Global Pistons (GP) has common stock with a market value of $200 million and debt with a

Question:

Global Pistons (GP) has common stock with a market value of $200 million and debt with a value of $100 million. Investors expect a 15% return on the stock and a 6% return on the debt. Assume perfect capital markets.

a. Suppose GP issues $100 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 $50 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 in part (i)?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...