S. Colton Conveyance, Inc.., is a large U.S. natural gas pipeline company that wants to raise $120 million finance expansion. Derming wants a capital structure that is 50% debt and 50% equity. Its corpora combined federal and state income tax rate is 40%. Derming finds that it can finance in the dormestic U capital market at the rates listed below. Both debt and equity would have to be sold in multiples of $: million, and these cost figures show the component costs, each, of debt and equity if raised half by equi and half by debt. Cost of Domes tic Costs of Raising Capital in the Market Cost of Domes tic Debt Equity Up to $40 million of new capital 18% 12% $41 million to $80 million of new capital 18% 15% Above $80 million 22% 16% ondon bank advises Deming that U.S. dollars could be raised in Europe at the following costs, also in tiples of $20 million, while maintaining the 50/50 capital structure. Cost of Eumnean Cost of
S. Colton Conveyance, Inc.., is a large U.S. natural gas pipeline company that wants to raise $120 million finance expansion. Derming wants a capital structure that is 50% debt and 50% equity. Its corpora combined federal and state income tax rate is 40%. Derming finds that it can finance in the dormestic U capital market at the rates listed below. Both debt and equity would have to be sold in multiples of $: million, and these cost figures show the component costs, each, of debt and equity if raised half by equi and half by debt. Cost of Domes tic Costs of Raising Capital in the Market Cost of Domes tic Debt Equity Up to $40 million of new capital 18% 12% $41 million to $80 million of new capital 18% 15% Above $80 million 22% 16% ondon bank advises Deming that U.S. dollars could be raised in Europe at the following costs, also in tiples of $20 million, while maintaining the 50/50 capital structure. Cost of Eumnean Cost of
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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![3. Colton Conveyance, Inc., is a large U.S. natural gas pipeline company that wants to raise $120 million to
finance expansion. Deming wants a capital structure that is 50% debt and 50% equity. Its corporate
combined federal and state income tax rate is 40%. Derning finds that it can finance in the domestic U.S.
capital market at the rates listed below. Both debt and equity would have to be sold in multiples of $20
milhon, and these cost figures show the component costs, each, of debt and equity if raised half by equity
and half by debt.
Cost of Domestic
Cost of Domes tic
Costs of Raising Capital in the Market
Up to $40 million of new capital
Equity
Debt
18%
12%
$41 million to $80 million of new capital
18%
15%
Above $80 million
22%
16%
A London bank advises Deming 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.
Costs of Raising Capital in the Market
Up to $40 million of new capital
Cost of European
Equity
Cost of European
Debt
14%
16%
$41 million to $80 million of new capital
14%
16%
Above $80 million
24%
18%
Each imcrement of cost would be influenced by the total amount of capital raised That is, if Deming 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 10% in Europe. The same
relationship holds for equity financing.
Calculate the lowest average cost of capital for each increment of $40 million of new capital, where
Deming raises $20 million in the equity market and an additional $20 n the debt market at the same time.
1.
If Deming plans an expansion of only $80 million, how should that expansion be financed? What will be the
weighted average cost of capital for the expansion?]
1.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7f1bc1ec-1959-4934-a1e6-1f255f6a2bb1%2F5dde92ed-9d1f-43f9-90a9-e5ead177313b%2F7tn7t9e_processed.jpeg&w=3840&q=75)
Transcribed Image Text:3. Colton Conveyance, Inc., is a large U.S. natural gas pipeline company that wants to raise $120 million to
finance expansion. Deming wants a capital structure that is 50% debt and 50% equity. Its corporate
combined federal and state income tax rate is 40%. Derning finds that it can finance in the domestic U.S.
capital market at the rates listed below. Both debt and equity would have to be sold in multiples of $20
milhon, and these cost figures show the component costs, each, of debt and equity if raised half by equity
and half by debt.
Cost of Domestic
Cost of Domes tic
Costs of Raising Capital in the Market
Up to $40 million of new capital
Equity
Debt
18%
12%
$41 million to $80 million of new capital
18%
15%
Above $80 million
22%
16%
A London bank advises Deming 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.
Costs of Raising Capital in the Market
Up to $40 million of new capital
Cost of European
Equity
Cost of European
Debt
14%
16%
$41 million to $80 million of new capital
14%
16%
Above $80 million
24%
18%
Each imcrement of cost would be influenced by the total amount of capital raised That is, if Deming 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 10% in Europe. The same
relationship holds for equity financing.
Calculate the lowest average cost of capital for each increment of $40 million of new capital, where
Deming raises $20 million in the equity market and an additional $20 n the debt market at the same time.
1.
If Deming plans an expansion of only $80 million, how should that expansion be financed? What will be the
weighted average cost of capital for the expansion?]
1.
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