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9609 · 5.2.1

Business ownership and sources of finance — practice questions

Practice and worked examples for 9609 Business ownership and sources of finance. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

A successful sole trader wants $500 000 to open three new shops. Explain two finance constraints linked to ownership.

Show solution outline

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.

Worked example 2

Innovate Ltd, a private limited company, needs to raise $200,000 for new machinery. It has $50,000 in retained profits. The company is valued at $800,000 and has 80,000 existing shares. It plans to issue new shares to a venture capitalist. Calculate:

  1. The number of new shares to be issued.
  2. The percentage of ownership the new investor will have.
Show solution outline

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%.

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