Pablo Este, owner of the South American steel company, Rosario Acero, SA, is currently trying to determine his company's optimal capital structure. Este must beside whether it should issue long-term debt in the form of bonds (notes + warrants) or long-term publicly traded stock (equity) through the company's first initial public offering (IPO). Management is seeking $7.5 million in capital in order to (1) pay down its working-capital line of credit, (2) repay long-term debt and (3) capital improvements, among other things.
Pablo Este's determination will arise from a variety of significant factors that play a role in the business. A quantitave analysis is provided first, then a FRICTO analysis is performed to determine whether the quantitative finding are consistent with what is best for the firm. Additionally, the Hamada equation will be used to un-leverage and re-leverage Rosario's beta based upon the new debt/equity ratios. Finally, a WACC will be calculated to fully examine the effects of each option of the firm's overall cost of capital.
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