On March 23, 2021, Pfizer announced that it aims to expand its vaccine business by becoming...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
On March 23, 2021, Pfizer announced that it aims to expand its vaccine business by becoming a leader in the new gene-based technology behind its successful Covid-19 shots. The following is a hypothetical scenario. Suppose the company undertakes a research and development project and uses the technology called mRNA to target other viruses and pathogens beyond the coronavirus The project costs $500 million immediately and will generate a payoff of $ 1 billion next year if things go well, which happens with (65% +7%) probability, If things turn out not to work, however, the project will not generate any cash flows. The appropriate before-tax cost of capital for this project is 20% per year. The company has to pay taxes on the profit of this project at the rate of 21% (this low tax rate is a result of the US tax reform legislation enacted on 22 December 2017, ie, PL. 115-97), and the relevant marginal income tax rate of a representative investor of Pfizer is regarded as 30% (1) Assuming that the project is 100% equity financed, calculate the net present value (NPV) of the project. (ii) Assuming that the project is 100% equity financed, and the inflation rate is expected to be 3% for the year. What is the NPV of the project? (ii) Assume now that the firm finances the project by a 1-year debt of $200M at an annual interest rate of 9%, and the remainder with equity. Assume there is no inflation. By the end of the year, the firm needs to pay the interest on the debt but can defer the debt principal repayment until later (so you don't need to worry about the cash flow of debt principal in your calculation). Calculate the NPV of the project using the Adjusted Present Value (APV) method under this alternative capital structure. (iv) Suppose you find that Pfizer has a debt-equity ratio of 3:2 (in terms of their values). The company's equity beta is 0.62 and debt beta is 0.05, what other information do you need in order to calculate Pfizer's adjusted weighted average cost of capital (AWACC)? How will you do the calculation? How can this AWACC be used for capital budgeting decisions of Pfizer? (v) An investor bought 100 shares of Pfizer's common stock before the Covid-19 pandemic, say on November 11, 2019 when the bid price was $35.37/share and the difference between bid price and ask price was $0.1/share. She then sold all the shares after the announcement of its vaccine news on November 30, 2020 when the ask price was $41.01/share and the difference between bid and ask prices was $0.1/share. Pfizer had issued one dividend of $0.4/share during this period. What was the investor's after-tax profits, if she faces a capital gains tax rate of 15% and a dividend tax rate of 30%? On March 23, 2021, Pfizer announced that it aims to expand its vaccine business by becoming a leader in the new gene-based technology behind its successful Covid-19 shots. The following is a hypothetical scenario. Suppose the company undertakes a research and development project and uses the technology called mRNA to target other viruses and pathogens beyond the coronavirus The project costs $500 million immediately and will generate a payoff of $ 1 billion next year if things go well, which happens with (65% +7%) probability, If things turn out not to work, however, the project will not generate any cash flows. The appropriate before-tax cost of capital for this project is 20% per year. The company has to pay taxes on the profit of this project at the rate of 21% (this low tax rate is a result of the US tax reform legislation enacted on 22 December 2017, ie, PL. 115-97), and the relevant marginal income tax rate of a representative investor of Pfizer is regarded as 30% (1) Assuming that the project is 100% equity financed, calculate the net present value (NPV) of the project. (ii) Assuming that the project is 100% equity financed, and the inflation rate is expected to be 3% for the year. What is the NPV of the project? (ii) Assume now that the firm finances the project by a 1-year debt of $200M at an annual interest rate of 9%, and the remainder with equity. Assume there is no inflation. By the end of the year, the firm needs to pay the interest on the debt but can defer the debt principal repayment until later (so you don't need to worry about the cash flow of debt principal in your calculation). Calculate the NPV of the project using the Adjusted Present Value (APV) method under this alternative capital structure. (iv) Suppose you find that Pfizer has a debt-equity ratio of 3:2 (in terms of their values). The company's equity beta is 0.62 and debt beta is 0.05, what other information do you need in order to calculate Pfizer's adjusted weighted average cost of capital (AWACC)? How will you do the calculation? How can this AWACC be used for capital budgeting decisions of Pfizer? (v) An investor bought 100 shares of Pfizer's common stock before the Covid-19 pandemic, say on November 11, 2019 when the bid price was $35.37/share and the difference between bid price and ask price was $0.1/share. She then sold all the shares after the announcement of its vaccine news on November 30, 2020 when the ask price was $41.01/share and the difference between bid and ask prices was $0.1/share. Pfizer had issued one dividend of $0.4/share during this period. What was the investor's after-tax profits, if she faces a capital gains tax rate of 15% and a dividend tax rate of 30%?
Expert Answer:
Answer rating: 100% (QA)
1 Assuming that the project is 100 equity financed calculate the net present value NPV of the project The NPV of the project can be calculated as follows NPV Initial Investment Probability of Success ... View the full answer
Related Book For
Financial Reporting Financial Statement Analysis and Valuation
ISBN: 978-0324302950
6th edition
Authors: Clyde P. Stickney
Posted Date:
Students also viewed these finance questions
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
Following the 2017 General Election and change of government, the Labour-led coalition government established a Tax Working Group (TWG) to consider the overall structure, balance and fairness of the...
-
The glass rod of Exercise 34.18 is immersed in oil (n = 1.45). An object placed to the left of the rod on the rod's axis is to be imaged 1.20 m inside the rod. How far from the left end of the rod...
-
Which account does a merchandiser use that a service company does not use? a. Cost of goods sold b. Inventory C. Sales revenue d. All of the above
-
Decade, Inc., recorded certain capital stock transactions shown in the following journal entries: (1) issued common stock for \(\$ 25\) cash per share, (2) purchased treasury shares at \(\$ 40\) per...
-
For the follow situations indicate whether a rule of the AICPA Code of Conduct applies, if yes, which rule, whether the rule has been violated, and why or why not. a. Walker, CPA, is purchasing a...
-
Describe an overview of financial accounting. As part of your description of your description please describe the purpose of financial accounting including the type of decision maker and provide two...
-
Based on the attached case details address the following in at least 1. External environment (threats and opportunities) 2. Internal capabilities 3. Recommended business-level strategy to follow Case...
-
Marvel Parts, Incorporated, manufactures auto accessories Including a set of seat covers that can be adjusted to fit most cars. According to its standards, the factory should work 1,070 hours each...
-
Who do you need to consult with when determining work allocation and resources? Explain why. Explain what a work plan is. Why does it need to be in line with the operational plan? It is essential...
-
Please discuss some the issues that are related to the failure of an employer to adequately do a proper background check of a future employee. If you were an employer, what would be your biggest...
-
Video Post 1: Explain the misconception of sales and sales people? Tell us about what most people think about sales people and what you have learned from the videos that we will cover in this course....
-
at are the two fundamental ways to boot a computer are? ndows Boot Loader (winload.exe) is responsible for loading Windows components F kernel (Ntoskrnl.exe) does the following: Session Manager...
-
Imagine that you have been hired by a major corporation to plan and market an incentive trip for their top performing managers and their spouses/significant other. Your client has decided that they...
-
con- 1.4 How much heat (Btus) will be stored in a 100-ft crete wall 1 ft thick if it is warmed from 65F to 85F by exposure to sunlight? with 1.5 What is the value of the heat in Question 1.4 compared...
-
Element compound homogeneous mixture (heterogeneous mixture) 4) A piece of gold has a mass of 49.75 g. What should the volume be if it is pure gold? Gold has a density of 19.3 g/cm (3 points) D=m/v...
-
Mylan Laboratories (Mylan) is a leading firm in the generic pharmaceutical industry. Generic drugs have chemical compositions similar to ethical drugs but sell for a significantly lower price. Once...
-
U. S. Steel Corporation derives most revenues from manufacturing a wide variety of steel products. The steel industry in the United States has experienced intense foreign competition in the past...
-
The Gap operates chains of retail clothing stores under the names of The Gap, Banana Republic, and Old Navy. Exhibit 3.17 presents the statement of cash flows for The Gap for Year 0 to Year 4....
-
Refer to the balance sheet data given in Exercise E13-3B. a. Prepare common-size balance sheets for each year (use total assets as the base amount for computing percentages). b. Compare the...
-
Purple Company has a current ratio of 2.2 on December 31. On that date its current assets are as follows: Purple Company's current liabilities at the beginning of the year were \(\$ 195,000\) and...
-
The following information is available for Virginia Company: Calculate the following ratios for 2019: a. Gross profit percentage b. Return on sales c. Asset turnover d. Return on assets e. Return on...
Study smarter with the SolutionInn App