Question: So I'm Stuck on the last question and need help. Genedak-Hogan's WACC and Effective Tax Rate. Use the table in the popup window, , to



So I'm Stuck on the last question and need help.
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 nternational 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 narket 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 nternational operations. Assume that Genedak-Hogan was able to reduce its consolidated effective tax rate from 40% to 36% after international diversification. a. Calculate the weighted average cost of capital for Genedak-Hogan before and after international diversification. o. Adding the hypothetical risk premium 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? . If Genedak-Hogan was able to reduce its consolidated effective tax rate from 40% to 36%, what would be the impact on its WACC? \begin{tabular}{lrcc} Assumptions & Symbol & BeforeDiversification & AfterDiversification \\ \hline Correlation between G-H and the market & jm & 0.86 & 0.72 \\ Standard deviation of G-H's returns & j & 28.4% & 25.4% \\ Standard deviation of market's returns & m & 18.8% & 18.8% \\ Risk-free rate of interest & krf & 3.8% & 3.8% \\ Additional equity risk premium for internationalization & RPM & 0.0% & 3.4% \\ Estimate of G-H's cost of debt in U.S. market & kd & 7.3% & 6.8% \\ Market risk premium & kmkrf & 5.6% & 5.6% \\ Corporate tax rate & t & 40% & 40% \\ Proportion of debt & D/V & 39% & 33% \\ Proportion of equity & E/V & 61% & 67% \\ \hline \end{tabular} a. Without the hypothetical additional risk premium, what is Genedak-Hogan's cost of equity before international diversification of its operation % (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.)
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
