Business Organisations

State TWO features of a sole trader. (2 marks)

State TWO features of a private limited company. (2 marks)

Distinguish between capital expenditure and revenue expenditure. (2 marks)

Explain one advantage of a sole trader converting their business to a private limited company. (3 marks)

Explain one disadvantage for a sole trader of forming a partnership. (3 marks)

Explain one advantage of limited liability for the shareholders of a private limited company. (3 marks)

Explain one disadvantage to the existing shareholders of a private limited company issuing new ordinary shares to raise finance. (3 marks)

Distinguish between a private limited company (Ltd) and a public limited company (plc). State two differences. (4 marks)

Explain why a bank overdraft would be unsuitable to finance the purchase of non-current assets. (4 marks)

Explain the effect of issuing debentures on a limited company's gearing and profitability. (4 marks)

Explain two factors a business should consider when choosing an appropriate source of finance. (6 marks)

Hadley Ltd is a manufacturing company that wishes to purchase a new factory for £850 000. The directors are considering two sources of finance: (i) a 25-year mortgage at a fixed interest rate of 4.5% per annum (ii) a 10-year bank loan at a variable interest rate currently at 5.2% per annum Advise the directors of Hadley Ltd which source of finance they should use to purchase the factory. Justify your answer. (6 marks)

The directors of Kensington plc are planning a major expansion programme requiring £5 million of additional finance. They are considering two options: (i) issuing 5 million new ordinary shares at £1 each (ii) issuing £5 million of 6% debentures Advise the directors of Kensington plc which source of finance they should use for the expansion. Justify your answer. (6 marks)

Thornton Catering is a sole trader business. The owner has experienced a significant increase in orders during the summer months, leading to higher spending on ingredients and wages. He expects a cash shortfall of approximately £12 000 for a three-month period before customer payments are received. Assess the suitability of a bank overdraft to finance this cash shortfall. (6 marks)

Birchwood Ltd has been trading profitably for five years. The directors wish to purchase new machinery costing £40 000 and are considering using retained profit as the source of finance. Assess the suitability of retained profit to finance this purchase. (6 marks)

Elmhurst Ltd is a growing business. The directors have decided to issue 200 000 new ordinary shares at £2.50 each to raise £500 000 to fund an expansion of its operations. Explain the impact of this ordinary share issue on the liquidity and profitability of Elmhurst Ltd. (8 marks)

Sandford Engineering Ltd is a private limited company that has been established for 12 years. The following financial information is available. The directors wish to purchase new CNC machinery costing £250 000. They are considering either: (i) issuing 100 000 new £1 ordinary shares at a premium of £1.50 per share to raise £250 000 (ii) taking out a 5-year bank loan at a variable rate of interest currently at 6.8% per annum Assess the suitability of each source of finance for Sandford Engineering Ltd. (10 marks)