Thunder horse Oil is a U.S. oil company. Its current cost of debt is 7%, and the

Question:

Thunder horse Oil is a U.S. oil company. Its current cost of debt is 7%, and the 10-year U.S. Treasury yield, the proxy for the risk-free rate of interest, is 3%. The expected return on the market portfolio is 8%. The company's effective tax rate is 39%. Its optimal capital structure is 60% debt and 40% equity.

a. If Thunder horse beta is estimated at 1.1, what is its weighted average cost of capital?

b. If Thunder horse's beta is estimated at 0.8, significantly lower because of the continuing profit prospects in the global energy sector, what is the company's weighted average cost of capital?

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...