Steinberg Corporation and Dietrich Corporation are identical companies except th

Question

Steinberg Corporation and Dietrich Corporation are identical companies 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 company will generate earnings before interest and taxes (EBIT) of $3.1 million. If a recession occurs, each company will generate earnings before interest and taxes (EBIT) of $1.5 million. Steinberg's debt obligation requires the company to pay $940,000 at the end of the year, Dietrich's debt obligation requires the company to pay $1.6 million at the end of the year. Neither company pays taxes. Assume a discount rate of 15 percent. a-1. What is the value today of Steinberg's debt and equity? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) Steinberg's Equity value Debt value a-2. What is the value today of Dietrich's debt and equity? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) Dietrich's Equity value Debt value

Explanation / Answer

Steinberg potential payoffs:

Equity = (0.8 × 2,650,000 + 0.2 × 560,000)/1.15 = 1,878,261

Debt = (0.8 × 940,000 + 0.2 × 940,000)/1.15 = 817,391

Dietrich potential payoffs:

Equity = (0.8 × 1,900,000 + 0.2 × 0)/1.15 = 1,321,739

Debt = (0.8 × 1,600,000 + 0.2 × 1,500,000)/1.15 = 1,373,913

Steinberg Expansion (80%) Recession (20%) EBIT 3500000 1500000 Payoff to bondholders 940000 940000 Payoff to Stockholders 2560000 560000

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.