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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

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 generate earnings before interest and taxes of $4.1 million. If a recession occurs, each firm will generate earnings before interest and taxes of $1.5 million. Sternberg's debt obligation requires the firm to pay $950,000 at the end of the year. Dietrich's 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 14 percent.

a-1 what are the current market values of stein berg's equity and debt?

a-2 what are the current market values of dietrich's equity and debt?

b. stein berg's CEO recently stated that Sternberg'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?

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