Duplex Corporation consists entirely of two business units, ABC and XYZ. ABC has a constant EBIT of $200 per year forever and a beta of assets of 1.2. XYZ has a constant EBIT of $400 per year forever and a beta of assets of 0.8. The corporate tax rate is 25%, the risk free rate of return is 2%, and the market risk premium is 10%.

(a) What is the unlevered value of Duplex Corporation (VU )? (Hint: Find the value of each division)

(b) What is the required return on assets for Duplex Corporation? Assume that the EBIT for both divisions remains constant forever.

(c) Suppose Duplex sets its debt-to-equity ratio to 0.2. What is the levered value of Duplex Corporation (VL) if its beta of debt is equal to 0?