Excel File
#6
Steinberg Corporation and Dietrich Corporation are identical firms except Dietrich is more levered.
Chance of current expansion 80% (EBIT $2.9M)
Chance of recession 20% (EBIT $950k)
Steinberg Debt 825k
Dietrich Debt 1.3M
Discount rate 14%
Key points: Since Dietrich's debt is greater than recession EBIT, need to have a 0 (see formula C25)
Answer B is the sum of both market values (debt and equity) for each firm.
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