Question
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
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
36%.
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
88%
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? 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?
11.53%
(Round to two decimal places.)
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