WestGas Conveyance, Inc. WestGas Conveyance, Inc. is a large U.S. natural gas pipeline company that wants to raise \($120\) million to finance expansion.

WestGas wants a capital structure that is 50% debt and 50% equity. Its corporate combined federal and state income tax rate is 40%.

a. Calculate the lowest average cost of capital for each increment of \($40\) million of new capital, where WestGas raises \($20\) million in the equity market and an additional \($20\) million in the debt market at the same time.

b. If WestGas plans an expansion of only \($60\) million, how should that expansion be financed?

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Equity Cost of Raising Capital in the Market Cost of Domestic Cost of Domestic Cost of European Cost of European Debt Up to $40 million of new capital 12% 8% Equity 14% Debt 6% $41 million to $80 million of new 18% 12% 16% 10% capital Above $80 million 22% 16% 24% 18%