Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.50%, and the10-year U.S. Treasuryyield, the proxy for therisk-free rate ofinterest, is 4.00%. The expected return on the market portfolio is 8.50%. Thecompany's effective tax rate is 40%. Its optimal capital structure is 25% debt and 75% equity.

a. IfThunderhorse's beta is estimated at 1.40, what isThunderhorse's weighted average cost ofcapital?

b. IfThunderhorse's beta is estimated at 1.00, significantly lower because of the continuing profit prospects in the global energysector, what isThunderhorse's weighted average cost ofcapital?