CASO ROSARIO ACERO Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

CASO ROSARIO ACERO Case Study Solution

Effect of Financing Decision on following Components

Voting rights

When making corporate decisions as in deciding about board of directors, the company gives voting rights to its shareholders. The shareholders can exercise their right and can vote against or for any company policy. Though there is one condition for a company to have voting rights that is it cannot be private limited company but a public limited company. Only if it issues equity financing through IPO it can become a publicly traded company or a public limited company. As private limited company’s doesn’t issues capital through equity and invests its own capital it doesn’t need to consider any others advise to carry on with the policy or not. Therefore, a private company cannot have voting rights because there are no shareholders of that company and can only voting rights once it gets public.

Decision to go Public

Many private companies decides to expand their business for which they require huge capital. The expansion means that they want to increase their total output capacity and hence a private firm may need extra funds. The funds are utilized in acquiring more land to for expanding their plant or to buy advanced machinery that can boost the production level. The financing option other than debt financing is to acquire the capital through stock market for which it go through the book building process. The investment banks proceed with the Initial public offering where public buys the shares of the company. By doing this shareholders enjoys a part of ownership within the company and get returns in the form of capital gain or dividends but the company gets a huge chunk of capital that can be invested in further expanding its business. By doing so company’s overall revenues shoots up and they make better profits than what they use to make before going public.

Debt through Private Placement

The private placement allows the company’s’ head to fund their businesses through selling corporate debt privately. Both private and public companies can opt to go for debt through private placement as they are no restrictions. In this situation the lenders are limited and they are a few qualified investors. This method of acquiring debt is an unconventional as it traditionally firms usually gets funded via banks or public bond market. The other reason companies go for the private placement is the longer maturities they provide to the companies. Opposite to this, the banks usually have provide debts on lesser maturity. Gaining interest rate at a fixed rate is another benefit provided by the private placement as it minimizes interest rate.

RECOMMNEDATION

Currently, many firms across the financial globe are known to opt to go for both debt financing combined with equity financing. Talking about the company Rosario Acero, our major focus has been over funding the company via stock market or can be referred to as equity financing. A company like Rosario Acero can get benefit through equity financing because of some of its unique and distinct features that gives equity financing an upper hand over debt financing. Unlike debt financing, a business doesn’t have to worry about consistent repayment obligations because of absence of debt. This further leads to lower down the financial burden on the company’s owners as there are no concerns of keeping aside a fixed amount out of the profits for repayment purpose. Although, business owners retain a certain amount of cash from their net cash earnings but they re-invest that into their business which can assist the company in producing more innovative products. Or it can even use that money to market its product more efficiently rather than paying it to the bank. Moreover, in times of acquisition, a company like Rosario Acero with no debt can become the best choice for the investors. As the debt to equity ratio will be minimal the threat of getting bankrupt won’t be looming over Rosario Acero’s board of directors. It has been seen that when in times of severe economic crisis even big companies get crumbled by huge long-term liabilities which becomes increasingly difficult for the firm to payback on the back of low sales. Not only the company’s management has to worry about declining sales but they also have to ponder upon periodic debt repayments. As the business gets weak it teams up with huge debt burden to completely sink the company. The economic downturn creates a huge negative impact on all the companies, but at least in those condition Rosario Acero won’t be taking care about debt obligations rather would be completely submerged to save their business and bring in new and better policies which can sail them out of the crisis. Therefore, it is clear that when in economic downturn companies with equity financing will always have higher chance to make their way out of the crisis whereas a company with debt financing might completely get blown away.

Focusing on situations when government goes for Quantitative tightening, interest rates inevitably goes up causing cost of debt to jump up. This would mean complete chaos for the company opting for debt financing. With the increasing interest rate, the company’s overall debt obligations will be increased. In such conditions, most of the profits earned by the companies gets drained off into periodic interest payments. The companies aren’t left with much and it seems that the company is just for the institutional investors. Comparing to that Rosario Acero won’t be much bothered by government’s monetary policy as they do not have any debt hence no tension of increased interest payments. Rosario Acero being an equity financed company will have a competitive edge as with healthy profits it can re-invest it in its own firm and can beat its competitors by coming up with better products............

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