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Evaluate these two sources 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 sources of finance and recommend which one might be most appropriate to finance the £100.00 catering investment at Derby Theatre. Sources of fina... show full transcript
Worked Solution & Example Answer:Evaluate these two sources 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 are the net earnings that a company keeps after paying dividends. For Derby Theatre, utilizing retained profits offers several advantages. Firstly, it does not involve incurring additional liabilities or interest payments, making it a cost-effective solution. By reinvesting these funds, Derby Theatre can ensure financial stability without external pressures. This method supports long-term sustainability by leveraging existing resources.
However, relying solely on retained profits may limit scalability, especially if the profits are insufficient to cover the £100 investment. Furthermore, if prior profits have already been allocated to other pressing needs, the immediate availability of cash could be a concern.
Step 2
Evaluate loan from private investor
Answer
A loan from a private investor presents a different set of opportunities and challenges. The primary advantage lies in the potential for a larger sum of money, perhaps exceeding £120,000, which may be available more quickly than waiting for retained profits to accumulate. Additionally, private investors often bring expertise and connections that can prove beneficial to Derby Theatre’s operations.
Nevertheless, loans come with the obligation of repayment, often with interest, which adds financial strain. It could also limit flexibility in budgeting for future projects, as funds may be diverted to cover loan repayments. Therefore, while a private loan may solve immediate funding needs, it places Derby Theatre in a vulnerable financial position if revenues do not increase as anticipated.
Step 3
Recommendation
Answer
Given the aforementioned evaluations, the recommendation for Derby Theatre is to utilize retained profits for the catering investment. This choice minimizes financial risk and avoids the burdens of debt, allowing the Theatre to maintain greater control over its operations. If sufficient retained profits are not available, it would be advisable to seek alternative funding strategies that do not involve high-risk loans, such as grants or partnerships with local businesses.