Pfizer, a major pharmaceutical company, has a debt ratio of 10 30 and is considering increasing its debt ratio to 30 Its cost of capital is expected to drop from 14 51 to 13 45 Pfizer had an EBIT of $2 billion in 1995 and a book value of capital (debt equity) of approximately $8 billion It also fac...

a Given that there are significant antitakeover restrictions in the corporate charter and assuming t ...

Pfizer, a major pharmaceutical company, has a debt ratio of 10.30% and is considering increasing its debt

Question:

Pfizer, a major pharmaceutical company, has a debt ratio of 10.30% and is considering increasing its debt ratio to 30%. Its is expected to drop from 14.51% to 13.45%. Pfizer had an EBIT of $2 billion in 1995 and a book value of capital (debt + equity) of approximately $8 billion. It also faced a tax rate of 40% on its income. The stock in the firm is widely held, but the corporate charter includes significant antitakeover restrictions.
a. Should Pfizer move to its desired debt ratio quickly or gradually? Explain.
b. Given the choice in part a, explain how you would move to the optimal?
c. Pfizer considers using the excess debt capacity for an acquisition. What are some of the concerns it should have?
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...