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‘THE WM. WRINGLEY JR. COMPANY: CAPITAL STRUCTURE, VALUATION,
AND COST OF CAPITAL

MSc Financial Management
Corporate Finance – A2 – Final Individual Assignment
Assignment Instructions:
Assignment Reference (subject title) CF-StudentNumber-Mar22-A2
Due Date 25
th July 2022
Word Count (if applicable) 2,000 words
Weighting 50%
File Format Word
Submission Details Instructions provided on Blackboard
Important instructions:
Please read the case study ‘THE WM. WRINGLEY JR. COMPANY: CAPITAL STRUCTURE, VALUATION,
AND COST OF CAPITAL’. After doing this, attempt to answer the assignment questions below
individually and without colluding with other students. You should comply with the maximum word
limit that is set for each question. Please report at the end of each answer the total number of words
used, bearing in mind that you do not need to consider any tables and reference lists when counting
words.
Since the case study is on a real company, you can also carry out independent research on the
company (and related industry, competitors and country) to gather any further information that you
may consider useful to address the questions.
You can also take into account the following additional information:

  • As stated in the case study, in June 2002 Wringley did not have any interest-bearing debt;
  • The Standard Industrial Classification (SIC) code of the company was 2099;
  • Using a large sample of international companies, an employee of the hedge fund Aurora
    Borealis LLC had produced the table below containing average book leverage ratios across 44
    non-financial industries (defined here:
    http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_49_ind_port.ht
    ml);
    Industry Mean Book Leverage Ratio
    Agriculture 0.2166
    Food Products 0.2641
    Candy and Soda 0.2479
    Beer & Liquor 0.1984
    Tobacco Products 0.2116
    Recreation 0.1966
    Entertainment 0.2442
    Printing and Publishing 0.1931
    Consumer Goods 0.1972
    Apparel 0.2188
    Healthcare 0.2715
    Medical Equipment 0.1952
    Page 2 of 4
    Pharmaceutical Products 0.1771
    Chemicals 0.2315
    Rubber and Plastic Products 0.2487
    Textiles 0.3333
    Construction Materials 0.2332
    Construction 0.2315
    Steel Works 0.3071
    Fabricated Products 0.2300
    Machinery 0.1816
    Electrical Equipment 0.1855
    Automobiles & Trucks 0.2339
    Aircraft 0.2355
    Shipbuilding and Railroad Equipment 0.2602
    Defence 0.2198
    Precious Metals 0.1767
    Non-Metallic & Industrial Metal Mining 0.1685
    Coal 0.3213
    Petroleum & Natural Gas 0.2730
    Utilities 0.3200
    Communication 0.2934
    Personal Services 0.2200
    Business Services 0.2069
    Computers 0.1749
    Computer Software 0.1472
    Electronic Equipment 0.1761
    Measuring & Control Equipment 0.1389
    Business Supplies 0.2857
    Shipping Containers 0.2808
    Transportation 0.3079
    Wholesale 0.2155
    Retail 0.2263
    Restaurants, Hotels, Motels 0.2556
  • The same employee had used the same dataset to estimate the following regression
    coefficients for book leverage and its determinants:
    𝐷𝑒𝑏𝑡 𝑡𝑜 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
    = 0.12 − 0.34 × 𝑃𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦 + 0.23 × 𝑇𝑎𝑛𝑔𝑖𝑏𝑖𝑙𝑖𝑡𝑦 − 0.01
    × 𝐴𝑠𝑠𝑒𝑡 𝐺𝑟𝑜𝑤𝑡ℎ + 0.05 × 𝐹𝑖𝑟𝑚 𝑆𝑖𝑧𝑒
    Profitability: Operating income before depreciation and amortization over total assets;
    Tangibility: Tangible assets over total assets;
    Asset growth: Current value of total assets minus previous value of total assets, all
    scaled by the previous value of total assets;
    Page 3 of 4
    Firm size: Natural logarithm of the value of net sales/turnover (in millions).
    Assignment Questions:
    1) Assume that Wringley’s managers want to evaluate the benefits and costs of the debt issue
    recommended by Blanka Dobrynin in an informal way, without carrying out any precise calculations
    at this stage. To this end, they want to understand which information and variables contained in the
    case study are relevant to analyse Wringley’s likelihood of financial distress once the debt issue has
    taken place. You should help Wringley’s managers by creating a list of the most important variables
    to consider. For each variable, explain in general terms why it could be relevant and how it should
    have an impact on financial distress. Also, what additional information not included in the case study
    would you gather to improve your analysis? [Word limit: 400 words]
    [20 marks]
    2) Blanka Dobrynin is convinced that Wringley could borrow $3 billion at a credit rating between BB
    and B and with an interest rate of about 13%. However, a firm’s cost of debt is often hard to estimate
    and different analysts can consider alternative methods that can generate a wide range of estimates.
    Produce your own estimates of Wringley’s cost of debt assuming that it borrows $3 billion. Overall,
    would you agree with Blanka Dobrynin that Wringley should be able to raise such amount of debt at
    an interest rate of around 13%? [Word limit: 300 words]
    [15 marks]
    3) Blanka Dobrynin’s recommendation is for Wringley to boost leverage by raising $3 billion through
    a debt issue and return an equivalent amount of cash to shareholders.
    In contrast, a rival hedge fund is making a more radical recommendation which would entail a debt
    issue of $5 billion with a contemporaneous cash distribution to shareholders of the same amount.
    Evaluate the two alternative recommendations above by using as many methods as possible and in
    consideration of what could be considered Wringley’s optimal level of leverage. Which of the two
    recommendations is preferable? Why? [Word limit: 800]
    [40 marks]
    4) Assume that after considering the recommendations of the hedge funds described in the previous
    question, Wringley’s managers are convinced that leverage should be increased over time. The
    company is evaluating the following alternative options that should cause a similar increase in
    leverage over the next year or so:
  • A debt issue together with an incremental dividend payment of the same amount;
  • A debt issue together with incremental stock repurchases of the same amount;
  • A debt issue together with incremental cash distributions to shareholders (a mix of a dividend
    payment and stock repurchases) of the same amount;
  • A larger debt issue in comparison with the other options above without any contemporaneous
    incremental cash distribution to shareholders.
    Comment on the options above and analyse their costs and benefits considering their effects on the
    market value of the firm. [Word limit: 500 words]
    [25 marks]
    Page 4 of 4
    End of assignmen