Genedak-Hogan’s WACC and Effective Tax Rate.

Many MNEs have greater ability to control and reduce their effective tax rates when expanding international operations. If Genedak-Hogan was able to reduce its consolidated effective tax rate from 35% to 32%, what would be the impact on its WACC?

Use the table below to answer this problem. Genedak-Hogan is an American conglomerate that is actively debating the impacts of international diversification of its operations on its capital structure and cost of capital. The firm is planning on reducing consolidated debt after diversification.

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Assumptions Symbol Before Diversification After Diversification 0.88 0.76 Correlation between G-H and the market Pjm 28.0% 26.0% Standard deviation of G-H's returns j 18.0% 18.0% Standard deviation of market's returns Risk-free rate of interest Krf 3.0% 3.0% Additional equity risk premium for internationalization RPM 0.0% 3.0% Estimate of G-H's cost of debt in U.S. market kd 7.2% 7.0% Market risk premium km - krf 5.5% 5.5% t 35.0% 35.0% Corporate tax rate Proportion of debt Proportion of equity DIV 38% 32% EIV 62% 68%