Alliance Pipeline is a large U.S. natural gas pipeline company that wants to raise $120 million to finance expansion. Alliance wants a capital structure that is 50% debt and 50% equity. Its corporate combined federal and state income tax rate is 40%.

Alliance finds that it can finance in the domestic U.S. capital market at the rates listed below. Both debt and equity would have to be sold in multiples of $20 million, and these cost figures Its corporate combined federal and state income tax rate is 40%. Alliance finds that it can finance in the domestic U.S. capital market at the rates listed below.

Cost of domestic equity Cost of domestic debt

First $40 million new capital 12% 8%

Subsequent new capital from $41 million 18% 12%

onwards

Both debt and equity would have to be sold in multiples of $20 million, and these cost figures show the component costs, each, of debt and equity if raised half by equity and half by debt.

i) Calculate the average cost of capital for Alliance Pipeline if the company is considering raising $40 million domestically to finance the pipeline expansion project. (4 marks)