Question
Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.40%, and the 10-year U.S. Treasury yield, the proxy for the risk-free
Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.40%, and the 10-year U.S. Treasury yield, the proxy for the risk-free rate of interest, is 3.50%. The expected return on the market portfolio is 8.20%. The company's effective tax rate is 30%. Its optimal capital structure is 55% debt and 45% equity.
a. If Thunderhorse's beta is estimated at 1.80, what is Thunderhorse's weighted average cost of capital?
b. If Thunderhorse's beta is estimated at 1.50 , significantly lower because of the continuing profit prospects in the global energy sector, what is Thunderhorse's weighted average cost of capital?
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