Financial item Amount ($) Retained profit 80 000 Current assets 145 000 Current liabilities 62 000 Long-term liabilities 0 Annual revenue 720 000 Rosewood F...

(a) Definition of retained profit [2]

Retained profit is the amount of profit that a business keeps after all expenses, taxes, and any dividends or drawings have been paid. It is an internal source of finance that remains within the business and can be used for future investment, expansion, or as a financial reserve. [2]

(b) Two advantages of using a bank loan [4]

1. Provides a large lump sum immediately [2]: A bank loan can deliver the full amount needed (or a significant portion of the $500,000) in one transaction, allowing Rosewood to begin construction or purchase of the new factory without delay. This is important because the retained profit of only $80,000 leaves a gap of $420,000.
2. Directors keep full ownership [2]: Unlike selling shares, a bank loan does not require the directors to give up any ownership stake. They retain 100% control over all business decisions, which is particularly important for a family-style business where the two directors have built the company together and may not want outside interference.

(c) Analysis: problems of inviting new shareholders [6]

• Dilution of ownership and control: The existing two directors currently own the entire company. Inviting new shareholders means they must share ownership, which could lead to disagreements about business direction. New shareholders may have different views on product design, export strategy, or the pace of expansion, creating conflict in decision-making.
• Sharing future profits: New shareholders will expect a return on their investment through dividends. This reduces the amount of profit available for reinvestment in the business (such as purchasing raw materials, upgrading machinery, or funding further expansion), limiting Rosewood's financial flexibility.
• Finding suitable investors: Identifying shareholders who are willing to invest in a Malaysian furniture manufacturer, who share the directors' vision, and who bring compatible expectations may take considerable time. Private limited company shares cannot be advertised publicly, so the search is limited to personal and professional networks. This could delay the factory opening and give competitors an advantage.
• Loss of privacy: New shareholders have a right to access company financial information. The directors would need to share accounts and strategic plans with a wider group, reducing the privacy they currently enjoy as sole owners.

[6]

(d) Recommendation: bank loan or selling shares? [8]

Arguments for a bank loan:

• Ownership stays entirely with the two directors. They maintain full control over the business they have built.
• The loan provides the full amount needed. Rosewood has $80,000 in retained profit and needs $500,000, so a loan of $420,000 would bridge the gap completely.
• The company has no existing long-term liabilities (the table shows $0), so it has capacity to take on debt without over-leveraging.
• Current assets of $145,000 against current liabilities of $62,000 suggest reasonable liquidity, and annual revenue of $720,000 indicates the business should be able to service loan repayments.

Arguments for selling shares:

• No repayment obligation and no interest charges, which reduces financial risk. If the new factory takes longer than expected to become profitable, there are no fixed monthly repayments to meet.
• New shareholders could bring additional skills, contacts, or industry expertise that benefit the business beyond just the capital they invest.
• Spreading the financial risk of a major expansion across more owners reduces the personal exposure of the two existing directors.

Conclusion: A bank loan is the more appropriate choice for Rosewood. The company has strong fundamentals: zero long-term debt, healthy revenue ($720,000), and positive working capital ($145,000 - $62,000 = $83,000). It can comfortably service a loan. The directors value their independence, and a $420,000 loan (combining the $80,000 retained profit with the factory cost) preserves their complete ownership. Selling shares permanently changes the ownership structure and obliges the directors to share profits and decision-making indefinitely, which is a disproportionate price to pay for a one-time capital need that the business can fund through borrowing. [8]