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as WestGas Conveyance, Inc. WestGas Conveyance. Inc. is a large U.S. natural gas pipeline company
sion. WestGas wants a capital wants to raise $120 million to finance expan- estGas wants a capital structure that is 50% debt
Problem 13.8: WestGas Conveyance, Inc. Costs of Raising Capital in the Market Up to $40 Million of new capital $41 million to
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Answer #1

A. Lowest for 40 million can be taken as below the weightage cost of capital will be 7.80%WACC = (equity weightage*cost of equity)+(debt weigtage *(cost of debt (1-tax rate))) As for debt we get tax benefit

Cost of Capital 7.80%
Ratio Cost % Tax
Debt 0.5 6% 0.4
Equity 0.5 12%

taken the lowest % rate

B if breakup is allowed then 1st 40million as per lower to take from domestic equity then european debit

The next 20 million both from the European market

WACC = (7.8*2+9)/3 = 8.2%

C. For 40$ million costs of capital

Cost of Capital 8.80%
Ratio Cost % Tax
Debt 0.5 6% 0.4
Equity 0.5 14%

For remaining, 20million will be

Cost of Capital 9.00%
Ratio Cost % Tax
Debt 0.5 10% 0.4
Equity 0.5 12%

So in ratios 2:1 the cost will be =(8.8+8.8+9)/3 = 8.67%

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