EASYJET TAKES OFF TO 342P SHARE PRICE

Review Assessment

EasyJet, Europe’s second largest low-cost airline, saw its share price rise
strongly on its first day of trading as a public limited company, rising 10% to
£3.42. The offering was priced at £3.10 a share with the issue of 63 million
shares raising £195 million. The issue, solely to institutional investors,
represented about 25% of the enlarged share capital. The stake held by
Georgiana HajiIoannou, founder and chairwoman of the company, was valued
at about £328 million. Mrs. Haji-Ioanno and her brother and sister still control
about 75% of easyJet. Investment bankers said the issue attracted strong
interest. The performance of the shares had been helped by the strong rise of
Ryanair, the leading European low-cost airline, which has been used by
investors as a yardstick for the easyJet offering.
EasyJet shares have also proved attractive because the company has seen its
passenger numbers rise markedly over previous years. Capital raised from the
share issue is earmarked to support the purchase of new aircraft as part of the
group’s plans for a rapid expansion during the next few years, which includes
the addition of 32 new Boeing 737-700s, more than doubling the size of the
fleet.
Assessment 25 MARKS, 45 MINUTES
1.Define the terms:
Public limited company:
A public limited company is one that may use the stock market to advertise
and sell its stock to the general public unlike private limited companies which
seli shares only to friends and relatives . EasyJet is a public limited business,
as evidenced by the fact that its shares are sold to the general public, as
shown in the case study. Well answered
The value of a single share is reflected in the share price. According to the
case study, easyJet's stock price started at £3.10 per share, but on its first
day, the stock price increased by 10% to £3.42. 3 marks
2. Outline two possible sources of long-term finance available to easyJet. [6
marks]
The phrase "long-term" refers to any time frame that extends beyond the
following five years. EasyJet has various options for long-term financing, but
each one must be carefully weighed to determine if it is the best choice for
the company. Debentures and long-term loans are two options for easyJet to
raise money.

Debentures are a long-term loan to a company with a fixed annual interest

payment to the debenture holders. They resemble shares, but unlike
stockholders, debenture holders often have no say in the company (no voting
rights) or ownership in it. Debenture holders benefit from receiving interest,
while the corporation suffers since they are required to pay interest to
shareholders of long-term debt obligations Raising money with debentures is
similar to borrowing money via debt. This long-term funding source has a
benefit over the sale of shares for the company because they retain
ownership over the business. A long-term loan is another option for easy jet
to obtain funding. These loans are received from commercial lenders, such as
banks, and are more often utilized for medium- to long-term investments,
which is what easyJet seeks. Since lenders are less reluctant to issue loans to
profitable companies with strong credit ratings, raising capital through loans
provides the business with a rapid way to raise a substantial quantity of
capital. However, the downside is that, like with debentures, interest must
be paid. When EasyJet obtains funds via a long-term loan, it must pay back
interest.
GOOD 5 marks

3. Differentiate between capital and revenue expenditure.

The revenue a company spends to generate sales revenue or to maintain a
revenue-generating fixed asset is known as revenue expenditure. Equipment,
structures, and real estate are examples of fixed assets.
Investing in physical assets like property, industrial buildings, or equipment is
known as a capital expenditure. Companies make this kind of investment to
keep or expand the scope of their activities. Expenses can range from a
simple roof replacement to the construction of an entirely new theater.
Could have explained the difference specifically like revenue expendidure
are costs that are incurred on regular bases while capital expenditure are
tyoically one- off purchase of tangible or physical assets that are relatively
expensive . 5/6

4..Evaluate the view that easyJet’s decision to raise long-term finance by

selling shares is preferable to raising it through borrowing. [9 marks

A source of long-term finance is one that has a time horizon longer than the
next five years. Both equity financing (the sale of shares) and debt financing
are examples of this (borrowing). correct
Raising funds through the selling of stock in a company is known as equity
financing. When we talk about equity financing, we're referring to the selling
of a company's ownership position in order to raise money for the company.
Funding from your own resources.
You have given general meaning or explanation of selling shares and the
procedure of borrowing.
There is no mention of Easyjets decision
Incomplete 4 marks