Monday Oil is an American refining oil company with a presence only in Texas until now. Its current cost of debt is 7%, and the yield on the risk-free interest rate (the 1-year US Treasury bill) is 4%. The expected return on the market portfolio is 9%. The effective corporate tax rate is 30%. The firm's optimal capital structure is 30% debt and 70% equity. The company's beta is estimated at 1.2, what is Thunderhorse Oil's weighted average cost of capital? Monday Oil has the opportunity to acquire a refinery in Mexico, and sees the project, which would provide cheap labor, favorably. Can we use the average cost of capital calculated previously to estimate the profitability of the project? Explain.  If you don't think the cost of capital calculated previously is appropriate, what do you suggest (only 1 alternative solution is required)?

Answer rating: 100% (QA)

The weighted average cost of capital WACC is the weighted average of the cost of debt and the cost o... View the full answer