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. Assumeperfect 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)7a. 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.)

Expected return of a stock is calculated by considering the weight of each asset class in the…

Answered: Global Pistons (GP) has common stock…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Assume capital markets are perfect. Kabo Industries currently has $12 million invested in shortterm Treasury securities paying 8%, and it pays out the interest payments on these securitieseach year as a dividend. The board is considering selling the Treasury securities and paying outthe proceeds as a one-time dividend payment.i. If the board went ahead with this plan, what would happen to the value of Kabo stock uponthe announcement of a change in policy?ii. What would happen to the value of Kabo stock on the ex-dividend date of the one-timedividend?iii. Given these price reactions, will this decision benefit investors?
A. Suppose that Taco John’s equity is currently selling for $55 per share, with 4million shares outstanding. If the firm also has 17 thousand bonds outstanding,which are selling at 94 percent of par, what are the firm’s current capital structure weights? Use the capital structure weights equation:B. Suppose that Taco John’s is considering an active change to their capital structure so as to have a D/E of 0.4, which type of security (stocks or bonds) would they need to sell to accomplish this, and how much would they have to sell?
Indell stock has a current market value of $160 million and a beta of 1.50. Indell currently has risk-free debt as well. The firm decides to change its capital structure by issuing $69.34 million in additional risk-free debt, and then using this $69.34 million plus another $9 million in cash to repurchase stock. With perfect capital markets, what will the beta of Indell stock be after this transaction? The beta of Indell stock after the recapitalization is (Round to two decimal places.)
Suppose you prefer the original capital structure with a 13% return on the common stock and a WACC of 11.88%. If you have $3,000 to invest, how much should you invest in the stock and bonds of the restructured firm (which have returns of 13.53% and 9%, respectively) to obtain the same return as an investment in the stock of the original firm? Enter your answers rounded to 2 DECIMAL PLACES. Amount into equity = Amount into debt =
An all-equity firm has expected earnings of $14,200 and a market value of $82,271. The firm is planning to issue $15,000 of debt at 6.3 percent interest and use the proceeds to repurchase shares at their current market value. Ignore taxes. What will be the cost of equity after the repurchase?
Use the following information to answer the question(s) below. Expected Liquidating Dividend Market Stock Capitalization Beta Taggart Transcontinental $800 $920 1.10 Rearden Metal $600 $720 1.20 Wyatt Oil $1000 $1100 0.80 Nielson Motors $400 $500 1.40 All amounts are in millions. If the risk - free rate is 3% and the market risk premium is 5%, then the CAPM's predicted expected return for Nielson Motors is closest to: A. 10.0% O B. 9.0% Oc. 9.5% O D. 8.5%
Indell stock has a current market value of $130 million and a beta of 1.50. Indell currently has risk-free debt as well. The firm decides to change its capital structure by issuing $27.79 million in additional risk-free debt, and then using this $27.79 million plus another $17 million in cash to repurchase stock. With perfect capital markets, what will the beta of Indell stock be after this transaction? The beta of Indell stock after the recapitalization is www (Round to two decimal places.)
Suppose that Papa Bell Inc. equity is currently selling for $41 per share, with 3.6 million shares outstanding. The firm also has 8000 bonds outstanding, which are selling at 95% of par. Assume Papa Bell was considering an active change to its capital structure so as to have a D/E ratio of 0.5. Which type of security (stocks or bonds) would the firm need to sell to accomplish this? How much would it have to sell? (Enter your answer in dollars not in millions. Do not round immendiage calculations and round your final answer to 2 decimal places.)
A. Suppose that Chi Chili’s equity is currently selling for $40 per share, with 2.5 million shares outstanding. If the firm also has 100,000 bonds outstanding, which are selling at 94 percent of par, what are the firm’s current capital structure weights? B. Suppose that Chi Chili’s is considering an active change to their capital structure so as to have a D/E of 0.60 OR 60%, which type of security (stocks or bonds) would they need to sell to accomplish this, and how much would they have to sell?
Indell stock has a current market value of $150 million and a beta of 2.00. Indell currently has risk-free debt as well. The firm decides to change its capital structure by issuing $41.02 million in additional risk free debt, and then using this $41.02 million plus another $10 million in cash to repurchase stock. With perfect capital markets, what will the beta of Indell stock be after this transaction? %? (Round to two decimal places.)
Suppose the risk-free rate is 1.15% and an analyst assumes a market risk premium of 6.07%. Firm A just paid a dividend of $1.14 per share. The analyst estimates the β of Firm A to be 1.44 and estimates the dividend growth rate to be 4.17% forever. Firm A has 272.00 million shares outstanding. Firm B just paid a dividend of $1.68 per share. The analyst estimates the β of Firm B to be 0.77 and believes that dividends will grow at 2.55% forever. Firm B has 185.00 million shares outstanding. What is the value of Firm B?
Suppose the risk-free rate is 2.61% and an analyst assumes a market risk premium of 6.65%. Firm A just paid a dividend of $1.19 per share. The analyst estimates the ẞ of Firm A to be 1.31 and estimates the dividend growth rate to be 4.79% forever. Firm A has 288.00 million shares outstanding. Firm B just paid a dividend of $1.89 per share. The analyst estimates the ẞ of Firm B to be 0.87 and believes that dividends will grow at 2.28% forever. Firm B has 196.00 million shares outstanding. What is the value of Firm B? Submit Answer format: Currency: Round to: 2 decimal places. Show Hint

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