Global Pistons? (GP) has common stock with a market value of$ 300million and debt with a value of$ 223million. Investors expect a18 %return on the stock and a9 %return on the debt. Assume perfect capital markets.
a. Suppose GP issues$ 223million of new stock to buy back the debt. What is the expected return of the stock after this? transaction?
b. Suppose instead GP issues$ 64.17million 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 when debt is issued to repurchase stock in part ?(i?)?
a. Suppose GP issues$ 223million of new stock to buy back the debt. What is the expected return of the stock after this? transaction?
If GP issues$ 223million of new stock to buy back the? debt, the expected return is nothing ?__%.
?(Round to two decimal? places.)
b. Suppose instead GP issues$ 64.17million 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?
If GP issues$ 64.17million of new debt to repurchase stock and the risk of the debt does not? change, the expected return is ___%. (Round to two decimal places.)
ii. If the risk of the debt? increases, would the expected return of the stock be higher or lower than when debt is issued to repurchase stock in part ?(i?)? Higher or lower?
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