Cortez Industries owns assets that will have an 80% probability of having a market value of $50 million in one year. There is a 20% chance that the assets will be worth only $20 million. The current risk-free rate is 5%, and Cortezs assets have a cost of capital of 10%.

a. If Cortez is unlevered, what is the current market value of its equity?

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

c. What is the expected return of Cortezs equity without leverage? What is the expected return of Cortezs equity with leverage?