Reference no: EM133036708

Question - 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 6?% 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? $60 million, how should that expansion be? financed?

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