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 $4.6 million. if a recession occurs, each firm will generate earnings before interest and taxes (ebit) of $1.4 million. steinberg's debt obligation requires the firm to pay $1,000,000 at the end of the year. dietrich's debt obligation requires the firm to pay $1.5 million at the end of the year. neither firm pays taxes. assume a discount rate of 12 percent. what are the current market values of steinberg's equity and debt? what are the current market values of dietrich's equity and debt? 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?

1. consider a two-firm industry. firm 1 (the incumbent) chooses a level of output qı. firm 2 (the potential entrant) observes qı and then chooses its level of output q2. the demand for the product is p 100 q, where q is the total output sold by the two firms which equals qi +q2. assume that the marginal cost of each firm is zero. a) find the subgame perfect equilibrium levels of qi and q2 keeping in mind that firm 1 chooses qi first and firm 2 observes qi and chooses its q2. find the profits of the two firms-n1 and t2- in the subgame perfect equilibrium. how do these numbers differ from the cournot equilibrium? b) for what level of qi would firm 2 be deterred from entering? would a rational firm 1 have an incentive to choose this level of qi? which entry condition does this market have: blockaded, deterred, or accommodated? now suppose that firm 2 has to incur a fixed cost of entry, f> 0. c) for what values of f will entry be blockaded? d) find out the entry deterring level of q, denoted by q1', a expression for firm l's profit, when entry is deterred, as a function of f. for what values of f would firm 1 use an entry deterring strategy?