
Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Transcribed Image Text:Global Pistons (GP) has common stock with a market value of $380 million and debt with a value of $245 million, Investors expect a 17% return on the stock and a 4% return on the debt. Assume
perfect capital markets.
a. Suppose GP issues $245 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 $53.63 million of new debt to repurchase stock.
1. If the risk of the debt does not change, what is the expected return of the stock after this transaction?
1. 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 (0)7
a. Suppose GP issues $245 million of new stock to buy back the debt. What is the expected return of the stock after this transaction?
If GP issues $245 million of new stock to buy back the debt, the expected return is [17%. (Round to two decimal places.)
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