Fin 571 Week 5

FIN 571 WEEK 5

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FIN 571 Week 5,

Research-based pharmaceuticalPfizer develops its own innovative pharmaceutical products. Pfizer’s worldwide revenue is over $60 billion with a gap close to $140 billion.

Pfizer employs a textbook Capital Asset Pricing Model (CAPM), which uses the weighted average of debt and equity in its capital base to calculate its cost of capital.

CAPM describes the relationship between risk and the expected return. To calculate CAPM, Pfizer uses the risk-free rate from the treasury market, the beta from historical performance of its stock against an index such as S&P 500, and the market risk premium or the expected return on the market. The market risk premium is the difference between the expected return on the market and the risk-free rate from the treasury market. To calculate the weighted cost of debt, Pfizer calculates the net debt (the amount of debt held minus the amount of cash held) rather than the gross debt. This leads to the primary capital structure of Pfizer as equity rather than debt based.

0More importantly, Pfizer looks at the cost of debt side, starting with debt, which is observable. On the equity side, the capital asset pricing model comes in. The input is the risk-free rate, observable in the treasury market. Pfizer then looks at the beta of the company, which is a calculated number, based on the historical performance of the organization stock, which is an index. Pfizer uses the productivity index tool to calculate the MPV/ PVC. This approach allows,

Research-based pharmaceuticalPfizer develops its own innovative pharmaceutical products. Pfizer’s worldwide revenue is over $60 billion with a gap close to $140 billion.

Pfizer employs a textbook Capital Asset Pricing Model (CAPM), which uses the weighted average of debt and equity in its capital base to calculate...