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Evaluate these two methods of finance and recommend which one might be most appropriate to finance the £100.00 catering investment at Derby Theatre - Edexcel - A-Level Business - Question 2 - 2022 - Paper 3
Question 2
Evaluate these two methods of finance and recommend which one might be most appropriate to finance the £100.00 catering investment at Derby Theatre. Extract H: Nati... show full transcript
Worked Solution & Example Answer:Evaluate these two methods of finance and recommend which one might be most appropriate to finance the £100.00 catering investment at Derby Theatre - Edexcel - A-Level Business - Question 2 - 2022 - Paper 3
Step 1
Evaluate retained profits/surpluses
Answer
Retained profits provide a self-sustaining source of finance that doesn't require external repayment obligations. This method allows Derby Theatre to avoid borrowing costs and maintain financial independence. However, the limit to this option is dependent on the theatre's previous surpluses, which may not be sufficient for the £100 investment. In addition, using retained profits keeps the funding internal, preserving more control over financial decisions.
Step 2
Evaluate loan from a private investor
Answer
A loan from a private investor may provide a larger sum, potentially exceeding £120,000, which can be beneficial for immediate financing needs. However, this comes with structured repayment obligations, which can create financial pressure. Furthermore, the engagement with a private investor can also lead to additional expertise and resources being available, aiding in the overall operation of the theatre.
Step 3
Conclusion and recommendation
Answer
In conclusion, while retained profits offer a no-cost option without the burden of repayments and maintains financial independence, the immediate support of a private investor could offer vital resources if higher funding is required. Therefore, if Derby Theatre has sufficient retained profits available without impacting other operations, I would recommend using retained surpluses as it would be less risky. However, if there is an urgent need for capital beyond what is available from retained profits, engaging with a private investor would provide the necessary funds but with careful consideration of repayment terms.