n.com/products/d2f1c419-5463-4794-8aa6-604d218d0d5a/pages/a2d95447a7798... 0 13.8 13: Global Cost and Availability of Capital Cong Prome prospect Me Yar pratra DECOR, WIE IS Wege average cost of capital? West Gas 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%. WestGas finds that it can finance in the domestic U.S. capital market at the following rates. Both debt and equity would have to be sold in multiples of $20 million, and these cost figures show the component costs of debt and equity, if raised half by equity and half by debt. A London bank advises WestGas that U.S. dollars could be raised in Europe at the following costs, also in multiples of $20 million, while maintaining the 50/50 capital structure. Each increment of cost would be influenced by the total amount of capital raised. That is, if WestGas first borrowed $20 million in the European market at 6% and matched this with an additional $20 million of equity, additional debt beyond this amount would cost 12% in the United States and 10% in Europe. The same relationship holds for equity financing. 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 in the debt market at the same time. b. If WestGas plans an expansion of only $60 million, how should that expansion be financed? c. What will be the weighted average cost of capital for the expansion? Problem 13.8: WestGas Conveyance, in Costs of Raising Capital Cost of cost of Cost of Cost of in the Market Domestic Equity Domestic Debit European Equity European Debit Up to $40 Million of new 12% 89 1496 896 capital $41 million to $80 million 1890 1296 1896 10% of new capital Above $80 million 2290 189 2490 1896 no n.com/products/d2f1c419-5463-4794-8aa6-604d218d0d5a/pages/a2d95447a7798... 0 13.8 13: Global Cost and Availability of Capital Cong Prome prospect Me Yar pratra DECOR, WIE IS Wege average cost of capital? West Gas 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%. WestGas finds that it can finance in the domestic U.S. capital market at the following rates. Both debt and equity would have to be sold in multiples of $20 million, and these cost figures show the component costs of debt and equity, if raised half by equity and half by debt. A London bank advises WestGas that U.S. dollars could be raised in Europe at the following costs, also in multiples of $20 million, while maintaining the 50/50 capital structure. Each increment of cost would be influenced by the total amount of capital raised. That is, if WestGas first borrowed $20 million in the European market at 6% and matched this with an additional $20 million of equity, additional debt beyond this amount would cost 12% in the United States and 10% in Europe. The same relationship holds for equity financing. 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 in the debt market at the same time. b. If WestGas plans an expansion of only $60 million, how should that expansion be financed? c. What will be the weighted average cost of capital for the expansion? Problem 13.8: WestGas Conveyance, in Costs of Raising Capital Cost of cost of Cost of Cost of in the Market Domestic Equity Domestic Debit European Equity European Debit Up to $40 Million of new 12% 89 1496 896 capital $41 million to $80 million 1890 1296 1896 10% of new capital Above $80 million 2290 189 2490 1896 no
