Global Pistons(GP) has common stock with a market value of $470 million and debt with a value of $260 million. Investors expect a 14% return on the stock and a 4% return on the debt. Assume perfect capital markets.

a. Suppose GP issues $260 million of new stock to buy back the debt. What is the expected return of the stock after thistransaction?

If GP issues $260 million of new stock to buy back thedebt, the expected return is .................... %. (Round to two decimalplaces.)

b. Suppose instead GP issues $55.76 million of new debt to repurchase stock.

i. If the risk of the debt does notchange, what is the expected return of the stock after thistransaction?

If GP issues $55.76 million of new debt to repurchase stock and the risk of the debt does notchange, the expected return is .....................%. (Round to two decimalplaces.)

ii. If the risk of the debtincreases, would the expected return of the stock be higher or lower than when debt is issued to repurchase stock in part (i)? (Select the best choicebelow.)

Higher

Lower