is 100% 10-yeA S Tresasaury 370% The expectied relurna af deal is a aRo sury yie

Question

is 100% 10-yeA S Tresasaury 370% The expectied relurna af deal is a aRo sury yietld horse Cil i capital strucure is 50% debi and 50%equity a. lf Thunderhorse's bena is estimated at 0 80, what is Thunderhorse's weighted average cost of capita b. Thunderhorse's ea is estimated at 0 3 significant y lower because of the o minung prm rns e sin the g hale e g of ra it sector, what is nur demon es weighted aver gen n ty bouet beru fai? a.I ThurehrsesbelaieD0, wal is Thue's eighled avenage Round to two decimal places)

Explanation / Answer

Cost of Equity (Ke)= 3.70 + 0.80 (7.90-3.70) = 7.06%

Weighted Average Cost of Capital (WACC) if Beta is 0.80 = 5.95%

* Cost of Equity (Ke)= 3.70 + 0.30 (7.90-3.70) = 4.96%

Weighted Average Cost of Capital if Beta is 0.30 = 4.90%

Solution: a) Statement showing computation of Weighted Average Cost of Capital if Beta is 0.80 Particulars Weight Cost WACC Equity   0.50 7.06% 3.53% Debt 0.50 4.83% 2.42% WACC 1.00 5.95% Current Cost of Debt 6.90% Tax Rate 30% Cost of Debt (kd) = 6.9%(1-.30) = 4.83% Cost of Equity (Ke) as per CAPM Model = Rf+B (Rm - Rf) Risk Free Rate of Interest (Rf) = 3.70% Return from Market (Rm) = 7.90% Beta (B) = 0.80

Cost of Equity (Ke)= 3.70 + 0.80 (7.90-3.70) = 7.06%

Weighted Average Cost of Capital (WACC) if Beta is 0.80 = 5.95%

b) Statement showing computation of Weighted Average Cost of Capital if Beta is 0.30 Particulars Weight Cost WACC Equity * 0.50 4.96% 2.48% Debt 0.50 4.83% 2.42% WACC 1.00 4.90% Cost of Equity (Ke) as per CAPM Model = Rf+B (Rm - Rf) Risk Free Rate of Interest (Rf) = 3.70% Return from Market (Rm) = 7.90% Beta (B) = 0.30

* Cost of Equity (Ke)= 3.70 + 0.30 (7.90-3.70) = 4.96%

Weighted Average Cost of Capital if Beta is 0.30 = 4.90%

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