Fig. 1 shows the finance choices considered by Asia Harvest Ltd. The company imports dried fruit from Asia and sells it to trade customers in the UK. It pla...
Question 1 Report
Fig. 1 shows the finance choices considered by Asia Harvest Ltd. The company imports dried fruit from Asia and sells it to trade customers in the UK. It plans to open a new packing site costing £600 000. Directors expect the site to operate for many years. They are considering selling shares to existing investors or taking a long-term bank loan. Some shareholders are concerned that new shares could reduce their percentage ownership. The bank loan has a fixed rate of 7% each year and requires regular repayments. The company has good sales but limited cash because it has recently bought new stock.
(a) Which term describes finance raised by selling small ownership parts of a company? [4]
(b) Which advantage and which disadvantage could result from selling new shares? [6]
(c) Which source of finance should Asia Harvest Ltd select for the packing site? Explain your answer. [10]
Answer Details
(a) Shares or share capital are finance raised by selling small ownership parts of a company. [4]
(b) Selling new shares can provide substantial long-term finance without compulsory loan repayments. [2+1] However, existing shareholders then own a smaller percentage and may have less control. [2] Dividends may also have to be paid when the company earns profit. [1] [6]
(c) Asia Harvest should sell new shares. [1] The £600 000 packing site is a long-term project [1], and share capital is permanent finance with no compulsory repayment date. [2] The company has limited cash after buying stock [1], so avoiding regular loan repayments protects cash flow. [2]
A bank loan has the benefit of a known fixed 7% rate [1], but interest remains a continuing cost. [1] Directors must accept dilution of ownership [1]. Overall, shares better match the scale and long-term nature of the site. [1] [10]
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