Global Pistonsâ (GP) has common stock with a market value of $480 million and debt with a value of $346

million. Investors expect a 14% return on the stock and a 6% return on the debt. Assume perfect capital markets.

a. Suppose GP issues $346 million of new stock to buy back the debt. What is the expected return of the stock after thisâ transaction?

b. Suppose instead GP issues $77.83 million of new debt to repurchase stock.

i. If the risk of the debt does notâ change, what is the expected return of the stock after thisâ transaction?

ii. If the risk of the debtâ increases, would the expected return of the stock be higher or lower than when debt is issued to repurchase stock in part

â(iâ)?

Question

Global Pistonsâ (GP) has common stock with a market value of $480 million and debt with a value of $346 million. Investors expect a 14% return on the stock and a 6% return on the debt. Assume perfect capital markets. a. Suppose GP issues $346 million of new stock to buy back the debt. What is the expected return of the stock after thisâ transaction? b. Suppose instead GP issues $77.83 million of new debt to repurchase stock. i. If the risk of the debt does notâ change, what is the expected return of the stock after thisâ transaction? ii. If the risk of the debtâ increases, would the expected return of the stock be higher or lower than when debt is issued to repurchase stock in part â(iâ)?

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