Describe one feature of a private limited company.

Explain one advantage and one disadvantage for MC of having a mission statement.

Explain one advantage and one disadvantage for MC of using venture capital to provide financial support.

Discuss whether MC should organize the live concert.

One feature of a private limited company is that

• The number of shareholders may be limited to 20 depending on the country in which the business is owned.
• Shareholders have to be invited to join the board of directors as shares cannot be advertised.
• Owners of the business will enjoy limited liability, which indicates that if a business experiences a financial collapse then the owners will only be liable for the capital contributed.
• There is normally no legal requirement to publish detailed financial accounts for the public or provide quarterly forecasts to an exchange or supervisory committee unless it is for corporate tax purposes.

Award [1] for a partial description and an additional mark for a full description similar but not exact to one of the above bullet points.

Theoretical answer – award [1] for each advantage and disadvantage:

• A mission statement allows a business to state its current purpose and can be used to position the organisation in the minds of its stakeholders.
• It can be a motivating force for employees and also provide a goal/purpose which potential investors may be attracted to.
• However, some mission statements can only provide a vague goal or objective and a mission statement does not indicate how this objective will be achieved which could make them misleading or have little value.
• Focussed mission statements do require management time and resources to be effective.

MC’s mission allows a clear differentiation for its business model away from rivals. Given that the number of young people eschewing musical instruments is rising, the mission could allow MC to create a USP. Clearly, musical instrument companies favour the mission and are willing to sponsor the potential concert adding a vital source of funds to allow it to proceed.

However, the mission seems to preclude the use of technology to a degree by artists. It is accepted that even real musicians will use technology but if participants who play in the concert use only technology then MC runs the risk of being “hypocritical”. There is evidence of a clear backlash (negative reaction) on social media, which could undermine MC’s perception. Of course, it is accepted that organising the concert will require some use of the latest technology but the mission runs the risk of confusing its stakeholders.

Award [1] for application to MC for both the advantage or disadvantage.
N.B. [2] cannot be awarded if the response lacks either explanation and / or application.

Mark as [2+2]

PLEASE NOTE: Venture Capital is not included in the syllabus for 2024 exams onward. Related parts of this multi-part question may be used.

Theoretical advantage and disadvantage – award [1] for each.

Advantages:
Venture capital provides the company with an opportunity to expand. This would not have been possible through other methods like bank loans. Bank loans require collateral and there is an obligation to repay the loan. However, in venture capital, the investors themselves are ready to take the risk as they believe in the company’s long-term success. Therefore, venture capital financing is beneficial for start-ups with high initial cost and limited operating history.

Venture capitalists are often people with significant experience in their respective industries and this can be extremely helpful for those starting out in these industries. They can help with building strategies, technical assistance, resources, etc. in order to make a business successful.

Venture capitalists have a huge network of connections in the business community. These connections could be advantageous for the start-ups to grow and become successful. They can help the start-up to enter into alliances with potential customers or business houses.

Disadvantages:
Venture capitalist provides huge capital to the start-ups in return for a stake in the equity of the company. If the start-up succeeds, then it helps them earn tremendous amounts of profit. VC’s usually become a part of the Board. They actively participate in the company’s decision-making. VC’s will want to protect their investments. If there is a difference of opinion between the VC and the start-up founder, then things can get chaotic. Any major decision requires the consent of investors.

A venture capitalist may decide to redeem the investment within 3 to 5 years. Their primary focus is to earn capital gains. Venture capital may not be suitable for an entrepreneur whose business plan will take a longer time to provide liquidity.

Venture capital investors are taking high risks, hence take time in making decisions to invest. It can therefore be a lengthy process and not suitable when quick funding required.

Application (award [1] for application to MC for both the advantage or disadvantage).

Without the support of Abbi, MC would probably not be still able to carry out its mission. She is also able to provide some technological assistance on operations away from the playing of real instruments which will support MC in organising the concert. Rob clearly feels that MC does not have sufficient resources to do this on their own. The global concert may also attract other venture capitalists or other possible sources of finance from business angels for example.

The disadvantage, however, is that Abbi being a venture capitalist may see the concert as the only solution to MC’s current financial predicament and if not successful may decide to seek other ventures. The financial situation at MC could deteriorate further. She thinks the mission needs updating and any social media backlash could hit MC hard. There is a considerable risk here given the nature of venture capital. Rob may have to look for new investors.

Mark as [2+2].

Refer to Paper 2 markbands for 2016 forward, available under the "Your tests" tab > supplemental materials.

There is a considerable tension between the need for financial sustainability outlined in the stimulus and the table and a violation of the mission statement if they decide to go ahead with the concert. There is no quick fix to MC’s problems.

The financial figures provide some ammunition for evaluation both positively and negatively. Musicology’s solvency is at risk if they do nothing. But if they host the concert, they will use up valuable resources and the CEO doubts that the business will be able to cope. There is a forecast profit of 24million but what if budgets are exceeded or forecasts not met? Musicology is going beyond its normal operational ability and costs will be difficult to forecast. Even with pay per view it will be difficult to judge how many will actually pay.

Musicology is being kept “alive by venture capital”. Will other potential investors tolerate a concert where musicians do not play real instruments? The mission statement is at risk and the gearing ratio is currently 75 %. They will not be able to borrow their way out of any financial difficulties.

A great deal of trust is being placed in Abbi. Her confidence may be a positive thing, but can MC have faith in her social media connections? It can be very difficult to measure exactly how many people will be willing to pay. Cash flow forecasting at a time of variable cash inflows and outflows may be very hard to do.

However, the global concert will spread the mission of MC. The reach could be considerable and new investors will probably come forward. The pay for view and sponsorship from the musical instrument manufacturers will offset revenue lost to illegal downloaded sites. If this concert goes well the future benefits to MC could be considerable. There may be future concerts and or other extension strategy possibilities. Angel investors may see the ethical approach MC is taking and bring forth newer investors reducing the dependence on venture capitalists.

It would seem that if MC wish to remain economically sustainable the concert will have to proceed. It is a risky strategy but one which could have longer term benefits if the exposure of the business via the pay per view model to a global audience generates significant funds and publicity. Abbie seems confident and well connected and this is important for MC who do most of their promotion and brand building through the internet and social media.

Marks should be allocated according to the paper 2 markbands for May 2016 forward.

Candidates will not be able to proceed to the highest mark bands without using the quantitative data in the table. [max award [6]]

Balanced analysis will imply two arguments in favour with two against. Judgements should be substantiated to move beyond the 5–6 band.

Generally, well done and a question quite common over the last few sessions. Unfortunately, a significant number of candidates incorrectly stated that features of a private limited company included, only selling to a family member and not having to publish any financial data. Whilst it is true that many private limited companies are family owned, they are free to sell shares to anyone they please – they do not have to be family. Also, all private companies must produce financial statements and these are usually lodged with a central company registry. They are under no obligation to make available to the public although many central registries do allow public access.

Many candidates were able to identify one advantage and one disadvantage but were unable to utilise the stimulus material for application in their responses.

Most candidates recognised venture capital as a source of finance but there were many misunderstandings about the length of term with many candidates suggesting that interest will need to be paid and loan paid back in the medium term. There was almost too much discussion of Abi and the level of advice she was going to give and constraints it might place on Robs ability to run the business without always keeping an eye on the fact that the question was about venture capital itself and that it represents an equity stake. Yes, they will receive dividends if the company is profitable, but most have an exit route – usually an IPO – after a set period of time.

In many ways there was not much of a decision to be made with a current loss of $8m and a potential profit from the concert of $24m. Many candidates managed to avoid mentioning either of these two figures. Instead there was a good deal more use of the 0.8 current ratio and the 75 % gearing ratio, frequently with little relevance or validity to the argument. In many responses there was a great deal of direct repetition of the stimulus without clear analysis, synthesis or balance in leading to a conclusion.