Global Pistons (GP) has common stock with a market value of $470 million and debt with...

Global Pistons (GP) has common stock with a market value of $470 million and debt with a value

of $299 million. Investors expect a 15% return on the stock and a 5% return on the debt. Assume perfect capital markets.

a. Suppose GP issues $299 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 $71 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?

Expert Solution

jeff jeffy answered 10 months ago

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