Question: Corcovado Pharmaceuticals. Corcovado Pharmaceutical's cost of debt is 7%. The risk-free rate of interest is 3%. The expected return on the market portfolio is 8%. After effective taxes, Corcovado's effective tax rate is 25%. Its optimal capital structure is 60% debt and 40% equity.
a. If Corcovado's beta is estimated at 1.1, what is its weighted average cost of capital?
b. If Corcovado's beta is estimated at 0.8, significantly lower because of the continuing profit prospects in the global energy sector, what is its weighted average cost of capital?