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William Wrigley Jr. Company: Capital Structure

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The William Wrigley Jr. Company: Captial Structure, Valuation, and the Cost of Capital
Thomas A. Dotter
University of the Incarnate Word

Introduction
In the case study, “The William Wrigley Jr. Company: Captial Structure, Valuation, and the Cost of Capital” the author, Robert Bruner, examines how Blanka Dobrynin, managing partner at Aurora Borealis, explores the opportunity to persuade Wrigley’s board to complete a leveraged recapitalization through a dividend or major share repurchase. Through her active investor strategy, Blanca is trying to increase the value of investment in Wrigley. Blanca’s objective would be to create ultimately new value in Wm. Wrigley Jr. corporation and thus increase the value of Aurora Borealis’ initial investment in the firm.
As a result of using the three billion to complete a significant share repurchase or by increasing the dividend to stockholders; Finance theory can be used to demonstrate how Blanca’s strategy will enhance the value of the firm and ultimately increase Aurora Borealis’ initial investment.
Case Study Questions
Based on the theory and research papers read during the semester, the following is an analysis of the effects of issuing $3 billion of new debt and using the proceeds either to pay a dividend or to repurchase shares on: 1. Wrigley’s outstanding shares? a. A firm can leverage debt to maximize profitability which will allow the firm to compete in a competitive market (DeAngelo & Masulis, 1979). b. The debt will increase the value of a company using shielding cash flows from taxes. c. Masulis believed the price of the stock goes up after a stock repurchase due to a personal tax savings effect, “a reduction in corporate taxes due to increased leverage, and transfers of wealth across and within security classes” (Masulis, 1980b). 2. Wrigley’s book value of equity…...

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