The Balance Sheet for Pfizer, Inc. is listed below. According to p.106 of Appendix A of...

The Balance Sheet for Pfizer, Inc. is listed below. According to p.106 of Appendix A of the firm’s 2015 financial statement, Pfizer has $3.3 billion in unfunded pension obligations that are included as part of noncurrent liabilities. The average interest rate on its long-term loans is 5.18%. In 2015, the firm paid $6.94 billion in dividends, a 5% increase per share over 2014. This growth rate is expected to be constant. Pfizer has 6 billion shares of common stock and is currently trading at $35/share. Its marginal tax rate is 30%. Find Pfizer’s cost of equity capital, opportunity cost of capital, and weighted average cost of capital.

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Expert Solution

Price = Dividends Per Share last year * (1+ growth)/ cost of equity - growth

Dividends per share = Dividends paid / Number of Outstanding Shares

Dividends per share = $6.94/ 6 = $1.1567 per share

So, Price of the stock is given = $35

Growth Rate = 5%

Or, $35 = 1.1567 * (1 + 0.05)/ cost of equity - growth

Or, cost of equity = 1.2145/ 35 + 0.05 = 8.47%

Market value of equity = Market price of equity * No. Of shares

Or, Market value of equity = $35*6 = $210billion

Opportunity Cost of Capital is the post tax after tax cost of debt which is yielding 5.18% (pre tax) and unfunded cost of pension obligations is the hidden debt of the company

So post tax cost of opportunity capital = Interest on long term debt * (1- tax rate)

post tax cost of opportunity capital = 5.18% * (1 - 0.3)

or, post tax cost of opportunity cost of long term debt capital = 3.626%

Market value of Unfunded Obligations = $3.3billion

So, weighted average cost of capital = cost of equity * weight of equity + post tax cost of unfunded pension obligations* weight of unfunded pension obligations

Or, WACC = 8.47% * 210/213.30 + 3.626%* 3.3/213.30

Or, WACC = 8.40%

jeff jeffy answered 1 year ago

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