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Wrigley Case Essay

1160 words - 5 pages


Team 14
Constantine Brocoum
Courtney Delia
Stephanie Doherty
David Dubois
Radu Oprea
November 19th, 2009
Objectives 1
Management Summary 2
Item 1 2
Sub 1.1 2
Sub 1.2 2
Conclusion 2
Item 2 2
Sub 2.1 2
Conclusion 2
Item 3 2
Sub 3.1 2
Sub 3.2 2
Conclusion 2
Item 4 2
Item 5 2
Appendices 2

This report seeks to answer the following five questions about William Wrigley Jr.:
1. In the abstract, what is Blanka Dobrynin hoping to accomplish through her active-investor strategy?
2. What will be the effects of issuing $3 billion of new debt and using the proceeds either to pay a dividend or to ...view middle of the document...

Many would see this as a benefit. However, taking on some debt would help to raise expenses so that cash flow can be shielded from taxes. By leveraging the firm there is an extra $156 million that can be invested to improve shareholder wealth. The value of this extra cash flow is shown as the present value of a perpetuity at $1.2 billion. This is a significant amount of value that is created due to the leveraging of the firm. The market value of a levered firm versus an unlevered firm is as follows:

As estimated in the case, a 40% tax rate can generate some significant savings if avoided.
Sub 1.1
Sub 1.2
$3 Billion in new debt
a. Issuing 3 billion dollars of new debt to buy back shares will reduce the number of outstanding shares, placing those shares in the company treasury as treasury stock. Paying a dividend with this borrowed money will not affect the number of shares outstanding.
b. The net asset value or book value of a company is calculated by total assets minus intangible assets (patents, goodwill) and liabilities. So as the company issues more debt the book value is not changed since both sides of the balance sheet are increased by $3 Billion. The book value of the company should not be affected by a dividend payout.
c. The price of a share will decrease by the amount of the dividend paid per share. Repurchasing shares of the company stock will not have an effect on the share price directly. Some investors see share repurchase as a “bullish sign” for the company so the shares may appreciate on that basis.
d. Earnings per share (EPS) = Earnings After Taxes(EAT)/Outstanding Shares. If the number of outstanding shares is reduced by a buyback of shares then the EPS will increase if the EAT remains unchanged. However the EAT is reduced since there is interest expense. If the dividend payout remains the same then the dividend paid per share will increase as well. The debt interest would be 13% of $3 billion which is $390 million. EBIT in 2001 was $527,366,000. So the EBIT is $137,366,000. Then this is taxed at 40% so the EAT is $82,420,000. So by taking on more debt the EAT diminishes so the earnings per share will drop dramatically. Dividends affect next years earnings as they are taken out of the EAT.

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