In March 2015 the management team of Londonderry Air (IA) met to discuss a proposal Lo purchase five shorthaul aircraft at a total cost of $25 million. There was general enthusiasm for the invest ment, and the new aircraft were expected to generate an annual cash flow of $4 million br 20 years. The focus of the meeting was on how to finance the purchase. LA had $20 million in cash and marketable securities (sec table). hut Ed Johnson, the chief lmnancial officer. pointed out that the company needed at least StO million ¡n cash to lileet normal out flow and as a contiiency_reserve. This meant that there would be a - . 1 cash deficiency ohl5 million,twhich the firm would need o COVC
eithTthc sale oT common stock or by additional born)wing. While adiÎting that the arguments tinely balanced, MiJhn son recommended an issue of stock. Ile pointed out that ihe airline industry was subject to wide swings ¡n profits and the firm should he careful to avoid the risk of excessive borrowing. He estimatcd
that in market value terms the long-term debt ratio was about 59% and that a further (lcht issue would raise the ratio to 62%.