WACC, EVA and Payout Policy Problem Assessment
Company description:
Novartis (NOVN VX) operating in the global pharmaceutical industry headquartered in Switzerland and publically traded on several international exchanges. The following tables contain the relevant data required to solve the following problems related to solving and commenting on the firm's cost of capital, current position of economics value added, as well as your assessment of the firm's payout policy and capital investment policy.
|
Moody's Levels
|
Moody's Current Yields
|
|
Country
|
Marginal Corp Tax Rate
|
|
AAA
|
3.780%
|
|
Switzerland
|
25%
|
|
AA
|
4.076%
|
|
United Kingdom
|
20%
|
|
A
|
4.374%
|
|
United States
|
25%
|
|
Baa
|
4.670%
|
|
|
|
Sources: Moody's, Federal Reserve Bank, Bloomberg
|
Ticker
|
Total Debt / EBITDA
|
Net Debt / EBITDA
|
12M IVol
|
S&P Rating
|
Moody's Rating
|
Fitch Rating
|
1Yr Default Risk
|
|
MRK US
|
2.16
|
1.05
|
25.1
|
AA
|
A2
|
A+
|
0.0149%
|
|
NOVN VX
|
1.28
|
0.41
|
22.5
|
AA-
|
Aa3
|
AA
|
0.0058%
|
|
PFE US
|
1.86
|
0.18
|
21.2
|
AA
|
A1
|
A+
|
0.0100%
|
|
BMY US
|
2.21
|
-1.13
|
27.8
|
A+
|
A2
|
A-
|
0.0122%
|
|
JNJ US
|
0.61
|
-0.71
|
21.2
|
AAA
|
Aaa
|
AAA
|
0.0028%
|
|
GSK LN
|
2.32
|
1.78
|
20.8
|
A+
|
A2
|
A+
|
0.0191%
|
Source: Bloomberg
|
Ticker
|
Total Assets
(Billions)
|
Price
|
Shares Outstanding
(Billions)
|
Mkt. Value Debt (Billions)
|
Revenue
(Billions)
|
EBIT (Billions)
|
Net Income (Billions)
|
|
MRK US
|
$105.1
|
$58.25
|
2.171
|
$18.56
|
23.850
|
6.439
|
7.808
|
|
NOVN VX
|
125.4chf
|
103.01chf
|
2.728
|
13.79chf
|
41.459chf
|
9.439chf
|
8.195chf
|
|
PFE US
|
$172.1
|
$34.14
|
7.210
|
$31.67
|
48.296
|
17.056
|
8.104
|
|
BMY US
|
$33.7
|
$60.00
|
1.966
|
$7.24
|
17.715
|
3.566
|
5.247
|
|
JNJ US
|
$131.1
|
$100.43
|
2.899
|
$15.12
|
63.747
|
16.169
|
12.949
|
|
GSK LN
|
40.7gbp
|
23.91
|
5.755
|
15.84gbp
|
24.352gbp
|
7.884gbp
|
4.602gbp
|
Sources: Bloomberg
|
Ticker
|
Short Term Beta
|
Long Term Beta
|
Current Risk Free Rate
|
Long Term Risk Free Rate
|
Current Expected Market Return
|
Long Term Expected Market Return
|
|
MRK US
|
0.74
|
0.56
|
1.34%
|
5.8%
|
12.4%
|
10.4%
|
|
NOVN VX
|
1.02
|
0.77
|
0.09%
|
4.3%
|
8.52%
|
7.1%
|
|
PFE US
|
1.00
|
0.82
|
1.34%
|
5.8%
|
12.4%
|
10.4%
|
|
BMY US
|
0.91
|
0.54
|
1.34%
|
5.8%
|
12.4%
|
10.4%
|
|
JNJ US
|
0.90
|
0.70
|
1.34%
|
5.8%
|
12.4%
|
10.4%
|
|
GSK LN
|
0.86
|
1.04
|
1.76%
|
4.9%
|
10.66%
|
10.2%
|
Sources: Bloomberg, Dimson Marsh and Staunton (2002) Triumph of the Optimists, Princeton University Press.
|
Ticker
|
Revenue Growth
|
Dividends TTM/Share
|
5yr Average CAPEX
(Billions)
|
5yr Asset Growth
|
5yr Dividend Growth
|
5yr Average Share Repurchases
|
|
MRK US
|
-4.08%
|
$1.78
|
$2.04
|
-0.74%
|
1.78%
|
Still need to look these up
|
|
NOVN VX
|
0.63%
|
2.6chf
|
2.76chf
|
5.28%
|
4.14%
|
|
|
PFE US
|
-3.84%
|
$1.06
|
$1.22
|
4.35%
|
9.94%
|
|
|
BMY US
|
-3.08%
|
$3.61
|
$-2.02
|
2.36%
|
3.01%
|
|
|
JNJ US
|
4.23%
|
$2.80
|
$9.88
|
9.7%
|
7.39%
|
|
|
GSK LN
|
-13.20%
|
88.8p
|
-2.11gbp
|
3.99%
|
5.57%
|
|
Source: Bloomberg
Your Analysis, Comments and Recommendations:
1. Calculate the long run weighted cost of capital, and comment on its implication for the firm.
2. Calculate the current capital charge, based on existing market value of the firm's debt and equity.
3. Calculate the current Net Operating Profit After-taxes, as well as the Return on Invested Capital, comment on these and distinguish them from the measures of Net Income and ROE.
4. Calculate and discuss the implications of the Economic Value Added and EVA Spread for the prospects of the firm with regard to its payout policy versus its reinvestment plans.
5. Should the firm increase its dividend payout, stock repurchase program, increase its capital investment program? Justify your recommendation.