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 $30\%.$ 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 $8\%$ 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.

If WestGas plans an expansion of$$$$120$ million, what is the lowest average cost of capital for the first$$ $$40$ million of new$$ capital? Specifically:

What is the lowest average cost of capital for the second $$40$ million of new capital?

What is the lowest average cost of capital for the third $$40$ million of new capital?

What will be the weighted average cost of capital for the $$120$ million expansion?

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

If WestGas plans an expansion of only $$60$ million, what will be the weighted average cost of capital for the additional $$20$ million over the first $$40$ million of new capital?

c$.$ What will be the weighted average cost of capital for the$$ expansion?