Reyhan Huseynova

Business Management
Sun/4/03/2021
Activity: 28.5; 28.6; 28.7; 28.8; 28.10

ACTIVITY 28.5
KOOVS lists on AIM

Online fashion retailer Koovs has been listed on London

Stock Exchange AIM. Koovs successfully raised £22 million
at the initial public off er (IPO), valuing the business at £36
million. Koovs is the first Indian business to list on London
Stock Exchange since Nandan Cleantech, which debuted
in November 2011. There are 62 Indian businesses, with a
combined value of £90 billion listed in London across AIM
and the main stock exchange market. Ibukun Adebayo,
Head of Primary Markets, India at the London Stock
Exchange Group said “We welcome Koovs to our market.
This is an important listing, not just for the company, but
for Indian companies overall.”
It will focus on aff ordable Western fashion rather
than Indian ethnic clothing, copying celebrity fashions
to appeal to middle-class working men and women aged
18–30 years, exactly like the London-based company. The
owners plan to float about 35% of the company with 44%
owned by the Nahata family, 11% by Lord Alli and the
remainder with management.

Peacocks to go public

Peacocks, the discount clothing and houseware retailer,

has issued its prospectus to the public. The company is
going public to raise £42 million (aft er expenses) to fund
further expansion and to repay outstanding debt. The
managing director believes that there are great benefits
in replacing debt finance with equity or share finance.

Rights issue from Australian company

Australian fertiliser-maker Incitec Pivot Ltd plans to raise

A$1.17 billion through a rights issue of shares. Some of the capital will be used to repay
loans and the rest will be used for long-term investment and research. The rights
issue is being offered at A$2.50 per share, a 40% discount
to the company’s latest traded share price. The share
issue is likely to reduce the market share price, at least
in the short term. The company has also announced a
tripling of annual profits, reflecting gains from a recent
takeover and high fertiliser prices.
[28 marks, 40 minutes]

1 Why have Indian companies such as Koovs decided

 to join AIM rather than the main Stock Exchange? [4]

2 Why has the management of Koovs decided not to

sell more than 50% of the shares in the company? [2]

3 Peacocks decided to issue shares by prospectus

to the general public. Why do you think this method
of selling shares was selected? [4]

4 What did the managing director of Peacocks mean

when he said that there were advantages in selling
shares to repay debt? What are the advantages of
repaying debts? [6]

5 Why do you think Incitec Pivot decided to use a

rights issue of shares to raise capital? [4]

6 Evaluate whether a shareholder in Incitec Pivot

should buy the rights issue of shares being offered. [8]

ANSWER:

1. Since they can have more adaptable administrative frameworks. Point likewise doesn't
have prerequisites for organization size, history and market capitalization.

2. Since they needed to bring in more cash instead of making their merchandise less
expensive.

3. Since they needed to raise more capital and pull in financial backers.

4. They need to give their obligations that they acquired cash from. At the point when they
reimburse it, it will lessen the organizations intrigues trouble.

5. Since the rights issue is a less expensive method of raising capital.

6. Indeed, in light of the fact that a 40% rebate is advertised. An expansion in offers will
prompt a decline in the common cost.

ACTIVITY 28.6
Financing small business start-ups
Nelson is a very good car mechanic. He wants to set up
his own business repairing cars. He has some tools and
he will work from the shed in his garden. He needs $50
to buy a small stock of oil and other materials needed so
that he can get started. Serena has an idea for a new business – making exclusive
luggage cases from a new ultralight material her brother has
helped to develop. She has made a video of the design of
the new cases she plans to make. She estimates she needs
around $50,000 to buy the machines she will need.
[24 marks, 35 minutes]

1 Explain why traditional banks might be unlikely to

 provide loan finance to these two new businesses. [8]

2 Evaluate the usefulness of microfinance for

Nelson’s business. [8]
3 Evaluate the use of crowd funding for Serena’s
business. [8]

ANSWER:

1. Since new organizations don't have their very own business credit to show the bank. A
few banks deny the startup credit as they couldn't say whether their business can take care
of them or in the event that they will succeed.

2. Microfinance is offering monetary types of assistance for poor and low-pay clients who
don't approach banking administrations, for example, Nelson's grease monkey business.
This will help Nelson as he will have the funding to begin his business with enough cash for
the present. He will have sufficient cash and items to make the completed products in his
business and begin exchanging now.

3. Crowdfunding is the utilization of modest quantities of capital from an enormous

number of people to fund another undertaking. Crowdfunding will assist Serena with
elevating her new business to others which they should put resources into. She will profit
by the capital that would have been difficult to get in the event that she didn't utilize
crowdfunding.

ACTIVITY 28.7
Sources of finance
[9 marks, 9 minutes]
Copy the following table and complete it by ticking the appropriate boxes alongside each
source of finance.

Sources of Long-term Medium- Short-term Available to Available Available

finance finance term finance unincorporated to to
finance businesses private public
limited limited
companies companies
Sale of X X
shares to
the public
Sale of X X X
debentures
Leasing X X X X
Debt X X X X
factoring
Loans from X X X X
family
Take on X X
partners
Rights issue X X X
of
Shares
Ten-year X X X X
bank loan
 Bank X X X
overdraf

ACTIVITY 28.8
Going exclusive with ice cream
Omah and Sara were convinced that their idea of an
exclusive ice cream bar in the city centre would be
a success. There were already high-class cafés and
restaurants, but there was not yet an establishment that
specialised in luxury ice creams. They had considered
buying a Häagen-Dazs franchise. This would have
provided them with a ready-made business plan to
present to bankers and investors. However, the cost
seemed excessive and so they decided to ‘do their own
thing’. They had worked in retailing, but not in catering.
They could invest $20,000 each, but the projected cost of
the shop, stock and initial promotion was $80,000. The
couple had no property themselves apart from cash in
the bank. They had seen how successful similar ice cream
bars were in America, so they thought that it would be a
success in their own country too. Further research had
been undertaken among their own friends and work
colleagues, who all seemed enthusiastic about the idea.
There seemed to be some resistance to the proposed
prices of $2 for a standard cone of ice cream, though.
Omah and Sara were keen to have control over
their business and be independent of other firms.
However, they did not agree entirely about their
future motivation for setting the bar up. Omah
wanted this to be ‘the start of global domination
of the ice cream market’ – but he was always keen
on exaggeration. Sara just wanted to be her own
boss and to be in control of her life. This difference
of opinion between them was probably reflected in
some sections of their business plan. They were both
enthusiastic and hard-working, and these qualities
impressed both their bank manager and a venture
capitalist who was interested in supporting the idea.
However, once they had read the rather hurriedly
produced business plan, they refused finance. Omah
and Sara had been hoping to raise ‘about $50,000’.
The bank manager said, ‘There are many positive
points about your proposal, but I want you to put
further work into your business plan before agreeing
to your loan request.’
[37 marks, 50 minutes]

1 What is meant by a ‘venture capitalist’? [3]

 2 Outline the benefits for Omah and Sara in preparing
a detailed business plan for their new proposal. [8]

3 Discuss what ‘further work’ on the business

plan the bank manager might have been
requesting Omah and Sara to undertake. [8]

4 To what extent would a bank loan be

preferable to venture capital to finance
this new business start-up? [10]

5 Evaluate two factors that might determine the

success of this new venture. [8]

ANSWER:

1. Venture capitalist is a danger capital put resources into business new companies or
growing independent ventures that have great benefit potential, however, don't think that
its simple to acquire account from different sources.

2. At the point when they set up a definite field-tested strategy, they will actually want to
recognize the danger of disappointment they may have later on. It will have an immediate
spotlight on the thing they are attempting to accomplish. The arrangement will empower a
survey of the business' advancement in gathering targets. The field-tested strategy will
assist them with going the correct way by settling on educated choices for their business to
be effective.

3. They may have to accomplish more statistical surveying to discover more about what
clients like instead of their equitable companions. A more detailed beginning up and
working capital. Getting some answers concerning the short and long haul objectives of the
business.

4. On the off chance that they hold control of the business when they have a safe bank
credit. In the event that they have an investor, they will not have full control as the
financial speculator will need some control of the business.

5. Contingent upon the opposition they have. On the off chance that there is another
establishment in the city with a similar occupation as them. It may likewise rely upon the
economy and individuals as they might not have any desire to spend a lot of cash on an
exorbitant cost and extravagance item.

ACTIVITY 28.10
Telkonet raises $3.5 million by sale
of debentures
Telkonet Inc. the provider of energy-management
systems, has arranged to sell $3.5 million of 13% three-
year debentures. The company plans to use the finance
to cover working capital needs and to invest in expansion
of its range of products. The announcement was made as
world share prices recorded another bad day with further
falls in most of the major indices.
 CuraGen raises $125 million from the
sale of convertible debentures
This drug research and development company has issued
$125 million of convertible debentures. The capital
raised will be used to finance further long-term research
into genomics-based drugs for medical purposes.
The debentures off er a fixed 6% per year and are
convertible into CuraGen’s shares in seven years’ time at
a conversion price of $127 per share.
[16 marks, 20 minutes]
1 a Define the term ‘convertible debentures’. [2]
b Briefly explain the term ‘working capital’. [3]

2 Explain the benefits to both companies of raising

finance through the sale of debentures rather than either selling shares or taking a long
term bank loan with variable interest rates. [11]

ANSWER:

1.

A) Convertible debentures are a sort of bond that the holder can change over into various
offers.

b) Working capital is the capital expected to pay for crude materials, everyday running
expenses, and credit offered to clients. It's the account and man-made assets that are
expected to help the business continue onward and to give merchandise and enterprises to
clients.

2. They can urge long haul subsidizing to grow a business. Monetary assurance is
accommodated chiefs. They guarantee a higher position. Interest is fixed.