2011 Paper 7 Question 1
Business Studies
(a) Distinguish between debt and equity finance. [5 marks]
(b) Under what conditions must the directors of a company declare insolvency?
[5 marks]
(c) A small software company has the following simplified cashflow, funded by
shareholders’ equity of £20,000 and a bank overdraft of £5000:
Invoiced money received 2 months after due date;
paid after 1 month of receipt of invoice Cashflow:
Month 1 2 3 4 5 6 7
Income 30, 000 30, 000
Expenditure
Programmers 5, 000 5, 000 5, 000 5, 000 5, 000 5, 000 5, 000
Overheads 5, 000 5, 000 5, 000 5, 000 5, 000 5, 000
Total costs 5, 000 10, 000 10, 000 10, 000 10, 000 10, 000 10, 000
Cash at start −5, 000 15, 000 5, 000 25, 000 15, 000 5, 000 −5, 000
Cash at end 15, 000 5, 000 25, 000 15, 000 5, 000 −5, 000 15, 000
Draw up the balance sheet at the end of month 6. [5 marks]
(d) What advice would you give the directors? [5 marks]