SHOW ALL WORK FOR ALL HIGHLIGHTED, AND ROUND ALL VALUES TO 5 DECIMALS PLEASE.
Genedak-Hogan's WACC and Effective Tax Rate. Use the table in the popup window, , to 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. 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 3.4% 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 Genedak-Hogan was able to reduce its consolidated effective tax rate from 38% to 34% after international diversification. a. Without the hypothetical additional risk premium, what is Genedak-Hogan's cost of equity before international diversification of its operations? (Round to two decimal places.) Without the hypothetical additional risk premium, what is Genedak-Hogan's cost of equity after international diversification of its operations? (Round to two decimal places.) Without the hypothetical additional risk premium, what is Genedak-Hogan's WACC before international diversification of its operations? ; (Round to two decimal places.) Without the hypothetical additional risk premium, what is Genedak-Hogan's WACC after international diversification of its operations? (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 risk premium, what is Genedak-Hogan's cost of equity after international diversification of its operations? % (Round to two decimal places.) With the hypothetical additional risk premium, what is Genedak-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. If Genedak-Hogan was able to reduce its consolidated effective tax rate from 38% to 34%, 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.) Options: TRUE OR FALSE
