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Essay / Research Paper Abstract
This 5 page paper considers the cost of capital for this large pharmaceutical company, using both WACC and CAPM. The writer then considers the differences between these two models and how the rates may be decreased. The bibliography cites 7 sources.
Page Count:
5 pages (~225 words per page)
File: TS14_TEpfizer.rtf
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Unformatted sample text from the term paper:
well as being indicators for future profit and indicators of gearing. These ratios are useful alone, but it may also be of benefit to use these within the context of
the sector and benchmarking them. For example we would expect to find different capital structures for a pharmaceutical company such as Pfizer, where there is the need for high levels
of research and development, than in more traditional manufacturing companies, such as the automotive industry. If we use Pfizer as an example we can look at the weighted average
cost of capital, also known as the WACC, and the Capital Asset Pricing Model, also known as the CAPM. Calculating the WACC requires that the different forms of finance
are known and that their amounts as well as interest rates are known. They are then calculated proportionally. As of April 2002 the WACC was 8.71% (figures extracted from the
Financial Times, 2002 and the Pfizer Annual Report 2001). This is below the average for the manufacturing industry, which made up of 536 companies average 9.81%, or 9.61% for only
the larger companies (Anonymous, 2002). If we look at the capital asset valuing model the industry average is 9.91%, and for Pfizer is
still lower, but gives different results, this time of 8.54. This may also be seen as being below the industry average as a result of the risk rating, and therefore
a lower risk premium being sought by lenders. The beta for the company at April 2002 was 0.69, indicating that this was seen as a very safe company to invest
in. When we future consider that this company has many drugs, and of the major drugs only one licence is due to expire before 2005, the security appears well
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