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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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The correct answer is option D.

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The domestic even though operating in the domestic territories may still face foreign exchange risk. This is because their competitors may be operating internationally.

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Explanation:

As for the provided information,

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Fixed Cost = $308,100

Contribution per unit = Selling price - Variable cost = $79 - $40 = $39

Therefore, break even units = \frac{308,100}{39} = 7,900 smokers

b. In case the company wants a profit of $51,480 after tax @ 40% then,

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Explanation:

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Suppose that, in a competitive market without government regulations, the equilibrium price of milk is $2.50 per gallon. Complet
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Answer and Explanation:

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Binding:-The binding price ceiling is below the equilibrium price.  

Unbinding:-The unbinding price ceiling is above equilibrium price.  

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Unbinding:-The unbinding price floor is below the equilibrium price.

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