Question

Please show calculation

VUUTU. U ULIPE UUIJCOPIC O . . 10,- P14-14 (similar to) Question Help Global Pistons (GP) has common stock with a market value of $310 million and debt with a value of $231 million. Investors expect a 15% return on the stock and a 9% return on the debt. Assume perfect capital markets. a. Suppose GP issues $231 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 $61.73 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 $231 million of new stock to buy back the debt. What is the expected return of the stock after this transaction? %. (Round If GP issues $231 million of new stock to buy back the debt, the expected return is to two decimal places.)

Answer 1

Proposed Existing Stock Debt 310 15% Stock 541 Debt 231 Value Expected rate of return 9% 46.50 67.29 20.79 Profit Total profit 12.44% (Stock/Total profit)