Table 1 shows a pet-grooming business's proposal to fund a second salon. The owner is deciding between a loan and inviting a relative to invest in return fo...
Question 1 Report
Table 1 shows a pet-grooming business's proposal to fund a second salon. The owner is deciding between a loan and inviting a relative to invest in return for a share of the profit.
| Source | Amount offered ($) | Condition |
|---|---|---|
| Bank loan | 30,000 | 9% interest per year |
| Relative's investment | 30,000 | 25% share of annual profit |
| Retained profit | 8,000 | No condition |
(a) Which source could reduce the owner's share of future profit? [1]
(b) Identify the external source that creates a fixed interest cost. [1]
(c) Explain one possible benefit of the relative's investment compared with a bank loan. [2]
(d) Explain one reason why the owner may reject the investment. [2]
Answer Details
(a) The relative's investment could reduce the owner's share of future profit because the relative receives 25% of annual profit. [1]
(b) The external source with a fixed interest cost is the bank loan. [1]
(c) The relative's investment has no fixed interest repayment. Therefore, when sales are low, the business may face less pressure to make compulsory payments than it would with a bank loan. [2]
(d) The relative receives a share of profit and may gain ownership influence. The owner may therefore lose some control and keep less future profit. [2]
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