Ch12_SSol - Problem 12.1 Novo's cost of equity prior to...

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Problem 12.1 Novo's cost of equity prior to April 1980 Assumptions Values Danish risk free rate of interest, krf 10.00% Danish stock market return, km 18.00% Novo's beta before internationalization 1.00 What was Novo's cost of equity? 18.00% In Chapter 11 we described how Novo Industri A/S (Novo) increased its stock price by sevenfold during the April, 1980 to July, 1981 period. Its strategy was to be discovered by international portfolio investors and sell equity and list in both London and New York. The next six problems ask you to determine just how the dramatic increase in Novo’s stock price theoretically should have lowered Novo’s cost of capital after the new securities issues in London and New York. Prior to April, 1980, Novo’s stock price was determined by the norms of the Danish Stock market since nearly all shareholders were Danish, mostly institutional investors. Novo’s stock price hovered around Dkr200 with a price-earnings ratio of 5, typical of the Danish stock market. After April, 1980, Novo’s stock price was
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This note was uploaded on 07/27/2011 for the course ECON 101 taught by Professor Dr. during the Spring '11 term at Columbia Union.

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Ch12_SSol - Problem 12.1 Novo's cost of equity prior to...

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