Chapter 13 Global Cost and Availability of Capital Seminar Assignment #4-work in teams of two /60 / 100 Use the following information to answer the questions below. Genedak-Hogan is an American conglomerate which 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. Senior management at Genedak-Hogan is actively debating the implications of diversification on its cost of equity. All agree that the company's returns will be less correlated with the reference market return in the future, the financial advisors believe that the market will assess an additional 3.0% risk premium for 'going international to the basic CAPM cost of equity. (10 marks per question) Before After Assumptions Correlation between G-H and the market Standard deviation of G-H's returns Standard deviation of market's retuns Risk-free rate of interest Additional equity risk premium for internationalization Estimate of G-H's cost of debe in US market Market risk premium Corporate tax rate Symbol pjm aj Diversification Diversification 0.88 28.0% 18.0% 3,0% 0.76 26,0% 18.0% 3.0% krf RPM kd km-krf 0.0% 7.2% 5.5% 35.0% 38% 62% 3,0% 7.0% 5.5% 35.0% 32% Proportion of debt Proportion of equity D/V E/V 68% Estimated cost of equity Estimated cost of equity with additional risk premium ke krf+ B(km - krf)+ RPM Estimated beta P, measure of systematic risk for security correlation between security j and the market o,-standard deviation of the return on firm/ .-standard deviation of the market return