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?

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jeff jeffy answered 3 months ago

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