3. Air Taxi, Inc. and Wing Air, Inc. are identical in every way, except that Wing Air is a more levered

firm. Both companies expect to remain in business for one more year. Here are the economist projections for the next year:

Probability of expansion 75%

Probability of recession 25%

Expansion EBIT$3,700,000

Recession EBIT$2,100,000

Air Taxi debt payment$850,000

Wing Air debt payment$1,300,000

Annual discount rate 12%

What is the value of each firm's debt and equity?

a. Air Taxi, Inc.

Equity payment

Expansion

Recession

Equity value

Debt payment:

Expansion

Recession

Wing Air, Inc.

Equity payment

Expansion

Recession

Equity value

Debt payment:

Expansion

Recession

Debt value

b.V(Air Taxi, Inc.)

W(Wing Air, Inc)