Preview

Wrigley

Satisfactory Essays
Open Document
Open Document
664 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
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

  • Powerful Essays

    Wacct 505 Week 9 Final Paper

    • 3289 Words
    • 14 Pages

    2. Value Line reports the Beta on AHP to be 0.90 (as of April 9, 1982) and they estimate the growth rate on "cash flow" will be 13%. The yield on the Long-term U.S. Treasury on 12/23/81 was 13.60%. What is cost of equity under the above scenarios? What is the WACC? Note: the market value of equity at the time was $4.652 billion (155,068,985 shares times $30/share). 3. What would your projections look like assuming AHP’s debt rating would be based off of Warner Lambert’s rating and financial ratios? 4. Under the above scenarios (and assuming AHP does no restructuring), what is your estimate of the value of AHP as a whole? What is the value of the debt and equity under these scenarios assuming AHP issues debt and uses the proceeds to repurchase equity to attain the debt to capital ratios? What will the wealth impact on current shareholders be under the alternative scenarios from part 3? 5. So far, you have ignored the nonquantifiable aspects of debt usage. What are the important nonquantifiable effects of debt that we should consider in general (basic list). Are these important considerations for AHP? Why or why not? 6. What should AHP do in regards to the debt usage if they wish to maximize shareholder value considering your quantitative analysis and the qualitative concerns from part 5 (i.e., what’s your bottom line recommendation)? B. Junk Bond Financing…

    • 3289 Words
    • 14 Pages
    Powerful Essays
  • Good Essays

    Finance Part 2

    • 711 Words
    • 3 Pages

    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
  • 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
  • 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
  • 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
  • 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
  • Satisfactory Essays

    UST CASE STUDY

    • 967 Words
    • 7 Pages

    Although it is not explicit how rating agencies assess the creditworthiness of companies, we can attempt to estimate the rating of UST’s long-term debt…

    • 967 Words
    • 7 Pages
    Satisfactory Essays
  • Good Essays

    Fenway Park

    • 770 Words
    • 4 Pages

    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

    Wrigley Junior Case Study

    • 1638 Words
    • 7 Pages

    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. Comparing Wrigley’s projected results to the benchmarks given in case Exhibit 6 suggests that BB/B is a reasonable call.…

    • 1638 Words
    • 7 Pages
    Good Essays
  • Good Essays

    Blaine’s Case

    • 272 Words
    • 2 Pages

    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
  • 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
  • Better Essays

    Bond Market Trends

    • 1148 Words
    • 5 Pages

    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
  • Powerful Essays

    Paginas Amarelas Case Study

    • 7435 Words
    • 31 Pages

    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
  • Good Essays

    Textile Industry

    • 944 Words
    • 4 Pages

    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
  • Satisfactory Essays

    Document

    • 510 Words
    • 3 Pages

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

    • 510 Words
    • 3 Pages
    Satisfactory Essays