Question

A new board of directors of the BMP Corporation is considering a capital restructuring as currently BMP uses no-debt financing. There are currently 10 M shares on issue.

The board is considering issuing $2M of debt to buy back some existing shares. The interest rate on debt is 11% per annum.
Shares are currently trading at $12

Calculate the number of shares in the proposed structure (Round to the nearest whole number)

Use the current Australian company tax rate.

Answer 1

Calculation of number of shares in proposed structure :

Existing shares = 10 million shares

Price per share = $12 per share

New debt issue = $2 million

Shares buyback through debt issue = New debt issue / Price per share

Shares buyback through debt issue = $2 million / $12 per share

Shares buyback through debt issue = 0.167 million shares

Balance shares after debt issue = Existing shares - Shares buyback

Balance shares after debt issue = 10 million - 0.167 million

Balance shares after debt issue = 9.83 million shares

Proposed capital structure :

Debt = $2 million

Common stock ($12 per share * 9.83 million shares) = $117.96 million

Total capital (Debt + Common stock) = $119.96 million

Number of shares in proposed structure = 9.83 million shares