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 40%. 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 12% in the United States and 11% 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? 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? % (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Costs of Raising Capital in the Market Up to $40 million of new capital Cost of Domestic Equity Cost of Domestic Debt Cost of European Equity Cost of European Debt 11% 7% 13% 6% $41 million to $80 million of new capital Above $80 million 19% 12% 18% 11% 23% 17% 24% 18% Print Done - X
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 40%. 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 12% in the United States and 11% 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? 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? % (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Costs of Raising Capital in the Market Up to $40 million of new capital Cost of Domestic Equity Cost of Domestic Debt Cost of European Equity Cost of European Debt 11% 7% 13% 6% $41 million to $80 million of new capital Above $80 million 19% 12% 18% 11% 23% 17% 24% 18% Print Done - X
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 22P
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 a capital structure that is 50% debt and 50% equity. Its corporate combined federal
and state income tax rate is 40%. 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 12% in the United States and 11% 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?
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?
% (Round to two decimal places.)
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Costs of Raising Capital in the Market
Up to $40 million of new capital
Cost of
Domestic Equity
Cost of
Domestic Debt
Cost of
European Equity
Cost of
European Debt
11%
7%
13%
6%
$41 million to $80 million of new capital
Above $80 million
19%
12%
18%
11%
23%
17%
24%
18%
Print
Done
- X](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fce1f7cbe-2e50-4f82-8f70-521a182ddd43%2F4590437f-fd3b-4bd6-97fd-4892fba60c00%2Fkxhzkve_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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 40%. 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 12% in the United States and 11% 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?
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?
% (Round to two decimal places.)
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Costs of Raising Capital in the Market
Up to $40 million of new capital
Cost of
Domestic Equity
Cost of
Domestic Debt
Cost of
European Equity
Cost of
European Debt
11%
7%
13%
6%
$41 million to $80 million of new capital
Above $80 million
19%
12%
18%
11%
23%
17%
24%
18%
Print
Done
- X
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