A clothing retailer wants £120 000 to develop an online store and advertising campaign. The company is deciding whether to sell ordinary shares or take an 8...
Question 1 Report
A clothing retailer wants £120 000 to develop an online store and advertising campaign. The company is deciding whether to sell ordinary shares or take an 8% bank loan. Its directors expect the new website to attract customers across the country. If shares are sold, the company plans to issue 24 000 shares at £5 each and pay a dividend of 6% of the issue price each year.
(a) State two sources of internal finance available to a retailer. [2]
(b) Identify two features of ordinary shares that may affect the existing owners of the company. [4]
(c) Calculate the money raised from the share issue and the annual dividend payment. [4]
(d) Explain two advantages to the company of selling shares rather than using the 8% bank loan. [6]
Answer Details
(a) Two internal sources are retained profit and selling surplus stock or assets. The owner using personal savings is also acceptable. [2]
(b) Ordinary shareholders become part owners and may have voting rights. If new shares are issued, the existing owners' percentage control may fall. Dividends may be paid from profit, but unlike loan interest they are not compulsory fixed payments. Any two developed features gain credit. [4]
(c) Money raised: \[24000\times£5=£120000\] Annual dividend: \[24000\times£5\times\frac{6}{100}=£7200\] The company raises £120,000 and the annual dividend payment is £7,200. [4]
(d) Selling shares avoids compulsory loan interest, so cash-flow pressure is lower if online sales grow slowly. Shares also have no fixed repayment date, allowing the £120,000 to support long-term growth. In addition, investors share the business risk; a bank still expects loan repayments even when profit is low. [6]
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