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    Mini Case Chapter 13

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    Thanh Trúc
    Novo faced higher costs of capital and barriers to raising equity in Denmark's segmented market. This was due to information asymmetries between Danish and foreign investors, high taxes on capital gains, and government policies restricting investment options. To escape this, Novo increased disclosure in Danish and English, listed on the London Stock Exchange, and ultimately listed on the New York Stock Exchange in 1981 with Goldman Sachs' help.

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    Mini Case Chapter 13

    Uploaded by

    Thanh Trúc
    52 views1 page
    Novo faced higher costs of capital and barriers to raising equity in Denmark's segmented market. This was due to information asymmetries between Danish and foreign investors, high taxes on capital gains, and government policies restricting investment options. To escape this, Novo increased disclosure in Danish and English, listed on the London Stock Exchange, and ultimately listed on the New York Stock Exchange in 1981 with Goldman Sachs' help.

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    MINI CASE CHAPTER 13

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    Novo faced higher costs of capital and barriers to raising equity in Denmark's segmented market. This was due to information asymmetries between Danish and foreign investors, high taxes on capital gains, and government policies restricting investment options. To escape this, Novo increased disclosure in Danish and English, listed on the London Stock Exchange, and ultimately listed on the New York Stock Exchange in 1981 with Goldman Sachs' help.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    52 views1 page

    Mini Case Chapter 13

    Uploaded by

    Thanh Trúc
    Novo faced higher costs of capital and barriers to raising equity in Denmark's segmented market. This was due to information asymmetries between Danish and foreign investors, high taxes on capital gains, and government policies restricting investment options. To escape this, Novo increased disclosure in Danish and English, listed on the London Stock Exchange, and ultimately listed on the New York Stock Exchange in 1981 with Goldman Sachs' help.

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    1.

    What were the impacts on Novo as a result of operating in a segmented


    market?
    In particular, the lack of availability and high cost of equity capital in Denmark
    resulted in Nova having a higher cost of capital than its main multinational
    competitors. Furthermore, the company have to faced additional barriers imposed by
    the government of Denmark on securities issuances, the regulation in Denmark were
    not designed so that firm could issue shares at market value. As a result, this will
    prevent Novo from fully exploiting its competitive advantage in research on insulin
    and industrial enzymes.Its revised weighted average cost of capital should have
    become a new reference hurdle rate when evaluating new capital investments in
    Denmark or abroad

    2. What were the primary causes of the market segmentation?


    Six characteristics of Danish equity market were responsible for market
    segmentation:
    1) Asymmetric information base of Danish and foreign investors;
    2) Taxation: capital gain on stock over 2 years were taxed at 50% and less than 2
    years is 75%
    3) Alternative sets of feasible portfolios: danish government policy prevent the
    company from choosing the securities as well as provide a high rate of return on
    government bond
    4) Financial risk: financial leverage utilized by Danish firm was very high
    5) Foreign exchange risk:
    6) Political risk : the foreign investors avoid the Danish market and thus this market
    became segmented
    3. Ultimately, what actions did novo take to escape its segmented market?
    ● Novo increased the level of its financial and technical disclosure in both
    Danish and English versions. Novo listed its shares on the London Stock
    Exchange to facilitate conversion and to gain visibility. These twin actions
    were the key to dissolving the information barrier and, of course, they also
    raised a large amount of long-term capital on favorable terms, which would
    have been unavailable in Denmark.
    ● Novo organized a seminar in New York City on April 30, 1980. Soon after the
    seminar a few sophisticated individual U.S. investors began buying Novo’s
    shares and convertibles through the London Stock Exchange.
    ● During the first half of 1981, under the guidance of Goldman Sachs and with
    the assistance of Morgan Grenfell and Copenhagen Handelsbank, Novo
    eventually listed on the New York Stock Exchange.

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