Cost Of Capital Essay

781 words - 4 pages

Cost of Capital

Pfizer is researched drug corporation that increases their own inventive pharmaceutical goods. Pfizer's global income exceeds $65 billion with a marketplace fissure close to 140 billion. The organization was founded in 1849 by two cousins, Charles Pfizer and Charles Ehart with the mission of learning and evolving new and better, ways to prevent and treat disease and improve the well-being of people. (History, 2014) This paper shall present to the reader Team B’s prospective of the week five video assignment. Our breakdown shall include a brief explanation on the cost of capital, capital asset pricing model, capital base, and capital structure.
Cost of Capital
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Capital Base
Parrino, Kidwell, Bates (2014) states, "The firm’s capital base which consists of sources of capital that the firm can borrow from an investor base in return for a promised interest rate.” Pfizer’s capital base consists of a broad mix of debt and equity, and they invest in businesses that are NPV (Net Present Value) positive. Pfizer prioritizes the existing R&D projects they invest in by using financial metrics to evaluate the investment and fund those that hold good returns for their shareholders. One financial metric tool they use is a productivity index. The formula used to assess the potential investment is:
Productivity index = NPV index / present value of cost
The outcome illustrates the return of investment in the project and indicates whether or not the project is worth investing. Pfizer takes into account the value a product or project would have on the patient population. A product that can serve a larger patient population is going to give a greater net present value. These types of projects can also show shareholders Pfizer is using its resources to benefit the masses rather than the few.

Capital Structure
Pfizer uses a mixed capital structure which balances equity, debt, and cash. Liquidity is crucial for the company. It allows them the flexibility in choosing that projects to focus...

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