Fig. 1 shows a proposal for an employee-owned coffee roastery called Northern Bean. The founders need $20 000 for a packaging line and are considering selli...
Question 1 Report
Fig. 1 shows a proposal for an employee-owned coffee roastery called Northern Bean. The founders need $20 000 for a packaging line and are considering selling shares to employees. The business made a profit of $14 000 last year and has a strong local market, but it wishes to keep enough cash for coffee-bean purchases. Each share would cost $100. Employees have been told that dividends would only be paid if the business makes sufficient profit.
(a) Calculate the amount of finance raised if all 200 shares are sold. [2]
(b) State three features of shares as a source of finance. [3]
(c) Analyse one advantage and one disadvantage of selling shares to employees rather than using retained profit. [4]
Answer Details
(a) Finance raised is:
\[200\times$100=$20000\]
All shares sold would raise $20 000 [2 marks].
(b) Shares represent part ownership of a business [1]. Shareholders may receive dividends [1] and may have voting rights [1]. Share capital also does not normally have a fixed repayment date. [3 marks]
(c) Selling shares raises $20 000 while allowing Northern Bean to retain its $14 000 profit as working cash for buying beans [1]. This reduces the risk of a cash shortage [1]. In contrast, using retained profit would reduce cash held in the business. However, employees become owners and may expect dividends and voting rights [1]. The founders lose some control and must share future profit [1]. [4 marks]
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