Free Essay

Wrigley's Wacc

In: Business and Management

Submitted By Msecho
Words 297
Pages 2
In general, as the higher level of debt results in a higher degree of leverage, companies can benefit from the tax shield by incurring debt, however, adding debt also increases the risk of bankruptcy. So the Net effect on WACC is uncertain as it really depends on the level of debt. But it is rational to think in the way that the cost of capital would start increasing after a certain point when more debt is used, because at that point the cost outweigh the benefit.

So, coming back to our case, assuming that the company issued 3 billion in debt, we will do some calculation to see how the change in capital structure affect the company’s WACC.

This is how we calculated the WACC before the 3 billion debt. We can first find the cost of equity by using CAPM, and the risk-free rate that we used here is the 20 year treasury yield. And we have come up with the answer of 10.9% for cost of equity. Since the company has no debt at this time, the WACC is simply equal to 10.9%

After the recapitalisation, we have to recalculate the beta because according to the M&M theory: If a firm changes its financial leverage, the firm’s beta will change. And this is basically due to the increase of risk. So as the beta we just calculated is already a unlevered one, we can simply use that number to relever the beta, and we get .85 Then, using the relever beta to come up with a new cost of equity, we get 11.6%

Last step, substitute the new cost of equity, and include the after tax cost of debt, we have a similar result, which is 10.91%

Similar Documents

Free Essay

Calaveras

...Calaveras Vineyard GUSTAVO OCATVIO HERRERA OCAMPO A00313848 FZ 4007 – Finanzas corporativas avanzadas Calaveras Vineyard Antecedentes • NationsBank´s investment-banking group invita a Goldengate Capital a participar en un préstamo para la adquisición de Calaveras Vineyards. • El préstamo asciende a $4.5M; $2M a largo plazo, $2.5 línea de crédito revolvente. • Calaveras Vineyard es una empresa fundada en 1883 con una exitosa gestión de la marca a través del tiempo. Cuenta con 220 acres de los cuales 175 son viñedos. • Calaveras cuenta con 5 categorías de producto: 2 en el segmento super-premium (64.3% de las ventas). • Alta concentración de la distribución en el canal de mayoreo (67%). • Disminución de la demanda de bebidas alcohólicas excepto para la categoría de vinos. • 50% de los requerimientos de uva son obtenidos con mediante 2 contratos de largo plazo, una porción limitada del proceso de fermentación y el almacenaje de producto terminado estaba arrendada a un vecino • Evolución positiva de la rentabilidad gracias al aumento del precio promedio. • Proyecciones financieras ambiciosas (optimistas) • Valor de mercado de los activos se estima entre $5 y $7 M. • Actual gerente general y gerente operativo potenciales compradores (con participación de 85% y 15% respectivamente) FZ 4007 – Finanzas corporativas avanzadas Calaveras Vineyard Análisis cualitativo Fortalezas: • Empresa con abolengo. • Expertos en producción y comercialización de vinos......

Words: 1894 - Pages: 8

Free Essay

The Wm Wrigley Company Case

...INSTITUTO TECNOLÓGICO Y DE ESTUDIOS SUPERIORES DE MONTERREY SEMINARIO INTEGRADOR DE FINANZAS Caso “The Wm. Wrigley Jr. Company: Capital structure, Valuation, and Cost of Capital” Profesor Titular: Dr. Roberto Joaquín Santillán Salgado Profesor tutor: Mtra. Karla Macías Yanin Guerrero Enríquez A01180790 29/Mayo/2014 Introducción Blanca Dobrynin, administradora asociada de Aurora Borealis LLC, propuso a Susan Chandler, una asociada, a iniciar la búsqueda de una inversión potencial en Wrigley. Aurora Borealis tenía un fondo de cobertura de 3 billones bajo administración y una estrategia de inversión que se enfocaba en empresas con dificultades, arbitraje de fusiones, transacciones de cambio de control y recapitalizaciones. El típico modelo de operación de Blanca Dobrynin consistía en identificar oportunidades para una corporación para reestructurarla, invirtiendo significativamente en el capital de la empresa objetivo, y encargarse del proceso de persuadir al administrador y directores de reestructurar. Chandler notó que el valor de mercado del capital común de Wrigley era de 13.1 billones. Dobrynin y Chandler discutieron de las condiciones del mercado de capital actual y decidieron enfocarse en el supuesto de que Wrigley podía pedir prestados 3 billones en una clasificación crediticia entre BB y B, con un rendimiento del 13%. La compañía Wrigley era el fabricante y distribuidor de goma de mascar más grande del mundo. La industria era......

Words: 792 - Pages: 4

Free Essay

Chem-Cal

...asertivo usar una tasa de descuento apropiada para utilizar el método VPN o utilizar la tasa interna minima con el método TIR. Esta duda lleva a que no se esta logrando lo deseado. Identificar objetivos Uno de los objetivos principales es la valoración de estos proyectos. Chem- Cal Corporation debe volver a calcular el VPN de cada proyecto. Lograr una tasa de capital es decir la mejor opción es el Wacc y ver las fuentes para conseguir los recursos. Análisis de opciones para conseguir más capital - Elevar Ratios de deuda (30% cerca de la media del sector) - Vender bonos de 5 millones de dólares (un poco mas de 10.5%) - Fondo de amortizaciónDiagnostico Encontrar una fuente de financiamiento que no sea superior o igual al 11% y esa tasa seria un 10% para ajustar al wacc ya que los cálculos de valor presente neto VPN no entrega una representación adecuada de los proyecto. Además la compañía debería mantener algún sistema para considerar las inversiones propuestas. Plan de acción La compañía debe utilizar el valor presente neto VPN con una tasa de descuento del Wacc ya existen restricciones de capital, el VPN es una herramienta mas útil ya que considera al...

Words: 420 - Pages: 2

Free Essay

Caso Mommouth

...qué ha llegado a tal conclusión. 2.-        ¿Cuál es el precio máximo que pudiera llegar a pagar Monmouth, basándose en una valuación usando análisis de flujo de efectivo descontado, cálculo de WACC, y determinación del valor terminal? Ver Notas y/o “Tips” relacionadas con esta pregunta. 3.-        ¿A qué se debe que Simmons esté tan deseoso de vender su posición a Monmouth por $50 por acción? ¿Cuáles son las preocupaciones, así como las alternativas, para cada uno de los otros grupos de accionistas de Robertson? 4.-        La administración de Monmouth le solicita asesoría acerca de cómo debe de diseñar, así como también el implementar, una oferta que resultara exitosa para la adquisición de Herramientas Robertson. ¿Cuál, o cómo sería su asesoría? Por favor, justifique su respuesta. NOTAS Y/O “TIPS” (1(1)  El título del capítulo 9 de su libro de texto es, precisamente: “Usando análisis de flujo de efectivo descontado para hacer decisiones de inversión?, entonces usted puede aplicar lo estudiado en dicho capítulo. (2(2)   Se le recomienda ampliamente estudiar la sección 13.2: “The Weighted-Average Cost fo Capital” (WACC), a partir de la página 367 del libro de texto. En particular, asegúrese de que ha interiorizado tanto la lógica, como la o las fórmulas para calcular el WACC. (3)   De igual manera, ampliamente se le recomienda estudiar la sección 13.7 de su libro de texto, (a partir de la...

Words: 388 - Pages: 2

Premium Essay

Capitulo 8 Bonos

...02/2012. <vbk:978-1-4562-0587-4#outline(13.11.6)>. 5. Cálculo del costo de la deuda Shanken Corp. emitió un bono a 30 años a una tasa semestral de 7% hace siete años. Hoy, el bono se vende en 108% de su valor nominal. La tasa tributaria de la compañía es de 35%. a) ¿Cuál es el costo de la deuda antes de impuestos? b) ¿Cuál es el costo de la deuda después de impuestos? (ROSS 422) ROSS, STEPHEN A.. FINANZAS CORPORATIVAS, 9th Edition. McGraw-Hill Interamericana, 02/2012. <vbk:978-1-4562-0587-4#outline(13.11.6)>. 8. Impuestos y WACC Miller Manufacturing tiene una razón de deuda a capital accionario fijada como meta de .45. El costo de su capital accionario es de 17%, y el de su deuda es de 10%. Si la tasa tributaria es de 35%, ¿cuál será el WACC de Miller? (ROSS 422) ROSS, STEPHEN A.. FINANZAS CORPORATIVAS, 9th Edition. McGraw-Hill Interamericana, 02/2012. <vbk:978-1-4562-0587-4#outline(13.11.6)>. 11. Cálculo del WACC En el problema anterior suponga que las acciones de la compañía tienen una beta de 1.2. La tasa libre de riesgo es de 5.2% y la prima de riesgo de mercado es de 7%. Suponga que el costo total de la deuda es el promedio ponderado que implican las dos emisiones de deuda en circulación. Ambos bonos hacen pagos semestrales. La tasa tributaria es de...

Words: 416 - Pages: 2

Free Essay

Caso Laive

...194.00 21,847.00 24,305.00 TOTAL PATRIMONIO 122,958.00 TOTAL PASIVO Y PATRIMONIO 244,353.00 ESTADO DE RESULTADOS 2011 Ventas Costo de ventas Utilidad bruta 333,307.00 266,475.00 66,832.00 Gastos de venta y distribución Gastos de administración Otros ingresos operativos Otros gastos operativos Utilidad operativa 41,048.00 13,851.00 2,342.00 409.00 13,866.00 Ingresos financieros Gastos financieros Diferencia de cambio Utilidad antes de impuestos 619.00 4,326.00 644.00 10,803.00 Impuestos Utilidad Neta 3,554.00 7,249.00 COSTO DE CAPITAL Beta desapalancado Beta apalancado Rf (Rm - Rf) Rp Kd t Kd neto Ke WACC 0.8 (Damodaran) 0.98 2.19% 6.00% 2.31% 6.50% 30% 4.55% 10.36% 8.74% NOPAT Activos Operativos (A.O.) ROCE (ROCE - WACC) EVA BENEFICIO ECONÓMICO SUPUESTOS Crecimiento...

Words: 2768 - Pages: 12

Free Essay

Case Hpi

...PRODUCTOS DE HOGAR - VALORACIÓN DE BONOS Y ACCIONES En todos los libros de texto, la valoración de las acciones y bonos se limita a indicar que es el valor actual de todos los flujos de efectivo futuros esperados con seguridad. El concepto es lógico, sencillo, y engañosamente simple. La valoración de los bonos por lo general se presenta primero, hasta los relativos flujos de efectivo seguros se dividen en una anualidad y un pago del valor nominal en una fecha específica en el futuro. La valoración de las acciones preferidas deduce o sigue la valoración de bonos y el valor de las acciones preferentes se muestra como el valor actual de la anualidad perpetua. Los flujos de efectivo de los dividendos de tamaño constante es bastante seguro, y la mayoría de las acciones preferentes no tienen una fecha de vencimiento. Por último, las acciones comunes se presentan pero ni los flujos futuros de efectivo (de dividendos), ni el valor final se conoce con certeza, generalmente, los estudiantes parecen entender las técnicas de valuación de bonos y acciones preferentes, pero tienden a ser muy escépticos del modelo de valoración de las acciones comunes. El uso de los modelos de flujo de efectivo descontados en una empresa real puede ayudar a disipar algunas de las dudas, pero lo más importante, puede indicar cómo los modelos explican el comportamiento de los precios. HOME PRODUCTS, INC. Home Products, Inc, (HPI) es un fabricante líder de medicamentos de receta y éticos;......

Words: 1162 - Pages: 5

Premium Essay

Analysis

...------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- Case Studies in Finance ------------------------------------------------- Case 34: The Wm. Wrigley Jr. Company Question 1: In the abstract, what is Blanka Dobrynin hoping to accomplish through her 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 identifies companies that could benefit from restructuring and then invests heavily in the company’s stock. Dobrynin plays the role of the financial entrepreneur, exploiting inefficiencies in investment valuation and corporate finance. She seeks to profit by restructuring firms with “lazy financing” or too much cash and unused debt capacity relative to the (low) risks faced by the firms. Aurora Borealis must convince management and directors that restructuring will benefit the company and its stock holders. Wrigley has virtually no debt. By pressuring directors and managers to adopt more efficient policies, she hopes to reap an investment gain. 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......

Words: 2097 - Pages: 9

Premium Essay

Wiilam Wrigley Recapitalization Case

...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 4 Wrigley’s Recapitalization 4 Should Wrigley’s directors undertake the recapitalization? 5 Appendices 6 ⦁ Objectives This report seeks to answer the following five questions about William Wrigley Jr.: ⦁ In the abstract, what is Blanka Dobrynin hoping to accomplish through her active-investor strategy? ⦁ 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: ⦁ Wrigley’s outstanding shares? ⦁ Wrigley’s book value of equity? ⦁ The price per share of Wrigley stock? ⦁ Earnings per share? ⦁ Debt interest coverage ratios and financial flexibility? ⦁ Voting control by the Wrigley family? ⦁ What is Wrigley’s current (pre-re-capitalization) weighted-average cost of capital (WACC)? ⦁ 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? ⦁ Should Blanka Dobrynin try to convince Wrigley’s directors to undertake the recapitalization? Management Summary The analysis identifies both risks and benefits associated with undertaking the recapitalization for Wrigley. Given the reduction WACC, Wrigley should undertake the recapitalization. The conclusions reached in the following will......

Words: 1554 - Pages: 7

Premium Essay

Wrigley

...on the appropriateness of Wrigley’s debt level in the event of the proposed bond issue and make recommendations as to whether or not the firm should in fact follow through with the issue. The items of interest that will be analyzed include: the impact on share price, cost of capital, earnings per share, agency cost of debt, voting control, signaling & clientele effect and debt coverage & financial flexibility. Analysis Impact on stock price and WACC The leverage does not affect firm value and as such Wrigley should not prefer any particular capital structure. As payments made towards debt are tax deductable the issuing of debt will increase firm value by providing a tax shield. As the role of management is to maximize firm value, the amount of debt in Wrigley should be maximized. Management should also consider a safe level of debt though to prevent risks of liquidity and operating restrictions. To recapitalize with $3 billion of debt the firm will benefit from a tax shield of $1.2 billion. This will result in the market share price increasing to $61.53/share. Using Hamada’s equation, leveraging the firm would result in an increasing beta from 0.75 to 0.86. By issuing debt, Wrigley’s increases its level of risk as its sensitivity to market fluctuations increases. Although a potential for insolvency has risen, its correlation is still less than an equal measure of change and as such debt increase doesn’t present a considerable risk. WACC is the rate used to......

Words: 1190 - Pages: 5

Premium Essay

Wrigley Case Study

...2 Conclusion 2 Item 3 2 Sub 3.1 2 Sub 3.2 2 Conclusion 2 Item 4 2 Item 5 2 Appendices 2 i. 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? 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 this strategy, the firm looks for companies that could benefit from restructuring. Aurora Borealis then invests heavily in the company’s stock. The next step is to convince management that a restructuring will benefit the company......

Words: 1123 - Pages: 5

Premium Essay

Wrigley Case

...2 Conclusion 2 Item 3 2 Sub 3.1 2 Sub 3.2 2 Conclusion 2 Item 4 2 Item 5 2 Appendices 2 i. 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? 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 this strategy, the firm looks for companies that could benefit from restructuring. Aurora Borealis then invests heavily in the company’s stock. The next step is to convince management that a restructuring will benefit the company......

Words: 1133 - Pages: 5

Free Essay

William Wrigley Case Study

... assuming a credit rating between BB and B, at  a yield of 13%;  Ms. Chandler remains undecided on whether or not to suggest this $3 billion be used to  pay an equivalent dividend or to repurchase an equivalent value of shares.     Although leveraging a firm can create value, a detailed analysis is necessary to determine if doing so is  the right path for Wrigley.  The following analysis will evaluate the assumptions made by Ms. Dobrynin  and her associate, examine Wrigley’s financial position under each alternative option, and provide  suggested recommendations for Ms. Chandler to present to Wrigley’s board of directors.       Key Issues    Debt Rating:   Ms. Chandler’s estimations regarding Wrigley’s credit rating may not be entirely accurate;  therefore,  the debt rating in which Wrigley should be categorized may not be BB/B. Each of the factors in  Standard & Poor’s Corporate Ratings Criteria table (Exhibit 1) should be assessed in order to  appropriately score William Wrigley Jr. Company, in terms of investment grade.      Post Recapitalization Share Value, WACC, and EPS:  A  recapitalization  based  on  the  issuance  of  dividends  will  not  impact  the  number of  shares  outstanding;  however,  with  recapitalization  based  on  a...

Words: 1268 - Pages: 6

Premium Essay

Wrigley Recapitalization

...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...

Words: 257 - Pages: 2

Premium Essay

Wm Wrigley Jr Company Case

...William Wrigley Jr. originally founded the William Wrigley Jr. Company in Delaware as a partnership in 1891; it then became a corporation in 1903 based out of Illinois. The Wrigley’s company has been family ran up until recently when William D. Perez became president, CEO, and director. As of today, William Wrigley Jr. Co. corporate headquarters is located in Chicago, Illinois. Wrigley’s original two brands were Juicy Fruit and Wrigley’s Spearmint. These two brands are now a subsidy of the Mars Incorporated. Wrigley has since expanded, and it now owns a bunch of other brands, including Doublemint, Big Red, Winterfresh, Extra, Freedent, Hubba Bubba, Orbit, and Excel. Along with chewing gum, Wrigley’s offers mints, breath strips, and candies. Altoids, Crème Savers, Life Savers, and Velamints are some brands under Wrigley’s that offer these products. The company has done a good job of diversifying the amount of products that they manufacture. The Wm. Wrigley Jr. Company is a publically traded company in the New York Stock Exchange under the symbol, WWY As of 2006, Wrigley’s distributes to over 180 countries and has 15,800 employees worldwide (company website). The company manufactures gum and other confectionary products in 4 factories in the United States and 15 factories globally. The Wrigley’s manufacturing and marketing of gum equates to 90% of its business, which is obviously their biggest venture and what they originally started in. Also chewing gum accounts......

Words: 1316 - Pages: 6