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23-05-2023
Business

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Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.30%, and the 10-year U.S. Treasury yield, the proxy for the risk-free rate of interest, is 3.00%. The expected return on the market portfolio is 8.20%. The company's effective tax rate is 40%. Its optimal capital structure is 75% debt and 25% equity.
a. If Thunderhorse's beta is estimated at 1.30, what is Thunderhorse's weighted average cost of capital?
b. If Thunderhorse's beta is estimated at 0.90, 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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