Practise explaining internal sources of finance and retained profit using IB Business Management SL 3.2.1 questions and mark schemes.
ELE encourages internal recruitment and promotion when management vacancies arise, seeking employees with ambition, initiative and a belief in change. Internal recruitment can motivate staff, retain organizational knowledge and reduce recruitment risk and cost, but it may limit new ideas and the pool of candidates. ELE originally financed its Zeat takeover with €49 million from internal sources. Suitable internal finance includes retained profit and the sale of surplus assets, although ELE must consider whether enough retained profit exists, the effect on dividends and whether any assets can be sold without harming operations. Retained profits also financed the gasoline-station store refurbishment.
Explain suitable internal sources of finance that ELE could have used to take over Zeat PLC.
Suitable internal sources of finance include:
- retained profits: This has been preferred method in the past. How much is available?
- sale of unused assets: Are there any suitable? There appear to be less profitable petrol stations. Can these be sold? From working capital e.g. debtors. It's very unlikely to be sufficient.
- Manage working capital more effectively.
Accept any other relevant explanation.
External sources not acceptable include:
- bank loans
- selling of shares
- subsidies
- government grants
- business angels etc.
N.B. The case study says that internal sources were used, so do not reward external sources.
Marks should be allocated according to the mark bands on page 3.
Award a maximum of [3] for a theoretical answer.
Award a maximum of [5] if the explanation is mainly descriptive, but in context. E.g. if most of the context is mentioned but not developed.