Genedak-Hogan’s WACC. Calculate the weighted average cost of capital for Genedak-Hogan before and after international diversification.

a. Did the reduction in debt costs reduce the firm’s weighted average cost of capital? How would you describe the impact of international diversification on its costs of capital?

b. Adding the hypothetical risk premium to the cost of equity introduced in Problem 10 (an added 3.0%

to the cost of equity because of international diversification), what is the firm’s 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%