Business – 5.2 Sources of finance – Internal and external sources | e-Consult
5.2 Sources of finance – Internal and external sources (1 questions)
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Model Answer:
- Impact on future dividend policy – using retained earnings reduces the pool available for dividend distribution to shareholders.
- Opportunity cost – assess whether the £200,000 could generate a higher return if invested elsewhere (e.g., paying down debt or other projects).
- Liquidity considerations – ensure that the remaining retained earnings (£300,000) are sufficient to meet short‑term obligations and maintain a healthy working capital buffer.
- Strategic fit – the new product line should align with the company’s long‑term objectives and market positioning.
- Risk assessment – evaluate the commercial risk of the new product, including market demand, competition, and required expertise.
- Financial ratios – consider how the withdrawal will affect profitability ratios (ROE) and solvency ratios (equity ratio).
- Tax implications – retained earnings are already taxed; using them does not create additional tax, but the profitability of the new line will affect future tax liabilities.