The Wm. Wrigley Jr. Company: capital structure,
VALUATION and cost of capital Introduction: Blanka Doborynin a managing partner of AURORA BOREALIS LLC tries to initiate a research for a potential investment in Wrigleys. They are trying to recapitalize the firm. Wrigley’s which is 100% equity financed has a market value of $13,103,000,000 the question begins if it is totally equity financed is it running at its efficient level? Or Is it better to recapitalize the structure and thereby bring out more efficient operational levels. They are planning to get a debt of 3,000,000,000 using it to extract the profit out of the low risk (BBB) forecast that the company possesses. They are potentially investigating, if it is good to recapitalize …show more content…

WACC (Recapitalisation) When we recapitalize the weights will change, There is a new component the cost of debt and the Betas change because of the change in the weight. | Pre-recapitalisation | Recapitalisation | Weights Wd, Ws(%) (Respectively) | 0,100 | 77.10, 22.90 | Cost of debt | 0 | 13% | Beta | 0.75(unlevered) | .87(levered) | The weights change because of the introduction of the debt. Since the equity forms about 77.10% of the total weigh still the equity forms a larger part of the capital, So adding debt of about 22.90% doesn’t make a huge difference in the ratio of debt to equity. Which means the risk rate(Beta) doesn’t change a lot. With regard to the cost of debt Wrigleys has enjoyed a AAA rating since it has 0 debt, but after recapitalization S&P downgrades it to BB/B which technically means a yield of 12.753- 14.663%. Wrigleys is ready to give 13% for its debt which is very much in between the credit ratings standards yield levels. After recapitalization the WACC is at 10.91% which is not a real change. This change does not consider the risk the company possesses, the beta has increased from .75 to .87(linear model is used for the calculation of levered beta) and the credit rating has downgraded it to