Thunderhorse Oil. Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.20%, and the 10-year U.S. Treasury yield, the proxy for the risk-free rate of interest, is 3.10%. The expected return on the market portfolio is 8.30%. The company's effective tax rate is 38%. Its optimal capital structure is 70% debt and 30% 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 1.00, significantly lower because of the continuing profit prospects in the global energy sector, what is Thunderhorse's weighted average cost of capital?

Essentials Of Investments
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Thunderhorse Oil. Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.20%, and the 10-year U.S. Treasury yield, the proxy for
the risk-free rate of interest, is 3.10%. The expected return on the market portfolio is 8.30%. The company's effective tax rate is 38%. Its
optimal capital structure is 70% debt and 30% 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 1.00, significantly lower because of the continuing profit prospects in the global energy sector, what is
Thunderhorse's weighted average cost of capital?
a. If Thunderhorse's beta is estimated at 1.30, what is Thunderhorse's weighted average cost of capital?
% (Round to two decimal places.)
Transcribed Image Text:Thunderhorse Oil. Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.20%, and the 10-year U.S. Treasury yield, the proxy for the risk-free rate of interest, is 3.10%. The expected return on the market portfolio is 8.30%. The company's effective tax rate is 38%. Its optimal capital structure is 70% debt and 30% 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 1.00, significantly lower because of the continuing profit prospects in the global energy sector, what is Thunderhorse's weighted average cost of capital? a. If Thunderhorse's beta is estimated at 1.30, what is Thunderhorse's weighted average cost of capital? % (Round to two decimal places.)
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