Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered. Both companies

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Steinberg Corporation and Dietrich Corporation are identicalfirms except that Dietrich is more levered. Both companies willremain in business for one more year. The companies' economistsagree that the probability of the continuation of the currentexpansion is 80 percent for the next year and the probability of arecession is 20 percent. If the expansion continues, each firm willgenerate earnings before interest and taxes (EBIT) of $4.7 million.If a recession occurs, each firm will generate earnings beforeinterest and taxes (EBIT) of $1.3 million. Steinberg's debtobligation requires the firm to pay $1,010,000 at the end of theyear. Dietrich's debt obligation requires the firm to pay $1.4million at the end of the year. Neither firm pays taxes. Assume adiscount rate of 13 percent.
a-1. What is the value today of Steinberg's debt andequity?
a-2. What is the value today of Dietrich's debt and equity?
b. Steinberg’s CEO recently stated that Steinberg’s value shouldbe higher than Dietrich’s because the firm has less debt andtherefore less bankruptcy risk. Do you agree or disagree with thisstatement?