So Wrigley has to make decisions on whether or not to borrow $ 3 billion for recapitalization. Question Based on the above situation, there are few questions that arise as seen below: ? Whether the recapitalization would be good for the company’s development in the long run? ?After borrowing $ 3 billion dollars what would the impact on the company’s debt rating be? ?What’s the impact on the company’s share value; would the recapitalization increase the company’s share value? ?What’s the impact on the company’s WACC, an increase or decrease? Would recapitalization increases the EPS of the company? Hypothesis
Before capital restructuring due to not having any debt, return on capital and operating income as a percent of sales can be used based on exhibit 2(it is $513,356/$2,429,646= 21%) which is the A to AA range of investment grade. After recapitalization, the company’s debt rating will fall to a BB/B rating which reflects a higher risk and lower debt rating that will cause higher yields. According to Exhibit 7’s given information, the yield is between BB (12. 753) to B (14. 663) to obtain a cost of debt. Impact on share value
If the company chooses to repurchase the stock, the WD will be 22. 89% (3,000,000/13,103,000), the WACC will be 10. 19% (22. 89% (1-40%)*13%+77. 1%*10. 9%). Both 10. 32% and 10. 19% are lower than the WACC before recapitalization, which indicates that after the recapitalization the company will have a lower minimum rate of return for the company that it needs to earn on its investments to maintain its wealth. Impact on Voting Control If the company is using the dividend plan to do capital restructuring, there will not be any impact on voting control.
However, if the company is using the stock repurchase plan, it will have an influence on the voting control. The current Wrigley family ownership includes 21% of common shares and 58% of B shares. The total numbers of shares outstanding for Wrigley consists of the sum of the common shares of 189. 8 million and class B shares of 42. 641 million (10 votes each), a total of 232,441 million shares. So the company will have 46. 6% ((189. 8*21%+426. 41*58%)/616. 21=46. 6%)voting control before recapitalization.
After the recapitalization the voting control will increase to 49% [(179. 22-42. 641)*21%+426. 41*58%]/ (136. 58+426. 41) =49 Based on the above analysis, my suggestion is not to borrow $ 3 billion dollars, or if the company insists in doing a recapitalization I would suggest for them to not borrow as much and to make some investment on assets instead of it all in equity. For the Wrigley Company I think they should keep their debt below 50 percent.
Because after recapitalization, it will have negative impacts on EPS, debt rating, share value and it has a slightly positive impact on WACC and voting control. The results of impact on EPS analysis shows that EPS will drop from $ 1. 61 to 0. 46 and, the debt/ assets ratio will be 169% which will increase the company’s risks. From a debt rating aspect, after borrowing $ 3 billion dollars, the debt rating of the company will decline from AA/A to BB/B which means that the company will have a higher interest rate, more interest expense and a lower credit rating in the future.
This is not good for the company’s future development. From a long term prospective, I believe it’s important that the company be careful in determining whether they should pursue a dividend or stock repurchase strategy. If the company chooses to use the $ 3 billion to pay dividends now, it might increase the investor’s satisfaction in the short run but once the dividend has been paid, the investor will expect the same amount of dividend in the future and a lower dividend might disappoint investors and that might affect the company’s stock price in the future.
The stock repurchase is temporary as well, so after the repurchase the ending stock price might drop and it may hurt a potential new investor who made a purchase during the repurchase period. All things considered as long as Wrigley keeps an eye on their long term goals and continues to look at the big picture whilst making good solid financial choices for their company they should be most successful.