Fig. 1 shows a financial adviser explaining two ways in which a furniture manufacturer can obtain funds. The manufacturer expects increased demand but has l...
Question 1 Report
Fig. 1 shows a financial adviser explaining two ways in which a furniture manufacturer can obtain funds. The manufacturer expects increased demand but has limited retained profit for new machinery.
(a) State one source of internal finance the manufacturer could use. [1]
(b) Explain one difference between a bank loan and issuing shares. [2]
(c) Which source is likely to require regular interest payments? [1]
Answer Details
(a) One source of internal finance is retained profit. Owners' savings or the sale of an existing asset would also be valid. [1]
(b) A bank loan is borrowed finance: the business must repay it, normally with interest. [1] Shares, in contrast, give investors part ownership of the company and investors may receive dividends. [1] A loan creates debt, whereas issuing shares raises equity finance.
(c) A bank loan is likely to require regular interest payments. [1]
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