WestGas Conveyance, Inc. WestGas Conveyance, Inc., is a large U.S. natural gas pipeline company that wants...
Fantastic news! We've Found the answer you've been seeking!
Question:
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 35%. 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 5% 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 icon to import the table into a spreadsheet.) Costs of Raising Capital in the Market Up to $40 million of new capital $41 million to $80 million of new capital Above $80 million Cost of Domestic Equity 12% 18% 21% Cost of Domestic Debt 7% 12% 17% Cost of European Equity 13% 17% 23% Cost of European Debt 5% 11% 18% - 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 35%. 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 5% 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 icon to import the table into a spreadsheet.) Costs of Raising Capital in the Market Up to $40 million of new capital $41 million to $80 million of new capital Above $80 million Cost of Domestic Equity 12% 18% 21% Cost of Domestic Debt 7% 12% 17% Cost of European Equity 13% 17% 23% Cost of European Debt 5% 11% 18% - X
Expert Answer:
Related Book For
Multinational Business Finance
ISBN: 978-0133879872
14th edition
Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett
Posted Date:
Students also viewed these accounting questions
-
Assume that the combined federal and state income tax rate for Kafka Company is 30%. 1. The book value of an old machine is $40,000. Kafka sold the machine for $35,000 cash. What is the effect of...
-
Suppose that Sharlene faces a marginal income tax rate of 35 percent, and if she cheats on her taxes, there is a 2 percent chance that she will be caught. Suppose also that the marginal penalty of...
-
Explain how federal and state income tax withholdings are determined.
-
Suppose we have an automatic module on the module path named lizard-^-cricket-^-1.0.0-SNAPSHOT.jar and no Automatic-Module-Name specified. What module name should named modules use to reference it?...
-
Multiple-Choice Questions 1. As a result of a stock split, a. An entry must be made showing the effect on stockholders' equity. b. The market price of the outstanding stock is increasing because a...
-
Sketch the galvanic cells based on the following overall reactions. Show the direction of electron flow, the direction of ion migration through the salt bridge, and identify the cathode and anode....
-
For each of the following, calculate the degrees of freedom \((d f)\) and determine the critical values of \(t\) (assume \(\mathbf{a}=.05\) ). a. N = 5, N = 5, H b. N =12, N2 = 12, H: H c. N = 9...
-
Kidd Company produces two products. Budgeted annual income statements for the two products are provided here: Required a. Based on budgeted sales, determine the relative sales mix between the two...
-
Daenerys, LLC provides cleaning service for homes and businesses. All sales are billed to clients with a credit terms that stipulate payment must be received 30 days after the invoice is received....
-
Design the 4-to-1 MUX two ways Write a Verilog module called mux4to1 to implement 4-to-1 multiplexer using functional descriptions and if-else blocks. Write another Verilog module called...
-
Which of the following, while desirable from some perspectives, might actually increase the risk of supply chain reductions? (1) fewer supply chain partners (II) a shorter supply chain (III) greater...
-
Bramble Inc., has 1300 shares of 5%, $50 par value, cumulative preferred stock and 50544 shares of $1 par value common stock outstanding at December 31, 2020, and December 31, 2021. The board of...
-
Machinery purchased for $61,800 by Swifty Co. in 2021 was originally estimated to have a life of 8 years with a salvage value of $4,120 at the end of that time. Depreciation has been entered for 5...
-
Larkspur Corporation has the following cost records for June 2025. Indirect factory labor $3,700 Factory utilities $310 Direct materials used 16,400 Depreciation, factory equipment 1,130 Work in...
-
"What factors influence consumers' adoption of sustainable packaging options in the personal care industry?"
-
Profit for the year is $ 4 5 , 0 0 0 . ?Calculate Judy's owner's equity as at March 3 1 , 2 0 2 4 Judy Cumby is the sole owner of Cullumber, a public camping ground near Gros Morne National Park....
-
You purchase an 8% July 2013 CGS with a YTM of 8.6% that has a settlement date of 15 July 2010. You sell the bond when it is yielding 9.4%. The settlement date of the sale is 15 July 2012. If you can...
-
Kenneth Hubbard has prepared the following list of statements about managerial accounting and financial accounting. 1. Financial accounting focuses on providing information to internal users. 2....
-
What are the most common challenges a firm resident in a segmented market faces in regards to its access to capital?
-
Melinda Deane, a new analysts at Hermosa and a recent MBA graduate, believes that it is a fundamental error to evaluate the Argentine project's prospective earnings and cash flows in dollars, rather...
-
What do the terms active and passive mean in the context of U.S. taxation of foreign source income?
-
Consider the homogeneous bar, of negligible cross section, mass \(M=1.333 \mathrm{~kg}\) and length \(L=60.0 \mathrm{~cm}\) in Fig.12.19 . It is constrained to rotate in a vertical plane about its...
-
A projectile of mass \(m=2.5 \mathrm{~kg}\) is shot tangentially (see Fig.12.19) at the edge of a ring having radius \(R=50 \mathrm{~cm}\) and whose mass is equal (within measurement errors) to that...
-
A homogeneous disk, having mass \(M=2.50 \mathrm{~kg}\) and radius \(R=15.0 \mathrm{~cm}\), can rotate, without friction, about a fixed horizontal axis, passing through the point \(\mathrm{O}\) of...
Study smarter with the SolutionInn App