Reference no: EM131347306
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 90 percent for the next year, and the probability of a recession is 10 percent. If the expansion continues, each company will generate earnings before interest and taxes (EBIT) of $4.5 million. If a recession occurs, each company will generate earnings before interest and taxes (EBIT) of $1.9 million. Steinberg's debt obligation requires the company to pay $990,000 at the end of the year. Dietrich's debt obligation requires the company to pay $2 million at the end of the year. Neither company pays taxes. Assume a discount rate of 14 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 $
b. Steinberg’s CEO recently stated that Steinberg’s value should be higher than Dietrich’s because the company has less debt and therefore less bankruptcy risk
Do you agree or disagree with this statement? Agree Disagree
|
Explain why the expansion of sears
: Discuss in general (without any calculation) whether Microsoft’s bid for Yahoo is justifiable. Explain why the expansion of Sears, Roebuck & Co. into the financial services industry fails. Explain how the acquisition of NCR by AT&T is value-destructi..
|
|
Providing a brief summary of key points in each article
: Write a 3-4 page paper providing a brief summary of key points in each article from a legal and ethical perspective, then compare and contrast the findings and recommendations from the perspective of a healthcare administrator or chief of medical ..
|
|
What is the company target debt–equity ratio
: Fama’s Llamas has a WACC of 10.3 percent. The company’s cost of equity is 13.2 percent, and its pretax cost of debt is 8.9 percent. The tax rate is 40 percent. What is the company’s target debt–equity ratio?
|
|
List the 12 cities where the district banks are located
: Briefly describe the functions the Fed performs for the banking community. In what sense is the Fed the bankers' bank?
|
|
What is the value today of dietrich debt and equity
: Steinberg Corporation and Dietrich Corporation are identical companies except that Dietrich is more levered. Both companies will remain in business for one more year. What is the value today of Steinberg's debt and equity? What is the value today of..
|
|
What is difference between thinking and thinking critically
: Consider the following questions to guide your definition: What does it mean to think critically? What is the difference between thinking and thinking critically?
|
|
What is the company unlevered cost of equity capital
: Williamson, Inc., has a debt–equity ratio of 2.6. The company's weighted average cost of capital is 9 percent, and its pretax cost of debt is 7 percent. The corporate tax rate is 40 percent. What is the company’s cost of equity capital? What is the c..
|
|
Why the curves have the slopes they do
: Draw a graph showing equilibrium in the money market. Carefully label all curves and axes and explain why the curves have the slopes they do.
|
|
What is cost of equity after recapitalization
: Bruce & Co. expects its EBIT to be $83,000 every year forever. The company can borrow at 11 percent. The company currently has no debt, its cost of equity is 15 percent, and the tax rate is 35 percent. The company borrows $144,000 and uses the procee..
|