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ivolga24 [154]
3 years ago
6

Global Pistons​ (GP) has common stock with a market value of $ 200$200 million and debt with a value of $ 100$100 million. Inves

tors expect a 15 %15% return on the stock and a 6 %6% return on the debt. Assume perfect capital markets. a. Suppose GP issues $ 100$100 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 $ 50.00$50.00 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​)?
Business
1 answer:
kvv77 [185]3 years ago
3 0

Answer:

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

  • 12%

b. Suppose instead GP issues $ 50.00$50.00 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?

  • 18%

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​)?

  • If the risk of the debt increases, then the cost of the debt will increase. Therefore, the company will need to spend more money paying the interests related to the new debt which would decrease the ROE compared to the 18% of (i). Since we do not know the new cost of the debt, we cannot know exactly by how much it will affect the ROE, but I assume it will still be higher than the previous ROE.

Explanation:

common stock $200 million

total debt $100 million

required rate of return 15%

cost of debt 6%

current profits = ($200 million x 15%) + ($100 x 6%) = $30 million + $6 million = $36 million

if equity increases to $300 million, ROI = 36/300 = 12

if instead new debt is issued at 6%:

equity 150 million, debt 150 million

cost of debt = 150 million x 6% = $9 million

remaining profits = $36 - $9 = $27 million

ROI = 27/150 = 18%

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3 0
3 years ago
A stock's price fluctuations are approximately normally distributed with a mean of $104.50 and a standard deviation of $23.62. Y
denpristay [2]

Answer:

$ 74.23

Explanation:

We are given the following:

mean, μ = $ 104.50

standard deviation, σ = $ 23.62

Using the z-score table, we have

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Using z-score formula,

x = z *σ + μ

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x =- - 1.282 * 23.62 + 104.50

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6 0
3 years ago
he following information for Cooper Enterprises is given below: December 31, 2021Assets and obligations Plan assets (at fair val
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Answer:

the amortization of Other Comprehensive Loss for 2022 is $38,370

Explanation:

The computation of the amortization of Other Comprehensive Loss for 2022 is shown below;

= (Accumulated other comprehensive loss - 10% of Projected benefit obligation)  ÷ given no of years

= ($503,700 - 10% of $1,200,000) ÷ given no of years

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The same would be considered

7 0
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Which of the following is true of source documents in an accounting information​ system?
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a. Source documents provide control and reliability in an accounting information system.

Explanation:

The source documents are the documents that support all types of business transaction. It can be in terms of bank statement, purchase order, sales order, supplier invoices, etc. It can also known as vouchers

With the help of the source documents the accounting system provides the reliable and controlling of transactions

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Taxes has grown much bigger for most online retailers, when the like of Amazon started selling products online they were not billed to pay tax, those taxed then where companies who had a building(structure) but now online stores are now subject to taxes.

Some of the tax are much that it affects sellers who are not able to break even and make profit, especially when they don't meet targets they've set for themselves.

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