CAIE A-Level Business A2 10 Finance and Accounting Questions

Refer to Table 1.1. Calculate, for 2023, the current ratio.

Responses may include:

CR = Current Assets / Current Liabilities
0.6 / 0.8=0.75: 1(1)

Accept 0.75 OR 3:4 or $\frac{3}{4}$ (1)

Note:

0.75 m or $0.75 / 1 \mathrm{~m}$ (0)

Refer to Table 1.1. Calculate, for 2023, the return on capital employed (ROCE).

Indicative content

Responses may include:

ROCE = Profit from operations / capital employed × 100

OR

Capital employed = NCL + shareholder capital

OR

Capital employed = issued shares + reserves + non-current liabilities (1 mark if no relevant calculation)

Note: ROCE = Net profit / capital employed × 100 is incorrect and not rewardable.

CE=7+3.2=10.2(1)

$\mathrm{ROCE}=1.3 / 10.2 \times 100(2)$

=12.7 % OR 13\% OR 12.75\% (3)

Accept 12.7 or 13 or 12.75 (3)

Allow 12.8 (3)

Alternative calculations

2022 ROCE is 9.9\% (2)

Accept 9.9 (2)

1.3 / $3.2 \times 100=40.6 \%$ (2) NCL not included in calculation of CE

$1.3 / 7 \times 100=18.6 \%(2)$ Shareholder equity not included in calculation of CE

Responses may include:

0.2 / 0.05

Knowledge of correct equation & correct numbers

4(b)

Indicative content

Responses may include:

AO1 Knowledge and understanding

Limited knowledge K will be demonstrated through knowledge of the role of shareholders or annual reports or why shareholders may sell or keep shares.

Developed knowledge K+K+ will be demonstrated through knowledge of the role of shareholders and why shareholders may sell or keep shares.

- Explanation of contents and purpose of annual report - legal requirement, sets out company objectives, policies, plans, contains annual accounts and details regarding directors.

- Content of income statement.

- Content of statement of financial position.

- Possible meaning and implications of these two statements.

- Understanding of shareholders' role and possible purposes of holding shares - capital gain or dividend income.

AO2 Application

Limited application, ${ }^{\triangle \mathrm{APP}}$ applies knowledge to CP once.

Developed application, ${ }^{\text {APP }}+{ }^{\text {APP }}$ applies knowledge to CP twice.

Max one APP for application for the first usefulness of the annual report to shareholders and max one APP for application for the second usefulness of the annual report to shareholders.

- CP is a paint manufacturing plc.

- Nanopaints and finance needed, new production line and its cost.

- Static market share and increasing competition in country Q.

- Possible international marketing.

- Use made of information in Table 1.2 including any calculations undertaken.

Calculations might include for 2024 and 2023:

- Operating profit margins: 0.47\% in 2023 and 0.26\% forecast for 2024

- ROCE is forecast to decrease by 0.57% points

- Forecast decrease in operating profit of $\$ 0.18 \mathrm{~m}$

- Forecast decrease in profit for the year of $\$ 0.8 \mathrm{~m}(80 \%)$

- Forecast decrease in dividends payable of $\$ 0.15 \mathrm{~m}(75 \%)$

- Increase in gearing ratio

4(b)

AO3 Analysis

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

Developed analysis L2IAN - candidate shows two or more links in the chain of analysis OR offers a two-sided analysis.

- Development of knowledge and application points in terms of the impact of the annual report on shareholders decision to keep or sell shares.

- Optimistic written section of annual report will encourage shareholders to keep shares, hoping for higher returns in the future to make their investment worthwhile. AN

- CP seems a company with a good future, investing in new products, new production line, considering expansion internationally, so this should lead to higher future sales revenue AN and profits, leading to higher dividends. L2 AN

- Forecasted financial information is not optimistic, which may encourage 'short termist' shareholders to sell shares, due to low expected returns. AN This could drive down the market value of CP. L2/AN

- Analysis of accounting data for two years linked to shareholder decision AN and L2AN if impact on shareholders is developed.

AO4 Evaluation

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

Developed evaluation ${ }^{\text {L2 }}{ }^{\text {Eval }}$ - supported judgement and/or reasonable evaluative comment.

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

- Shareholders hold shares for different reasons: capital gain, income, interest in the company, commitment as owners. Reason will be a factor in decision.

- More information needed to finalise a decision including share price (difficult to forecast), and previous years information to see any trends.

- Objectives of shareholders vital component in decision to sell or not - short-term income seekers more likely to sell, capital seekers less likely as costs in the next year are likely to generate future revenues, committed owners, maybe founders, less likely to sell unless want to realise financial gain.

- Very important factor is timescale - short term sees a deteriorating financial position due to investment that will generate longer term improved figures.

- Key factor is how shareholders perceive the accuracy of the forecast information.

- Longer term forecasts would be extremely useful in making the decision.

- Are shareholders capable of interpreting the report information accurately?

Accept all valid responses.

Refer to Table 1.1. Calculate the payback period for SCC's new factory.

All in $000
(150)+20+40+80=(10)

10/100 $\times 12=1.2$ so 3 years and 1.2 months / 3 years 2 months / 3.1 years / 3 years and 36.5 or 37 days (1)

Refer to Table 1.1. Calculate the accounting rate of return (ARR) for SCC's new factory.

ARR= average profit/average investment $\times 100$

OR where the average investment $=\frac{\text { initial capital cost }+ \text { residual capital value }}{2}$ (Maximum 1 mark, if no valid calculation)

Average investment $=(150 \mathrm{~m}+0) / 2=75 \mathrm{~m}(1)$

OR

Total net cash flow (all $m) = 240 - set-up costs 150 = 90. (1)

90/4 = 22.5. (2)

OR

$22.5 / 75 \times 100(2)$$22.5 / 75 \times 100=30 \%(3)$

Common error - forget to deduct original cost $=240 / 4=6060 / 75 \times 100=80 \%$ (2)

\% not needed for full marks

Alternative formula: average profit / initial investment x 100

22.5 / 150 = 15\% (2)

\% not needed for full marks

Incorrect units, e.g. $30 (2)

Evaluate whether SCC should invest in the new factory.

3(c)

OFR for 3(a) and 3(b)

Indicative content

Responses may include:

AO1 Knowledge and understanding

- Knowledge of IA methods, such as payback, ARR, but also net present value (NPV).

- The new production unit will increase capacity so generic knowledge of capacity utilisation.

- Knowledge of other relevant quantitative or qualitative factors.

AO2 Application

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

Developed application, ${ }^{\text {APP }}+{ }^{\text {APP }}$ applies knowledge to SCC twice

- The new production unit will increase capacity for bespoke items.

- Factories currently operating at 85%.

- The new production unit will also be used to develop the new products made from recycled textile materials.

- There will be a need for more trained employees to make the clothing and these are in short supply.

- It may be possible to promote some trained employees from the original two factories.

- Payback (year 4 ) and ARR is quite high ( 30% ) (OFR here).

- Relies on demand for bespoke items increasing as well as successful market entry into market for clothing made from recycled textiles.

- SCC are intending to take a bank loan to finance the new unit, which will attract interest payments/increase gearing.

3(c)

AO3 Analysis

Limited analysis ${ }^{\mathrm{AN}}$ - candidate shows one link in the chain of analysis.

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

- Development of application points, in terms of the likely advantages and disadvantage to SCC of the new production unit, including impact on costs, reliance on future sales and revenue.

- An increase in capacity is needed if demand increases, as they are working at 85% currently. This will enable SCC to produce more clothing. AN This should lead to higher sales and revenue, as suggested by the forecast figures. L2 AN

- However, it may be difficult to staff the new unit with specialist workers, as they may be hard to find in Country Z. This may mean that Sunil needs to set up his own training sessions, which could be costly.

- Wage rates may also need to be higher, given the scarcity of skilled workers, adding to costs AN and potentially decreasing profits if prices cannot be increased. L2 AN

- Given SCC's current product portfolio, the main products being mass-produced clothing, the marketing mix will need to be changed to target 'environmentally aware' customers, this could add to marketing costs ${ }^{\text {AN }}$ possibly decreasing profits if it takes time to reach these customers and increase sales. L2 AN

AO4 Evaluation

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

Developed evaluation ${ }^{\text {L2 }}$ - supported judgement and/or reasonable evaluative comment.

Developed evaluation in context ${ }^{\left\lfloor 3,{ }^{\text {vat }}\right\}}$ - supported judgement in context and/or reasonable evaluative comment in context.

- Either conclusion rewardable as long as it is justified.

- In the short term, this will be costly ( $ 150000 ) and will the bank be willing to lend?

- How secure may the sales forecasts be, given the economic situation in Country Z and the other export countries.

- There is considerable risk involved, especially in the untried market for recycled clothing. Is Sunil (and family) willing to take the risk?

Accept all valid responses.

Refer to Table 1.1. For 2024, calculate the price earnings ratio.

Indicative content

PE Ratio = Market price per share / earnings per share

= 4.00 / 0.6 = 6.67 (1 mark) Accept 6.7, 6.66

Refer to Table 1.1. For 2024, calculate the return on capital employed.

Indicative content

Responses may include:

ROCE = Profit from operations / Capital employed × 100

and / or capital employed = issued shares + reserves + non-current liabilities (1 mark if no relevant calculation)

CE $=3+13.5+16=32.5 \mathrm{~m}(1)$

ROCE $=2.6 / 32.5 \times 100(2)$

ROCE =8 % (3)

Accept 8 (3)

Other answers and marks:

ROCE for 2023

$2.5 / 30.8 \times 100=8.12 \%(2)$

One element of CE not included (2).

$2.6 / 16.5 \times 100=15.76 \%$$2.6 / 29.5 \times 100=8.81 \%$$2.6 / 19 \times 100=13.68 \%$

OFR

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.