In early 2019, the executive leadership of Chipotle Mexican Grill, Inc. (Chipotle), gathered to discuss the company’s 2018 performance and align the company's capital structure policy and its growth aspirations going forward.
Before 2018, Chipotle distributed earnings to shareholders by implementing stock repurchases funded by accumulated cash reserves. Should it consider orchestrating a larger stock repurchase funded by debt? Since going public in 2006, Chipotle had kept a clean balance sheet, never taking on any debt. The executive team contemplated the benefits of levering up Chipotle to fuel shareholder returns. How far should the company go in levering up? How quickly? What risks would Chipotle be exposed to? Would the leverage decision affect its treasured operations?
This case facilitates a theoretical discussion and practical application of Franco Modigliani and Merton Miller's capital structure irrelevance propositions and debt tax shields. Students gain experience analyzing the effects of debt on the weighted-average cost of capital (WACC) and company stock price.