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% 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 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% by debt and 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 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% and matched this with an additional$20 million ofequity, 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 newcapital, 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 befinanced?

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