Question

Thunderhorse Oil. Thunderhorse Oil is a US oil company. Its current cost of debt is 7.20%, and the 10-year U.S. Treasury yield, the proxy for the nsk-free rate of interest, is 3.70%. The expected return on the market portfolio is 8.00%. The company's effective tax rate is 40%. its optimal capital structure is 60% debt and 40% equity a. If Thunderhorse's beta is estimated at 1.70, what is Thunderhorse's weighted average cost of capital? b. If Thunderhorse's beta is estimated at 1.20, signific antly lower because of the continuing profit prospects in the global energy sector, what is Thunderhorse's weighted average cost of capital?

Answer 1

a.

cost of equity=3.70%+1.70*(8.00%-3.70%)=11.01%

weighted average cost of capital

=40%*11.01%+60%*7.20%*(1-40%)

=7.00%

b.

cost of equity=3.70%+1.20*(8.00%-3.70%)=8.86%

weighted average cost of capital

=40%*8.86%+60%*7.20%*(1-40%)

=6.14%

the above is answer..