Offices Ltd$.$ is a construction company focused on office space, which in the past had a large

market capitalisation and turnover, but, after the recent pandemic, finds itself struggling to

recover to its past stature in the construction industry due to the lower demand for office space.

The company has, over the past few years sold off all its subdivisions and is now focussed

solely on its core competency of building offices.

Demand for new offices has remained subdued since $2020,$ however, there is still enough

demand for the company to stay afloat. The management of Offices Ltd $($from hereon,

management$)$ believes that the company can operate in this environment and return healthy

profits due to its experienced staff. Management believes in the turnaround plan and the

prospects of the company and is sure that it will return to being a large competitor in its

industry, however, it is not expected that the company will return to its size pre the pandemic.

Due to low demand, the company is cash poor and management wishes to raise more funds

to implement the proposed turn$-$around plan, which is based around reducing debt repayments

$($lowering financial leverage$)$ and focusing on their core competency.

Below follows some financial information regarding the company:

$$ Current number of shares in issue: $200000000$

$$ Current share price: $30$c

$$ Current capital structure: Assets $=$ R$200000000$; Liabilities$=$ R$100000000$; Equity $=$

R$100000000$

$$ Current EBIT $($operating profit$)=$ R$20000000$

$$ Current interest expense $=$ R$12000000$

$$ Tax rate: $27\%$

$$ Current beta: $1\mathrm{.}9$

$$ Risk free rate: $8\%$

$$ Market risk premium: $5\%$

The company has had to incur a lot of debt to stay afloat and is planning a rights issue to raise

funds to repay some of its debts and to implement its turn$-$around plan. Management estimates

that it needs R$20000000$ over and above any retained earnings to implement the turnaround

plan while they wish to lower its debt by R$50000000$ to bring about better profitability due to

reduced interest payments, together with more future flexibility. It is not expected that EBIT

would change for the foreseeable future and that any effect of the turn$-$around plan would only

be felt later. The company will, immediately, use R$50000000$ to retire debt to that amount,

while the R$20000000$ for the turn$-$around plan would be kept as cash initially. The interest

payment is expected to fall in line $($proportionally$)$ with the reduction in the amount of debt.