International finance and Novo’s Cost of Equity

1. Novo’s cost of equity prior to April of 1980
Assume that the following data apply and calculate Novo’s cost of equity:

Danish Krf=10% Demark purpose maintained high real rates of interest to protect its exchange rate
Novo’s β=1.0 The Danish market did not distinguish between growth stocks and other industrial stick their share prices all moved together
Danish Km=18% The required return on stocks was quite high due to competition with high real interest rates and lack of international diversification by Danish investors caused by Danish legal restrictions

2. Novo’s WACC prior to April 1980. Assume the following data apply

Kc= 12% Novos’ cost of debt
Kc=18% Novo’s cost of equity
E/v=30% Novo’s equity to capital ratio
D/v=70% Novo’s debt to capital ration
V=100% Total market value of Novo’s securities D+E
T=40% Novo’s effective tax rate

A. what was novos weighted average cost of capital?
B. how did this affect its capital budget?

3. Novos’ cost of equity after April 1981
Assuming the following data now apply calculate Novo’s cost of equjity:

International Krf= 8.0%
International βnovo= 0.8
International Km=12.0%

International portfolio investors dominated the trading activity in Novo’s stock. Most of the volume was executed on the new York stock exchange therefore use international norms rather than Danish norms.

4. Novo’s Wacc after july 1981 Assume that the following data apply:
Kd=10% Novo’s new cost of debt due to a lower debt ratio
Kc= 11.2% Novo’s cost of equity
E/V= 50% Novo’s equity to capital ratio, international investors required a lowered debt ratio than the previous 70%
D/V=50% Novo’s new lower debt to capital ratio
V=100% Total market value of Novo’s securities D+E
T=40% Novo’s effective tax rate

a. What was Novo’s weighted average cost of capital
b. How did this affect its capital budjet?

5. Novos’s cost of equity in 2003. Answer the following question assuming the following:
International Kd=4.0% rish free interest rates had fallen due to the slow economic growth in much of the world
International βnovo= 0.8
International Km=8.0% The poor performance of stocks worldwide during the past three years had reduced expected returns

What was Novo’s cost of equity?

6. Novo’s WACC in early 2003 Assume that the following data apply:

Kd=6.0% Novo’s new cost of debt due to overall lover interest rates
Kc= 7.2% Novos cost of equity
E/V= 50% novo’s equity to capital ratio
D/V= 50% Novo’s debt to capital ratio
V=100% total market value of novo’s securities D+E
R=40% novo’s effective tax rate

a) What was Novo’s weighted average cost of capital
b) How did this affect its capital budjet?

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