# Wrigley

Satisfactory Essays
664 Words
Grammar
Plagiarism
Writing
Score
Wrigley
WACC before recapitalization

Wrigley’s prerecapitalization WACC is 10.9%. The cost of equity assumes a risk-free rate of 5.65% for 20-year U.S. Treasuries (case Exhibit 7), a risk premium is assumed 7% (or 5%), and uses Wrigley’s current beta of 0.75 (case Exhibit 5).

4. WACC after recapitalization

The increase in leverage will affect Wrigley’s WACC in at least three ways:

1. Cost of debt: Wrigley’s debt rating will change from AAA (consistent with no debt) to a BB/B rating reflecting the higher risk. The postrecapitalization credit rating is a matter of judgment. It is highly instructive to guide students through a rating exercise for Wrigley’s pro forma recapitalization. This requires computing the range of measures included in case Exhibit 6 and determining where in the ratings range the firm would fall.1 Comparing Wrigley’s projected results to the benchmarks given in case Exhibit 6 suggests that BB/B is a reasonable call.
Turning to the yields by credit rating given in case Exhibit 7, one can interpolate between BB (12.73%) and B (14.66%) to obtain a cost of debt. The cost used in the remainder of this analysis is 13%, Blanka Dobrynin’s choice.2
Yields rise almost linearly across the investment-grade spectrum (AAA to BBB) and then rise curvilinearly at lower debt ratings—this hints at the problem that we will encounter in estimating the cost of equity.
2. Beta: You should unlever Wrigley’s current beta of 0.75, assuming the current values of book debt and the market value of equity. This gives an estimate of the unlevered beta of 0.75, reflecting the fact that Wrigley has almost no debt.3 This beta then needs to be relevered to reflect the addition of \$3 billion in debt. Using the formula produces a levered beta of 0.87. All in all, this is not much of a change. Why? The answer is twofold: first, the market value of Wrigley’s equity is so large that \$3 billion more in debt does relatively little to change the debt/equity ratio. Second, the

## You May Also Find These Documents Helpful

• Good Essays

6) Suppose that Mr. Dubinski has obtained from Blaine’s banker the quotes below for default spreads over 10-year Treasury bonds. Note that these differ from the more general corporate bond yields in case Exhibit 4. What do these quotes imply about BKI’s cost of debt at the various debt levels and credit ratings? Compute BKI’s weighted average cost of capital at each of the indicated debt levels. What do your calculations imply about Blaine’s optimal capital structure? Based on these calculations, how many shares should Blain purchase and at what…

• 272 Words
• 2 Pages
Good Essays
• Good Essays

To adjust beta in accordance with project we assume that in the long-run Dixon will maintain its target debt-to-capital ratio in proportion of 35%. Thus, we get the following beta asset of the project that accounts for Dixon’s capital structure:…

• 1892 Words
• 8 Pages
Good Essays
• Good Essays

Some things on this earth are just magical. To some it may be the beach at sunset, to others it may be as simple as the drive to work in the morning. For me that place is Fenway Park in Boston Massachusetts.…

• 770 Words
• 4 Pages
Good Essays
• Good Essays

1. Compute the cost of debt. Assume AirJet Best Parts Inc. is considering issuing new bonds. Select current bonds from one of the main competitors as a benchmark. Key competitors include…

• 711 Words
• 3 Pages
Good Essays
• Better Essays

The interest rate on a debt security is largely determined by the perceived repayment ability of the borrower; higher risks of payment default almost always lead to higher interest rates to borrow capital.”…

• 2438 Words
• 10 Pages
Better Essays
• Powerful Essays

A. Bixton’s objective is to achieve a credit standing that falls, in the words of the chief financial officer, “comfortably within the ‘A’ range.” What target range would you recommend for each of the three credit measures?…

• 647 Words
• 3 Pages
Powerful Essays
• Satisfactory Essays

3. Exhibit 4 provides pro forma debt/total capital ratios. What interest rate do you expect UST to have to pay at these various debt levels? (Assume that if UST issues debt, it uses the proceeds to buy back equity). The highest debt level in the exhibit is 30%, you may want to look at 50 and 80% as well. At each debt level, try to estimate what bond rating the UST debt would have and what interest rate that would correspond to. Use the data on bond ratings and key financial ratios as a guide.…

• 967 Words
• 7 Pages
Satisfactory Essays
• Better Essays

Sobeys Inc. current ratio drops from an acceptable 1.59 in 2011 to .963 in 2012. Being in the grocery industry this is not uncommon as inventories are higher because of the high inventory turnover rate which is higher than the accounts payable becoming due. With the exception of high inventories in this calculation the firm appears to be efficient in paying its obligations. The main contributor to the decrease in the ratio value is 2012 long term debt due within one year increase by approximately 200 mill. Note 13 states “ at end of year the \$200 mill non revolving term credit was drawn down to due within one year”, this caused a substantial increase in current liabilities which in turn effects this ratio value. Working capital decreased in 2012 from 2011’s healthy positive value of \$266.6 mill to a negative value of -\$72.6 which is also a cause of long term debt due within one year increasing prominently. Again using the quick ratio it is lower than the desirable 1:1 value, however the company owns many assets and should not have a problem covering liabilities current or immediate future.…

• 1595 Words
• 5 Pages
Better Essays
• Satisfactory Essays

3) Drawing on the financial ratios in case Exhibit 6, how much debt could Deluxe borrow at each rating level? What capitalization ratios would result from the borrowings implied by each rating…

• 491 Words
• 2 Pages
Satisfactory Essays
• Better Essays

Financial markets have been subject to significant changes in recent years due to the credit crisis. Experts believed that risk was being under-priced, which was expressed in the markets by a narrow spread. They believed that once the market corrected this under-pricing and re-priced the risk, it would likely cause a dislocation in financial markets by overshooting its equilibrium. Hence the prices, yields and returns on bonds have been significantly effected by the global financial crisis. Looking at the effects this credit crisis had on the short term money market by evaluating bond performance over the past 10 years can give us significant insight into the extent of this dislocation.…

• 1148 Words
• 5 Pages
Better Essays
• Good Essays

Turning to the yields by credit rating given in case Exhibit 7, one can interpolate between BB (12.73%) and B (14.66%) to obtain a cost of debt. The cost used in the remainder of this analysis is 13%, Blanka Dobrynin’s choice.…

• 1638 Words
• 7 Pages
Good Essays
• Satisfactory Essays

We found Joanna’s estimates to be wrong because of a few reasons. The first mistake she made was using the average beta instead of the most recent beta provided. She was using average of Nike’s beta from 1996 to the present, which was .80 (Case 13, pg. 59). We used the beta of .69, which was the most recent beta provided to us. The second mistake we found was that she used the book value of debt instead of the market value of debt. The book value was \$441.30 and the market value was \$421.88 so she overstated debt by \$19.42 (Exhibit 6).…

• 393 Words
• 2 Pages
Satisfactory Essays
• Powerful Essays

The aim of this case study is to determine the value of Paginas Amarlas, and advise Brasil Investimentos what the appropriate action would be, given the information available to them in 1996. Expected future events and forecasting techniques, together with the company performance results are used to perform appropriate valuations. The options available to Brasil Investimentos would be the sale or restructuring of Paginas Amarelas.…

• 7435 Words
• 31 Pages
Powerful Essays
• Satisfactory Essays

Lecture 5: Corporate Bonds, Valuation, Implications for Rating & Migration, Investment Grade and Low Rated Bonds, Valuation of Convertibles…

• 510 Words
• 3 Pages
Satisfactory Essays
• Good Essays

Discuss the essence, development and the role of the following financial institutions, markets or instruments at the international and local context. Your discussion need to be supported by relevant references from at least 10 articles, reading material and/or books.…

• 944 Words
• 4 Pages
Good Essays