Wrigley Report

Topics: Finance, Stock, Stock market Pages: 4 (1035 words) Published: September 12, 2010
Executive Summary
Wrigley is considering a $3 Billion dollar bond issue to repurchase firm equity. They are planning to raise $3 billion through a bond issue. Two capitalisation alternatives are being considered; a direct share repurchase and a dividend payout. The affect of both alternatives will be evaluated – focusing specifically on the bond issues’ affect on firm value. Detailed analysis has found

Financial Policy Objectives
Share Repurchase
Dividend Payout

Cost of Capital
Cost of Equity:
* Prior to Recapitalisation: 10.80%
* Share Repurchase: 12.38%
* Dividend Payout: 12.54%
The capital asset pricing model (CAPM) was used calculate cost of equity. ke= Rf+βRm-Rf+ Dc
1.1.1 Calculating Exogenous Variables Risk Free Rate (Rf): 4.5% (Appendix)
10 Year US Treasury bond yield for 31/03/2005 (www.ustreas.gov) Market Return (Rm): 16.85% (Appendix)
The mean daily returns from S&P 500 Index were taken from 01/03/03-31/03/05 then annualised. Beta (β)
* Prior to Recapitalisation: 0.51 (unlevered) * Share Repurchase: 0.57
* Dividend Payout: 0.58

Due to the significance of the risk variable, two alternative calculation methodologies were employed to calculate the unlevered Beta; arithmetic and geometric. Once the unlevered Beta was found, it was re-levered to implement the new debt. βL= βU[1+1-tc×DE]

1.1.2 Distress Cost: 0.87% (Appendix)
The increase in debt financing increases the firms default risk. During periods of financial difficulty managements focus shifts from daily operating activities to consolidation strategies. This can diminish firm value and equity holders generally demand a risk premium to compensate for additional debt capital. The debt premium introduced from the change in credit rating from AAA to BBB (outlined in 3.2.1) has been used as a...
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