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

See similar textbooks

Similar questions

Global Pistons (GP) has common stock with a market value of $450 million and debt with a value of $321 million. Investors expect a 15% return on the stock and a 5% return on the debt. Assume perfect capital markets. a. Suppose GP issues $321 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 $48.94 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)? a. Suppose GP issues $321 million of new stock to buy back the debt. What is the expected return of the stock after this transaction? If GP issues $321 million of new stock to buy back the debt, the expected return is _______________ (Round to two decimal places.)
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?
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 =
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%
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?
Whispering Pines Inc. is all-equity-financed. The expected rate of return on the company's shares is 9.65%. a. What is the opportunity cost of capital for an average-risk Whispering Pines investment? (Enter your answer as a percent rounded to 2 decimal places.) Opportunity cost of capital % b. Suppose the company issues debt, repurchases shares, and moves to a 24% debt-to-value ratio (D/ V = 0.24). What will be the company's weighted-average cost of capital at the new capital structure? The borrowing rate is 5.75% and the tax rate is 21%. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Weighted-average cost of capital
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?
Suppose the risk-free rate is 2.60% and an analyst assumes a market risk premium of 5.93%. Firm A just paid a dividend of $1.40 per share. The analyst estimates the 3 of Firm A to be 1.48 and estimates the dividend growth rate to be 4.94% forever. Firm A has 268.00 million shares outstanding. Firm B just paid a dividend of $1.93 per share. The analyst estimates the ß of Firm B to be 0.79 and believes that dividends will grow at 2.37% forever. Firm B has 194.00 million shares outstanding. What is the value of Firm A? Submit Answer format: Currency: Round to: 2 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.)
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
The following were gathered for estimating the cost of equity of KKK Corporation: Return on Treasury Bonds = 4%; Return on the Market = 10%; Return on KKK Bonds = 6%. Upon analysis, you determined that the beta of KKK shares relating to the market return is 1.2 while a risk premium of 4% should be given to KKK's investors over its creditors. How much is the cost of equity using the capital asset pricing model?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS