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How can different sources of funds help a business achieve its financial objectives? - HSC - SSCE Business Studies - Question 27 - 2012 - Paper 1
Question 27
How can different sources of funds help a business achieve its financial objectives?
Worked Solution & Example Answer:How can different sources of funds help a business achieve its financial objectives? - HSC - SSCE Business Studies - Question 27 - 2012 - Paper 1
Step 1
Discuss different sources of funds
Answer
Different sources of funds, such as equity financing, debt financing, and retained earnings, play a vital role in helping a business achieve its financial objectives.
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Equity Financing: Raising capital through the sale of shares not only provides funds for expansion but also attracts investors who can offer expertise and networks that may enhance business opportunities. This can lead to increased market share and profits, aligning with financial goals.
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Debt Financing: Loans and bonds allow businesses to leverage funds for capital projects without diluting ownership. This can boost returns on equity when the business grows, thereby fulfilling objectives related to profitability and growth.
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Retained Earnings: Utilizing profits reinvested in the business supports sustainable growth without incurring additional debt. This aligns with long-term financial stability and meeting capital needs.
In summary, each funding source caters to specific business needs, ensuring operational efficiency and the capacity to pursue strategic initiatives.
Step 2
Evaluate the implications of these sources
Answer
Each source carries different implications:
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Cost of Capital: Debt may lead to fixed obligations but also tax benefits, whereas equity might dilute control but can provide greater flexibility.
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Risk Factors: Relying heavily on debt may increase financial risk during downturns, whereas equity can cushion against financial stress by providing a buffer of non-repayable funds.
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Growth Potential: Access to diverse funding options supports various dimensions of growth, allowing businesses to navigate different challenges and capitalise on opportunities.
Step 3
Relate sources of funds to financial objectives
Answer
Businesses aim for profitability, liquidity, and growth. Appropriate sourcing helps meet these objectives:
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Profitability: Funds that foster expansion and operational efficiency can lead to higher profit margins.
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Liquidity: Quick access to cash through certain funding sources ensures that businesses can meet short-term obligations, enhancing financial health.
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Growth: Strategic investments in infrastructure or innovation supported by adequate funding will drive long-term growth, aligning directly with business objectives.