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Pablo Este owner of the South American steel company Rosario Acero SA is currently trying to determine his companys 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 companys first initial public offering IPO Management is seeking 75 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 Estes 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 Rosarios beta based upon the new debtequity ratios Finally a WACC will be calculated to fully examine the effects of each option of the firms overall cost of capital EBITEPS Analysis This analysis determines which method of capital financing will produce the higher EPS at a given level of EBIT Central to this analysis is the determination of the EBIT the point at which both debt and equity financing would produce the same EPS EBIT is found by setting the EPS Debt equal to the EPS Equity and solving for the corresponding EBIT See attachment 1 Based on the forecast Rosario Acero should use the debt financing option as every forecasted year produces an EBIT higher than EBIT FRICTO Analysis The FRICTO Flexibility Risk Income Control Timing and Other Concerns analytical framework is used to fully examine the implications of Rosarios options to issue debt or equity Flexibility Debt The issuance of debt to the private bondholders will reduce the firms financial flexibility New ventures or investments will be difficult to finance because lending firms will recognize a substantial amount of long-term debt on the balance sheet
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