Reliable Corp. currently has expected FCFs of $60 million per year, which are expected to continue forever. The first cash flow will occur one year from today. The firm has committed to keep a constant D/E ratio of 1.5.The firm's unlevered(or asset) cost of capital (ru) is 12%. The firm's debthas a yield of 6%. The debt has a probability of default of 2% and a loss given default of 50%. The corporate tax rate is 25%.

a.What is the total value of Reliable Corp (what is the PV of Reliable Corp's FCFs)?

b. How much of thisvalue is due to the firm'sdecision to have debt in its capital structure (as opposed to being an all equity firm)?