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 $40\%.$ WestGas finds that it can finance in the domestic U$.$S$.$ capital

market at the rates listed in the popup window:

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 $50\%$ by debt and $50\%$ by equity. 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 $$20$ million in the European market at $7\%$ and matched this with an additional $$20$ million of equity, additional debt beyond this amount would cost $13\%$ in the United

States and $12\%$ 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?Data table

$($Click on the following icon $$ in order to copy its contents into a spreadsheet.$)$

$3\mathrm{.}60\%.$ The expected return on the market portfolio is $8\mathrm{.}60\%.$ The company's effective tax rate is $30\%.$ Its optimal capital structure is $55\%$ debt and $45\%$ equity.

a$.$ If Thunderhorse's beta is estimated at $1\mathrm{.}30,$ what is Thunderhorse's weighted average cost of capital?

b$.$ If Thunderhorse's beta is estimated at $1\mathrm{.}00,$ significantly lower because of the continuing profit prospects in the global energy sector, what is Thunderhorse's weighted average

cost of capital?

a$.$ If Thunderhorse's beta is estimated at $1\mathrm{.}30,$ what is Thunderhorse's weighted average cost of capital?