IB DP Business Management: Introduction to finance and Sources of finance – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

These questions cover sections 3.1 Introduction to finance and 3.2 Sources of finance of the IB Business management guide, first assessment 2024, for SL and HL. Learn the content first in the study guide and the revision notes. The wider unit has a Unit 3 practice set. Course hub: IB DP Business Management. Tick-list: printable checklist.

Questions

1. Define the term revenue expenditure and give one example. [2]

2. Pimlowe Pottery Studio spent the following in a year (in USD): kiln 6,400; clay 850; extension to the studio building 12,000; electricity 310; delivery van 14,500.

(a) Identify the items that are capital expenditure. [3] (b) Calculate the total capital expenditure and the total revenue expenditure. [2]

3. Explain two ways in which finance is used by a business. [4]

4. A company made a profit after tax of USD 95,000 and paid USD 35,000 in dividends.

(a) Calculate the retained profit. [2] (b) Explain one drawback of relying on retained profit to fund expansion. [2] (c) Explain one benefit and state one limitation of raising finance through the sale of assets. [2]

5. A private company has 50,000 shares, of which the founder holds 40,000. It issues 25,000 new shares at USD 3.20 each. The founder buys none of them.

(a) Calculate the funds raised. [1] (b) Calculate the founder’s percentage ownership after the issue, to one decimal place. [2] (c) Explain one disadvantage to the founder of financing growth this way. [2]

6. Wolderfield Dental needs equipment costing USD 36,000. A bank offers a five-year loan with interest of 7% a year on the original sum. A supplier offers a lease at USD 780 a month for 60 months.

(a) Calculate the total cost of each option. [4] (b) Explain one reason the practice might still choose the more expensive option. [2]

7. (a) Distinguish between an overdraft and trade credit. [4] (b) A firm uses an overdraft of USD 15,000 for two months at 12% a year. Calculate the interest, using simple interest. [2]

8. Vesperly Loom Collective is a start-up of six weavers who need USD 15,000 for looms. A bank refused a loan because the collective has no collateral or trading record.

(a) Outline what is meant by crowdfunding. [2] (b) Explain why a microfinance provider might be a suitable source for the collective. [3] (c) Explain one drawback of the collective seeking a business angel. [2]

9. Sunnymede Paper Mill wants to buy a USD 90,000 packaging line expected to last eight years. Two options are on offer. An overdraft facility of USD 90,000 at 14% a year, or an eight-year bank loan charging 7% a year on the original sum. The mill’s owners have retained profit of USD 25,000 that is also earmarked for wages. Evaluate which source is more appropriate. [8]

10. Dapplewick Brewing needs USD 120,000 for new tanks. It has USD 45,000 of retained profit it can use. For the other USD 75,000 it can take a five-year bank loan at 8% a year on the original sum, or sell a 25% share of the business to a business angel. Expected profit after tax is USD 90,000 a year. Recommend which option the brewery should choose. Assume, for comparison, that the angel receives 25% of expected profit each year. [8]

Answers

1. Spending on the everyday running of the business whose benefit ends within the year [1]; for example wages, raw materials or electricity [1]. [2] Examiner insight: A definition needs the idea of short-term, recurring running costs; an example alone does not define the term.

2. (a) The kiln [1], the studio extension [1] and the delivery van [1], because each is an asset used for more than one year or an improvement to one. [3] (b) Capital: 6,400 + 12,000 + 14,500 = USD 32,900 [1]. Revenue: 850 + 310 = USD 1,160 [1]. [2] Examiner insight: Part (b) says calculate, so show the addition and give units; the two totals should add to the full spend of USD 34,060 as a check.

3. Starting up, for example buying equipment and stock before any sales come in [1]; this is needed because the business has no income to pay for it yet [1]. Running the business day to day, for example paying wages and suppliers [1]; this is needed because bills fall due before customers pay [1]. Other valid uses are growth or surviving a poor period. [4] Examiner insight: Each use needs a reason (“because…”) to count as explained; listing uses with no reasons describes them but does not explain.

4. (a) Retained profit = profit after tax - dividends [1] = 95,000 - 35,000 = USD 60,000 [1]. [2] (b) It may be too small for the project [1], and keeping more means lower dividends, which shareholders may dislike [1]. [2] (c) Benefit: it raises cash without borrowing or interest [1]. Limitation: the business may lose an asset it still needs, or have few spare assets to sell [1]. [2] Examiner insight: In part (c) the question asks for one explained benefit and one stated limitation, so answer both halves and keep each focused on the sale of assets, not on finance in general.

5. (a) 25,000 x 3.20 = USD 80,000 [1]. [1] (b) Total shares = 50,000 + 25,000 = 75,000 [1]. 40,000 / 75,000 x 100 = 53.3% [1]. [2] (c) The founder’s share falls from 80% to 53.3% [1], so the founder has less control and a smaller share of future dividends [1]. [2] Examiner insight: The percentage must use the new total of shares as the denominator; dividing by 50,000 is the usual slip.

6. (a) Loan interest = 36,000 x 0.07 x 5 = 12,600 [1]; total = 36,000 + 12,600 = USD 48,600 [1]. Lease = 780 x 60 = USD 46,800 [1]. The lease is USD 1,800 cheaper [1]. [4] (b) The loan is the more expensive option [1], but it gives ownership of the equipment at the end, so the practice may value owning the asset more than the saving [1]. [2] Examiner insight: “More expensive” has to be read from your own totals; a reason that contradicts your part (a) figures will not be credited, so check which option you found dearer.

7. (a) An overdraft is an agreed facility to spend more than the account holds up to a limit [1]; interest is paid only on the amount used, and it is short-term and can be recalled [1]. Trade credit is buying goods now and paying the supplier later [1]; there is usually no interest if paid on time [1]. [4] (b) 15,000 x 0.12 x 2/12 [1] = USD 300 [1]. [2] Examiner insight: Distinguish means differences are made clear, so each side should be compared on the same feature, such as who provides it and what it costs.

8. (a) Raising small amounts from a large number of people [1], usually through an online platform [1]. [2] (b) Microfinance providers lend small sums to entrepreneurs who cannot get bank credit [1]; the collective has no collateral or record, so it fits that profile [1] and USD 15,000 is a small sum of the kind they might lend [1]. [3] (c) An angel would take part of the ownership [1], so the six weavers would give up some control and a share of future profit [1]. [2] Examiner insight: Application is rewarded when you point to the facts given, here no collateral, no record and a small sum, rather than writing generally about microfinance.

9. Answer, with credit available for the following points. Overdraft: flexible and quick to arrange, but fully used, interest is 90,000 x 0.14 = USD 12,600 a year [1]. It is short-term and can be recalled, so it does not match a machine lasting eight years [1]. Loan: interest is 90,000 x 0.07 = USD 6,300 a year, or USD 50,400 over eight years [1]. The term matches the machine’s life and the fixed repayments make planning easier [1]. Limit: the loan must be repaid whether or not the line earns enough, so the mill needs confidence in sales [1]. The USD 25,000 of retained profit cannot realistically cover the cost and is earmarked for wages [1]. Judgment: the loan is more appropriate [1], because its term matches the asset, it costs less per year than a fully used overdraft, and it avoids the risk of the bank recalling the funds; the decision would change if the mill’s sales were uncertain [1]. [8] Examiner insight: An evaluation needs both sides weighed and a clear conclusion that names the deciding factor; answers that list features of each source and stop are unlikely to reach the top of the range.

10. Loan: interest = 75,000 x 0.08 x 5 = USD 30,000 [1]; total repaid = USD 105,000, about USD 21,000 a year [1]. Angel: 25% of 90,000 = USD 22,500 a year, USD 112,500 over five years [1]; the share continues after year five [1]. Loan: cheaper over five years and the owners keep full ownership, but fixed repayments must be met even if profit falls [1]. Points for the angel: no repayment burden and possible advice and contacts [1]. Against: permanent loss of 25% ownership and some control [1]. Recommendation: the loan, because it costs less over the period and ownership stays whole, provided profit is stable; if profit were uncertain the angel might be safer [1]. [8] Examiner insight: A recommendation must be supported with figures from the stem, here the 105,000 and 112,500 comparison, and should state what the advice depends on.

Where marks are usually lost

• Writing a definition of revenue expenditure that mentions only “cost” without the short-term, running-cost idea.
• Missing the extension in question 2 style questions: improvements are capital even if they sound like maintenance.
• Using the wrong denominator when finding ownership percentages after a share issue.
• Giving a monthly lease figure and not multiplying by the number of months.
• Forgetting to change time to years when a loan or overdraft runs for months.
• Describing a source in general terms with no reference to the business in the stem.
• Weighing only one source in an evaluation, or leaving out a conclusion.
• Recommending without using the numbers given.

Next steps

• Re-read the revision notes for any source you misjudged.
• Go back to the study guide.
• Course hub: IB DP Business Management
• Tick off the printable checklist
• Try all the free 10-minute diagnostics
• Book a free trial class

Frequently asked questions

Is an improvement to a building capital or revenue expenditure? An improvement that adds to an asset’s value or life, such as an extension, is capital expenditure even if it sounds like maintenance. Spending that only restores an asset to working order, such as an ordinary repair, is revenue expenditure.

What are common mistakes on sources of finance questions? Students often describe a source in general terms with no link to the business in the stem, use the wrong denominator for ownership percentages after a share issue, and forget to convert months into years for loan or overdraft interest. Weighing only one source or leaving out a conclusion in an evaluation also loses marks.

How do you calculate retained profit? Retained profit is profit after tax minus dividends. It is the part of profit kept in the business, and it is one of the internal sources of finance in section 3.2 of the IB Business management guide.

How should you answer a recommend question on financing an asset? Compare the sources on offer using the numbers given, such as total interest or total lease payments, and match the term of the finance to the life of the asset. Then give a clear recommendation with a justification.

Official syllabus

IB Diploma Programme Business management guide, first assessment 2024, published by the International Baccalaureate Organization. Sections 3.1 Introduction to finance and 3.2 Sources of finance.