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 7 M shares on issue.

The board is considering issuing $1M of debt to buy back some existing shares. The interest rate on debt is 12% per annum.
Shares are currently trading at $10

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

Use the current Australian company tax rate.

Answer 1

Existing capital structure :

7 million shares @ $10 per share = $70 million

Proposed capital structure :

New debt issued for $1 million to buy back existing shares.

Shares buyback = Amount raised through debt issue / Price per share

Shares buyback = $1 million / $10

Shares buyback = 0.1 million shares

Balance outstanding shares after buyback = Outstanding shares - Buyback shares

Balance outstanding shares after buyback = 7 million shares - 0.1 million shares

Balance outstanding shares after buyback = 6.9 million shares

Now,

Proposed capital structure :

Debt = $1 million

6.9 million shares @ $10 per share = $69 million

Total capital = Debt + Equity

Total capital = $1 million + $69 million

Total capital = $70 million

Number of shares in the proposed structure = 6.9 million shares