Question: 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 earnings before interest and taxes 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 anti-takeover 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 is consider using the excess debt capacity for an acquisition. What are some of the concerns it should have?