Question

. Evaluate the view that easyJet’s decision to raise long-term finance by selling shares is preferable to raising it through borrowing.

Answer 1

Easyjet is a British low-cost Airlines group and recent coronavirus crisis has completely affected the operation of the company because the company has not been operational past few months due to complete lockdown and it had affected the revenues of the companies and the profitability of the company as well as liquidity and solvency of the company so the company has decided to raise capital through issuance of equity capital rather than debt capital because it feels that debt capital has a higher amount of risk in such uncertain Times.

This company has preferred to raise capital through issuance of equity shares in the market because equity share does not have fixed repayment obligation whereas debt capital will be having fixed repayment obligation in the form of interest and at such times when there would be very high pressure on the revenues and there would be a large amount of already existent fixed cost the company has been trying to reduce the fixed cost by not issuing additional debt because it would have been leading to more cost for the company which the company would have been finding harder to repay as there is shutdown of the economy so so it can be said that the company has made strategically wise decision to reduce the raising of capital through debt and instead of preferring it through equity.

It should also be noted that that to equity ratio of the company has been higher because of non generation of cash flows at the current pandemic,so the company is trying to to prevent itself from additional fixed cost during these uncertain times and volatile economic conditions so it has been a strategically wise move to issue equity capital instead of debt capital.