What is the value of debt and equilty, Financial Accounting

Assignment Help:

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

 


Related Discussions:- What is the value of debt and equilty

Calculate interest rates and volatilities , The following market data are a...

The following market data are available for interest rates and volatilities associated with standard maturities: Suppose you are holding a bond portfolio which invests in a

Design a organisational strategy, Q. Design a organisational strategy? ...

Q. Design a organisational strategy? The objectives to which organisational approach relates depend on the relative power of different stakeholders associated with the company

Break-even point, am trying to figure out the break-even point in units usi...

am trying to figure out the break-even point in units using the mathmatical equation. the numbers i have are unit selling price $520, the variable costs per unit are $312 and fina

Calculate interest rate forecasting, Assume that we are in December 2009 an...

Assume that we are in December 2009 and try to make forecasts of the five year interest rate at the end of January 2010. For this question , you just need to fill out the blank s

Leases, Company A(lessee) will rent inventory for you for 3 years rather th...

Company A(lessee) will rent inventory for you for 3 years rather than buying it for the regular price of $240,000. Normally these units, which cost us $120,000 to produce, will las

Rate of return on a stock, Suppose that the risk-free rate is 7% and that t...

Suppose that the risk-free rate is 7% and that the market risk premium is 7%. What is the needed rate of return on a stock with a beta of 1.2? What is the needed rate of retu

What is the npv of project - cost of capital, 1. Kinetics is considering a ...

1. Kinetics is considering a project that has a NINV of $874,000 and generates net cash flows of $170,000 per year for 12 years. What is the NPV of this project if Kinetics' cost o

Financial leverage - ratio analysis, Provide a brief (one typed page) discu...

Provide a brief (one typed page) discussion of analysis of the ratios of your company versus the competitor and the industry, addressing your company's liquidity, solvency, profita

What are the various strategies about bond, What are the various strategies...

What are the various strategies behind selected low (e.g., zero) or high coupon rates when issuing bonds?

Prepare journal entries to record liquidation transaction, The following t...

The following transactions transpire during the liquidation of the Marks, Norris, Smith, and Savannah partnership: • Collected 90 percent of the total accounts receivable with the

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd