D 1g 16 Gwen Stefani (G-S) Is an American conglomerate that is actively debating the Impact of internal diversification of its operations on its capital structure and cost of capital, The firm is planning to reduce consolidated debt after diversification. Senior management at G-S 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 on additional 2.0% equity risk premium for "going international" to the basic CAPM cost of equity. Assumptions Before After Diversification Diversification Correlation between G'S and the market 0.85 0.72 Standard deviation of G-S's returns 25.0% 22.0% Standard deviation of market's returns 15.0% 15,0% Risk-free rate of Interest .0% 4.0% Additional equity risk premium for 0.0% 2.0% internationalization Estimate of G-S's cost of debt In U. S. market 7.5% 7.2% Market risk premium 5.75% 5.75% Corporate tax rate 30.0% 30.09% Proportion of debt 40.0% 35.09%