Genedak Hogan's WACC and Effective Tax Rate. Use the table in the popup window to answer the problem Genedok Hogan (GH) 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. 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 adesitional 3 2% 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 Genedak: Hogan was able to reduce its consolidated affective tax rate from 42% 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 premium to the cost of equity (an added 32% to the cost of equilty because of international diversification), what is the firm's WACC before and after international diversification? c. Il Genedak Hogan was able to reduce its comolidated effective tax rate from 42% to 37%, what would be the impact on its WACC? a. Without the hypothetical additional tisk premium what is Genedak Hogan's cost of ecpulty before International diversification of its operationa? % (Round to two decimal places) Without the hypothetical additional elsk premium what is Gonadok Hogan's cost of equity after international diversification of its operations % (Round to two decimal places) Without the hypothetical additional tisk premium, what is Ganedok Hogan's WACC before international diversification of its operations? 0% (Round to two decimal places) Without the hypothetical additional rok premium, what is Gunadak Hogan's WACC altar international diversification of its operations? % Round to two decimal places) 1. With the hypothetical additional risk premium what is Genedak Hogan's cont of equily before international diversification of its operations? D% (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? 10% (Round to two decimal places) With the hypothetical additional tisk premium, what is Genadak-Hogan's cost of equity after international diversification of its operations? 0% (Round to two decimal places) With the hypothetical additional tak promium, what is Genedak-Hogan's WACC before international diversification of its operations ? > Pound to two decimal places) With the hypothetical additional tik premium what in Genedok Hogan's WACC after international diversification of its operations? (Round to two decimal places) c. Gendak Hogan was able to reduce its consolidated effective tax rate from 42% 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 riak 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 V (Select from the drop-down menu) Next Data table (Click on the icon to import the table into a spreadsheet.) Symbol Pjm om 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 k RPM Before Diversification 0.92 28.4% 18.4% 3.2% 0.0% 7.5% 5.6% 42% 38% 62% After Diversification 0.77 25.3% 18.4% 3.2% 3.2% 6.8% 5.6% 42% 31% 69% ko km - kat t DIV EIV Print Done