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Assignment CF
Assignment CF
Assignment CF
Higher Learning
CORPORATE FINANCE
END TERM ASSIGNMENT
CASE ANALYSIS
ROSARIO ACERO S.A.
Submitted To:
Dr Reshma Sheik
Submitted By:
Bhanuprakash Vijayvargiya,
Chayank, Kanika Maheshwari,
Rishika Pareek, Shubham
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Ques1 Why is Pablo Este
considering obtaining long-
term capital?
Answer
Pablo Este, the owner of Rosario Acero
S.A., wants a long-term financing for his
company. The requirements for this type of
financing were-
To repay its long-term debt which was
maturing by mid-1997.
To pay down its working capital
line of credit.
To facilitate the capital improvements
among other things in the company.
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Ques2 How will be the 2-financing
alternative affect the
performance the firm?
Answer
The 2-financing alternatives that are
present as per the case is-
Privately placed debt and warrant
issue
Issue of equity shares
As per exhibit 6 and 9 the 2-financing
alternatives can be valued based on
Earning per share (EPS).
Here,
Privately placed debt and warrant issue
is considered as OPTION 1 and Issue of
equity shares is considered as OPTION 2
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ANALYSIS Chart Title
14
12
10 EPS TRENDS
14
8
12
6 10
8
4
6
2 4
2
0
0 1
Category Category 2 Category 3 Category 4
1996 1997 1998 1999 2000 2001 2002
Series 1 Series 2 Series 3
OPTION 1 OPTION 2
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Another way of measuring that, how the
2-financing alternatives can affect
the valuation of firm by evaluating
the Return on Equity ratio.
As per Exhibit 7 and 10 following data
is given-
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Return on assets ratio can also be
used for measuring the effectiveness
of the 2-financing alternatives.
Table showing Return on Assets ratio
for the Option 1
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Here it is observed that with the use of
either debt or equity does not have any
greater effect on Return on Assets. The ROA
has been decreased more in option 1 as
compared to option 2. Thus, in both the
cases Return on Assets is decreased in
comparison to the ROA of 7.92% of the year
1996.
Answer
There are various risks associated with the
firm. They are as follows-
As per Exhibit 2 of the respective case,
there is only one primary source for the
scrap metal used in its production of
rolls and castings.
Moreover, there is market fluctuation
risk also as the stock market of
Argentina is tied up with South American
Markets.
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If Acero takes on a private placement of
eight-year notes, the cash flows are not
enough to fulfil the payment requirement in
the year 2003 and 2004. And due to this there
is negative cashflow left with the equity
shareholders and thus, the company will
require to raise the funds again in the near
future.
The following table shows the negative cash
flow-
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Ques4 From Rosario’s standpoint,
are the terms of notes and warrant
package affect the performance of
the firm?
Answer
If warrants are issued with notes, then
there is increase in the return of
investors. Moreover, company also enjoys
the benefit of the reduced coupon
payments in notes. But in this respective
case, the notes were being issued at a
high coupon rate that is 13%.
Also, as per the company’s terms and
conditions, the company cannot call the
notes before 7th year thus, it does not
permit the company to take the benefit of
the decline interest rate of interest in
the industry.
As per the case, the base lending rate
which is, (8.5%+2%) is less than the rate
at which the company is issuing the notes
with warrants which is 13%. Thus, from
the point of the company, it is not
beneficial and as per Exhibit 14, many
companies in the same industry are
issuing debt at a rate higher than
Rosario SA.
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Ques5 As for the possible equity
issue, would an offering price of
$9 per share be fair?
Answer
As per the given case, required data has
not been given for the solving the
question.
Thus, for solving this we need to assume
certain figures to get an appropriate
answer.
Thus, for computing the fair value of the
stock of the Company, following figures
are to be assumed, just as growth rate is
assumed as 6% and inflation rate in
economy has been assumed as 4%.
Thus, if company is using debt finance,
then the fair value of stock of the
company is 5.11 Rs and if company uses
only equity financing then the fair value
of stock is 118.67 Rs
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Ques6 Which Course of action
should Este adopt?
Answer
FRICTO analysis is used to analyse the given
options.
FLEXIBILITY
Issue of Warrants does not provide
flexibility to the company as due to the
raising of debt as a source of finance will
not let the company to meet its unexpected
anticipated financial needs such as sudden
investment opportunity or financial crises
in the economy.
But, on the contrary, EPS forecasted in the
above case tend to be higher and will help
the company to maintain its flexibility.
RISK
The risk associated with the debt
financing is relatively more as
compared to the equity financing as
debt is a obligation and has to be paid
on the required time.
But on the contrary, IPOs or equity
financing as they carry low risk and an
easy gaining source of collecting
finance.
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INCOME
If we analyse debt financing based on
income, thus as per the inflation in
economy, Interest rate will increase
resulting in the payment of higher
interest but there will be a fixed rate
which is set at the time of raising the
funds only, therefore it will be turning
out more beneficial for the Company.
Whereas IPOs are also good source of
income as there is no additional interest
is paid, moreover, Equity stock earning
always produces higher earnings nut does
not provide tax benefit.
Control
In the case of equity financing there is a
dilution of control among the equity
shareholders which results in the change
of voting rights of the existing Equity
shareholders.
Issuing of debt does not support dilution
of control among the existing shareholders
in the company.
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TIMING
Whereas, as per the case the equity market
seems to be more rising as people of
Argentina is highly optimistic about the
equity share market. Thus, issuing IPO is
comparatively more viable option.
As debt financing requires high interest
payments and as per the respective case
most of the companies are having low
credit rating thus it will be perceiving
difficulty in raising the debt.
OTHER
Considering the parameter of liquidity,
Debt financing is not a viable option as
there is no sufficient cash flow when it
is projected.
But in the case of equity financing, there
is no such barrier, so as per the case,
IPO will be the better option for raising
the funds.
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