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 3.5% risk premium for "going international" to the basic CAPM cost of equity. Calculate the weighted average cost of capital for Genedak-Hogan before and after international diversification. a. Did the reduction in debt costs reduce the firm's weighted average cost of capital? How would you describe the impact of international diversification on its costs of capital? b. Adding the hypothetical risk premium to the cost of equity (an added 3.5% to the cost of equity because of international diversification), what is the firm's WACC?

Assumptions	Symbol	Before Diversification		After Diversification
Correlation between G-H and the market	rho Subscript jmjm	0.860.86		0.740.74
Standard deviation of G-H's returns	sigma Subscript jj	29.429.4%		25.625.6%
Standard deviation of market's returns	sigma Subscript mm	17.617.6%		17.617.6%
Risk-free rate of interest	k Subscript rfkrf	3.43.4%		3.43.4%
Additional equity risk premium for internationalization	RPM	0.0%		3.53.5%
Estimate of G-H's cost of debt in U.S. market	k Subscript dkd	7.17.1%		6.96.9%
Market risk premium	k Subscript mkmminusk Subscript rfkrf	5.45.4%		5.45.4%
Corporate tax rate	tt	3535%		3535%
Proportion of debt	D/V	3434%		2929%
Proportion of equity	E/V	6666%		7171%