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ID: 2657422 • Letter: Y
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WestGas Conveyance, Inc. WesGas Conveyance, Inc., is a large U.S. natural gas pipeline company that wants to raise S120 million to finance expansion. WestGas wants a capital structure that is 50% debt and 50% equity. Its corporate combined federal and state inc n tax rate s 35% West tinds nat i can tinance in the domestic s cap al market at the rates I sted in the po up wi da costs, each, of debl and equity if raised 50% by debi and 50% by equity. A London bank adviscs WestGas hat U 5 dollars could be raised in Eurcpe at the folkwing costs, also in muitiplks of 520 million, while maintaining the 5D50 apital structure Each ncrement ot cost would be intuenced by te total amount o capital ra sed hat Is t estGas t?st borrowed S2D m? on n the European market at 5% and matched this wrth an addrtional S20 million ot equit additional debt beyond this mount would cost 11% in the United States and 9% in Furope The same relatonship holds 1or eqiaty financing Hoth debt and equity would have to be sold in muiples ar S2D million, and these cost tigures shaw the component a. Calculate lhe lowest average uusl of uapital or each r en enl of $40 mill oInew capila where Wes Gas ses $20 rnilion n lhe Bquity irial kelar?d an ditonal $20 n lhe deb rnarkel al he sair?ti ne b it WestGas plans an expansion of only 50 million, h? should that expansion be tnanced? What will he the weighted average mst of rapital tor me expansion a. If WestGas plans arn expansion of $120 million, what is the lowesl average cost of capital for the first 340 milion of new capital? L% Round to two decimal plsces. Data Table Cost ot Cost ot Cost at Cast ot Domestic Domestic European Europe Costs of Raising Capital in the Market Up to 540 million of new capilal $11 million to $80 milion of new capital Above S00 million Debl 12% 18% 22% Equity 14% 17% 23 Dett 5% 9% 19% 11% 17% Print Done Enter your answer in the answer box and then click Check AnswerExplanation / Answer
Data given Amount required:-$120 m.(To be finaced By 50 Equity & 50 by Debts) Income tax rate:-35%
Domestc market European Market
Cost of raising the finance
Equity
Debt
Equity
Debt
Up To 40M
12
7
14
5
41-80M
18
11
17
9
Above 80M
22
17
23
19
A:- For the first 40M company should issue the Debt of 20M In European market since the cost of Debt in european market is lower than Domestic market and For balance 20M equity Should Be issued In Domestic market due to Lower Cost , european Market equity cost. Simliarrly for next 40M Debt of 20M And Equity Of20M should Be issued In european Market. Simliarrly for Another 40M Debt of 20M And Equity Of20M should Be issued In domestic Market. B:-For 60M Expansion Only Company Should issue Debt Of 30M & 20M equity in European market,& Equity Of 10M In Domestic Market calculation of avg Cost :-
WACC:- 610/60 =10.17%
Cost of raising the finance
Equity
Debt
Equity
Debt
Up To 40M
12
7
14
5
41-80M
18
11
17
9
Above 80M
22
17
23
19
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