WestGasConveyance, 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

50% debt and 50

50% equity. Its corporate combined federal and state income tax rate is 40

40%. WestGas finds that it can finance in the domestic U.S. capital market at the rates listed in the popupwindow: LOADING...

. 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

50% by debt and 50

50% by equity.

A London bank advises WestGas that U.S. dollars could be raised in Europe at the followingcosts, also in multiples of$20 million, while maintaining the 50

50/50

50 capital structure.

Each increment of cost would be influenced by the total amount of capital raised. Thatis, if WestGas first borrowed$20 million in the European market at 6

6% and matched this with an additional$20 million ofequity, additional debt beyond this amount would cost 13

13% in the United States and 12

12% in Europe. The same relationship holds for equity financing.