Tutorial 2 The Wm. Wrigley, Jr. Company (Part 1)
In the first part of the tutorial, each group will present to the class a succinct and yet comprehensive discussion of the following issues relating to Wrigley. Students who do not belong to any group will be assigned to a group in this tutorial. Intra-group discussions will be facilitated in the second part of the tutorial.
PART A Question #1: (J1, S1, PA1, PB1)
Looking at the data provided to you in the case, without doing a detailed analysis, do you agree with Blanka Dobrynin’s view that Wrigley is not efficiently financed? Why? Discuss clearly the methods you will use to help you to arrive at your decision.
Question #2: (J2, S2, PA2, PB2)
What could possibly be the
…show more content…
To make an advantages of such a debt financing feature, companies often use debt –financing feature
While using debt may add pressure to a company’s ongoing operations as a result of having to meet interest-payment obligations, it helps retain more profits within the company compared to using equity, which requires the sharing of company profits with equity holders. Using debt, companies need to pay only the amount of interest out of their profits. Using equity, on the other hand, the more profits a company makes, the more it has to share with equity investors. To take advantage of such a debt-financing feature, companies often use debt to finance stable business operations in which they can more easily make ongoing interest payments and, meanwhile, retain the rest of the profits to themselves.
Financial Leverage
Using debt is also advantageous to existing owners because of the effect of financial leverage. When companies use debt to provide addition capital for their business operations, equity owners get to keep any extra profits generated by the debt capital, after any interest payments. Given the same amount of equity investments, equity investors have a higher return on equity because of the additional profits provided by the debt capital. As long as using debt doesn’t threaten the financial soundness of a company in times of difficulties, equity owners welcome certain debt uses to help enhance their investment
The company position is strong enough so its better that company should use debt financing instead of equity financing.
There are several factors that guide the choice among debt financing and equity financing such as potential profitability, financial risk and voting control. Equity financing is a method used to obtain capital in order to finance operations, growth or expansion. Sources of equity financing are extremely important. Major sources of equity financial are Retained Earnings, sale of stock, and funds provided by venture capital firms. Profits that are kept and reinvested are called Retained earnings, which is a very attractive source fund due to the savings it provides to the entity by not paying the interests, dividends or underwriting fees related to issuing securities. This source of financing does not dilute ownership, but it
Stockholders will be happy that the managers of the firm are not wasting any money and working hard to pay for the interest expense for the debt holders; as a default brings the company to the brink of bankruptcy. In addition issuing debts will minimize or prevent any unwanted incentives giving room for the better growth of the company.
The advantage of debt financing is that interests paid on such debt are tax deductible. If a company has the intention of maintaining a permanent debt, the present value of the tax shield can be obtained by discounting them by the expected rate of return demanded by the investors who hold the debt (this is a perpetuity, where in reality would be the maximum possible present value for the tax shield). This tax shield value reduces the tax bill and increases the cash payment to investors, increasing the value of their investments.
Debt ratio indicates how much debt is used to finance a firm’s assets. To see the profitability a firm has to compare the difference between debt-to-equity mixes. The company should evaluate how do they finance their assets, do they use debt? There two types of debt, short-term and long-term debt, realizing the remaining percentage must be financed by equity. The amount of debt a firm uses depends on its proven income record and the availability of assets that can be used as collateral for the loan — and how much risk management is willing to assume. When a company borrows money to finance business there is a certain requirement that the company pay
spending by means of cutbacks may be a path, possibly a difficult one, to the
Jamaica is not just white sand beaches and mimosas. Behind the thin veil of paradise lurk corruption, violence, and inequalities. Life & Debt illustrates the daily realties of Jamaica following IMF structural adjustment programs. IMF reforms have perpetuated a cycle of debt that Jamaicans have little hope to escape. Although IMF conditionality claims to develop nations so that they can grow and re-pay their lenders, Jamaica is still indebted $4.5 billion dollars and has little development to show for it. Measures of austerity coupled with devaluation, high interest rates, and drops in local wages results in greater unemployment, increased violence, and widening inequality. The bulk of the film focuses on how global integration has undercut
There are a number of reasons that a company would forgo debt financing in favor of equity. The first is that debt financing increases the risk of the company. The cash flows that the company earns are allocated to debt re-service first, which reduces the amount of funding available to help the company expand. Additionally, there may come covenants attached to the debt that further restrict the ability of management to perform its duties in the manner it would prefer. Thus, the debt's restrictions may cause management to undertake activities that are not in the best interest of the shareholders, simply because those activities are in the best interests of the creditors.
The documentary “Life and Debt” portrays and shows us a true example of what the impact of economic globalization can have on a developing country (Louis Proyect). The irie Island of sun, white sandy beaches and beautiful people is a spot where numerous flock to for relaxation. People all over the world sees and describe Jamaica as a tropical, beach like atmosphere where they go to enjoy their selves, but no one discusses how difficult life is for its citizens. It gives wholeheartedly for stability, however its struggles are indeed deep. Jamaica, over the years after Independence, have seek to stand on its own, without success.
Unsustainable Debt Many ordinary citizens today in developed countries such as Canada acknowledge the abject poverty affecting citizens of various African countries and other undeveloped nations. However, exactly why these countries are in this position appears to be a mystery, despite many cash grants, relief efforts, and aid are delivered to these countries by various Western organizations amidst great media attention. In addition, it also seems natural that such undeveloped countries should have a net flow of capital moving towards them from wealthy industrialized nations such as Canada. On the contrary, a net flow of money has actually been directed towards the industrialized nations and various financial institutions from
The documentary Life and Debt portrays a true example of the impact economic globalization can have on a developing country. When most Americans think about Jamaica, we think about the beautiful beaches, warm weather, and friendly people that make it a fabulous vacation spot. This movie shows the place in a different light, by showing a pressuring problem of debt. The everyday survival of many Jamaicans is based on the economic decisions of the United States and other powerful foreign countries.
b) Why do virtually all companies choose to finance themselves by the mixture of debt and equity?
Imagine yourself as a tourist. You have come fed up with your daily ritual of your 9 to 5. You feel as if you are going to go insane if you do not have a break from the routine. Subsequently, you find yourself booking a two-week trip to Jamaica, your dream vacation where you will focus on yourself, and only yourself. The outside world doesn’t matter; all you want to care about is having the best quality vacation you possibly can. This is precisely the problem that Stephanie Black, interweaving text by Jamaica Kincaid, attaches to Jamaica’s current economic climate in her 2001 documentary “Life and Debt”. Once a self-reliant economy, Jamaica has become highly dependent on the global market due to the economic interference of the International Monetary Fund (IMF), the World Bank, and the Inter-American Development Bank, implementing of their globalist views. The film recounts the history of Jamaica’s economy and its present-day status as an economy attempting to
If you do not pay out a dividend will reflect badly on the company and may stop future investors investing.
In Trade of Theory the company will decide that how much debt finance and how much equity finance will be used so that the cost and benefits are balanced out. In fact this theory explains how the corporations finance i.e. partly with debt and party with equity. It emphasis on the marginal benefit of debt finance by stating that tax benefits of debt will offset with the cost of debt.