Global Pistons (GP) has common stock with a market value of $450 million and debt with a value of $321 million. Investors expect a 15% return on the stock and a 5% return on the debt. Assume perfect capital markets. a. Suppose GP issues $321 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 $48.94 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 $321 million of new stock to buy back the debt. What is the expected return of the stock after this transaction? If GP issues $321 million of new stock to buy back the debt, the expected return is _______________ (Round to two decimal places.)
Global Pistons (GP) has common stock with a market value of $450 million and debt with a value of $321 million. Investors expect a 15% return on the stock and a 5% return on the debt. Assume perfect capital markets. a. Suppose GP issues $321 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 $48.94 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 $321 million of new stock to buy back the debt. What is the expected return of the stock after this transaction? If GP issues $321 million of new stock to buy back the debt, the expected return is _______________ (Round to two decimal places.)
Chapter14: Distributions To Shareholders: Dividends And Repurchases
Section: Chapter Questions
Problem 2STP
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Question
Global Pistons (GP) has common stock with a market value of
$450
million and debt with a value of
$321
million. Investors expect a
15%
return on the stock and a
5%
return on the debt. Assume perfect capital markets.a. Suppose GP issues
$321
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
$48.94
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
$321
million of new stock to buy back the debt. What is the expected return of the stock after this transaction?If GP issues
$321
million of new stock to buy back the debt, the expected return is
_______________
(Round to two decimal places.)Expert Solution
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