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
Puts - A put is an option to sell a number of shares of stock at a stated price within a definite period. Gain or loss on a put is short or long term depending on holding period of

GOODWILL This is defined as “the difference between the value of a business as a whole and the fair value of its net separable assets”. Goodwill in practical sense is the advant

Q. Non-financial factors for non-financial considerations? There are several non-financial factors which possibly relevant to a decision to contract out and the type of factors

State the term Reliability- Accounting Information Accounting must be free from significant error or bias. It must be capable of being relied upon by managers to represent

After discontinuing the ordinary business operations and closing the accounts on May 7, the ledger of the partnership indicate the following: Cash $75,000 Non cash 105,000 Liabilit

THE INCOME STATEMENT It shows the financial performance of the company during the given financial period. It discloses the income and expenses and thus the net profit for the per

How do you report a note in exchange for treasury stock

#define stock exchange? mention the SEBI guideline pertaining to the functioning of stock exchange? question..

Could you please read this article? I am confused what the shortcoming of this critical review.

Harper Co. provided the following information concerning two products: contribution margin per unit- product 12 $46 Contribution margin per unit-product 43 $30. Machine hours requi