Equity investors will look at the ROCE in order to determine if a firm is effectively deploying its capital. Having a ROCE that is in-line with its competitors will aid Barra Airways in achieving a good price for its equity, should it choose to use equity as a source of finance.
Barra Airways has an interest coverage ratio (ICR) of 18; this means that Barra Airways is not burdened with a large amount of interest payments on existing debts. Therefore, using debt does appear to be an attractive source of finance. This is because Barra Airways existing interest burden is low, meaning that to increase it would have a reduced effect on the company’s net profit. However, EasyJet has an ICR of 30.88, considerably larger than that of Barra Airways…show more content…
However, using equity as a source of finance could mean that Barra Airways will face increased dividend costs. Whilst Barra Airways would not be obligated to pay a dividend, its competitor EasyJet does so. EasyJet has paid a dividend each year since 2011 . Due to this if Barra Airways does not pay a dividend then investors seeking to invest in the low-cost airline industry may favour EasyJet over Barra Airways, resulting in a lower share price for Barra Airways. Furthermore, investors who own Barra Airways equity may sell their shares and purchase EasyJet, contributing to a further decrease in the value of Barra Airways shares. This would mean that Barra Airways would need to issue more equity to raise the same level of finance, relinquishing more ownership and control of the company.
The state of financial markets can have considerable effect on the success of an equity issue. Over the last twelve months the share value of EasyJet has risen by 64%, this is a highly positive result. This suggests that the market for low-cost airlines for this period is bullish. Upon observation of figure 1 it becomes apparent that a large proportion of this growth, almost half, occurred in the last five months. This demonstrates further that market has confidence in the growth potential of low-cost airlines. Therefore, it is clear that for Barra Airways to issue more equity at this time would be a highly effective