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8) Lombard Corporation has an equity cost of capital of 14.4% and a debt cost of capital of 6%, and the firm maintains a debt-equity
8) Lombard Corporation has an equity cost of capital of 14.4% and a debt cost of capital of 6%, and the firm maintains a debt-equity ratio of 1. Lombard is considering an expansion that will contribute S4 million in free cash flows the first year, growing by 4% per year thereafter. The expansion will cost $60 million and will be financed with $40 million in new debt initially with a constant debt- equity ratio maintained thereafter. Lombard corporate tax rate is 40%; the tax rate on interest income is 40%; and the tax rate on equity income is 20%. Compute the value of the expansion using the APV method Verify It Using WACC method
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