Question

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.

Pfizer Balance Sheet (all numbers in millions)
Period Ending	12/31/2015	12/31/2014
Current Assets
Cash And Cash Equivalents	3,641	3,343
Short Term Investments	19,649	32,779
Net Receivables	10,838	10,967
Inventory	7,513	5,663
Other Current Assets	2,163	2,843
Total Current Assets	43,804	55,595
Long Term Investments	15,999	17,518
Property Plant and Equipment	13,766	11,762
Goodwill	48,242	42,069
Intangible Assets	40,356	35,166
Other Assets	3,499	3,513
Deferred Long Term Asset Charges	1,794	1,944
Total Assets	167,460	167,566
Liabilities
Accounts Payable	8,249	7,293
Short/Current Long Term Debt	10,160	5,141
Other Current Liabilities	10,990	9,153
Total Current Liabilities	29,399	21,587
Long Term Debt	32,810	35,894
Other Liabilities	13,376	15,147
Deferred Long Term Liab. Charges	26,877	23,317
Minority Interest	278	321
Total Liabilities	102,741	96,265
Stockholders' Equity
Misc. Stocks Options Warrants	-	-
Redeemable Preferred Stock	-	-
Preferred Stock	-	-
Common Stock	459	455
Retained Earnings	71,993	72,176
Treasury Stock	-79,252	-73,021
Capital Surplus	81,016	78,977
Other Stockholder Equity	-9,496	-7,286
Total Stockholder Equity	64,720	71,301
Net Tangible Assets	-23,878	-5,934

Answer 1

cost of equity capital:

Value of equity part P0= shares outstanding * share price

= 6 billion * 35 = 210 Billion

next dividend D1 = D0 (1+g)

= 6.94 * (1.05) = 7.287 billion

cost of equity = D1/P0 + 0.05

= 7.287/210 + 0.05

= 8.47%

value of debt part = Long Term Debt + Short/Current Long Term Debt

= 10.16 + 32.81 = 42.97 (in thousands)

Enterprise value = debt value + equity value = 42.97 +210 = 252.97 Billion

equity weight = 210 / 252.97 = 83.01%

debt weight = 42.97/252.97 = 16.999% (roughly 17 %)

opportunity cost of capital = weight of equity * cost of equity + weight of debt * cost of debt = 0.8301 * 0.0847 + 0.1699 * 0.0518 = 7.911%

weighted average cost of capital = weight of equity * cost of equity + weight of debt * cost of debt * (1 - Tax rate)

= 0.8301 * 0.0847 + 0.1699 * 0.0518 (1-0.3) = 7.65%