AQA A-Level Business: What is Business?

Read the following case study and answer the question that follows.

The following case study was written for this exercise.

Meadowgate Organics Ltd is a private limited company that makes chilled organic ready-meals, founded in 2015 by Priya Nayar, who still owns 80 per cent of the shares; the remaining 20 per cent is held by two early private investors. The company has grown quickly, with revenue rising from £4 million to £31 million in eight years, and its meals are now stocked by two national supermarkets. Demand is running ahead of what Meadowgate's single factory can supply, and the board estimates it needs about £25 million to build a second, automated factory and a national chilled-distribution network.

Meadowgate's bank has offered a loan, but the directors are reluctant to take on that much debt given rising interest rates. An adviser has suggested instead that Meadowgate convert to a public limited company (plc) and float its shares on the stock market, raising the £25 million by selling new shares to outside investors. A flotation would bring in the capital without the fixed interest burden of a loan, but it would dilute Priya's stake below 50 per cent, expose the company to the scrutiny and short-term profit expectations of institutional shareholders, and require full public disclosure of its accounts. Priya is proud that Meadowgate has always balanced profit with its founding commitments to organic sourcing, fair supplier prices and low-waste packaging, and she fears these could come under pressure from new shareholders focused on returns.

Question: Evaluate whether becoming a public limited company (plc) is the best way for Meadowgate Organics Ltd to raise the finance it needs. [25 marks]

Read the following case study and answer the question that follows.

The following case study was written for this exercise.

Joel Whitcombe runs Whitcombe Joinery as a sole trader, making bespoke fitted furniture. The business is doing well, but it is growing: Joel now employs four people, takes on larger contracts worth up to £40,000 each, and has just signed a lease on a bigger workshop. As a sole trader he has unlimited liability, meaning that if the business were sued over a faulty installation or could not pay its debts, his personal assets — including the house he owns with his partner — would be at risk. His accountant has advised him to convert the business into a private limited company (Whitcombe Joinery Ltd).

The accountant argues that the most important benefit of incorporating would be limited liability, which would protect Joel's personal assets if the business ran into trouble. However, there would be other effects too. Incorporation would also make it easier to raise finance for growth by issuing shares to a business partner or investor; it might make the firm look more credible to the larger commercial clients Joel now wants to win; but it would also bring more paperwork, public filing of the company's accounts and higher accountancy costs. Joel is trying to decide whether limited liability really is the main reason to make the change.

Question: Assess whether limited liability is the most important advantage of forming a private limited company for Whitcombe Joinery. [16 marks]

Read the following case study and answer the question that follows.

The following case study was written for this exercise.

Lena Forsythe runs Forsythe Florals as a sole trader, supplying flower arrangements to weddings and events. The business has grown beyond what she can manage alone: she now wants to open a second studio and take on a long-term partner who would invest money and expertise in return for a share of the business. She also wants to bid for contracts to supply several large hotels, which prefer to deal with established limited companies rather than individuals. Lena is considering changing the legal structure of Forsythe Florals from a sole trader to a private limited company (Forsythe Florals Ltd).

Question: Analyse two benefits to Forsythe Florals of changing its legal structure from a sole trader to a private limited company. [9 marks]

Riverbend Foods plc is a listed UK food manufacturer. The table below shows its current share price and the number of ordinary shares it has issued.

	Value
Current share price	£1.40
Number of ordinary shares issued	250,000,000

(a) Calculate the market capitalisation of Riverbend Foods plc. (2 marks)

(b) Following a strong trading update, Riverbend's share price rises to £1.61. Calculate the percentage change in the company's market capitalisation, and briefly state what this figure represents. (4 marks)

Aanya is considering investing £15,000 of her savings in Brookvale Cycles Ltd, a private limited company that makes electric bikes, in return for shares. She knows that the business is fairly new and that some new companies fail.

Explain why the limited liability of Brookvale Cycles Ltd might encourage Aanya to invest in the company. (5 marks)

Hartcliffe Tools plc set itself the objective of growing its annual sales revenue. In the year before its growth plan, revenue was £18.0 million. In the year after the plan, revenue had risen to £20.7 million.

Calculate the percentage change in Hartcliffe Tools plc's sales revenue over this period. (4 marks)