Genedak Hogan's WACC and Effective Tax Rate. Use the table in the popup window. Ito answer the problem Genedak Hogan (G-H) 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 Senior management at Genedak-Hogan is actively debating the implications of diversification on its cost of equity Al 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 4% risk premium for going international to the basic CAPM cost of equity. Many MNEs have greater ability to control and reduce their effective tax rates when expanding international operations. Assume that Genedok Hogan was able to reduce its consolidated effective tax rate from 40% to 37% after international diversification a. Calculate the weighted average cost of capital for Genedak-Hogan before and after international diversification b. Adding the hypothetical risk premiturn to the cost of equity (an added 3 4% to the cost of equity because of international diversification) what is the firm's WACC before and after international diversification? c. Genedik Hogan was able to reduce its consolidated effective tax rate from 40% to 37%, what would be the impact on its WACC? 2. Wthout the hypothetical additional riak premium what is Genedok Hogar's cost of equity before international diversification of its operations? % (Routed to two decimal places) Without the hypothetical additional risk premium, what is Genedak Hogan's cost of equity after international diversification of its operations? Is (Round to two decimal places) Without the hypothetical aditional tik premium, what is Genedak Hogan's WACC before international diversification of its operations? Mund to be decimal places) Wout the hypothetical analis pretium, what is Genedak Hogan's WACC attor International diversification of its operations? Os Round to two decimal places) b. With the hypothetical additional risk premium, what is Genedak-Hogan's cost of equity before international diversification of its operations? % (Round to two decimal places.) With the hypothetical additional tisk premium, what is Genedak Hogan's cost of equity after international diversification of its operations? 1% (Round to two decimal places) With the hypothetical additional risk premium, what is Gonedak Hogan's WACC before International diversification of its operations? % (Round to two decimal places.) With the hypothetical additional risk premium, what is Genedak-Hogan's WACC after international diversification of its operations? % (Round to two decimal places) c. It Genedak-Hogan was able to reduce its consolidated effective tax rate from 40% to 37%, what would be the impact on its WACC? The reduction in the effective tax rate obviously impacts WACC through the cost of debt This does have substantial benefits in the company's WACC-as long as additional equity risk premiums are not assessed. Then, even the lower effective tax rate does not offset the higher equity costs associated with the international risk premium The above statement is (Select from the drop-down menu - Data table (Click on the icon to import the table into a spreadsheet.) 0 Symbol Pim om ki Assumptions Correlation between G-H and the market Standard deviation of G-H's returns Standard deviation of market's returns Risk-free rate of interest Additional equity risk premium for internationalization Estimate of G-H's cost of debt in U.S. market Market risk premium Corporate tax rate Proportion of debt Proportion of equity Before Diversification 0.87 28.2% 17.1% 3.5% 0.0% 7.4% 5.4% 40% 39% 61% After Diversification 0.69 25.1% 17.1% 3.5% 3.49 6.9% 5.4% 40% 32% 68% RPM ka Ro km-ky H + DIV EIV Ro ell