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 39%. 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 11% in the United States and 9% 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 560 million, how should that expansion be financed? c. What will be the weighted average cost of capital for the expansion? a. If WestGas plans an expansion of $120 million, what is the lowest average cost of capital for the first $40 million of new capital? % (Round to two decimal places.) Data table (Click on the icon to import the table into a spreadsheet.) Costs of Raising Capital in the Market Up to $40 million of new capital $41 million to $80 million of new capital Above $80 million Cost of Domestic Equity 12% 18% 23% Cost of Domestic Debt 8% 11% 16% Cost of European Equity 13% 17% 24% Cost of European Debt 7% 9% 17% Print Done 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 39%. 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 11% in the United States and 9% 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 560 million, how should that expansion be financed? c. What will be the weighted average cost of capital for the expansion? a. If WestGas plans an expansion of $120 million, what is the lowest average cost of capital for the first $40 million of new capital? % (Round to two decimal places.) Data table (Click on the icon to import the table into a spreadsheet.) Costs of Raising Capital in the Market Up to $40 million of new capital $41 million to $80 million of new capital Above $80 million Cost of Domestic Equity 12% 18% 23% Cost of Domestic Debt 8% 11% 16% Cost of European Equity 13% 17% 24% Cost of European Debt 7% 9% 17% Print Done
