The Effect of Information Asymmetry, Essay Example

Ryanair Company has had its asset tangibility reducing in 2012 increasing from 2011 through to 2013 and its growth opportunity increase from 2011 through to 2015. Company growth involves widening its scope thus increasing its market share. Leverage ratio access how much finances a company gets from debts, this includes loan, debentures and stocks. High leverage ratio and less equity-based indicate that a company can comfortably repay the loans than issuing out shares. Ryanair moved from to a region of high leverage compared to shareholders equity because of increased cash flows, which the company could comfortably use it to repay the loans (Petacchi 2015, p. 153). Loans have several uncertainties since its interest rates depend on the market patterns and the company will have to spend more in repaying the loan than before,  increasing its expenses hence reducing its retained earnings.

Reduction in fixed assets in 2012 could be attributed to the company selling some of its asset to finance its ambitious projects rather than acquiring money from the open market. In the year, 2012 market interest rates could have been higher; this was un-worthwhile for the company to acquire loans. Share prices in 2012 were 5.95 compared to its competitor company; this indicates that the company could have issued a large number of shares to acquire the desired capital. It would lead to dilution and high expenses in the future in repaying share dividends. Reduced dividends would affect financial stability reputation of the company compared to its competitors (Petacchi 2015, p. 149).

Growth opportunity of Ryaniar company increased to 1.23566, and its Asset tangibility increased to 0.0053, this implies that the company had increased its fixed assets and allotted increased its market equity. Ryanair company market share price was 11.13; the company reduced its leverage ratio and increased share funding because o low cash flow generated which made the company unable to repay its loans.

Reference

Petacchi, R. (2015). Information asymmetry and capital structure: Evidence from regulation FD. Journal of Accounting and Economics, 59(2), 143-162.