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 13.8 (an added 3.0% to the cost of equity because of international diversification), what is the firm’s WACC?

Transcribed Image Text:

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