Business ownership and sources of finance — practice questions

1. Unlimited liability — banks may limit lending because the owner's personal assets secure the debt; a large loan is riskier for both parties.

2. No share issue — unlike a Ltd or PLC, a sole trader cannot sell shares to raise $500k quickly. Options are mainly retained profit, bank loan, or converting to a company to access equity finance.

Recommendation might include incorporation to limit liability and enable share investment.

This example demonstrates how a private limited company can use equity finance, a source unavailable to a sole trader or partnership.

Step 1: Calculate the capital needed from the share issue. Total capital required: $200,000$ Capital from retained profits: $50,000$ Capital to be raised from shares = $200,000 -$50,000 = $150,000$

Step 2: Calculate the price per share. Current company valuation: $800,000$ Number of existing shares: 80,000 Price per share = Total Valuation / Number of Shares = $800,000 / 80,000 =$10 per share

Step 3: Calculate the number of new shares to be issued. Capital to be raised: $150,000$ Price per share: $10$ Number of new shares = Capital to be raised / Price per share = $150,000 /$10 = 15,000 shares

Answer 1: Innovate Ltd must issue 15,000 new shares.

Step 4: Calculate the new total number of shares. Existing shares: 80,000 New shares: 15,000 New total shares = 80,000 + 15,000 = 95,000 shares

Step 5: Calculate the new investor's ownership percentage. Ownership % = (New shares / New total shares) * 100% Ownership % = (15,000 / 95,000) * 100% Ownership % ≈ 15.79%

Answer 2: The venture capitalist will own approximately 15.79% of the company.

Analysis: By being an Ltd, the business could access $150,000 in equity finance to fund its growth. The trade-off is that the original owners' control is diluted by nearly 16%.