Q. 5. Seagate Limited is a steel manufacturing company which have a turnover of 543 Million

Rupees. Recently, Mr. Ramanujan joined the Seagate Limited as a CEO. Mr. Ramanujan is a

technically-educated CEO (Technically educated CEO means when CEO has less knowledge

of finance and have graduate and post-graduate degrees in engineering/operations/natural

sciences). Mr. Ramanujan explored the opportunities for firm and planning for expansion

which will require huge amount of funds. Mr. Ramanujan had a meeting with finance manager

(Mr. Kamath) to suggest the better financing for upcoming projects. Mr. Kamath suggests that

firm can raise funds by issuing equity/debt or mix of equity and debt. Mr. Kamath has also

highlighted that firm should consider the outcome of previous fund raising sources on firms

share price, investor and firm value. Some of the previous records are following.

a. Firm has experienced a high increment in its share price when raise funds through debt

in 2017.

b. Firm has also experienced that share price fall when raise funds through equity in 2019.

c. Firm share price falls when firms raised huge amounts of funds by using debt in 2020.

d. Firm also reported a decline in agency cost when firm raised funds through debt.

e. Firm did not used any external finance while used internal funds to finance projects in

2015.

f. Firm was also about to be bankrupt in 2009 when it was failed to pay interest and

principal of loan.

Considering the above-mentioned previous records, Mr. Kamath proposed to Mr. Ramanujan

that firm should raise funds by issuing mix of debt and equity. Now, Mr. Ramanujan has to

finalize the decisions but this will not be easy for him because he is a technically educated

CEO. You have to help Mr. Ramanujan as an external finance manager to understand the role

of debt and equity issue on firms share price/firm value. Additionally, you have to cover that

what firm will lose or gain if its issue more debt over equity. Further, is it necessary to raise

funds or firms can use their internal funds to finance opportunities. Considering the above-

mentioned case, you have to provide the fundamentals of capital structure which will help Mr.

Ramanujan to take final decision.