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Discuss the benefits to GSA of using retained profit to fund the development of new products. - Edexcel - GCSE Business - Question 9 - 2017 - Paper 1
Question 9
Discuss the benefits to GSA of using retained profit to fund the development of new products.
Worked Solution & Example Answer:Discuss the benefits to GSA of using retained profit to fund the development of new products. - Edexcel - GCSE Business - Question 9 - 2017 - Paper 1
Step 1
Benefits of Using Retained Profit
Answer
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Cost Effectiveness: Using retained profit to fund product development is generally cheaper than external financing options such as bank loans. This minimizes financial costs and enhances overall profitability.
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Speed of Access: Retained profits allow for quicker access to funds when developing new products. This agility can give GSA a competitive edge by enabling faster time-to-market compared to securing loans or external investment.
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No Debt Obligation: Relying on retained profit means GSA avoids the risks associated with debt. There is no obligation to repay loans, thus reducing financial strain and maintaining a more stable financial position.
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Flexibility in Investment: The company has the autonomy to allocate retained earnings towards projects which it deems most beneficial without seeking approval from external investors.
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Shareholder Confidence: Utilizing retained profits for growth initiatives can instill confidence in shareholders, demonstrating that the company is capable of funding its growth internally, which may positively affect stock prices.
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Long-term Growth: Retained earnings can contribute to sustainable long-term growth by funding innovative developments and product lines, crucial for staying relevant in the market.
Step 2
Possible Downsides to Consider
Answer
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Funding Limitations: Relying solely on retained profits may limit the amount available for significant projects, thereby restricting growth potential.
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Impact on Dividends: If retained earnings are being used for development, this may result in lower dividends for shareholders, potentially leading to dissatisfaction or decreased stock value.
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Opportunity Costs: Funds tied up in development cannot be used elsewhere, which may represent a missed opportunity for short-term gains from other investments.