5.2 Sources of Finance Practice Questions

Text 2 — Harrowfield Juice Ltd

Harrowfield Juice Ltd is a private limited company that makes cold-pressed fruit juices. It sells its juices to 220 independent cafés across the north of England. The company is owned by its two directors, Dev Ranjit and Marcie Oduya, who each hold half of the shares.

The directors want to launch a new range of vegetable smoothies. New bottling equipment, recipe testing and a launch advertising campaign will cost £240 000 in total.

Harrowfield Juice Ltd has a £30 000 bank overdraft, which it has used almost in full for the last six months. The directors do not want to sell shares to new investors because they wish to keep control of the company.

Dev wants to pay for the new range out of retained profit. Marcie wants to use crowdfunding: supporters would be offered free boxes of the new smoothies in return for their money. The company has 14 000 followers on social media.

Year	Retained profit
2023	£68 000
2024	£92 000
2025	£110 000

Table 1

Text 2 — Wenlow Ceramics Ltd

Wenlow Ceramics Ltd is a private limited company based in the Midlands. It makes handmade plates and bowls which it sells to restaurants and hotels across the UK. The company is owned by three shareholders: Priya Raskin, who started the business, and two friends who each bought shares when the company was formed.

Demand has grown quickly and Wenlow Ceramics Ltd now turns away orders every month because its single kiln cannot fire enough items each week. A second kiln and a larger workshop would cost £260 000.

Priya wants to pay for the expansion using the company's retained profit. The other two shareholders think the company should instead sell new shares to Marta Vellis, a local investor. Marta has said that she would want a say in how the business is run.

Some financial data for Wenlow Ceramics Ltd is shown in Table 1, below.

	2023	2024
Revenue	£820 000	£965 000
Net profit	£74 000	£88 000
Retained profit held by the company	£150 000	£190 000

Table 1

Stillwake Kayak Hire

Tamsin Rowe set up Stillwake Kayak Hire as a sole trader in 2021. The business hires out kayaks on a river estuary in Devon between April and September and employs two seasonal instructors. Last year Stillwake Kayak Hire made a profit of £14 000, and Tamsin kept £5 000 of this in the business as retained profit.

Tamsin now wants to offer guided sea-kayak trips. She needs £18 000 to buy ten sea kayaks, safety equipment and a trailer. She will use the £5 000 of retained profit and plans to raise the remaining £13 000 through crowdfunding on an online platform. Table 1 shows her crowdfunding plan.

Table 1: Stillwake Kayak Hire's crowdfunding plan

Target	£13 000
Length of campaign	30 days
Platform fee	5% of the money raised
Reward for backers	one free guided sea trip (normal price £45) for every £100 pledged
If the target is not reached	no money is paid to the business

Hartop Bakehouse

Nadia Hartop set up Hartop Bakehouse as a sole trader in 2022. She bakes bread and cakes in a rented unit in Lincoln and sells them to 14 cafés in the city. The cafés pay Nadia at the end of each month.

Nadia buys flour, butter and sugar from a wholesaler and pays when the goods are delivered, for which the wholesaler gives her a 2% discount. The wholesaler has offered her 30 days' trade credit instead, as long as she spends at least £500 a week. If she accepts, she will lose the 2% discount.

The business has an overdraft agreed with its bank, which Nadia uses in most months before the cafés pay. Nadia wants a new deck oven so that she can supply more cafés. She is thinking of asking the bank to raise her overdraft limit to pay for it.

Table 1: Hartop Bakehouse

Average weekly spending with the wholesaler	£650
Current overdraft limit	£3 000
Cost of the new deck oven	£8 000
Number of cafés supplied	14

Gearbox Mobile Mechanics Ltd

Ibrahim Hamid started Gearbox Mobile Mechanics Ltd, a private limited company based in Swindon, in 2019. He used £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. Ibrahim employs one other mechanic and the business runs two vans.

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, at a total cost of £18 000. He is considering two options:

• Option 1: a bank loan of £18 000, repaid over five years with interest
• Option 2: selling shares to a friend, who would invest £18 000 in return for 25% of the shares. The friend would be entitled to 25% of the profit.

Table 1: Gearbox Mobile Mechanics Ltd

Price of a standard service	£85
Services completed per month	60
Rent for lock-up garage	£400 a month
Van insurance	£1 900 a year
Profit last year	£11 000
Retained profit from last year	£7 000

Saltcove Rooms plc

Saltcove Rooms plc operates 18 hotels in coastal towns in England and Wales and employs 1 100 people. It became a public limited company in 2019. The UK seaside hotel market has stopped growing and Saltcove Rooms' revenue has been flat for three years.

The directors want to buy a chain of five hotels in Alicante, Spain, for £26 million. The Spanish hotels take bookings all year round, while Saltcove Rooms' UK hotels are busy only between April and September. The company has £4 million of retained profit and must raise the remaining £22 million. The directors are considering two options:

• Option 1: sell the conference centre the company owns in Cardiff. It 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% of the company.

Table 1: Saltcove Rooms plc

Number of UK hotels	18
Room prices from	£75 per night
Retained profit	£4 million
Cost of the Alicante hotels	£26 million
Founding family's shareholding now	38%
Founding family's shareholding after a share issue	22%

Ellerton Kitchens plc

Ellerton Kitchens plc designs and makes fitted kitchens, which it sells through 40 showrooms in the UK. It became a public limited company in 2017. Demand for its kitchens has risen and its factory in Derby is working at full capacity.

The directors plan to build a second factory costing £20 million. Table 1 shows how they plan to finance it. The share issue would be made on the stock market and would increase the number of shares in the company by 15%. Last year the company paid £3 million in dividends to its shareholders.

Some directors would prefer not to issue shares. Instead, they want to borrow the £8 million from the bank, on top of the bank loan already planned. Any bank loan would be repaid, with interest, over ten years.

Table 1: How Ellerton Kitchens plc plans to finance the second factory

Source of finance	Amount (£m)
Retained profit	4
Sale of assets (an unused warehouse)	2
Share issue	8
Bank loan	6
Total	20

Thunder Lane Climbing

Thunder Lane Climbing is an indoor climbing centre in a converted warehouse in Hull. It was opened in 2019 by Deniz Kaya, a sole trader who had worked as a climbing instructor for six years. The centre employs four instructors on annual salaries.

Membership has grown steadily and the centre is now busy every weekday evening. Some members have cancelled because they have to queue to use the climbing walls. Deniz wants to spend £40 000 building a second climbing area and installing new auto-belay equipment, and is considering two options to raise the money:

• Option 1: a five-year bank loan, repaid in monthly instalments with interest
• Option 2: crowdfunding, offering supporters three months of free membership in return for their money.

Table 1: Thunder Lane Climbing

Monthly membership	£42
Day pass	£11
Rent for the warehouse	£3 100 a month
Profit last year	£19 000
Deniz's remaining personal savings	£6 000
Cost of the expansion	£40 000