IB Business Management HL 3.2 Sources of finance Question Bank

1. AH Ltd
Jose owns A H Ltd, a private limited company, that provides climbing and adventure tourism opportunities for children in Ecuador. AH Ltd is partly financed by a non-governmental organization (NGO), which promotes outdoor and other healthy activities in Ecuador. An increase in tourism has meant that A H Ltd has been working at full capacity. However, some issues have begun to emerge.
In a meeting with Jose, an NGO representative expressed concern over the quality of the climbing equipment being used. Several minor accidents involving children had occurred. In addition, the NGO representative had not been kept up-to-date on the financial position of AH Ltd. After the meeting, Jose showed the following financial figures to his accountant, Marco.
Selected financial information from A H Ltd's accounts as at 31 March 2014 (all figures in US$m).

Marco is concerned that the information from A H Ltd's accounts does not show a true reflection of AH Ltd's financial position. For example, Jose has not made any provisions for depreciating the value of the equipment since purchasing it three years ago. Marco has informed Jose that the equipment should be depreciated using the reducing balance method at a rate of 40 % per year.

Jose wishes to expand the business to offer more climbing opportunities. Marco, however, warns that the current equipment needs to be replaced to meet international quality standards. Additional funding from the NGO is not possible, and banks in Ecuador give few loans to small businesses such as AH Ltd.

1. Scoot Fun (SF)
Scoot Fun ( S F ) is a family-owned private limited company specializing in scooter rentals to a student market segment. Most of the scooters will need replacement in January 2014. SF will purchase 20 new scooters at a total cost of $ 80000. They are expected to have a useful life of four years and the total residual value (scrap value) of the 20 scooters is estimated at $ 4000.
SF's Finance Manager currently uses a straight line method of depreciation, but she has now decided to adopt a reducing balance method of depreciation. However, she is still considering the percentage rate at which the assets (scooters) should be depreciated. The Finance Manager is also looking for various sources of finance for the purchase of the new scooters.
S F 's shareholders would like to receive higher dividends in the coming year. One way to do this is to find a legal way to reduce S F 's tax expense in the coming year.

3. Davidson Studios Ltd. (DS)
Davidson Studios Ltd. (DS) is a private limited company created in 2018 and equally owned by two sisters, Emma and Laura Davidson. Both recent graduates, they design and produce fantasy board games, which are sold to local retailers.
Emma specializes in game design and Laura is the operations manager. The design of a new game takes 12 months. DS's first board game was a success and enabled DS to rent workspace and hire employees. The second game, Held Captive, was a massive commercial success.
DS had to move to larger premises and recruit more design, marketing and production staff. DS's organizational culture empowers employees to solve problems and gives them the opportunity to manage tasks. Employees also enjoy modern office spaces, generous breaks and competitive salaries. Quality circles and job rotation are common. Labour turnover is low and employee morale is high.
As production increased, however, DS ran into problems. With more employees to pay and invoices due, D S had almost run out of working capital (see Table 4).

Two options are being considered to avoid further liquidity problems and continue DS's rapid expansion:
- Option 1: Accept an offer from Big Game Industries (BGI), the market leader, to purchase 51 % of DS's shares. BGI would keep the DS brand and install a chief executive officer (CEO). Emma and Laura would have reduced roles in DS.
- Option 2: Accept an offer from a venture capitalist to purchase 35 % of shares. This would provide a cash injection sufficient for the next 12 months.

3. Speedy Delivery (SD)
Speedy Delivery (SD) is a private limited company that delivers freshly cooked meals by bicycle. SD only delivers. Restaurants subcontract SD to deliver meals to customers who place orders online and expect quick and efficient delivery. SD has been operating profitably for two years. Currently, it has the highest market share in the city.
SD is now facing two issues:
- It operates at 98 % capacity utilization. Recently, some restaurant owners complained to SD that meals arrived late and cold to customers.
- The market for home delivered, freshly cooked meals is growing quickly and some new delivery companies have just entered the market.
The CEO wants to address the delivery quality issues and the threat of competitors, two of whom recently merged. He is considering an internal growth strategy involving investing in new electric scooters and employing more staff to deliver a greater number of meals more efficiently. SD must raise a large sum of finance. Major shareholders are in disagreement regarding the internal growth strategy.
The financial manager has provided some financial information.

3. Cheap4U (C4U)
Cheap4U (C4U), a public limited company (plc), operates a successful low-price airline service. C4U offers a basic service targeting low-income families and students. It is positioned as offering the lowest price for a flight. Staff training for flights is on-the-job and C4U uses non-financial motivation such as job enlargement. C4U has recently experienced difficulty in recruiting enough flight staff. As a result, flight staff are overworked and there have been complaints by some passengers about poor service.
In 2013, C4U suffered its first loss in 11 years. C4U carried out a review and the following three issues were identified:
- given the staff shortages, C4U flights are often delayed or cancelled.
- some advertising for popular flights is considered to be unethical. For example, cheap one-way flights are promoted without stating that the return flight is twice as expensive.
- new low-price competitors are emerging, using newer and more fuel-efficient aircrafts.
C 4 U is considering offering a new international flight service, Quality4U ( Q 4 U ). This service will only be offered at certain times. Q4U will target higher-income consumers by offering excellent aircraft facilities, free internet access and more comfortable seats. Four new fully equipped aircrafts will need to be purchased. C4U's gearing ratio is rising at over 80 %. New sources of finance will be required.
C 4 U is also considering new methods of staff training for the new Q4U service:
- One new method of off-the-job training could be conducted by a hotel which is famous for its high quality of customer service. This new training method will increase C4U's costs at a time when its working capital is limited.
- Secondly, all flight staff will have to study for and pass an examination to meet international quality standards of customer service. C4U's senior management is insisting that staff study in their own free time. Flight staff have complained and have consulted their representatives about possible industrial action, as they feel that they are already overworked.

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.

5. Fort Industries (FI)
Fort Industries (FI) manufactures aircraft. Jacques Fort founded the business in 1957 as a private limited company. He owned 100 % of the shares and managed the company strictly, making most of the decisions himself. FI grew through both internal and external growth. Later, it began to manufacture aircraft parts for other manufacturers.
Jacques led his workforce by using Taylor's motivation theory. He regularly set clear objectives and monitored his employees carefully. Employees had to meet international quality and safety standards. Although Jacques was controlling, employees had job security and believed that he had their best interests at heart.
FI became a public limited company in 1988 and grew. Jacques found this transition difficult. He liked privacy and rarely spoke to the media. This had to change. Employees also began to ask for less supervision, wider spans of control and greater control over quality standards. Jacques retired in 2000 and his son, Henri, took over as CEO. Henri consults widely with his executive team and line managers on all decisions.
Recently, FI has been struggling with liquidity. Henri implemented strict cost controls and analysed the following ratios (see Table 5).

Often, FI has to delay payment to creditors. Employees are concerned that by saving money, safety standards at FI have been reduced.

Henri is considering two options to solve the liquidity problem:
- Option 1: A long-term loan.
- Option 2: Issuing and selling additional shares in FI.