Write your name here Marks:

Unit Test

Duration:1 hours
Instructions
• Use black ink or ball-point pen.
• If pencil is used for diagrams/sketches/graphs it must be dark (HB or B). Coloured pencils
and highlighter pens must not be used.
• Fill in the boxes at the top of this page with your name.
• Answer all questions and ensure that your answers to parts of questions are clearly labelled.
• Answer the questions in the spaces provided
– there may be more space than you need.

Information
• The total mark for this paper is xxx.
• The marks for each question are shown in the question
– use this as a guide as to how much time to spend on each question.

Advice
• Read each question carefully before you start to answer it.
• Try to answer every question.
• Check your answers if you have time at the end.
 Section A
Answer ALL questions in this section
You should spend 15 minutes on this section
Question 1

The other 3 sources of finance do not make you lose ownership of the company as they are debt finance
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Because it's a new company, it may not have retained profit. It has low credibility and high risk in investing
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therefore banks may not wish to lend loans of overdraft, but in this case the amount is already
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too large for an overdraft as well, which makes it impossible.
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Venture capital are organizations which invest into new startup companies by lending capital or purchasing
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shares, as long as they see potential in the business their investing, they would take the high risk, as the
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reward is greater.
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Question 2

The start-up cost of Sharon's business would be low as she already has a location and the case
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didn't say she's intending to hire workers, the only expenditure would be buying the sewing machines.
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Because of this, she wouldn't need to raise capital through issue of shares, which most of the time are
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for large figures of capital and involves legal formalities which is going to increase the cost.
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By being a sole trader, Sharon can have full control of the business and its profit, as she works from her
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home she can also choose the working patterns etc.
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(Total for Section A 4*2=8 marks)

Section B
 Section B
(a) To continue developing the most innovative technology in the travel market, MT
could either use more venture capital or bank loan.
Evaluate these two options and recommend which option would be most suitable
for a company that operates in a dynamic market, such as MT
(20)

A venture capital is an organization that lend risk capital to small-medium sized companies or purchase
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shares in them, so it's a form of equity finance. A bank loan is money offered from the bank at a fixed or
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variable interest rate, and is a source of debt finance, the company have to pay back the amount loaned.
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The advantage of a equity finance like venture capital for MT is the capital invested by VC never has to
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be repaid, it's a permanent capital. While loans have to be with an interest rate which can be extra
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costs to the company. Furthermore the annual dividends do not have to be paid every year while
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interests on loans have to be paid gradually. But if dividends are paid to the shareholders it means

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that part of the ownership of the company is lost, and if not managed well, it may lose control of the

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overall ownership. This is not the case for bank loans as lenders have no voting rights in the annual

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general meeting, and the loans may make the company function better, bringing higher returns in the

future for shareholders, so higher value on dividends.

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However there is a crucial factor that classifies the two, the credibility of MT and the level of risk the
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investment involves. MT as a new company, using strategy of product development, developing the
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most innovative technology in an existing market, surely is a risky thing. A venture capitalist would
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surely invest in MT as it achieved a turnover of 4.5m in 2015, which shows its great potential and the
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investment by the IT pioneer, which backs it up as well, increasing its credibility. However a bank loan
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would hesitate on invest into MT as although its credibility is high, the uncertain outcome of this new
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technology may make bank loans possible but at a high interest rate which is not benefitting the company.
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So in conclusion MT would favor Venture Capital in this case as it has 85% of the ownership after

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giving 15% to Piers, and it would not be a problem if another part is given out. However if the company

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do not want to lose part of the ownership of the company and is confident in itself and believes this

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technology will be profitable enough to pay the high bank loans, bank loan would be a better choice then.

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(Total for Section B = 20 marks)