Fig. 1 shows the finance routes being considered by Nia, who owns a market stall selling repaired bicycles. Her business has made a profit of $6 000, but sh...
Question 1 Report
Fig. 1 shows the finance routes being considered by Nia, who owns a market stall selling repaired bicycles. Her business has made a profit of $6 000, but she needs $18 000 to buy a mobile repair van. Nia wants to keep control of the business and needs the cash for at least three years. She has asked her two employees to research the following options before she selects an answer.
(a) Define the term retained profit. [2]
(b) State one reason why the bank loan is an external source of finance. [1]
(c) Calculate the amount of finance still required if Nia uses all of the retained profit. [2]
(d) Analyse which one of the following options, a bank loan or a new partner, is likely to be better for Nia. [3]
Answer Details
(a) Retained profit is profit kept in the business rather than paid to the owner or shareholders. [2]
(b) A bank loan is external finance because the money comes from outside the business, specifically from a bank. [1]
(c)
\[\$18\,000-\$6\,000=\$12\,000\]
Finance still required is \(\$12\,000\). [2]
(d) A bank loan lets Nia retain ownership and control, which matches her objective. Repayments can be spread over the three years for which she needs finance. However, interest and repayments reduce cash flow. A new partner may provide funds without loan repayments, but the partner shares control and future profit. A supported choice of either source is acceptable; because control is important to Nia, a manageable bank loan is likely to fit better. [3]
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