Rosario Acero S.A.
Synopsis and Objectives
In March 1997, the board’s chair of this small steel mill was pondering how to finance the growth of his firm: either with an initial public offering (IPO) of equity or through a private placement of eight-year senior notes with warrants. The task for the student is to sort out the comparative advantages and disadvantages of each alternative—including valuing the possible securities—and then recommend a course of action.
These are the objectives of this case:
Survey the main considerations in the basic choice between debt and equity financing. The case allows an application of the classic FRICTO (flexibility, risk, income, control, timing, and other) framework, as well as…show more content…
The forecasts are premised on a revenue growth rate of 10.3% and the historical percentage-of-sales figures for expenses and most balance sheet accounts. The 10.3% rate of growth is drawn from the case. It is consistent with that of similar companies and with trends in the Latin American steel industry.2 Other assumptions are summarized in the exhibits.
The notes payable balances in case Exhibits 7 and 10 reveal that either financing alternative will satisfy the firm’s funds requirements through 2002. The instructor can question the students as to the following circumstances that might cause an adverse change in the fundamental assumptions:
Increased price competition: Resulting in lower margins and/or higher accounts receivable. As the Mercosur trade group matures, competition inside the region may well intensify. Labor difficulties: Resulting in strikes, higher wages, or adverse work rules. Though Argentina’s labor unions have weakened slightly in recent years, the country has had a tradition of confrontational labor relations. Another small steel manufacturer, Picasso Acero, has just sustained a long strike and strike-related vandalism. Increased growth: Though the assumed annual