please explain the example 14.4 of how the firm can undo the changes of additional risky debt.

. Example: How an Individual Investor Can Undo" a Firm's Capital Structure Choice Current: 1000 shares outstanding @100 per share Riskless Zero coupon debt valued at D= 10,000 Suzi Mkini owns 100 share (10% of the equity) Suzi's payoff at the year end is: .1[( - (1+r)10,000] =.1 - (1+r)1,000 The firms plans to repurchase 500 share of its outstanding stock for 50,000 and will finance the equity repurchase by issuing 50,000 in risk free debt. If Suzi chooses not to alter her portfolio her payoff will be: 2[(-(1+r))60,000] - - However, if Suzi sells 50 shares of her stock using the proceeds to buy 5000 in bonds, she will once again own 10% of the firm's shares and will realize a return equals to: [C-(1+r)60,000] +(1+r)5,000=.1 -(1+r)1,000 15 Exhibit 14.4 Undoing the Effects of Additional Risky Debt When New Debt Is Junior to Old Debt Rate_for Senior Debt:10,000 euros Continue with previous example Poi - Rate_forJunior Debt:50,000euros Scenario A Scenario B Scenario C Cash flow exceeds all Cash flow exceeds sr. but Senior debt obligation debt obligations: not jr. debt obligation exceeds cash flow: Investment X > (1+rps)10,000 + (1+n)50,000 (1 + r)50,000 > - (1+ros)10,000 X