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Questions and Answers
Which of the following is not one type of equity financing?
Which of the following is the only true internal source of funds?
What is equipment trust financing?
Which of the following about “line of credit” is not correct?
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What is the usual practice for an airline to have with banks before the time the funds will be needed?
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Which of the following statements about the debt to equity ratio is not correct?
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In airlines that have heavily invested in their self-owned fleet and operate with thin net profit margins, what represents the airlines' largest single source of internal funds?
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A WLU is equivalent to one passenger or 150 kg of freight. Airlines that transport passengers and freight convert passenger revenue and cargo revenue into revenue per WLU to be able to make comparisons on the same basis.
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Which of the following statements about the current ratio is not correct?
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What is an asset?
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Net profit margin measures how much net income is generated as a percentage of revenue received. A high net profit margin is preferred.
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Study Notes
Equity Financing
- Categories of equity financing include venture capital, angel investment, public offerings, and direct investment by founders.
- Incorrect Type: Not all options listed may qualify as equity financing; it is essential to identify which does not fit.
Internal Source of Funds
- The only true internal source of funding is retained earnings, which are profits reinvested in the company.
Equipment Trust Financing
- A type of financing where an airline acquires equipment, using the equipment itself as collateral for the loan.
- Allows for structured payments over time while enabling the airline to use the equipment immediately.
Line of Credit
- A line of credit allows for flexible borrowing, but incorrect statements may involve assumptions about repayment terms or usage.
Airline Financing Practices
- Typically, airlines establish a credit facility with banks in advance, ensuring they have access to funds when needed for operations or emergencies.
Debt to Equity Ratio
- This ratio indicates the proportion of debt and equity used to finance assets. Understanding its implications is crucial; inaccuracies in statements might relate to the interpretation of what counts as debt or equity.
Internal Funds in Airlines
- Airlines with substantial investment in self-owned fleets rely heavily on depreciation and amortization as the largest internal funds sources, especially when earnings are low.
WLU Measurement
- A WLU (Weighted Loading Unit) equates to one passenger or 150 kg of freight, providing a standard measurement for comparing passenger and cargo revenues.
Revenue Metrics
- Airlines convert passenger and freight revenue into revenue per WLU for comparability, aiding in decision-making and strategic planning.
Current Ratio
- This ratio measures a company’s ability to pay its short-term liabilities with its short-term assets; incorrect assertions might involve misconceptions about acceptable values.
Asset Definition
- Assets are resources owned by a company, expected to bring future economic benefits through their use in operations.
Net Profit Margin
- Net profit margin is a profitability ratio indicating how much net income is generated from total revenue.
- A high net profit margin signals efficient cost management and pricing strategies.
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