1. Steinberg Corp. and Dietrich Corp. are identical companies, except 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% for next year, and the probability of a recession is 20%. If the expansion continues, each firm will generate a EBIT of 2 million. If a recession occurs, each firm will generate a EBIT of 800,000. Steinberg's debt obligation requires the firm to pay 750,000 at the end of the year. Dietrich's debt obligation requires the firm to pay 1 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 15%. a) What are the potential payoffs in one year to Steinberg and Dietrich's stockholders and bondholders? What is the market value of equity and debt of each firm? b) Steinberg's CEO recently stated than Steinberg's value should be higher that Dietrich's because the firm has less debt and therefore less bankruptcy risk. Do you agree or disagree with this statement?