# Question

Tybo Corporation adjusts its debt so that its interest expenses are 20% of its free cash flow. Tybo is considering an expansion that will generate free cash flows of $2.5 million this year and is expected to grow at a rate of 4% per year from then on. Suppose Tybo’s marginal corporate tax rate is 40%.

a. If the unlevered cost of capital for this expansion is 10%, what is its unlevered value?

b. What is the levered value of the expansion?

c. If Tybo pays 5% interest on its debt, what amount of debt will it take on initially for the expansion?

d. What is the debt-to-value ratio for this expansion? What is its WACC?

e. What is the levered value of the expansion using the WACC method?

a. If the unlevered cost of capital for this expansion is 10%, what is its unlevered value?

b. What is the levered value of the expansion?

c. If Tybo pays 5% interest on its debt, what amount of debt will it take on initially for the expansion?

d. What is the debt-to-value ratio for this expansion? What is its WACC?

e. What is the levered value of the expansion using the WACC method?

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