Global Pistons$($GP$)$ has common stock with a market value of

$ $470$$$470$

million and debt with a value of

$ $274$$$274$

million. Investors expect a

$12\%12\%$

return on the stock and a

$9\%9\%$

return on the debt. Assume perfect capital markets.

a$.$ Suppose GP issues

$ $274$$$274$

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

$ $116\mathrm{.}76$$$116\mathrm{.}76$

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$)?$