What is the value of debt and equilty, Financial Accounting

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 75 percent for the next year, and the probability of a recession is 25 percent. If the expansion continues, each firm will generate earnings before interest and taxes (EBIT) of $2.42 million. If a recession occurs, each firm will generate earnings before interest and taxes (EBIT) of $913,000. Steinberg's debt obligation requires the firm to pay $813,000 at the end of the year. Dietrich's debt obligation requires the firm to pay $1.15 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 11 percent.

Requirement 1:

What is the value today of Steinberg's debt and equity? What about that for Dietrich's?
(Do not include the dollar signs ($). Enter your answers in dollars, not millions  of dollars. (e.g., 1,234,567))

Debt Equity

Steinberg $_____ $______
Dietrich $_____ $______

Requirement 2:

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?

(i) Agree ; (ii) Disagree

 

Posted Date: 3/29/2013 5:09:46 AM | Location : United States







Related Discussions:- What is the value of debt and equilty, Assignment Help, Ask Question on What is the value of debt and equilty, Get Answer, Expert's Help, What is the value of debt and equilty Discussions

Write discussion on What is the value of debt and equilty
Your posts are moderated
Related Questions
The business changed their policy with regards to the profit mark-upfrom 2018 to 2019 financial year. What was the changed.

How do you know what goes on an income statement? P.S. This is a basic income statement.

Questikon: For Period Wilson Ltd has produced the following budget figures for Product X: For the period, the budgeted fixed overhead is Rs100,000 and the budgeted sales ar

Explain the meaning of the terms "tangible" and "intangible" and discuss how these terms are used in describing assets.

Protected transactions These fall into three categories: (A) Under Section 50: Payments by the bankrupt to creditors; Payments or deliveries to the bankrupt; C

agency conflicts and solutions in shareholders vs auditors

Courts application for grant A court may: 1) Wherein a deceased person is proved whether by production of a will or authenticated copy of the will or by oral evidence of its

Piecemeal Realizations and Distributions Partnership dissolutions may take a substantial number of days even months) so it is unlikely that all cash generated will be simultane

1. You have decided to sell some goods at a local music festival. You have hired a sales stand for $500. Your cost per item is $3 and you will sell each item for $5. When you did y

Illustration of Bankruptcy Njuguna Mwandawiro, carrying on a business as a trader in Likoni, Mombasa, finds himself insolvent, and on 15 August 1997 files his petition in bankr