Pfyser Study Case

Due: Class 9

Case No.3

How much cash does your company need?

Questions for the case analysis

1. Make an assessment of the optimal capital structure for a knowledge-based corporation. Compare with the traditional capital structure analysis.

The knowledge-based companies usually are characterized by very high proportion of intangible assets, e.g. patents, licenses, capitalized R&D expenses. As often the value of such assets reflects the “subjective” value of the asset to the company, the liquidity of such assets outside the company often is doubtful, and volatility of the assets is very high, the knowledge-based companies face the problem of attracting external financing.

In contrast, companies representing industries with extensive tangible assets have better opportunities for attracting external financing, as the value of the assets is easier to assess and verify, and they are also often valuable at the market, without a link to the companies business. Therefore, such companies are way more leveraged (e.g. real estate companies, where almost of all assets – real estate – is often financed by the debt).

As a result, to finance own operations, knowledge-based companies need to generate and keep significant amount of cash.

2. Evaluate knowledge-intensive company’s sensitivity to financial distress.

As the financing opportunities of knowledge-based companies are limited, and the companies are quite dependent on the cash generated by the business, the companies are very vulnerable to the financial distress.

Furthermore, the knowledge-based companies’ debt burden is associated with higher potential bankruptcy costs in case of financial distress, as the value of companies’ assets decreases significantly, when it is no longer possible to maintain the same financing for the intangibles.

3. Consider the optimal capital structure for Pfizer based on the alternative capital structure analysis methods....