Wrigley Case
Statement of the Problem: The William Wrigley Company is the world’s largest manufacturer and distributor of chewing gum. Over the preceding two years, revenues had grown at an annual compound rate of 10% and earnings grew 9%, these increases are a direct result of the introduction of new products and foreign expansion. As illustrated in the graphical diagrams in Exhibit 4 (appendix), the company’s stock price had significantly outperformed the S&P 500 Composite Index, and performed slightly ahead of its industry index. At the end of 2001 The William Wrigley Company had total assets of $1.76 Billion and no debt. With all these highlights and bright spots of William Wrigley one may ask what problem a company such as this has. The answer to that question may seem odd, but the problem this company has is that it has no debt. Interest rates are at their lowest point in 50 years, but debt financing is at a decline. Many companies are missing opportunities to add value to their company, and in extreme cases such as The William Wrigley Company, mature firms may use no debt at all.
Alternative Solutions:
Borrow $3 Billion at a credit rating between BB and B, to yield 13%, with the intention to pay an equivalent dividend or to repurchase an equivalent value of shares.
Borrow less ($1-$1.5 Billion) and test the company’s ability to effectively leverage debt before borrowing maximum amounts.
Borrow $3 Billion at a credit rating between BB and B, to yield 13%, with the intention to use the cash flows to invest in new capital projects while keeping its own cash and reserves on hand.
Continue using the current capital structure.
Analysis of Alternatives: Alternative 1: If The William Wrigley Company where to borrow $3 Billion this action could affect the firm’s share value, cost of capital, debt coverage, earnings per share, and voting control. One benefit of leveraging debt is that the value of the firm will be increased by shielding cash flows
Alternative Solutions:
Borrow $3 Billion at a credit rating between BB and B, to yield 13%, with the intention to pay an equivalent dividend or to repurchase an equivalent value of shares.
Borrow less ($1-$1.5 Billion) and test the company’s ability to effectively leverage debt before borrowing maximum amounts.
Borrow $3 Billion at a credit rating between BB and B, to yield 13%, with the intention to use the cash flows to invest in new capital projects while keeping its own cash and reserves on hand.
Continue using the current capital structure.
Analysis of Alternatives: Alternative 1: If The William Wrigley Company where to borrow $3 Billion this action could affect the firm’s share value, cost of capital, debt coverage, earnings per share, and voting control. One benefit of leveraging debt is that the value of the firm will be increased by shielding cash flows