Wrigley's
Abstract
In April 2005, Wm. Wrigley Jr. company announced plans to issue $3 billion of debt. The conundrum that it faced was whether it should use the funds to repurchase shares or pay dividends, with both options having different implications on the firm. This report provides a comprehensive analysis of the firm, both before and after recapitalisation, in order to recommend a solution. It encompasses the appropriateness of the new debt level and Wrigley’s ability to service it, while also considering the increase in the value of the firm, the level of flexibility, and the implications of the debt issue on the firm’s financial policies and objectives. It was found that through the repurchase of shares, Wrigley would better satisfy shareholders, through the increase in share price and earnings per share (EPS) as compared to paying dividends. Doing so would also afford managers more financial flexibility and decrease the weighted average cost of capital (WACC), increasing the value of the firm.
Introduction
In 2005, Wm. Wrigley Jr. Company, the world’s largest manufacturer and distributor of chewing gum, announced plans for a $3 billion debt issue. The problem facing Wrigley’s was whether the company should repurchase shares or pay dividends. This report will present a thorough analysis of Wrigley’s decision to issue this $3 billion debt by assessing relevant financial factors. These factors include the use of the debt to equity (D/E) and the times interest earned (TIE) ratios to evaluate the appropriateness of Wrigley’s debt level.
Also, recommendations regarding the financial policy objectives of Wrigley’s are outlined. The report also looks at factors that influence signaling to the market, such as the EPS, as well as examines Wrigley’s level of flexibility by analysing the quick ratio. On the basis of the analysis, recommendations will be provided as to whether Wrigley should repurchase shares or pay dividends.
Debt Level Analysis
The D/E and TIE
In April 2005, Wm. Wrigley Jr. company announced plans to issue $3 billion of debt. The conundrum that it faced was whether it should use the funds to repurchase shares or pay dividends, with both options having different implications on the firm. This report provides a comprehensive analysis of the firm, both before and after recapitalisation, in order to recommend a solution. It encompasses the appropriateness of the new debt level and Wrigley’s ability to service it, while also considering the increase in the value of the firm, the level of flexibility, and the implications of the debt issue on the firm’s financial policies and objectives. It was found that through the repurchase of shares, Wrigley would better satisfy shareholders, through the increase in share price and earnings per share (EPS) as compared to paying dividends. Doing so would also afford managers more financial flexibility and decrease the weighted average cost of capital (WACC), increasing the value of the firm.
Introduction
In 2005, Wm. Wrigley Jr. Company, the world’s largest manufacturer and distributor of chewing gum, announced plans for a $3 billion debt issue. The problem facing Wrigley’s was whether the company should repurchase shares or pay dividends. This report will present a thorough analysis of Wrigley’s decision to issue this $3 billion debt by assessing relevant financial factors. These factors include the use of the debt to equity (D/E) and the times interest earned (TIE) ratios to evaluate the appropriateness of Wrigley’s debt level.
Also, recommendations regarding the financial policy objectives of Wrigley’s are outlined. The report also looks at factors that influence signaling to the market, such as the EPS, as well as examines Wrigley’s level of flexibility by analysing the quick ratio. On the basis of the analysis, recommendations will be provided as to whether Wrigley should repurchase shares or pay dividends.
Debt Level Analysis
The D/E and TIE