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Wrigley Recapitalization

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Wrigley’s WACC before recapitalization is 10.9%. Since the WACC is same as cost of equity. After raising $3 billion debt for pay dividend or share repurchase, it would change the Wrigley’s capital structure. The recapitalized WACC is 10.91%, which does not change. In general, the WACC would decrease after raise up large debt and the firm value would increase. In Wrigley’s case, the re-leveraged beta increased from 0.78 to 0.85 and debt ratios increased from 0 to 20.9%, which make the firm value stay at the same level. It is suggested to minimize the WACC in order to get the optimal capital structure. The WACC 10.782% is minimized for leverage 11%. The WACC 10.873% is minimized for leverage 4%. This result has includes the financial distress cost. ( may be we need a conclusion here).

The assumption is based on M&M theory, which needs Wrigley to keep 3 billion debt in perpetuity. The price per share increases from $56.37 to $61.53 due to the re-leveraging. Alternatively, the price per share decreases from $56.37 to $48.63 due to the dividend payout. Share repurchase makes the price increased but its same as $63.1. The reason why share price increase is because of assets grows by $1.2 billion, which equals to the present value of the debt tax shields. The share price decrease after pay dividend may implies that stakeholders are not satisfied with the dividend, which is less than what they…...

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