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 70 percent for the next year, and the probability of a recession is 30 percent. If the expansion continues, each firm will generate EBIT of $3.6 million. If a recession occurs, each firm will generate EBIT of $1.5 million. Steinbergs debt obligation requires the firm to pay $900,000 at the end of the year. Dietrichs debt obligation requires the firm to pay $1.6 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 12 percent.

a-1. What is the value today of Steinberg's debt and equity? (Do not round intermediate calculations. Enter the answers in dollars. Round the final answer to the nearest whole dollar. Omit $ sign in your response.)

	Steinberg's
Equity value	$
Debt value	$

a-2. What about Dietrich's? (Do not round intermediate calculations. Enter the answers in dollars. Round the final answer to the nearest whole dollar. Omit $ sign in your response.)

	Dietrich's
Equity value	$
Debt value	$

b. Steinbergs CEO recently stated that Steinbergs value should be higher than Dietrichs because the firm has less debt and therefore less bankruptcy risk. Do you agree or disagree with this statement?

multiple choice

• Agree
• Disagree