question archive Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered
Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered
Subject:FinancePrice: Bought3
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 60% for the next year, and the probability of a recession is 40%. If the expansion continues, each firm will generate EBIT of $2.4 million. If recession occurs, each firm will generate EBIT of $900,000. Steinberg’s debt obligation requires the firm to pay $800,000 at the end of the year. Dietrich’s debt obligation requires the firm to pay $1.1 million at the end of the year. Neither firms pay taxes. Assume a discount rate of 12%.
What is the value today of Steinberg’s debt (approximate)?
$1600,000
$910,714.28
$714,285.71
$800,000
What is the value today of Steinberg’s equity (approximate)?
$100,000
892,857.14
$1600,000
$696,428.57
What is the value today of Dietrich’s debt (approximate)?
$1100,000
$714,285.71
$910,714.28
$900,000
What is the value today of Dietrich’s equity (approximate)?
$696,428.57
$1300,000
$0 (zero)
$892,857.14
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?
Strongly agree
Neutral
Strongly disagree
Agree
Disagree
