Case Solution for The Wm. Wrigley Jr. Company: Capital Structure, Valuation, and Cost of Capital

Complete Case details are given below :

Case Name :      The Wm. Wrigley Jr. Company: Capital Structure, Valuation, and Cost of Capital
Authors :           Robert F. Bruner, Sean Carr
Source :             Darden School of Business
Case ID :           UV1373
Discipline :        Finance
Case Length :    11 pages
Solution Sample availability : YES
Plagiarism : NO (100% Original work)
Description for case is given below :
In June 2002, a managing director of an “active investor” hedge fund is considering the possible gains from increasing the debt capitalization of The Wm. Wrigley Jr. Company. Wrigley has been conservatively financed, and at the date of the case, carries no debt. The tasks for the student are to: ? Estimate the potential change in value from re-levering Wrigley using adjusted present value analysis; ? Assess the impact on weighted average cost of capital, earnings per share, the credit rating of the firm, and voting control of the Wrigley family; ? Consider the merits of dividend or share repurchase as a means of returning cash to shareholders. The central teaching objective of the case is to explore the financial effects of capital structure change. Key here is the trade-off between the tax benefits of debt and the associated costs in the form of financial distress and loss of flexibility. Related issues include signaling to investors, clientele effects (control considerations for the Wrigley family), and incentives created for directors and managers. Finally, the case affords a comparison of dividends and share repurchases.
 
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