Sources of Finance Practice Questions

Question 1

9 marks

Answer all parts of this question. You do not need to refer to a particular business in your answers.

(a)

Which one of the following sources of finance allows a business to obtain equipment immediately and pay for it in monthly instalments over several years?

A Government grant
B Hire purchase
C Retained profit
D Trade credit

/ 1

(b)

Explain the meaning of the term 'trade credit'.

/ 2

(c)

Explain one disadvantage to the existing owners of a private limited company of raising finance through a new share issue.

/ 2

(d)

State and explain two factors a business should consider when choosing a source of finance.

/ 4

Question 2

9 marks

(a)

Which one of the following is an internal source of finance?

A Bank loan
B Government grant
C Selling unwanted assets
D Trade credit

/ 1

(b)

Explain one benefit to a business of using a bank loan to pay for new equipment.

/ 2

(c)

Identify two external sources of finance that a sole trader could use when starting up a business.

/ 2

(d)

State and explain two reasons why an established business might choose to fund an expansion using retained profit rather than a bank loan.

/ 4

Question 3

5 marks

(a)

Which one of the following sources of finance does not have to be repaid by a business?

A Bank loan
B Overdraft
C Retained profit
D Trade credit

/ 1

(b)

Explain one advantage to a business of using retained profit as a source of finance.

/ 2

(c)

Identify two external sources of finance for a business.

/ 2

Question 4

7 marks

(a)

Which one of the following allows a business to spend more money than it has in its bank account, up to an agreed limit?

A Bank loan
B Mortgage
C Overdraft
D Trade credit

/ 1

(b)

Explain one disadvantage to a business of using an overdraft as a source of finance.

/ 2

(c)

State and explain two advantages to a business of using trade credit as a source of finance.

/ 4

Question 5

7 marks

(a)

Which one of the following sources of finance must be repaid with interest?

A Bank loan

B Government grant

C New share issue

D Retained profit

/ 1

(b)

Table 1 How a business plans to finance a £20 million expansion

Source of finance	Amount (£m)
Retained profit	4
Selling unwanted assets	2
New share issue	8
Bank loan	6

Using Table 1, calculate the percentage of the total finance that will come from internal sources.

Show your workings.

/ 2

(c)

State and explain two advantages to a business of using a new share issue to finance its growth.

/ 4

Question 0

19 marks

Item A: Gearbox Mobile Mechanics Ltd

Gearbox Mobile Mechanics Ltd is a private limited company based in Swindon. Ibrahim Hamid started the business in 2019 using £6 000 of his personal savings and a £4 000 loan from his sister. The business services and repairs cars at customers' homes and workplaces. A standard service costs £85 and Gearbox completes around 60 services a month.

Ibrahim now employs one other mechanic and the business runs two vans. Gearbox rents a lock-up garage for £400 a month to store parts and tools, and pays £1 900 a year for van insurance. Last year the business made a profit of £11 000, of which £7 000 was kept as retained profit.

Demand has grown and customers in nearby towns are being turned away because both vans are fully booked. Ibrahim wants to buy a third van, fit it out with tools and employ another mechanic. The total cost would be £18 000.

Ibrahim is considering two options:

Option 1: Take out a bank loan of £18 000, repaid over five years at an interest rate of 8% per year.

Option 2: Sell shares in Gearbox Mobile Mechanics Ltd to a friend, who would invest £18 000 in return for a 25% share of the business.

(a)

Explain one drawback to Ibrahim of using the £7 000 of retained profit to help pay for the third van.

/ 2

(b)

Ibrahim's friend would own 25% of Gearbox Mobile Mechanics Ltd and would be entitled to 25% of its profit.

Using Item A, calculate how much of last year's profit the friend would have been entitled to if he had owned 25% of the business.

Show your workings.

/ 2

(c)

Analyse two benefits to Gearbox Mobile Mechanics Ltd of using a bank loan to pay for the third van.

/ 6

(d)

Recommend whether Ibrahim should sell a 25% share of Gearbox Mobile Mechanics Ltd to his friend to raise the £18 000.

Give reasons for your answer.

/ 9

Question 0

19 marks

Item A: Corvane Gaming plc

Corvane Gaming plc designs gaming keyboards, mice and headsets. It was founded in Bristol in 2009 by Marta Okoye and became a public limited company in 2021. It employs 340 people and sells through its own website and through electrical retailers in the UK, Germany and Spain. Its best-selling product, the Z7 keyboard, sells for £129.

Sales revenue grew from £62 million to £68 million last year. All Corvane Gaming products are assembled by a contract manufacturer in Malaysia, so the business owns very few factories or machines.

The directors have set a new objective: to double sales revenue within five years. They have identified two ways of doing this. The first is to launch a range of lower-priced keyboards for younger children, designed by Corvane Gaming's own research and development team. The second is to begin selling the Z7 in the United States, where the business has no customers at present.

Both plans are expensive. Developing the children's range would cost about £4 million and launching in the United States about £5 million. Corvane Gaming has £6 million of retained profit and no long-term bank loans. The directors do not want to borrow money, but Corvane Gaming's bank has offered a £3 million loan that would allow both plans to go ahead at the same time.

(a)

Explain one drawback to a business of using retained profit as a source of finance.

/ 2

(b)

Using Item A, calculate the percentage of the total cost of both plans that Corvane Gaming could pay for using its retained profit.

Show your workings.

/ 2

(c)

Corvane Gaming has £6 million of retained profit and no long-term bank loans.

Analyse two benefits to Corvane Gaming of using retained profit to fund its growth.

/ 6

(d)

Recommend whether Corvane Gaming should take out the £3 million bank loan so that both plans can go ahead at the same time.

Give reasons for your answer.

/ 9

Question 0

19 marks

Item A: Saltcove Rooms plc

Saltcove Rooms plc operates 18 hotels in coastal towns in England and Wales. It became a public limited company in 2019. Rooms start at £75 per night and the business employs 1 100 people.

The UK seaside hotel market has stopped growing and Saltcove Rooms' revenue has been flat for three years. The directors now want to enter the Spanish market by buying a chain of five hotels in Alicante for £26 million. The Spanish hotels take bookings all year round, while Saltcove Rooms' UK hotels are busy only between April and September.

Saltcove Rooms has £4 million of retained profit, which is not enough. The directors are considering two options to raise the remaining £22 million.

Option 1: sell the conference centre the business owns in Cardiff. It was closed in 2022 and a developer has valued it at £23 million.

Option 2: issue new shares on the stock market. This would reduce the founding family's shareholding from 38% to 22%.

(a)

Explain one drawback to a business of selling unwanted assets to raise finance.

/ 2

(b)

Using Item A, calculate the percentage decrease in the founding family's shareholding if Saltcove Rooms chooses Option 2.

Show your workings.

/ 2

(c)

The Cardiff conference centre has been closed since 2022.

Analyse two benefits to Saltcove Rooms of selling the conference centre to raise the £22 million.

/ 6

(d)

Recommend whether Saltcove Rooms should issue new shares to raise the £22 million.

Give reasons for your answer.

/ 9

Business in the Real World

Influences on Business

Business Operations

Human Resources

Marketing

Finance

Question 1

Question 2

Question 3

Question 4

Question 5

Question 0

Question 0

Question 0