Vista Oil & Gas, S.A.B. de C.V. owns assets that are 80% likely to have a market value of $ 100 million within a year and 20% that they are worth only $ 70 million. The current risk-free interest rate is 5% and the assets of this company have a cost of capital of 10%. There are two supposed scenarios:
a) Without debt, what is the current market value of your equity?
b) You have a debt with a nominal value of 70 million dollars maturing within a year, what is the value of your equity? Argue, lean on the MM (Modigliani & Miller)Theory
c) What is the expected return without leverage?
d) What is the lowest possible return on equity with or without leverage? Argue based on the MM Theory