Pfizer Financial Management as of Dec. 2009

Short Paper 2:Pfizer:  October 17, 2009
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PAPER #2:

Consider the publicly listed company that your group is evaluating. Each student is required to independently write a short 3-5 page single-spaced paper in APA style, answering the following questions:

• Calculate the current Debt to Equity ratio of the company. Also compute the optimal Capital Structure of the company. How should the company transition from its existing to optimal Capital Structure? Provide supporting evidence (incl. All assumptions) to substantiate your analysis.

• Calculate a five-year Free Cash Flow analysis of the company, as well as a Terminal Value after the five-year mark? What do you estimate the company’s Fair Market Value stock price to be?


WACC = (E/V) x Re + (D/V) x Rd X (1-Tc) where:

Re = cost of equity – 10.436% (http://74.125.93.132/search?q=cache:GiC62Di0CGkJ:www.mtholyoke.edu/courses/sgabriel/corpfin/PFIZER.ppt+pfizer+cost+of+equity+2008&cd=1&hl=en&ct=clnk&gl=us)

Rd = cost of debt – 3.92% (http://74.125.93.132/search?q=cache:GiC62Di0CGkJ:www.mtholyoke.edu/courses/sgabriel/corpfin/PFIZER.ppt+pfizer+cost+of+debt+2008&cd=1&hl=en&ct=clnk&gl=us)

E = market value of the firm's equity – 57,556,000 http://finance.yahoo.com/q/bs?s=PFE&annual

D = market value of the firm's debt – 53,592,000 - http://finance.yahoo.com/q/bs?s=PFE&annual

V = E + D or 111,148,000

Tc = corporate tax rate - 21.9% http://mediaroom.pfizer.com/portal/site/pfizer/index.jsp?ndmViewId=news_view&newsId=20080417005548&newsLang=en

= (57,556,000/111,148,000) x 10.436% + (53,592,000/111,148,000) x 3.92% x (1- 21.9%)

= (.518) x 10.436% + (.482) x 3.92% x (.781)

= .054 + .015

How should the company transition from its existing to optimal Capital Structure?

• Provide supporting evidence (incl. All assumptions) to substantiate your analysis.

Calculate a five-year Free Cash Flow analysis of the company, as well as a Terminal Value after the five-year mark? Growing free cash flows are frequently a prelude to increased earnings. Companies that experience increasing FCF - due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distributions or debt elimination - can grow. FCF can be considered a measure of value. When a firm's share price is low and free cash flow is on the rise, the odds are good that earnings and share value will soon be increasing.

“By establishing how much cash a company has after paying its bills for ongoing activities and growth, FCF is a measure that aims to cut through the arbitrariness and "guesstimations" involved in reported earnings. Regardless of whether a cash outlay is counted as an expense in the calculation of income or turned into an asset on the balance sheet, free cash flow tracks the money.”(Investopedia.com).

The Cash Flow from operations is found on the company's cash flow statement and balance sheet. From this number subtract estimated capital expenditure required for current operations:


Cash Flow From Operations (Operating Cash)

- Capital Expenditure

---------------------------

= Free Cash Flow

To do it another way:

Net income

+ Depreciation/Amortization

- Change in Working Capital

- Capital Expenditure

----------------------------

= Free Cash Flow

•

• What do you estimate the company’s Fair Market Value stock price to be?

Latest 12 Months Data Items



Latest Full Context Quarter Ending Date 2009/06

Gross Profit Margin 89.2%

EBIT Margin 23.2%
EBITDA Margin 43.7%
Pre-Tax Profit Margin 22.1%
Interest Coverage 20.7
Current Ratio 2.7
Quick Ratio 2.3
Leverage Ratio 2.2
Receivables Turnover 4.1
Inventory Turnover 1.0
Asset Turnover 0.4
Revenue to Assets 0.3
ROE from Total Operations 12.0%
Return on Invested Capital 7.4%
Return on Assets 5.4%
Debt/Common Equity Ratio 0.62
Price/Book Ratio (Price/Equity) 1.83
Book Value per Share $9.33
Total Debt/ Equity 0.74
Long-Term Debt to Total Capital 0.38
SG&A as % of Revenue 29.0%
R&D as % of Revenue 16.5%
Receivables per Day Sales $88.74
Days CGS in Inventory 372
Working Capital per Share $6.73
Cash per Share $0.33
Cash Flow per Share $1.77
Free Cash Flow per Share $1.27
Tangible Book Value per Share $3.64
Price/Cash Flow Ratio 9.7
Price/Free Cash Flow Ratio 13.5
Price/Tangible Book Ratio 4.70

Most recent data

5-Year Averages
Return on Equity 16.8%
Return on Assets 9.5%
Return on Invested Capital 15.2%
Gross Profit Margin 86.9%
Pre-Tax Profit Margin 23.1%
Post-Tax Profit Margin 18.8%
Net Profit Margin (Total Operations) 22.1%
R&D as a % of Sales 15.6%
SG&A as a % of Sales 32.0%
Debt/Equity Ratio 0.11
Total Debt/Equity Ratio 0.23

Most recent data
WACC = (E/V) x Re + (D/V) x Rd X (1-Tc) where:

Re = cost of equity – 10.436% (http://74.125.93.132/search?q=cache:GiC62Di0CGkJ:www.mtholyoke.edu/courses/sgabriel/corpfin/PFIZER.ppt+pfizer+cost+of+equity+2008&cd=1&hl=en&ct=clnk&gl=us)

Rd = cost of debt – 3.92% (http://74.125.93.132/search?q=cache:GiC62Di0CGkJ:www.mtholyoke.edu/courses/sgabriel/corpfin/PFIZER.ppt+pfizer+cost+of+debt+2008&cd=1&hl=en&ct=clnk&gl=us)

E = market value of the firm's equity – 57,556,000 http://finance.yahoo.com/q/bs?s=PFE&annual

D = market value of the firm's debt – 53,592,000 - http://finance.yahoo.com/q/bs?s=PFE&annual

V = E + D or 111,148,000

Tc = corporate tax rate - 21.9% http://mediaroom.pfizer.com/portal/site/pfizer/index.jsp?ndmViewId=news_view&newsId=20080417005548&newsLang=en

= (57,556,000/111,148,000) x 10.436% + (53,592,000/111,148,000) x 3.92% x (1- 21.9%)

= (.518) x 10.436% + (.482) x 3.92% x (.781)

= .054 + .015

= .069

WACC = (E/V) x Re + (D/V) x Rd X (1-Tc) where:

Re = cost of equity – 10.436% (http://74.125.93.132/search?q=cache:GiC62Di0CGkJ:www.mtholyoke.edu/courses/sgabriel/corpfin/PFIZER.ppt+pfizer+cost+of+equity+2008&cd=1&hl=en&ct=clnk&gl=us)

Rd = cost of debt – 3.92% (http://74.125.93.132/search?q=cache:GiC62Di0CGkJ:www.mtholyoke.edu/courses/sgabriel/corpfin/PFIZER.ppt+pfizer+cost+of+debt+2008&cd=1&hl=en&ct=clnk&gl=us)

E = market value of the firm's equity – 57,556,000 http://finance.yahoo.com/q/bs?s=PFE&annual

D = market value of the firm's debt – 53,592,000 - http://finance.yahoo.com/q/bs?s=PFE&annual

V = E + D or 111,148,000

Tc = corporate tax rate - 21.9% http://mediaroom.pfizer.com/portal/site/pfizer/index.jsp?ndmViewId=news_view&newsId=20080417005548&newsLang=en

= (57,556,000/111,148,000) x 10.436% + (53,592,000/111,148,000) x 3.92% x (1- 21.9%)

= (.518) x 10.436% + (.482) x 3.92% x (.781)

= .054 + .015

= .069

All of the following examples were taken from Terminal Value. Financial Modeling Guide

Perpetuity with Growth
FCF (n+1) divided by WACC – growth rate

Balance Sheet

View: Annual Data
Quarterly Data

All numbers in thousands

PERIOD ENDING 31-Dec-08 31-Dec-07 31-Dec-06

Assets

Current Assets

Cash And Cash Equivalents 2,122,000 3,406,000 1,827,000

Short Term Investments 22,433,000 22,686,000 26,400,000

Net Receivables 13,992,000 9,843,000 9,392,000

Inventory 4,529,000 5,416,000 6,111,000

Other Current Assets - 5,498,000 3,219,000



Total Current Assets 43,076,000 46,849,000 46,949,000

Long Term Investments 11,478,000 4,856,000 3,892,000

Property Plant and Equipment 13,287,000 15,734,000 16,632,000

Goodwill 21,464,000 21,382,000 20,876,000

Intangible Assets 17,721,000 20,498,000 24,350,000

Accumulated Amortization - - -

Other Assets 4,122,000 1,844,000 2,138,000

Deferred Long Term Asset Charges - 4,105,000 -



Total Assets 111,148,000 115,268,000 114,837,000


Liabilities

Current Liabilities

Accounts Payable 6,233,000 7,787,000 12,443,000

Short/Current Long Term Debt 9,320,000 5,825,000 2,434,000

Other Current Liabilities 11,456,000 8,223,000 6,512,000



Total Current Liabilities 27,009,000 21,835,000 21,389,000

Long Term Debt 14,531,000 7,314,000 5,546,000

Other Liabilities 8,909,000 13,299,000 8,529,000

Deferred Long Term Liability Charges 2,959,000 7,696,000 8,015,000

Minority Interest 184,000 114,000 -

Negative Goodwill - - -



Total Liabilities 53,592,000 50,258,000 43,479,000



Stockholders' Equity

Misc Stocks Options Warrants - - -

Redeemable Preferred Stock - - -

Preferred Stock 73,000 93,000 141,000

Common Stock 443,000 442,000 441,000

Retained Earnings 49,142,000 49,660,000 49,669,000

Treasury Stock (57,391,000) (56,847,000) (46,740,000)

Capital Surplus 70,283,000 69,913,000 69,104,000

Other Stockholder Equity (4,994,000) 1,749,000 (1,257,000)



Total Stockholder Equity 57,556,000 65,010,000 71,358,000



Net Tangible Assets $18,371,000 $23,130,000 $26,132,000