Costs of various imperfections-value of debt and equity

Assignment Help Financial Management

Reference no: EM131185608

Costs of Various Imperfections: Steinberg Corporation and Dietrich Corporation are apparently identical firms except that Dietrich has more leverage. Both companies will remain in business for one year. The companies’ economists agree that the probability of continuation of the current expansion is 80 percent for the next year, and the probability of recession is 20 percent. If the expansion continues, each firm expects to generate earnings before interest and taxes (EBIT) of $2.7 million. If the recession occurs, each firm expects to generate EBIT of $1.1 million. Steinberg's debt obligation requires the firm to pay $900,000 at the end of the year. Dietrich’s debt obligation requires the firm pay $1.2 million at the end of the year. Neither firm pays taxes. Assume the required return on Steinberg's debt is 10 percent, and that for Dietrich is 10.5 percent. Assume Steinberg's equity cost of capital is 13 percent and Dietrich's equity cost of capital is 13.2 percent.

What is the value of Steinberg’s debt and equity?

Reference no: EM131185608

Questions Cloud

How were citizens in your community impacted : Share with the class implementation of the Affordable Care Act in your organization. (If you are not working as a nurse, think about what was happening when you were a prelicensure student). How did your fellow healthcare workers react to implemen..

What is the discounted payback period for each project : Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$ 344,000 –$ 49,000 1 51,000 24,600 2 71,000 22,600 3 71,000 20,100 4 446,000 15,200 Whichever project you choose, if any, you require a 15 percent return on ..

What is the companys net income : The Moore Corporation had operating income (EBIT) of $650,000. The company's depreciation expense is $162,500. Moore is 100% equity financed, and it faces a 40% tax rate. What is the company's net income? Assuming no changes to any of the Balance She..

Elements of the risk-assessment paradigm : What are the elements of the risk-assessment paradigm? How can these elements be applied in a workplace setting in which an emergency responder is addressing a large spill of trichloroethylene? Describe how risk assessment can be used in industria..

Costs of various imperfections-value of debt and equity : Costs of Various Imperfections: Steinberg Corporation and Dietrich Corporation are apparently identical firms except that Dietrich has more leverage. Both companies will remain in business for one year. What is the value of Steinberg’s debt and equit..

Professional job application assignment : find an actual job announcement that advertises a position for which you are qualified.- For this assignment, create documents:- A Job Application Letter- A Résumé.

Anticipating and responding to risk : What effect does enterprise risk management have in anticipating and responding to risk?

Choose two organisational theory : "Choose two organisational theory perspectives and evaluate how they contributes a different understanding of sustainability within companies"

Realized rate of return for investor who purchased bonds : Six years ago the Camargo Company issued 20 year bonds with a 14% annual coupon rate and $1,000 par value. Interest is paid annually. The bonds had a 9% call premium with 5 years of call protection. Compute the realized rate of return for an investor..

User Account

All Pages