Southwest Airlines Capital Analysis

1519 WordsFeb 26, 20186 Pages
The amount required by the company is $1 million; either using debt or equity or both equity and debt should be used for raising the required amount. Before making any decision about capital structure, both pros and cons of each method of financing have to be analyzed. Short-term debt: Short-term debt is easy to rise and faster to get as the requirements of this loan is significantly less. It requires for less verification and less processing time which is a great advantage of this loan (, 2012). The main drawback of short-term loan is higher interest rate and the repayment tenure. Since the loan tenure is short, it will increase the liquidity problem for the company and it becomes difficult to be repaid within the due date (, n.d.). Long-term debt: This will enable the company to raise huge amount of funds by issuing bond. The main advantage is that the company is not required to pay principal until maturity time; risk involved in bond issue is less which will reduce the cost of loan (, n.d.). Debt financing will not dilute the ownership and any decision related to the company can be made fast without any intervention, company will have more independence to make reinvestment of entire profit earned into the future development of the business (, n.d.). In this case, debt holders do not have any claim over the economic profits apart from the interest payment, and debt market is more efficient (Bradshaw, 2013). Fixed amount
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