Question

What will be the effects of issuing $3billion of new debt and using proceeds to repurchase shares on Wrigley's outstanding shares?

Answer 1

If the new debt has been issued for $3billion and the proceeds are used to repurchase the shares than the no of shares outstanding of the company would be reduced as these shares the company can no longer show as outstanding in its books, they will be shown under treasury stock. With purchase of shares the voting right and control would increase as compare to previous. There would be no impact on the financial statements as with increase in debt there would also be reduction in equity. There would be no impact on WACC as equity and debt would be netted off. Repurchasing of shares might have impact on shares indirectly as some may consider repurchase as bullish, directly there is no impact on price of shares. The repurchase may also have no impact on the book value of the company. On taking debt the company can have more tax savings on interest which was not available on the equity.