Presentation Title

The importance of Weighted Average Cost of Capital in investment decision-making for investors of corporations in the healthcare industry

Faculty Mentor

Teresa Alenikov

Start Date

17-11-2018 3:00 PM

End Date

17-11-2018 5:00 PM

Location

CREVELING 94

Session

POSTER 3

Type of Presentation

Poster

Subject Area

business_economics_public_administration

Abstract

The significant functionality of Weighted Average Cost of Capital (WACC) as a financial tool for both internal and external purposes is widely approved by financial analysts. From the company’s view, WACC can identify how much the company is expected to pay its security holders to provide funding for its assets. From the investors’ standpoint, WACC serves as one of the most important indicators in their decision of investment. Since the WACC formula is complicated, different investors or analysts calculating the WACC for the same company may come up with different results. In this research, I will calculate the WACC of 5 corporations in the healthcare industry, including Johnson & Johnson, Abbott Laboratories, Merck & Co. Inc., Pfizer Inc., and AbbVie Inc., in the year 2017 by applying two different methods. The first technique is using the traditional CAPM model based on historical data. The second method is running the Monte Carlo simulation that will consider probability and uncertainty. There are three major objectives for this research: Firstly, by comparing the WACC from both methods, we can conclude which approach is more reasonable to use. Secondly, we can acknowledge the WACC difference between the two approaches and go deeper into what factor is the crucial source of variability. Lastly, from the WACC calculation, we can give some suggestion to the investors of any of the 5 healthcare corporations whether to continue or discontinue their investment; as well as recommend future investors whether to invest in corporations in the healthcare industry.

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Nov 17th, 3:00 PM Nov 17th, 5:00 PM

The importance of Weighted Average Cost of Capital in investment decision-making for investors of corporations in the healthcare industry

CREVELING 94

The significant functionality of Weighted Average Cost of Capital (WACC) as a financial tool for both internal and external purposes is widely approved by financial analysts. From the company’s view, WACC can identify how much the company is expected to pay its security holders to provide funding for its assets. From the investors’ standpoint, WACC serves as one of the most important indicators in their decision of investment. Since the WACC formula is complicated, different investors or analysts calculating the WACC for the same company may come up with different results. In this research, I will calculate the WACC of 5 corporations in the healthcare industry, including Johnson & Johnson, Abbott Laboratories, Merck & Co. Inc., Pfizer Inc., and AbbVie Inc., in the year 2017 by applying two different methods. The first technique is using the traditional CAPM model based on historical data. The second method is running the Monte Carlo simulation that will consider probability and uncertainty. There are three major objectives for this research: Firstly, by comparing the WACC from both methods, we can conclude which approach is more reasonable to use. Secondly, we can acknowledge the WACC difference between the two approaches and go deeper into what factor is the crucial source of variability. Lastly, from the WACC calculation, we can give some suggestion to the investors of any of the 5 healthcare corporations whether to continue or discontinue their investment; as well as recommend future investors whether to invest in corporations in the healthcare industry.