Global Pistons? (GP) has common stock with a market value of $ 310 million and debt with a value of $ 157million. Investors expect a 15 % return on the stock and a 7 % return on the debt. Assume perfect capital markets.
a. Suppose GP issues $157 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 $54.46 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 when debt is issued to repurchase stock in part ?(i?)?
a. Suppose GP issues $157 million of new stock to buy back the debt. What is the expected return of the stock after this? transaction?
If GP issues $157 million of new stock to buy back the? debt, the expected return is --------------%. (Round to two decimal? places.)
b. Suppose instead GP issues $54.46 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?
If GP issues $ 54.46 million 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
Lower