Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered. Both companies will remain in business for one more year.
The companies' economists agree that the probability of the continuation of the current expansion is 80 percent for the next year, and the probability of a recession is 20 percent. If the expansion continues, each firm will generated earnings before interest and taxes (EBIT) of $4.7 million.
If a recession occurs, each firm will generate earnings before interest and taxes (EBIT) of $1.3 million. Steinberg's debt obligation requires the firm to pay $1, 010,000 the end of the year.
Dietrich's debt obligation requires the firm to pay $1.4 million at the end of the year. Neither firm pays taxes Assume a discount rate of 13 percent.
a-1. What is the value today of Steinberg's debt and equity? (Enter your answers in dollars, not millions of dollars, i.e. 1, 234, 567. Do not round intermediate calculations and round your answers to the nearest whole dollar amount. (e.g. 32))
a-2. What is the value today of Dietrich's debt and equity? (Enter your answers in dollars, not millions of dollars, i.e. 1, 234, 567. Do not round intermediate calculations and round your answers to the nearest whole dollar amount. (e.g. 32))
b. Steinberg's CEO recently stated that Steinberg's value should be higher than Dietrich's because the firm has less debt and therefore less bankruptcy risk. Do you agree or disagree with this statement? Agree Disagree