Case 34 The Wm. Wrigley Jr. Company: Capital Structure, Valuation, and Cost of Capital 471 EXHIBIT 2 Income Statements for the Wm. Wrigley Jr. Company (in thousands, except per-share amounts) 2001 2000 1999 Earnings Net sales Cost of sales $ 2,145,706 $ 2,429,646 997,054 1,432,592 919,236 513,356 18,553 (4,543) 527,366 164,380 s 362,986 904,266 1,241,440 778,197 463,243 19,185 $ 2,061,602 904,183 1,157,419 721,813 Gross profit Selling, general and administrative expenses Operating income Investment income Other expense Earnings before income taxes Income taxes 435,606 17,636 (3,116) (8,812) 479,312 150,370 s 328,942 444,430 136,247 Net earnings 308,183 Per-share amounts Net earnings per share of common stock Dividends paid per share of common stock 1.61 S 0.745 $ 1.45 s 0.70 1.33 $ 0.66 Source of data: Company regulatory filings 1 172 Part Six Management of the Corporate Capital Structure EXHIBIT 3 | Consolidated Balance Sheets for the Wm. Wrigley Jr. Company 2001 2000 (in thousands of dollars) ASSETS Current assets: Cash and equivalents Short-term investments, at amortized cost s 307,785 300,599 29,301 191,570 25,450 239,885 Inventories 64,676 188,615 75,693 203,288 278,981 46,896 14,846 913,843 25,300 115,745 26,381 Finished goods Raw materials and supplies 253,291 39,728 14,226 Other current assets Deferred income taxes-current 828,715 Total current assets Marketable equity securities, at fair value Deferred charges and other assets Delerred income taxes- noncurrent Property, plant, and equipment (at cost) 28,535 83,713 26,743 39,125 344,457 756,050 1,139,632 532,598 607,034 $1,574,740 Buildings and building equipment Machinery and equipment 39,933 359,109 857,044 1,256,086 571,717 684,379 $1,765,648 Net property, plant and equipment TOTAL ASSETS LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable Accrued expenses Dividends payable $91,225 73,129 113,779 39,467 60,976 128,406 Income and other taxes payable Deferred income taxes- current 42,711 68,437 1,455 Total current liabilities Other non-current liabilities Class B convertible stock 332,234 43,206 113,921 12,646 2,850 1,153 288,210 Deferred income taxes- noncurrent 40,144 113,489 12,558 Common stock 2,938 Additional paid-in capital 346 1,492,547 Retained earnings Treasury stock Accumulated other comprehensive income 1,684,337 (289,799) (134,900) 1,276,287 $1,765,648 (256,478) (119,014) 1,132,897 $1,574,740 Total stockholders equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Source of data: Company regulatory filings. 474 3. You are the analyst of Wm.Wrigley Jr. Company and you are trying to evaluate the eftects of issuing 3 billion of new debt and using the proceeds either to pay a dividend or to repurchase shares. Tax rate is 40%. Cost of debt for the new debt is 13%. Exhibit 2 & 3 are income statements and balance sheets for the company and Exhibit 5 contains current capital structure information (before debt issuance) for Wm. Wrigley Based on the attached exhibits, please show (in numbers) what will happen to the following items. For part b and c, please calculate numbers for both the dividend and repurchase scenario. Make sure you clearly show your calculations. (18 points) a. Wrigley's book value and market value of equity after debt issuance. b. Number of shares outstanding and the new share prices. Earnings per share (use numbers from 2001 income statement). Please note, the net income on 2001's income statement is before the issuing of new debt so you may want to calculate the new NI after debt issuance first. c. d. Which distribution policy above Dividend or Repurchase would result in greater wealth for shareholders? Please illustrate with numbers in the question. Dividend and repurchase are two common methods used by companies to distribute cash to shareholders. List at least two differences between dividend and repurchase. e. Case 34 The Wm. Wrigley Jr. Company: Capital Structure, Valuation, and Cost of Capital 471 EXHIBIT 2 Income Statements for the Wm. Wrigley Jr. Company (in thousands, except per-share amounts) 2001 2000 1999 Earnings Net sales Cost of sales $ 2,145,706 $ 2,429,646 997,054 1,432,592 919,236 513,356 18,553 (4,543) 527,366 164,380 s 362,986 904,266 1,241,440 778,197 463,243 19,185 $ 2,061,602 904,183 1,157,419 721,813 Gross profit Selling, general and administrative expenses Operating income Investment income Other expense Earnings before income taxes Income taxes 435,606 17,636 (3,116) (8,812) 479,312 150,370 s 328,942 444,430 136,247 Net earnings 308,183 Per-share amounts Net earnings per share of common stock Dividends paid per share of common stock 1.61 S 0.745 $ 1.45 s 0.70 1.33 $ 0.66 Source of data: Company regulatory filings 1 172 Part Six Management of the Corporate Capital Structure EXHIBIT 3 | Consolidated Balance Sheets for the Wm. Wrigley Jr. Company 2001 2000 (in thousands of dollars) ASSETS Current assets: Cash and equivalents Short-term investments, at amortized cost s 307,785 300,599 29,301 191,570 25,450 239,885 Inventories 64,676 188,615 75,693 203,288 278,981 46,896 14,846 913,843 25,300 115,745 26,381 Finished goods Raw materials and supplies 253,291 39,728 14,226 Other current assets Deferred income taxes-current 828,715 Total current assets Marketable equity securities, at fair value Deferred charges and other assets Delerred income taxes- noncurrent Property, plant, and equipment (at cost) 28,535 83,713 26,743 39,125 344,457 756,050 1,139,632 532,598 607,034 $1,574,740 Buildings and building equipment Machinery and equipment 39,933 359,109 857,044 1,256,086 571,717 684,379 $1,765,648 Net property, plant and equipment TOTAL ASSETS LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable Accrued expenses Dividends payable $91,225 73,129 113,779 39,467 60,976 128,406 Income and other taxes payable Deferred income taxes- current 42,711 68,437 1,455 Total current liabilities Other non-current liabilities Class B convertible stock 332,234 43,206 113,921 12,646 2,850 1,153 288,210 Deferred income taxes- noncurrent 40,144 113,489 12,558 Common stock 2,938 Additional paid-in capital 346 1,492,547 Retained earnings Treasury stock Accumulated other comprehensive income 1,684,337 (289,799) (134,900) 1,276,287 $1,765,648 (256,478) (119,014) 1,132,897 $1,574,740 Total stockholders equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Source of data: Company regulatory filings. 474 3. You are the analyst of Wm.Wrigley Jr. Company and you are trying to evaluate the eftects of issuing 3 billion of new debt and using the proceeds either to pay a dividend or to repurchase shares. Tax rate is 40%. Cost of debt for the new debt is 13%. Exhibit 2 & 3 are income statements and balance sheets for the company and Exhibit 5 contains current capital structure information (before debt issuance) for Wm. Wrigley Based on the attached exhibits, please show (in numbers) what will happen to the following items. For part b and c, please calculate numbers for both the dividend and repurchase scenario. Make sure you clearly show your calculations. (18 points) a. Wrigley's book value and market value of equity after debt issuance. b. Number of shares outstanding and the new share prices. Earnings per share (use numbers from 2001 income statement). Please note, the net income on 2001's income statement is before the issuing of new debt so you may want to calculate the new NI after debt issuance first. c. d. Which distribution policy above Dividend or Repurchase would result in greater wealth for shareholders? Please illustrate with numbers in the question. Dividend and repurchase are two common methods used by companies to distribute cash to shareholders. List at least two differences between dividend and repurchase. e