THE WM. WRIGLEY JR.

COMPANY

Team 14
Constantine Brocoum
Courtney Delia
Stephanie Doherty
David Dubois
Radu Oprea
November 19th, 2009

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Contents
Objectives ..................................................................................................................................................... 1
Management Summary ................................................................................................................................ 2
Active Investor Strategy ................................................................................................................................ 2
Effects of $3 Billion in New Debt for Dividend or Stock Repurchase ............................................................ 2
a. Outstanding Shares ..................................................................................................................... 2
b. Book Value of Equity ................................................................................................................... 2
c. Price per Share............................................................................................................................. 2
d. Earnings per Share ....................................................................................................................... 3
e. Debt Interest Coverage Rations and Financial Flexibility ............................................................ 3
f. Outstanding Shares .......................................................................................................................... 3
Wrigley’s Current Weighted Average Cost of Capital (WACC)...................................................................... 3
Debt Proceeds to Pay a Dividend or Repurchase Shares .............................................................................. 5
Wrigley’s Recapitalization ............................................................................................................................ 6
Appendices.................................................................................................................................................... 6

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Objectives
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 repurchase shares on:
a. Wrigley’s outstanding shares?
b. Wrigley’s book value of equity?
c. The price per share of Wrigley stock?
d. Earnings per share?
e. Debt interest coverage ratios and financial flexibility?
f. Voting control by the Wrigley family?
3. What is Wrigley’s current (pre-re-capitalization) weighted-average cost of capital (WACC)?
4. What would you expect to happen to Wrigley’s WACC if it issued $3 billion in debt and used the
proceeds to pay a dividend or to repurchase shares?
5. Should Blanka Dobrynin try to convince Wrigley’s directors to undertake the recapitalization?

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Management Summary

Active Investor Strategy

Blanka Dobrynin is a managing partner of the Aurora Borealis Company. The company utilizes a
strategy called “Active Investor” in which the firm indentifies companies that could benefit from
restructuring and then invests heavily in the company’s stock. Aurora Borealis must convince
management and directors that restructuring will benefit the company and its stock holders.
Wrigley has virtually no debt. If Wrigley were to change the capital structure of the company by
increasing its debt/equity ratio, significant financial value would be created from the debt tax
shelter. This strategy created $156 million to be invested for shareholder gain. 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:
Levered Unlevered In Millions
EBIT $ 527.00 $ 527.00
Interest $ 390.00 $ -
EBT $ 137.00 $ 527.00
Tax@40% $ 54.80 $ 210.80

Difference $ 156.00
Borrow Rate 13%
PVP $ 1,200.00

Effects of $3 Billion in New Debt for Dividend or Stock Repurchase

a. Outstanding Shares
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. Book Value of Equity

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. Price per Share

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

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 see share repurchase as a “bullish sign” for the company so the shares may appreciate on that
basis.

d. Earnings per Share

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.

e. Debt Interest Coverage Rations and Financial Flexibility

The debt interest coverage ratio is EBIT/Debt Interest. The interest on the debt is $390 million as
calculated above. The EBIT in 2001 is $527,366,000. So debt coverage ratio is
527,366/390,000=1.35 If Wrigley’s gets a non-investment grade rating then their financial
flexibility is severely limited.

f. Outstanding Shares
Issuing 3 billion dollars of new debt to pay dividends should not have any effect on the voting
control of the Wrigley family. Using that money to buy back shares will have an effect on the
voting right of the family. When shares are repurchased they are put in the company treasury
and are no longer outstanding. Then the Wrigley family’s percent of outstanding shares would
rise giving them more voting control. They also have 58% if the outstanding shares of the Class B
shares which have a 10 to 1 voting advantage over the common share class. These shares are
not affected by the buyback.

Wrigley’s Current Weighted Average Cost of Capital (WACC)

The practice at Aurora Borealis is to use an equity market risk premium of 7.0 percent, therefore
this number was used in the WACC calculation.

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 WACC
rD * (1-Tc) * D/V + rE * E/V
Unlevered
Equity Beta 0.750
Risk free rate 4.86%
Equity Market Risk Premium 7.00%
Corporate tax rate (tc) 40.0%
re 10.11%
rd (net cost of debt) 0.000%
debt/equity 0
Wdebt 0.000
Wequity 1.000

WACC 10.110%

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Debt Proceeds to Pay a Dividend or Repurchase Shares
Beta Calculations - Using Exhibit 6 Equity Beta estimate
EquityBeta = AssetBeta * (1 + MV D/E)

Unlevered EquityBeta = 0.75 * (1 + 0) = 0.75

Levered EquityBeta = 0.75 * (1 + 1.705) = 2.025

CAPM
Unlevered CAPM = .0486 +.750 (.07) = 10.110%
Levered CAPM = .0486 + 2.025 (.07) = 19.038%

WACC
rD * (1-Tc) * D/V + rE * E/V
Unlevered Levered
Equity Beta 0.750 2.025375
Risk free rate 4.86% 4.86%
Equity Market Risk Premium 7.00% 7.00%
Corporate tax rate (tc) 40.0% 40.0%
re 10.11% 19.038%
rd (net cost of debt) 0.000% 7.800%
debt/equity 0 1.705
Wdebt 0.000 0.630
Wequity 1.000 0.370

WACC 10.110% 9.989%

debt/equity
Total Market Value of Assets 1.760
Market Value of Debt 3.000

Net cost of debt

13.00% 7.80%
Pretax cost of debt - Dobrynin's
estimates of obtaining BB - B debt

The $3 billion in debt would be a liability which would be broken out as short-term debt, that
which is payable within 12 months, and long term debt, which would be repayable in more than
a year. If the company uses this money to repurchase shares, there would be an offset as there
would be no change on the financial statements as the liabilities and equity would net each
other out and assets would remain unchanged. Therefore, it would not be necessary to include
the cost of debt in the weighted-average cost of capital.
Similarly, if the proceeds were used to pay a dividend it would have a similar effect because they
transaction would have a netted effect. Wrigley’s WACC would remain the same as long as the

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 liability and equity is netted out. This can be further supported by the Flow-to Equity Method in
which this method states that if a Company’s debt ratio is constant over time, the same number
will result as discounting cash flows at the WACC and subtracting the debt. Therefore, the
WACC will remain unchanged as the debt, dividends, and repurchase shares would all have the
same effect because they will be netted against each other and WACC will be constant.

( I DON’T KNOW IF THIS IS CORRECT)

The WACC definitely changes. It decreases after the recapitalization which
adds value for the firm.

Wrigley’s Recapitalization

Appendices

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