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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 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?
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