Pifzer Inc.'s Cost of Capital and Capital Structure
Pfizer Inc.’S Cost of Capital and Capital structure
- Xiaoyue Shi
The costs of capital and capital structures for Pfizer Inc. and its two competitors Merck & Co. Inc. and Johnson & Johnson in the pharmaceutical industry are analyzed in this memo.
When calculating the cost of common stock for the three companies, three different approaches including Capital Asset Pricing Model (CAPM), Discounted Cash Flow (DCF) and the bond yield plus risk premium are applied (Appendix A). For CAPM approach (Figure 1 & 3), the risk-free rate (rRF) used is the rate on the U.S. 10-year Treasury bonds, which is 1.66. The market risk premium (RPM) is the required return on the stock market minus rRF. The required market return used here is the average 20 years rates of return on S&P 500. With highest beta (0.71), Merck has the higher estimated cost of equity (6.167). Pfizer has lower estimated cost of equity (5.910) with lower beta (0.67). Because of the lowest beta (0.48), Johnson & Johnson has the lowest estimated cost of equity (4.697). For DCF approach (Figure 2 & 4), the stock price used is the current stock price. The expected growth rate (g) is the annualized growth rate based on the dividend growth over the past 10 years. Among the three companies, Johnson & Johnson has the highest estimated cost of equity due to its highest expected growth rate in dividends. Pfizer’s estimated cost of equity is much lower than Johnson & Johnson. Having the lowest expected growth rate in dividends, Merck has the lowest cost of equity. For bond yield plus risk premium approach (Figure 5), the bond yield (Figure 7) for Pfizer, Merck and Johnson & Johnson are 2.0724, 2.5553, and 1.9629 respectively. Since their betas are Pfizer 0.67, Merck 0.71 and Johnson & Johnson 0.48, and all below 1, the three companies’ judgmental risk premium estimated as 3.3, 3.4, and 3, respectively. According to the bond yield plus risk premium method, the estimated costs of
- Xiaoyue Shi
The costs of capital and capital structures for Pfizer Inc. and its two competitors Merck & Co. Inc. and Johnson & Johnson in the pharmaceutical industry are analyzed in this memo.
When calculating the cost of common stock for the three companies, three different approaches including Capital Asset Pricing Model (CAPM), Discounted Cash Flow (DCF) and the bond yield plus risk premium are applied (Appendix A). For CAPM approach (Figure 1 & 3), the risk-free rate (rRF) used is the rate on the U.S. 10-year Treasury bonds, which is 1.66. The market risk premium (RPM) is the required return on the stock market minus rRF. The required market return used here is the average 20 years rates of return on S&P 500. With highest beta (0.71), Merck has the higher estimated cost of equity (6.167). Pfizer has lower estimated cost of equity (5.910) with lower beta (0.67). Because of the lowest beta (0.48), Johnson & Johnson has the lowest estimated cost of equity (4.697). For DCF approach (Figure 2 & 4), the stock price used is the current stock price. The expected growth rate (g) is the annualized growth rate based on the dividend growth over the past 10 years. Among the three companies, Johnson & Johnson has the highest estimated cost of equity due to its highest expected growth rate in dividends. Pfizer’s estimated cost of equity is much lower than Johnson & Johnson. Having the lowest expected growth rate in dividends, Merck has the lowest cost of equity. For bond yield plus risk premium approach (Figure 5), the bond yield (Figure 7) for Pfizer, Merck and Johnson & Johnson are 2.0724, 2.5553, and 1.9629 respectively. Since their betas are Pfizer 0.67, Merck 0.71 and Johnson & Johnson 0.48, and all below 1, the three companies’ judgmental risk premium estimated as 3.3, 3.4, and 3, respectively. According to the bond yield plus risk premium method, the estimated costs of