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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 percent for the next year and the probability of a recession is
percent. If the expansion continues, each firm will generate earnings before interest and
taxes EBIT of $ million. If a recession occurs, each firm will generate earnings before
interest and taxes EBIT of $ million. Steinberg's debt obligation requires the firm to
pay $ at the end of the year. Dietrich's debt obligation requires the firm to pay
$ million at the end of the year. Neither firm pays taxes. Assume a discount rate of
percent.
a What is the value today of Steinberg's debt and equity? Do not round intermediate
calculations and enter your answers in dollars, not millions of dollars, rounded to
the nearest whole number, eg
a What is the value today of Dietrich's debt and equity? Do not round intermediate
calculations and enter your answers in dollars, not millions of dollars, rounded to
the nearest whole number, eg
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?
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