Question

Global Pistons​ (GP) has common stock with a market value of $ 400 million and debt with a value of $ 206 million. Investors expect a 14 % return on the stock and a 8 % return on the debt. Assume perfect capital markets. a. Suppose GP issues $ 206 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 $ 89.88 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​)?

Answer 1