Tybo Corporation adjusts its debt so that its interest expenses are 20% of its free cash ows. Tybo is considering an expansion that will generate free cash ows of $2.5 million this year and is expected to grow at a rate of 4% per year from then on (in
perpetuity). Suppose that Tybo's corporate tax rate is 21%.
(a) If the unlevered cost of capital for this expansion is 10%, what is its unlevered value?
(b) What is the present value of the interest tax shields from this leverage policy?
(c) What is the value of the project with this leverage?