3.2 Sources of finance Topic Practice

MS Cars (MSC)

Migrieve Shah owns a business, MS Cars (MSC), that sells used (second-hand) cars.
In the first four months of 2025, MSC's sales fell by 20 % compared with the same months in 2024.
On 1 May 2025, Migrieve arranged an overdraft from her bank, as a fall in sales caused liquidity problems for her business. She has forecasted the figures shown in Table 1 for MSC for the next four months of 2025 (June to September).

The majority of MSC's customers use a bank loan to finance car purchases.

State two features of an overdraft.

Explain the likely impact on B R D of selling additional share capital to solve its liquidity problem (lines 124-141).

Answer the following question.

Explain suitable internal sources of finance that ELE could have used to take over Zeat PLC (line 19).

Answer the following question.

2. Ritev Enterprises (RE)
Ritev Enterprises (RE) is a public limited company that owns a chain of 20 gas (petrol) stations. Next year, R E plans to modernize its gas stations by installing self-service pumps.
Table 2 provides selected financial data for R E from:
- the profit and loss account for year ending 31 May 2021
- the balance sheet as of 31 December 2021.

The finance director is concerned about the trend in consumer preference for electric cars and the potential impact of increased numbers of electric cars on R E.

State two appropriate external sources of finance that R E could use to modernize its gas stations.

4. Easy Ride Ltd. (ER)
Easy Ride Ltd. (ER) is a medium-sized private limited company that manufactures gasoline (petrol)-powered scooters that are sold worldwide. Customers think that ER's scooters are good value for money. However, increased global competition in both the gasoline-powered and electric scooter markets, and a shift in customers' demands, has resulted in a significant drop in sales.
ER commissioned market research in the Middle East using focus groups. This research revealed that consumers:

- perceive competitors as medium-price/medium-quality providers
- have highly innovative products as their top priority
- want products and production methods to be environmentally friendly.
E R 's employees have expressed dissatisfaction with the use of flow production. E R is no longer profitable and is highly geared.
Given the pace of change in the scooter industry, ER's management wants to react quickly and is considering two options for research and development.
Option 1: Adaptive creativity
ER would design and produce different models of electric scooters only. Lacking finance and expertise in the electric scooter industry, ER would subcontract the production of batteries to a well-known designer and producer of environmentally friendly batteries. Cellular production would be used for each scooter model. Employees would need training.
Option 2: Innovative creativity
ER would gain a new competitive advantage by developing cutting-edge gasoline-powered scooters. ER would create its own research and development department and recruit highly skilled and innovative product designers. It would reposition the scooters into the high-
price/high-quality market, and flow production would be used. This option would be more expensive than Option 1 and would take longer to implement.
Loan capital from a bank with low interest rates, aimed at helping small to medium enterprises (SMEs), is being considered for financing either option.

Explain one advantage and one disadvantage for E R of raising finance through loan capital from a bank.

5. Justin Price Clothing Ltd. (JP)
Justin Price Clothing Ltd. (JP) is a private limited company that manufactures clothing. Its unique selling point/proposition (USP) is its innovative process. Customers send images of themselves and some measurements to J P via the internet, which J P uses to determine the customer's exact measurements. Then, a style consultant contacts the customer via video conference to discuss the customer's fashion preferences. After this, the style consultant designs clothing for that customer. Using job/customized production, JP manufactures and ships the clothing to the customer. Most materials (stock) are ordered when a customer agrees to the designs. A total of 84 % of JP's customers have purchased items from JP more than five times.

Justin Price, JP's owner, asked his management team to consider two options and decide which would best increase profitability:
- Option 1: Change JP's design and production model. Consultants, when working with customers online, would recommend from a series of pre-made options. The company would shift to batch production and have the stock (inventory) available. Style consultants would still be central to the process, but the clothing would no longer be custom made.
- Option 2: Increase JP's customer base. JP's customers have high brand loyalty. However, the brand is not very well known. JP would open several strategically located retail stores in a few major cities to increase brand awareness. In the store, customers could get their measurements taken and receive in-person fashion advice from a fashion consultant, after which they could purchase unique clothing. JP would continue its online services.

State two features of loan capital.

5. Justin Price Clothing Ltd. (JP)
Justin Price Clothing Ltd. (JP) is a private limited company that manufactures clothing. Its unique selling point/proposition (USP) is its innovative process. Customers sends images of themselves and some measurements to J P via the internet, which J P uses to determine the customer's exact measurements. Then, a style consultant contacts the customer via video conference to discuss the customer's fashion preferences. After this, the style consultant designs clothing for that customer. Using job/customized production, JP manufactures and ships the clothing to the customer. Most materials (stock) are ordered when a customer agrees to the designs. A total of 84 % of JP's customers have purchased items from JP more than five times.

Justin Price, JP's owner, asked his management team to consider two options and decide which would best increase profitability:
- Option 1: Change JP's design and production model. Consultants, when working with customers online, would recommend from a series of pre-made options. The company would shift to batch production and have the stock (inventory) available. Style consultants would still be central to the process, but the clothing would no longer be custom made.
- Option 2: Increase JP's customer base. JP's customers have high brand loyalty. However, the brand is not very well known. JP would open several strategically located retail stores in a few major cities to increase brand awareness. In the store, customers could get their measurements taken and receive in-person fashion advice from a fashion consultant, after which they could purchase unique clothing. JP would continue its online services.

State two features of loan capital.