Read the information below about a start-up business. A former Huawei technician is planning a service that collects unwanted phones from offices, erases da...
Question 1 Report
Read the information below about a start-up business. A former Huawei technician is planning a service that collects unwanted phones from offices, erases data and sells reusable parts. He needs $9 000 for secure testing equipment. He can use a credit card, ask an investor for equity finance or wait until enough profit has been retained. The technician has no employees yet, but expects to recruit two staff if the business grows. He is considering which option best matches the risk of a new market.
(a) Define the term equity finance. [2]
(b) State one source of internal finance available to an established business. [1]
(c) Calculate the percentage of the $9 000 requirement covered by an investor providing $3 600. [2]
(d) Analyse one reason why waiting to use retained profit may limit the growth of this start-up. [3]
Answer Details
(a) Equity finance is finance raised by selling ownership or shares in a business to investors. [2]
(b) One internal source is retained profit. Sale of assets or owner's savings are also valid. [1]
(c)
\[\frac{\$3\,600}{\$9\,000}\times100=40\%\]
The investor covers \(40\%\) of the requirement. [2]
(d) Retained profit can be used only after the business has first made profit. Waiting therefore delays buying secure testing equipment and recruiting staff. Rivals may serve the market first, reducing possible revenue growth. [3]
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