Fin571 Week 5 Lt Reflection

LTC: Week 5 Reflection

Marguerete Barker, Margaret Battista, & Brenda Olivares

February 9, 2015

FIN570

Based on our discussion this week regarding the “Concept Review Video: Cost of Capital” located in the WileyPLUS Assignment: Week 5 Videos Activity, Learning Team C has come to the following conclusion. Cost of capital refers to the weighted average cost of the debt in equity that a company holds in its capital base. The cost of capital depends on the type of financing being used. Many companies utilize a combination of debt and equity to finance their business. In terms of these companies, their overall cost of capital is derived from a weighted average of all capital sources, which is widely known as the weighted average cost of capital (Investopedia, 2015). A firm’s capital base consists of various sources of capital that the firm can borrow from the investors. Debt refers to the amount of money that is borrowed from the banks in return for a promised interest rate. Equity is what investors that have invested in the company.

Pfizer uses the weighted average cost of debt and equity to determine the company’s capital base that they hold. They also use the most common capital asset pricing model. The most common capital asset pricing model will also include the risk free rate, the beta, as well as their market risk premiums. The debt that Pfizer includes are all monies that are borrowed. The equity that Pfizer includes are all monies invested by the investors. Pfizer’s ability to determine their NPV’s is because they are not funded from one project to the next. This gives them the capability to rank their projects in order by their value which allows them, in the long run, to be more capable of having better returns on their projects. One challenge that they face is the capability of optimizing their debt versus equity. Pfizer needs to account for all cash and their liquidity to use as insurance against their research and development...