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In light of Pfizer's current operations, as well as trends in the national economy and the organization's industry, what changes, if any, would you recommend in your selected organization's approach towards determining its cost of capital? How would you adjust the discount rate for riskier projects? Why?
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Solution gives an explaination and recommends a method how Pfizer can determine its cost of capital in changing economic and industrial environment. Also suggests How to adjust the discount rate for riskier projects and why?
Pfizer Inc is a researched based American multinational pharmaceutical company founded in 1849. In 2000, company merged with Warner-Lambert and Pharmacia to become the world's largest pharmaceutical company to healthcare (Pfizer, 2012). Company provides treatments for cardiovascular and metabolic diseases, central nervous system disorders, arthritis and pain, cancer, eye disease, etc. The pharmaceutical industry faces several issues in recent years. Patent expirations, generic competition, drug importance and legal liability creates risks for Pfizer, those affects the cost of capital of the company. This paper recommends the cost of capital approach for Pfizer Inc. It also suggests how Pfizer would adjust its discount rate for riskier projects.
Cost of Capital
Cost of capital is an opportunity cost of an investment. It is a rate of return that a company should earn at the same risk level as the investment that has been selected. Estimated cost of capital is critical important to all organization because business investments decision is based on the cost of capital. Pfizer should use weighted average cost of capital approach in the financial management examination. The WACC approach uses a weighted average of the costs for all sources of finance in a firm such as equity, debt, preferred stocks, retained earnings, etc (Nürk, 2009). It is a commonly used approach for determining the cost of capital assuming ...
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