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 table below. Both debt and equity would have to be sold in multiples of $20 million, and these cost figures show the componentcosts, 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 6% and matched this with an additional $20 million of equity, additional debt beyond this amount would cost 12% in the United States and 11% in Europe. The same relationship holds for equity financing.

Costs of Raising Capital in the Market	Cost of Domestic Equity	Cost of Domestic Debt	Cost of European Equity	Cost of European Debt
Up to $40 million of new capital	11%	8%	13%	6%
$41 million to $80 million of new capital	17%	12%	16%	11%
Above $80 million	22%	15%	24%	17%

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?