This Report investigates the financial effects on Wrigley’s with the issuance of $3bn debt. It explores two alternate means of allocation for the funds; pay out a one-time dividend or carry out a share repurchase. Both methods are analyzed in regards to an optimal capital structure and maximizing share holder value (value of the firm). A compilation of historical data and future predictions were used for the basis of this report, and recommendations.
The following paper will draw on Modigliani and Miller’s (1958) theorem of capital structure to determine whether an ‘optimal’ level for Wrigley’s can in fact be reached. A further discussion of agency costs and incentives by Jensen, Meckling (1976), and Lenland (1998) will evaluate the relative impact of these risks on re-structuring. Finally, Chambers, Harris and Pringle (1982) distinguish the approaches in valuation used for Wrigley’s.
Optimal Capital Structure
The Modigliani and Miller (1958) theorem has been widely touted as the basis for capital structure theory (M&M Propositions). While previously rationalizing that a firm should be indifferent between various levels of financial leveraging – a further study ‘optimal’ level of capital structure which enhances the use of a tax shield to best offset the cost of debt. It is important to note however, that there are several implicit considerations & limitations that are imposed with the increase of leverage (Modigliani and Miller, 1963).
Financial Distress & Flexibility
Financial distress and corporate performance is a widely debated topic. Although literature has portrayed financial distress as costly and important in concluding on a firm’s optimal capital structure, Opler and Titman (1994) discovered that it is substantially difficult to quantify. While Wrigley’s has been given a B/BB rating, due in part to their interest coverage ratio of 1.47; due to the fact that WACC has only increased 0.01%, it can be
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