# Question: Tybo Corporation adjusts its debt so that its interest expenses

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?

**View Solution:**## Answer to relevant Questions

You are on your way to an important budget meeting. In the elevator, you review the project valuation analysis you had your summer associate prepare for one of the projects to be discussed:Looking over the spreadsheet, you ...Arden Corporation is considering an investment in a new project with an unlevered cost of capital of 9%. Arden’s marginal corporate tax rate is 40%, and its debt cost of capital is 5%.a. Suppose Arden adjusts its debt ...Under the assumption that Ideko market share will increase by 0.5% per year, you determine that the plant will require an expansion in 2010. The cost of this expansion will be $15 million. Assuming the financing of the ...Using the information produced in the income statement in Problem 4, use EBITDA as a multiple to estimate the continuation value in 2010, assuming the current value remains unchanged (reproduce Table 19.15). Infer the ...The stock of Harford Inc. is about to pay a $0.30 dividend. It will pay no more dividends for the next month. Consider call options that expire in one month. If the interest rate is 6% APR (monthly compounding), what is the ...Post your question