Vista Oil & Gas Industries owns assets that will have a(n)80% probability of having a market value of $100 million in one year. There is a 20% chance that the assets will be worth only $70 million. The current risk-free rate is 5%, and Vista Oil & Gas assets have a cost of capital of 10%.

a. If Vista Oil & Gas is unlevered, what is the current market value of its equity?

b. Suppose instead that Vista Oil & Gas has a debt with a face value of $20 million due in one year. According to MM, what is the value of Vista Oil & Gas equity in this case?

c. What is the expected return of Vista Oil & Gas equity without leverage? What is the expected return of Vista Oil & Gas equity with leverage?

d. What is the lowest possible realized return of Vista Oil & Gas t's equity with and without leverage?

Answer rating: 100% (QA)

There is 80 probability that own assets of AI will have market value of 50 million in a yea... View the full answer