Fig. 1 follows an investor called Leila who is considering buying shares in North Coast Battery plc. The company wants to raise $6 million to develop a new ...
Question 1 Report
Fig. 1 follows an investor called Leila who is considering buying shares in North Coast Battery plc. The company wants to raise $6 million to develop a new battery-storage site. It is issuing shares rather than using a long-term bank loan. Leila can buy shares through a stockbroker, and the money raised by the issue goes to the company. If North Coast Battery makes a profit, it may pay shareholders a dividend. The market value of Leila’s shares could also rise or fall after she has bought them.
(a) Which one of the following is a possible return to Leila from owning shares? Select one answer.
A a dividend
B loan interest paid by Leila
C a wage from the business
D a supplier discount [2]
(b) Define the term shareholder. [3]
(c) Explain how issuing new shares gives North Coast Battery finance for its new site. [4]
(d) Compare finance from issuing shares with finance from a bank loan. [5]
(e) Suggest why Leila should consider both potential reward and risk before selecting shares as an investment option. [6]
Answer Details
(a) A possible return from owning shares is a dividend. [2] A dividend is a payment a company may make to shareholders from profit.
(b) A shareholder is a person or organisation that owns one or more shares [1] in a company. [1] This means that they own a small part of that business. [1]
(c) Investors such as Leila pay money to buy newly issued shares. [1] The company receives this money as capital, [1] which it can use to develop the battery-storage site. [1] Unlike a loan, the company does not repay each investor’s original share purchase as a loan repayment. [1]
(d) Share finance is raised by selling ownership stakes to investors, [1] whereas a bank loan is borrowed money. [1] A loan normally requires interest payments [1] and repayment of the amount borrowed. [1] Shareholders may receive dividends, but these depend on profit and company decisions. [1]
(e) Leila should consider reward and risk together. She may receive dividends if the company makes a profit, [1] and she may sell her shares for more than she paid if their value rises. [1] However, dividends are not guaranteed, [1] because the company may make little or no profit. [1] The share price can fall, [1] so selling may mean losing some or all of the money invested. [1] A possible high return does not remove the possibility of a financial loss.
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