3.

(TCO E) Division Asset Beta Next Period's Expected Free Cash Flow ($mm) Oil Exploration Oil Refining 1.4 1.1 450 525 4.0% 2.5% Expected Growth Rate

Gas & Convenience Stores 0.8 600 3.0%

The risk-free rate of interest is 3% and the market risk premium is 5%. 1) Which is the cost of capital for the oil exploration division closest to? A) 6.0%

B) 7.0% C) 8.5% D) 10.0% Cost of Capital = Risk Free Return + Beta x Market Risk Premium Cost of Capital = 3% + 1.4 x 5% = 10%