Sanofi: Dosing the Cost of Capital
Case number:
A06-25-0014
Abstract
At a pension fund that has a large position in Sanofi, a leading global pharmaceutical company, intern Rafael Perez has been asked to help equity analyst Maria Alba, CFA, estimate the company’s cost of capital. Following changes in corporate strategy and a deterioration in operating profitability, Maria is concerned that Sanofi’s business risk and financial risk will increase, driving the company’s cost of capital up and its valuation down. Rafael must quickly choose the right models and select the right data to estimate Sanofi’s weighted average cost of capital (WACC) and assess the potential impact of increases in the company’s credit spread on its debt and systematic risk on its stock.
Teaching
Students will learn to: Introduce and/or revisit financial concepts, particularly those related to risk measures; apply the dividend discount model (DDM) and the capital asset pricing model (CAPM) to estimate Sanofi’s cost of equity, understanding the differences between the models and their implications for WACC; apply the spread to Treasury (T-spread) and spread to curve (I-curve) methods to estimate Sanofi’s pre-tax cost of debt; analyze Sanofi’s capital structure and assess how it could change; and estimate Sanofi WACC and perform sensitivity analyses, particularly to changes in the company’s systematic risk and credit spread.
Case number:
A06-25-0014
Year:
Setting:
France
Length:
7 pages
Source:
Library/published sources
Barbara Pécherot
Clinical Professor (FSC)