis, you may consider the effectiveness of the financing decision as it impacts on a) Earnings per share
b) The book and market price per share of...