SPECIFIC GUIDELINES THE QUESTION AND ANSWER IN THIS MINI CASE STUDY ARE ASSESS UNDER CONTENT CRITERIAS AND MARKS AWARD ACCORDINGLY AS PER RUBRICS. If it is to grow, a firm needs capital and capital comes primarily in the form of debt or equity. Debt financing has two important advantages, the interest paid is tax deductible whereas dividend paid on stock are not which lowers debt's relative cost and the return on debt is fixed, so stockholders do not have to share the firm's profits if the firm turns out to be extremely successful. However, debt also has disadvantage, using more debt increases the firm's risk and that raises the costs of debt and equity and if the company falls on hard times and its operating income is not sufficient to cover interest charges, the firm may go bankrupt. Good times may be just around the corner, but too much debt can bankrupt the company before it reached that corner. Because of the risk of using debt, companies with volatile earnings and operating cash flows tend to limit its use. On the other hand, companies with relatively little business risk and stable operating cash flows can benefit from taking on more debt. The optimal capital structure of a company is defined as the structure that would maximise its share price and setting the capital structure involves a trade-off between risk and return, whereby, using more debt will raise the risk borne by the shareholders, however, using more debt generally increases the expected return on equity. Therefore, a company should strikes a balance between risk and return so as to maximise the stock price and generally calls for a debt ratio that is lower than the one that maximise expected Earnings Per Share ("EPS") The capital structure decisions are influenced by four major factors: The capital structure decisions are influenced by four major factors: 1. Business risk, or the riskiness inherent in the firm's operations if it used no debt. The greater the firm's business risk, the lower its optimal debt ratio; 2. The firm's tax position, whereby using debt is that interest is tax deductible, which lowers the effective cost of debt; 3. Ability to raise capital on reasonable terms even under adverse market conditions. As such, when a firm is experiencing operating difficulties, it is easier to raise debt than equity capital and lenders are more willing to accommodate companies with strong balance sheets; and 4. Consistent with others in the industry, the Group and the Company monitors capital utilisation on the basis of the net gearing ratio. This net gearing ratio is calculated as net debts divided by total equity. Net debts are calculated as total borrowings (including "short- term and long-term borrowings" as shown in the Group's and the Company's balance sheet) add lease liabilities less deposit, cash and bank balances. The above factors largely determine a firm's target capital structure, but operating conditions can cause its actual capital structure to vary from target, for instance, when a company's actual stock price might for some reason be well below the intrinsic value as seen by management and in this incident, management would be reluctant to issue new share to raise capital, so it might use debt financing even though this would cause the debt ration to rise above the target level. AirAsia Berhad ("AirAsia") was established in 1993 and began operations on 18 November 1996. It was founded by a government-owned conglomerate, DRB-HICOM. On 8 September 2001, the heavily indebted airline was bought by former Time Warner executive Tony Fernandes and Kamarudin Meranun's company Tune Air Sdn Bhd for the token sum of one ringgit (about US$0.26 at the time) with US$11 million (RM40 million) worth of debts. The partners turned the company around, producing a profit in 2002 and launching new routes from its hub in Kuala Lumpur, undercutting former monopoly operator Malaysia Airlines with promotional fares as low as RM1 (US$0.27). In 2003, AirAsia opened a second hub at Senai International Airport in Johor Bahru and launched its first international flight to Bangkok. AirAsia is a Malaysian multinational low-cost airline headquartered near Kuala Lumpur, Malaysia. It is the largest airline in Malaysia by fleet size and destinations. AirAsia Group operates scheduled domestic and international flights to more than 165 destinations spanning 25 countries. Its main base is klia2, the low-cost carrier terminal at Kuala Lumpur International Airport ("KLIA") in Sepang, Selangor, Malaysia. Its affiliate airlines Thai AirAsia, Indonesia AirAsia, Philippines AirAsia, and AirAsia India have bases in Bangkok- Don Mueang, Jakarta-Soekarno-Hatta, Manila-Ninoy Aquino, and Bangalore- Kempegowda airports respectively, while its sister airline, AirAsia X, focuses on long-haul routes. AirAsia's registered office is in Petaling Jaya, Selangor while its head office is at Kuala Lumpur International Airport. AirAsia operates with the world's lowest unit cost of US$0.023 per available seat kilometer and a passenger breakeven load factor of 52%. In 2007, The New York Times described the airline as a "pioneer" of low-cost travel in Asia. During the financial year, the Group's operations were significantly affected by the COVID-19 pandemic which led to operating losses. The Group has been relying on debt compared to its equity to finance the Group's operations which resulted in a negative net gearing ratio. The Group is in compliance with all externally imposed capital requirements for the financial years ended 31 December 2020 and 31 December 2019. The Group's and the Company's objectives when managing capital are to safeguard the Group's and the Company's ability to continue as a going concern and to maintain an optimal capital structure so as to provide returns for shareholders and benefits for other stakeholders. In order to optimise the capital structure, or the capital allocation amongst the Group's and the Company's various businesses, the Group and the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, take on new debts or sell assets to reduce debt. The net gearing ratio as at 31 December 2020 and 31 December 2019 are as follows: Group 2020 RM'mil 2019 Company 2020 2019 RM'mil RM'mil RM'm il Total borrowings (Note 28) 1,289 429 Lease liabilities (Note 29) 12,435 12,460 Less: Deposit, cash and bank balances (534) (2,588) (1) (41) (Note 25) Net debts 13,190 10,301 (1) (41) Total equity Net Gearing Ratio (times) (3,313) N/A 2,911 8,543 8,951 3.54 N/A N/A Based on the above AirAsia's corporate restructuring exercises i.e., two private placements and issuances of 1,106,18,177 Redeemable Convertible Unsecured Islamic Debt Security ("RCUIDS") on 27 December 2021, answer to the following: 3. What are the influence factors that a company to ensure the company achieve the optimal capital structure?