Rosario Acero S.A.

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 …

…problem generating enough income in earlier years to cover it. Unfortunately, the timing of this will probably result in the warrants issued being worth more when they are cashed in and this needs to be examined further to determine whether this offsets the higher EPS that is generated. However, it is unlikely that the effect will be significant enough. It is recommended that, in accordance with the quantitative analysis, the debt financing option is used.