Write a Critical review of the relevant capital structure theories and a research of relevancy and usability of these concepts for investing/divesting in pharma sector in the U.S., e.g. Pfizer as representative sample
The trade-off theory argues that companies must balance the tax benefits of debt with the costs of financial distress. In other words, companies must find the optimal level of debt that minimizes the overall cost of capital. The pecking order theory suggests that companies prefer to finance themselves with internal funds first, followed by debt and then equity, based
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In terms of investing or divesting in the pharma sector in the U.S., understanding the relevant capital structure theories can be useful in assessing the risks and returns of various investment opportunities. For example, a company with a high level of debt may be more vulnerable to financial distress in the event of an economic downturn or other unforeseen circumstances. On the other hand, a company with a low level of debt may be less risky but may also have less room for growth.
Taking Pfizer as a representative sample, it can be observed that the company has a relatively conservative capital structure, with a debt-to-equity ratio of around 0.64 as of 2021. This suggests that Pfizer has a relatively low level of financial risk, but may also have limited opportunities for growth if it does not leverage more debt.
In conclusion, understanding capital structure theory can be useful in evaluating investment opportunities in the pharma sector in the U.S., but it should not be the only factor considered. Investors should also consider other factors such as the competitive landscape, regulatory environment, and overall market trends when making investment decisions.