NABTEB Commerce 2022 Theory — Question 2

Model answer

(a) This would form a VERTICAL INTEGRATION/MERGER. Vertical integration is a type of merger or combination of two or more firms, where a firm merges with another firm that supplies its input (i.e. companies that operate along the same chain of supply/production merge). Here, XYZ (which processes cotton, the raw material) merges with ABC (which uses cotton to produce textiles). (b) Reasons that would have necessitated the merger: - Diversification of the activities of a company. - Financial crisis on the part of one of the companies. - Improvement in the value and worth of the companies. - Tax incentives. (c) Sources of finance available to the company formed: 1. Retained earnings: this is the easiest source of finance to any business. It is part of the profit made previously that is yet to be spent; it can be used to finance the company whenever it is needed. 2. Issuance of shares: a limited liability company can issue shares to its members (for a private company) or to the general public (for a public company) to raise funds. 3. Loan: the company can apply for a loan from a financial institution to finance its activities.