Question 1

ABC and DEF are identical firms except that DEF 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 70 percent for the next year, and the probability of a recession is 20 percent. If the expansion continues, each firm will generate earnings before interest and taxes (EBIT) of $2.7 million. If a recession occurs, each firm will generate earnings before interest and taxes (EBIT) of $1.1 million. ABCs debt obligation requires the firm to pay $0.9 million at the end of the year. DEFs debt obligation requires the firm to pay $1.2 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 13 percent.

a. What is the value today of ABCs debt and equity? What about that for DEFs?

b. DEFs CEO recently worried that its firm value should be lower than ABCs because the firm has more debt and therefore more bankruptcy risk. Do you agree or disagree with this statement?

Question 2

Freedom Bank has received a loan application from a private company Automatic Corporation. An abbreviated portion of the financial information provided by the company is shown below:

Total assets $630,000

EBIT 79,000

Net working capital 42,000

Book value of equity 180,000

Accumulated retained earnings 160,000

Total liabilities 570,000

What is the Z-score for Automatic Corporation? What does the score predict?

I want to finish all question, and give me detail calculation , and no use excel please