Rosario Acero S.A.

Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.

This step involves short and long term debt equity analysis. The proportion of equity capital depends on the possessing and additional funds will be raised. The choice of the source of funds the company has are the issue of shares and debentures, loans to be taken from banks and financial institutions and public deposits to be drawn in form of bonds. The choice will depend on relative merits and demerits of each source and period of financing. The management of the investment funds is key in allocating that the funds are going in the correct place. The profits that are made can be down in two ways dividend declaration which includes identifying the rate of dividends and retained profits in which the volume has to be decided which will depend upon expansion and diversification of the company. The management of cash is another important function. Cash is needed for all different aspects of the company such as payment of salaries, overhead and bills. All of these are important in a company and how successful the financial aspect is going to be.The financial management practices include capital structure decision, investment appraisal techniques, dividend policy, working capital management and financial performance assessment. A company needs to have well financial in order to be successful. “A company that sells well but has poor financial management can fail.” (Johnston)

cheaper product and giving some of it away, it would be necessary to make sure stockholders are satisfied

In case they finance with debt, Winfield (the company) would be able to enjoy the tax shield as a result of tax deductible interest expense, hence their effective cost of debt will be 4.225%. However, when financed with stock, the new stockholders will be entitled to perpetuity of $7.5M in dividends. Working out the net present values of the two scenarios as shown in the tables above, Debt financing becomes a favorable option to stock since it yields a higher NPV.

The company position is strong enough so its better that company should use debt financing instead of equity financing.

We would recommend the capital structure with 30% debt. This is because with 30% debt, they would be able to repurchase 19.8 million shares outstanding as well as save 37.8 million in taxes. EBIT is high in this company, and because of this, financial leverage will raise EPS and ROE. However, variability also increases as financial leverage increases, so the company would not want to take on too much debt and become very risky.

9. What is the Cost of Debt, before and after taxes? Using the interest rate for the largest debt…cannot use the weighted interest rate for the debt since it includes capital lease obligations with no stated rate and could not find in the notes to the financials. 5.4% After tax cost is .054 x (1-.36) = 3.5%

Three interrogations were thus to answer. Should the company provide investors with classic bonds or give them the opportunity to convert them into equity? Should they structure the offer with a fixed or a floating coupon rate? And last but not least, where should they locate the operation?

We suggest that the company should take the option 3. Firstly, as mentioned in the above, the company requires $4.8 billion during 1984 and 1990 and option 3 can provide largest fund compared with option 1 and 2. Secondly, the option 3 incurs the least interest rate, 7.5%. Thirdly, even though the company needs to increase the debt ratio in the short run, they can adjust it later with the conversion option, which gives the company flexibility for capital

Nevertheless, the use of the Optimal Capital Structure (OCS) is the right techniques to be used in order to acquire the right combination of debt and equity that can maximize the

2. Forecast the firm’s financial statements for 2002 and 2003. What will be the external financing requirements of the firm in those years? Can the firm repay its loan within a reasonable period? In order to forecast the financial statements of 2002 and 2003, the following assumptions need to be made. The growth of sales is 15%, same as 2001, which is estimated by managers. The rate of production costs and expenses per sales is constant to 50%. Administration and selling expenses is the average of last 4 years. The depreciation is $7.8 million per year, which is calculated by $54.6 million divided by 7 years. Tax rate is 24.5%, which is provided. The dividend is $2 million per year only when the company makes profits. Therefore, we assume that there will be no dividend in 2003. Gross PPE will be $27.3 million (54.6/2) per year. We also assume there is no more long term debt, because any funds need in the case are short term debt, it keeps at $18.2 million. According to the forecast, Star River needs external financing approximately $94 million and $107 million in 2002 and 2003, respectively. In order to analysis if the company can repay the debt, we need to know the interest coverage ratio, current ratio and D/E ratio. The interest coverage ratios through the forecast were 1.23 and 0.87 respectively, which is the danger signal to the managers, because in 2003, the profits even not

Du Pont's financial policy had always been based on maximization of financial flexibility. Taking to consideration the riskiness of Du Pont's businesses, its competitive position and profitability had declined in the last 20 years. Moreover, the firm is still forced to seek external financing each year for the next five years (1983-1987) due to the continued high level of capital expenditures which are considered non-deferrable to redress the causes of poor performance. In view of the importance and magnitude of the projected financing needs, the firm is concerned about how the cost and availability of debt

The purpose of the report is to understand the capital structure of the chosen company on the basis of the financial statements of the company which includes the income statement, balance sheet and the cash flow statement of the company and do the capital analysis of the company as well to find out the advantages and disadvantages in working capital of the company and suggest company logical and useful ways for growing their economy.

The course project involved developing a great depth of knowledge in analyzing capital structure, theories behind it, and its risks and issues. Before I began this assignment, I knew nothing but a few things about capital structure from previous unit weeks; however, it was not until this course’s final project that came along with opening

Debt financing is considered the fastest and cheapest method of financing growth of a company, however using debt to finance accelerated and explosive growth can have his drawbacks. The debt financing option enjoyed by Loewen kept shareholders stake in the business constant, and reduced the company’s tax liability. As shown in exhibit 4, from year 1989 to 1996 (excluding the special items regarding the law suits in 1995), the increase in debt (from 79.7 to 1428.6) led to an increase in EBITDA (from 21.4 to 251.9), operating profit(from 17.7 to 195.1) and net income (from 6.2 to 63.9), and led to an increase in the dividends paid throughout these years (from 0 to 11.4), and thus kept the shareholders happy. These results have encouraged investors to invest more in Loewen, and have encouraged Loewen to issue more debt to finance its acquisitions, until they arrived to a point where the debt to equity ratio became too high due to lots of reasons.