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Rosaria Acero

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| Rosario Acero | Case Analysis | | | |

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1. Based on the forecasts in Exhibits 6 through 11, how will the two financing alternatives affect the performance of the firm?

2. What are the principal risks facing the firm? Sales The majority of the company’s sales are to integrated steel producers who value relationships with their suppliers; however, Rosario Acero decided to pay sales personnel a straight salary in order to cut costs. Not offering a sales commission does not incent sales personnel to develop or maintain relationships with their clients which, in turn, puts their ability to gain more orders at risk. …show more content…

* Callable - not until year 7. * Warrants - Issuance of non-detachable warrants provides no advantage to company, but provides an additional return to the holders given $1/share exercise price. In fact, dilution of existing shareholder ownership interest occurs if warrants are issued, equating to a minimum 15% share for the holder. This number could increase to 25% based on the potential to issue an additional 35,000 shares, which is dependent upon average NOI calculation for 1997 and 1998. Based on income statement projections, the average NOI for 1997 and 1998 would allow for an additional 25,325 shares to be issued equating to additional dilution of 7.5% (exh. 5). In total, it is expected that Este’s interest would decrease from 58% to 45.3%. * Covenants – minimum EBIT coverage ratio of 2.0x could be problematic in the event of a downside scenario. 4. As for a possible equity issue, would an offering price of $9/share be acceptable? No, $9/share is too low. DCF analysis shows value of company at $22.3MM (assumes 6% stable growth and 8.92% WACC) which equates to $96/share vs. implied value of $9.6MM based on $9/share offer price. Additionally, at that price, $7.5MM in proceeds equates to 833,333 shares and 78.15% of company. If a higher offer price were received, the existing shareholders could limit the dilution of their interests. Lastly,

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