Novo is a Danish multinational firm which produces industrial enzymes and pharmaceuticals (mostly insulin). In 1977, Novos management decided to internationalize its capital structure and sources of funds. This decision was based on the observation that the Danish securities market was both illiquid and segmented from other capital markets. In particular, the lack of availability and high cost of equity capital in Denmark resulted in Novo having a higher cost of capital than its main multinational competitors. During most of 1981 and the years thereafter Novos share price was driven by international portfolio investors transacting on the New York, London, and Copenhagen stock exchanges. This reduced Novos weighted average cost of capital and lowered its marginal cost of capital. Novos systematic risk was reduced from its previous level, which was determined by non-diversified (internationally) Danish institutional investors and the Novo Foundation. However, its appropriate debt ratio level was also reduced to match the standards expected by international portfolio investors trading in the U.S., U.K., and other important markets. In essence, the U.S. dollar became Novos functional currency when being evaluated by international investors. Theoretically, its revised weighted average cost of capital should have become a new reference hurdle rate when evaluating new capital investments in Denmark or abroad.

Questions: 1. Why did Novo believe that its cost of capital was too high compared to its competitors? Why did Novos relatively high cost of capital create a competitive disadvantage? 2. Novo believed that the Danish capital market was segmented from world capital markets. Explain the six characteristics of the Danish equity market that were responsible for its segmentation. 3. What was Novos strategy to internationalize its cost of capital? Why was this successful?