CAIE A-Level Business 10.4.2 Ratio Analysis for Strategic Decisions

3(c)

Indicative content

Responses may include:

AO1 Knowledge and understanding

- Shareholder is an investor in the business seeking a return in the form of dividends and/or share price increase.

- Understanding of relevant factors to shareholders including:

- Change in revenue - impact of increasing revenue on share price.

- Profitability - impacts dividends and share value.

- Dividend yield - the return to shareholders relative to share price.

- Changes in share price - link to capital gain to shareholder.

- Gearing ratio - links to risk of investment.

- PE ratio - reflects confidence of shareholders in future prospects of the business.

- Current ratio - solvency.

AO2 Application

Limited application, ${ }^{\text {APP }}$ applies knowledge to CD once.

Developed application, ${ }^{\triangle \mathrm{APP}}+{ }^{\triangle \mathrm{APP}}$ applies knowledge to CD twice.

- Increase in revenue of $\$ 2.7 \mathrm{~m}$.

- Reduced operating profit margin - now 12.2%.

- Reduced return on capital employed from 8.1% to 8%.

- Reduction in dividend yield.

- Increase in share price by 2.56%.

- Plans for expansion.

- Gearing 49.23% close to being highly geared.

- Current ratio has improved from 0.6 to 0.8

AO3 Analysis

Limited analysis AN - candidate shows one link in the chain of analysis.

Developed analysis L2AN - candidate shows two or more links in the chain of analysis.

- Share price is increasing which will encourage potential shareholders to purchase shares ${ }^{\mathrm{AN}}$ in the expectation of a capital gain in the future L2AN.

3(c)

- Increasing profit may result in higher dividends in the future AN and therefore support decision to buy more shares L2AN.

- Dividend yield has decreased meaning that the return for shareholders is lower than in 2023. This suggests that potential shareholders would be less likely to purchase shares AN.

- Expansion plans are ambitious which might result in higher profits in the future AN and therefore increase returns to shareholders L2AN.

- Increased gearing could result in shareholders enjoying greater share of the benefits of future growth AN.

- Increased gearing can also mean lower dividend payout to shareholders in the short term AN as there are increased interest payments which then lower the profit for the year so there is less left for the shareholders L2AN.

AO4 Evaluation

Limited evaluation ${ }^{\text {Eval }}$ - limited supported judgement and/or a weak attempt at evaluative comment.

Developed evaluation $\mathbf{L 2}^{\mathbf{L} \text { Eval }}$ - supported judgement and/or reasonable evaluative comment.

Developed evaluation in context ${ }^{\text {L3 }}$ Eval - supported judgement in context and/or reasonable evaluative comment in context.

- Limited nature of the data in Table 1.1

- Data only available for 2024 and 2023 making it difficult for shareholders to identify longer terms trends on which to base their decision.

- Need to compare with other businesses in the industry.

- Changes may reflect changes in the economy rather than successful decision making of CD.

- Depends on whether shareholders are focused on the short term or the long-term gains.

- Given the cost push inflation in the economy the performance of CD might be considered to be good - this may explain why the share price has increased.

- Depends on attitude toward risk as the business is relatively highly geared and the plans for expansion are costly and may fail.

- Most important data in Table 1.1

- Shareholders most concerned by capital gains from increasing share price and dividend returns.

- Qualitative factors also important such as:

- CD's plans for future expansion will impact risk and reward of shareholder investment.

- Quantitative data is objective data on which to base investment decision.

Accept all valid responses.