You have recently started work as a graduate financial manager at Keystone Ltd (‘Keystone’), a large privately-owned retailer of upmarket granite and marble kitchen work surfaces. The company is wholly owned by the four founding directors and is currently all-equity financed. Two of the founding directors, who together own 40% of the equity, are now approaching retirement and want to sell their shares in order to raise funds for their retirement. The two remaining founding directors are very ambitious andwould like to raise additional funds to support the growth of Keystone over the next five to ten years. Keystone also employs a number of very experienced senior managers who have been promoted through the ranks, having worked for Keystone for a number of years.Advice has been sought from an investment bank as to how the company could facilitate the retirement of the two founding directors whilst raising funds for future growth. The investment bankers have come up with the following options:

1.Find a suitable private equity partner to invest in the business, providing the capital needed to buyout the two directors and to fund growth.

2.Undertake a leveraged MBO, with the remaining founding directors agreeing to dilute their shareholding in orderto offer shares to the senior managers in the business.

3.Sell Keystone to a trade buyer and look to secure roles on the board of directors for the two remaining founders of the business.

Required

(A)Critically evaluate the 3 options listed out above in the context of the information provided regarding Keystone and its situation. 

(B)Evaluate the potential impact on decisions regarding the capital structure of companies (relative levels of debt to equity) if governments decide to withdraw tax relief on interest payments for debt finance.