Finance Case Study

ROSARIO ACERO , FINANCIAL ANALYSIS

Pablo Este , founder and CEO of Rosario Acero , a small steel mill in Argentina is considering long-term capital for three different reasons Este is seeking to raise 7 .5 million in capital to restructure their capital . The company wishes to apply 4 .8 Million to pay down the company 's present working-capital line of credit , which is at a 2 premium . In addition , the company wants to apply 975 ,000 to repay long-term debt that would mature in mid-1997 , figured at 13-15 interest . Furthermore , the company wants to

use 1 ,725 ,000 for capital improvements and general purposes

Este is considering two options to finance the capital . The first option includes issuing public stock , which would add approximately 1 ,000 ,000 additional stocks at 9 .00 /share . This option would cause the senior managers who own 25 of private shares and Mr . Este who owns 51 of private shares to loose control of the company . The second option would be to issue long-term debt notes with warrants at 13 interest increasing the financial leverage of the company to close to 60 . By this maneuvering , the company would loose their financial flexibility to survive a business crisis or event

Both financing alternatives will affect the performance of the firm in varied manners . However , the projected profit margins (profit before interest /sales ) ratio will continue to remain the same . The significant distinction will be seen when evaluating the projected profit after interest /sales ratio . If the company should utilize the debt /warrant financing , profits are decreased due to additional interest costs PROFIT MARGIN 1997 1998 1999 2000 2001 2002

EQUITY 4 .8 5 .0 5 .2 5 .5 5 .7 5 .9

DEBT /WARRANTS 3 .0 3 .3 3 .6 3 .9 4 .2 4 .5 The return on equity (profit /equity ) indicates the amount of profit a business yields in relation to the money invested . Utilizing the debt method shows a less performance than the equity method (wikipedia .org

ROE 1997 1998 1999 2000 2001 2002

EQUITY 14 .2 14 .1 14 .0 13 .8 13 .7 13 .5

DEBT /WARRANTS 24 .3 22 .8 21 .6 20 .6 19 .5 18 .6 Another facet of capital financing to consider when choosing equity versus debt is risk . Principal risks can vary depending on external and internal risks adherent to each specific industry . Rosaria Acero faces wide-ranging principal risks . Market fluctuation risk is a significant consideration with the Argentina stock market so closely tied with various other South American markets . The Mexican peso crash of 1994 had dampened the Argentina 's market , but as of 1997 , Argentina 's market had rebounded especially in the older , stable industries . Foreign exchange risk is another consideration since Argentina became part of the Mercosur trade group , promoting trade with Brazil and Uruguay Interest rate risk is another significant consideration , although with the forecasted low inflation between 2 .5 and 4 , and real gross national product growth at 1 .5 to 6 , this...