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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?

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