Question

Firms ABC and XYZ are identical, except that ABC is more levered. Both firms will remain in business for one more year. It appears that the probability of the continuation of expansion is 75% for the next year and the probability of recession is 25%. If the expansion continues both firms will generate an EBIT of $1 million. If a recession occurs, each firm will generate EBIT of $400’000. ABC’s debt obligation requires the firm to pay $350’000 at the end of the year. XYZ’s debt obligation require the firm to pay $500’000 at the end of the year. Neither firms pay taxes. Assume a discount rate of 15%.

What are the potential pay-offs in one year to ABC shareholders and bondholders ? What about those for XYZ’s ?

Answer #1

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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 80 percent for the next year and the probability of a
recession is 20 percent. If the expansion continues, each firm will
generate earnings before interest and taxes (EBIT) of $3.5 million.
If a recession occurs, each firm will generate earnings...

Kangaroo Corporation and Platypus Corporation are identical
firms except that Platypus 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 80 percent for the next year, and the probability of a
recession is 20 percent. If the expansion continues, each firm will
generate earnings before interest and taxes (EBIT) of $2 million.
If a recession occurs, each firm will generate an...

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 80 percent for the next year, and the probability of a
recession is 20 percent. If the expansion continues, each firm will
generate earnings before interest and taxes (EBIT) of $2.9 million.
If a recession occurs, each firm will generate earnings...

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 80 percent for the
next year, and the probability of a recession is 20 percent. If the
expansion continues, each firm will generate earnings before
interest and taxes (EBIT) of $4.1 million. If a recession occurs,
each firm will generate earnings...

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 70 percent for the next year and the probability of a
recession is 30 percent. If the expansion continues, each firm will
generate earnings before interest and taxes (EBIT) of $2.8 million.
If a recession occurs, each firm will generate earnings...

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 70 percent for the next year and the probability of a
recession is 30 percent. If the expansion continues, each firm will
generate earnings before interest and taxes (EBIT) of $3.8 million.
If a recession occurs, each firm will generate earnings...

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 70 percent for the next year and the probability of a
recession is 30 percent. If the expansion continues, each firm will
generate earnings before interest and taxes (EBIT) of $3.4 million.
If a recession occurs, each firm will generate earnings...

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 70 percent for the next year and the probability of a
recession is 30 percent. If the expansion continues, each firm will
generate earnings before interest and taxes (EBIT) of $4 million.
If a recession occurs, each firm will generate earnings...

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 70 percent for the next year and the probability of a
recession is 30 percent. If the expansion continues, each firm will
generate earnings before interest and taxes (EBIT) of $3.4 million.
If a recession occurs, each firm will generate earnings...

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 70 percent for the next year and the probability of a
recession is 30 percent. If the expansion continues, each firm will
generate earnings before interest and taxes (EBIT) of $3.2 million.
If a recession occurs, each firm will generate earnings...

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