eiteman_178963_im12

eiteman_178963_im12 - Problem 12.1 Novo's cost of equity...

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Problem 12.1 Novo's cost of equity prior to April 1980 What was Novo's cost of equity? 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% ke = krf + ( km - krf ) β
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Problem 12.2 Novo's WACC prior to April 1980 What was Novo's weighted average cost of capital? Assumptions Values Novo's cost of debt, kd 12.0% Novo's cost of equity, ke 18.0% Novo's debt to capital ratio, D/V 70.0% Novo's equity to capital ratio, E/V 30.0% Novo's effective tax rate, t 40.0% a) What was Novo's weighted average cost of capital? WACC = (D/V x kd (1-t)) + (E/V x ke) 10.44% b) How did this affect its capital budget? The relatively high debt ratio and the tax shelter of interest led to a modest WACC despite the relatively high cost of equity. Thus the WACC was probably a reasonable hurdle rate for capital investments. However, as explained in Chapter 11, the bigger problem was that the marginal cost of capital would increase significantly if Novo did not gain access to the liquidity provided by international portfolio investors.
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Problem 12.3 Novo's cost of equity after July 1981 What was Novo's cost of equity? Assumptions
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eiteman_178963_im12 - Problem 12.1 Novo's cost of equity...

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