Find the expected return of the stock

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Reference no: EM1348551

Global Pistons (GP) has common stocks with a market value of $200 million and debt with a value of $100 million. Investors expect 15% return on the stock and 6% return on the debt. Assume perfect capital markets.

a) Suppose GP issues $100 million of new stock to buy back the debt. What is the expected return of the stock after this transcation?

b) Suppose instead GP issues $50 million of new debt to repurchases stock.
(1) if the risk of the debt does not change, what is the expected return of the stock after this transaction?
(2) If the risk of the debt increases, would the expected return of the stock be higher or lower tahn in part(i)?

Reference no: EM1348551

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