Question 1 (20 Marks) Redefine Properties is considering a change in its capital structure. Given their lacklustre financial perfor- mance in 2014, they believe that taking on more debt in their capital structure for the next financial year will improve their profitability. The company currently has 50 000 shares outstanding, each selling at a market price of R.95. The company is also currently financed with debt maturing in 10 years with a market value of R1 000 000 which charges an annual interest rate of rd, which is determined using a floating rate. Brian, one of the company's first equity holders, currently owns 10 000 shares. 1.1. As it currently stands, without any changes to the firm's capital structure, what will Brian's Payoff be at the end of next year? (5 Marks) 1.2. The firm plans to repurchase 5 000 shares of its outstanding equity for R475 000 and will finance it through the issuance of new debt with the same expiry, seniority and interest rate as the firm's existing debt. Assuming Brian makes no changes to his equity holding in the firm, what will his payoff be if the proposed restructure takes place? (5 Marks) 1.3. What would Brian have to do if he wanted to maintain the same payoff after the restructuring as he had before? Prove that his payoff would be the same and include the necessary steps. (10 Marks) Question 1 (20 Marks) Redefine Properties is considering a change in its capital structure. Given their lacklustre financial perfor- mance in 2014, they believe that taking on more debt in their capital structure for the next financial year will improve their profitability. The company currently has 50 000 shares outstanding, each selling at a market price of R.95. The company is also currently financed with debt maturing in 10 years with a market value of R1 000 000 which charges an annual interest rate of rd, which is determined using a floating rate. Brian, one of the company's first equity holders, currently owns 10 000 shares. 1.1. As it currently stands, without any changes to the firm's capital structure, what will Brian's Payoff be at the end of next year? (5 Marks) 1.2. The firm plans to repurchase 5 000 shares of its outstanding equity for R475 000 and will finance it through the issuance of new debt with the same expiry, seniority and interest rate as the firm's existing debt. Assuming Brian makes no changes to his equity holding in the firm, what will his payoff be if the proposed restructure takes place? (5 Marks) 1.3. What would Brian have to do if he wanted to maintain the same payoff after the restructuring as he had before? Prove that his payoff would be the same and include the necessary steps. (10 Marks)
