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i need step by step solution, WastGas Conveyance, Inc. WestGas Conveyance, Inc. is a large US. patural gas pipeline company that wants to raise $120 millon to finance expansion WesiGas wants a captdl < stiucture hat is 50% debi and 50% equity. ts comorata combined federal and stale name tax rate s 36%. WestGas finds that it can finance in the domestic US. capital market at the rates listed in the popup window: [55] Both debt and equity would have 10 be sold in multiples of $20 million, and these cost figures show the companent costs, each, of debt and euity f raised 50% by debt and 50% by equity. A London bark advises WestGas that U.S. dollars could be raised in Europe at the following costs, also in muliples of $20 milion, ‘while maintaining the 50/50 capital structure. Each increment of cost would be influenced by the total amount of capital raised. That fs, if WestGas first boriomed $20 millon in the European market at 6% and matched this with an addtional $20 milion of equity, additional debt beyond this amount weuld cost 11% in the United States and 10% in Europe. The same relationship holds for equity financing a. Calculate the lowest average cost of capital for each increment of S40 million of new capita, where WestGas raises 520 milion in the equity market and an additional $20 in the debt market at the same time. b. 1f WestGas plans an expansion of anly $50 milion, how should that expansion be financed? What wil be the weighted average cast of capital lor the expansion? | a 1f WestGas plans an expansion of $120 millon, what is the lowest average cost of capital for the first $40 millon of new capital? 8.42% (Round to two decimal places ) What is the lowest average cost of capital for the second $40 millon of new capital? [1% Round to two decimal places )

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i need step by step solutionUploaded Image, WastGas Conveyance, Inc. WestGas Conveyance, Inc. is a large US. patural gas pipeline company that wants to raise $120 millon to finance expansion WesiGas wants a captdl < stiucture hat is 50% debi and 50% equity. ts comorata combined federal and stale name tax rate s 36%. WestGas finds that it can finance in the domestic US. capital market at the rates listed in the popup window: [55] Both debt and equity would have 10 be sold in multiples of $20 million, and these cost figures show the companent costs, each, of debt and euity f raised 50% by debt and 50% by equity. A London bark advises WestGas that U.S. dollars could be raised in Europe at the following costs, also in muliples of $20 milion, ‘while maintaining the 50/50 capital structure. Each increment of cost would be influenced by the total amount of capital raised. That fs, if WestGas first boriomed $20 millon in the European market at 6% and matched this with an addtional $20 milion of equity, additional debt beyond this amount weuld cost 11% in the United States and 10% in Europe. The same relationship holds for equity financing a. Calculate the lowest average cost of capital for each increment of S40 million of new capita, where WestGas raises 520 milion in the equity market and an additional $20 in the debt market at the same time. b. 1f WestGas plans an expansion of anly $50 milion, how should that expansion be financed? What wil be the weighted average cast of capital lor the expansion? | a 1f WestGas plans an expansion of $120 millon, what is the lowest average cost of capital for the first $40 millon of new capital? 8.42% (Round to two decimal places ) What is the lowest average cost of capital for the second $40 millon of new capital? [1% Round to two decimal places )

This is AI generated Response.
Asked by: Rohit Vaghela
Created at: 2026-01-20 00:58:54

Final Answer:

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Let's break down the problem step by step: --- ## **Given Data** - **WestGas wants to raise $120 million** (in $20 million increments, 50% debt, 50% equity). - **Corporate tax rate:** 36% - **First $20 million equity** + **first $20 million debt** = **first $40 million** of capital. - **Interest rates:** - **U.S. Debt:** 11% (beyond $20 million) - **Europe Debt:** 6% (for $20 million, then 10%) - **Equity cost:** Not clearly specified, but implied to be the same in both markets. --- ## **Question a: Calculate the lowest average cost of capital for each increment of $40 million** Let's focus on the **first $40 million**: ### **Step 1: Structure** - $20 million from equity - $20 million from debt ### **Step 2: Find the lowest cost markets** - **Debt:** Lowest is European market at 6% for first $20M. - **Equity:** Assume equity cost is the same in both markets. ### **Step 3: Calculate After-Tax Cost of Debt** - **After-tax cost = Interest rate × (1 - tax rate)** - For debt: - 6% × (1 - .36) = 6% × .64 = **3.84%** ### **Step 4: Weighted Average Cost for First $40M** - Let's assume equity cost is 'E%' (as not given, we keep it symbolic for now). \[ \text{WACC} = .5 \times \text{After-tax cost of debt} + .5 \times \text{Cost of equity} \] \[ \text{WACC} = .5 \times 3.84\% + .5 \times E\% \] But the *solution provided* in the screenshot lists **8.42%** for the first $40M, meaning the cost of equity is likely **13%** (since $3.84\% + 13\% = 16.84\%$, and $16.84\%/2 = 8.42\%$). --- ## **Step-by-Step Solution for First $40 Million** 1. **Debt:** $20M at 6% (Europe), after-tax = 3.84% 2. **Equity:** $20M at 13% 3. **WACC:** \[ WACC = .5 \times 3.84\% + .5 \times 13\% = 1.92\% + 6.5\% = \textbf{8.42\%} \] --- ## **Question: What is the lowest average cost of capital for the second $40 million?** ### **Step 1: Next Increment** - The next $40M = $20M equity, $20M debt. #### **Debt:** - First $20M debt (Europe) already used. - Next $20M debt (Europe) at 10%. - After-tax cost = 10% × .64 = **6.4%** #### **Equity:** - Still at 13% (assumed). #### **WACC for Second $40M:** \[ WACC = .5 \times 6.4\% + .5 \times 13\% = 3.2\% + 6.5\% = \textbf{9.7\%} \] --- ## **Summary Table** | Increment | Debt Source | Debt Rate (after-tax) | Equity Rate | WACC | |-------------|-------------|----------------------|-------------|--------| | 1st $40M | Europe | 3.84% | 13% | 8.42% | | 2nd $40M | Europe | 6.4% | 13% | 9.7% | --- ## **Final Answers** - **First $40 million:** 8.42% - **Second $40 million:** 9.70% --- ### **Fill in the box for the second $40 million:** \[ \boxed{9.70} \] --- Let me know if you need the solutions for the remaining parts!

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