a) What is Johnson and Johnson’s beta with respect to the
market?

b) Under the CAPM assumptions, what is its expected return?

2. Global Pistons (GP) has a common stock with a market
value of $200 million and debt with a value of $100 million. Investors expect a
15% return on the stock and a 6% return on the debt. Assume perfect capital
markets.

a) Suppose GP issues $100 million of new stock to buy back
the debt. What is the expected return of the stock after this transaction?

b) Suppose instead GP issues $50 million of new debt to
repurchase stock.

i) If the risk of the debt does not change, what is the
expected return of the stock after this transaction?

ii) If the risk of the debt increases, would the expected
return of the stock be higher or lower than in part (i)?