Stein Corporation and Die Corporation are identical firms except that Die is mor
ID: 2661346 • Letter: S
Question
Stein Corporation and Die Corporation are identical firms except that Die 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 percent for the next year, and the probability of a recession is 40 percent. If the expansion continues, each firm will generate earnings before interest and taxes (EBIT) of $ 2.51 million. If a recession occurs, each firm will generate earnings before interest and taxes (EBIT) of $ 919,000. Stein's debt obligation requires the firm to pay $ 814,000 at the end of the year. Die's debt obligation requires the firm to pay $ 1.26 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 11 percent.
What is the value today of Stein's debt and equity? What about that for Die's? (Do not include the dollar signs ($). Enter your answers in dollars, not millions of dollars. (e.g., 1,234,567))
Stein Corporation and Die Corporation are identical firms except that Die 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 percent for the next year, and the probability of a recession is 40 percent. If the expansion continues, each firm will generate earnings before interest and taxes (EBIT) of $ 2.51 million. If a recession occurs, each firm will generate earnings before interest and taxes (EBIT) of $ 919,000. Stein's debt obligation requires the firm to pay $ 814,000 at the end of the year. Die's debt obligation requires the firm to pay $ 1.26 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 11 percent.
Explanation / Answer
The total value of a firm
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