Fig. 1 shows the finance plan of an Asia-based tea company. It is installing a packing line costing £180 000 to process goods for export. The company has al...

(a) Internal finance is \[£45000+£15000=£60000\] Therefore external finance required is \[£180000-£60000=£120000\] The company needs £120,000. [2]

(b) The internal sources shown are retained profit and the sale of unused packaging stock. [2]

(c) A bank loan must be repaid, while share capital has no fixed repayment date. Loan interest is compulsory, whereas dividends depend on profits and directors' decisions. Shareholders are owners and may vote; a bank lender is not an owner. Any two explained differences gain credit. [4]

(d) The interest rate alone does not show the full cost. A bank loan may include arrangement fees, and the company must calculate the total interest paid over seven years. Issuing shares can also involve legal, underwriting or administration costs. Dividends are not compulsory, but may become expensive when profits are high. A source with a low quoted rate but high additional charges could reduce profit and cash available for trading. [6]

(e) The packing line is a long-term asset, so a seven-year loan matches the time over which it will be used and earn revenue. Trade credit is normally due after a short period and could require a very large payment before export customers have paid, causing cash-flow difficulty. A loan can also provide the full £120,000 needed, whereas supplier credit may be limited. [6]