CAIE A-Level Business 10 Advanced Finance and Accounting Question Bank

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

Using the data in Table 1.2, calculate the forecast dividend cover ratio for 2024.

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.

Indicative content

Refer to Table 1.1. Calculate the net present value (NPV) of the new grinding machine.

Indicative content

Evaluate whether GBS should purchase the new grinding machine.

Level

AO2 Application 2 marks

AO3 Analysis 2 marks

AO4 Evaluation 6 marks

3

5-6 marks

Developed evaluation in context

- A developed judgement/conclusion is made in the business context.

- Developed evaluative comments which balance some key arguments in the business context.

2

2 marks
Developed application of relevant point(s) to the business context.

2 marks
Developed analysis that identifies
connections between
causes, impacts and/or
consequences.

3-4 marks

Developed evaluation

- A developed judgement/conclusion is made.

- Developed evaluative comments which balance some key arguments.

1

1 mark

Limited application of relevant point(s) to the business context.

1 mark
Limited analysis that identifies
connections between
causes, impacts and/or
consequences.

1-2 marks

Limited evaluation

- A judgement/conclusion is made with limited supporting comment/evidence.

- An attempt is made to balance the arguments.

0

0 marks

No creditable response.

0 marks

No creditable response.

0 marks

No creditable response.

3(c)

Indicative content

A01 Knowledge and understanding

Limited knowledge K will be demonstrated through knowledge of one factor in the decision.

Developed knowledge K+K will be demonstrated through knowledge of two or more factors in the decision.

- Understanding of investment appraisal methods - NPV, ARR, payback period.

- Understanding of possible qualitative factors in investment decision - business attitudes, risk, impact on stakeholders, external factors, consistency with business objectives/strategy availability of finance.

AO2 Application

Limited application, ${ }^{\triangle P P}$ applies knowledge to GBS once.

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

- Requirement for skilled operator.

- Loan finance is available.

- Use of data in Table 1.1 from manufacturer and Mo's experience.

- Impact on unit costs.

- Use of answers to Q3(a) and 3(b) (OFR applies).

- NPV is positive $ 22000.

- ARR is 16.4%.

- Payback and is in 4th year, 3 years and 10.3 months or 3.86 years.

- Discounted payback is 4 years 3.5 months or 4.29 years.

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.

- Payback is within the 4th year so the investment is forecast to be profitable AN and therefore potentially worth investing in L2AN.

- NPV is positive and should therefore be considered as a worthwhile investment AN.

- GBS may need to finance the investment through borrowing which will increase the gearing of GBS AN and this increases risk for shareholders L2AN.

- The investment would enable GBS to meet the increasing demand for its products and therefore potentially increase profit AN.

- The grinding machine would decrease unit costs and therefore GBS could set lower prices AN which should result in an increase in demand L2AN.

- NPV (positive) and ARR is higher than 5% cost of finance indicating GBS should go ahead AN.

AO4 Evaluation

Limited evaluation ${ }^{\text {гval }}$ - 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 ${ }^{\lfloor 3 \text { rwa }\rfloor}$ - supported judgement in context and/or reasonable evaluative comment in context.

- Data and investment appraisal methods strongly support the purchase but are the figures accurate and reliable?

- Is a 5 -year life realistic? Can data over a 5 -year future period be relied on?

- Qualitative factors may be as or more important than calculations.

- May not be reliable or accurate - can the manufacturer's data be relied on? They are trying to make a sale so data may be optimistic plus Mo has not done any market research or research into cost savings (relied on experience).

- Are there any other possible investments or changes that will meet GBS's needs? Little evidence of other possibilities other than the bullet points in last section - might finance be better spent on one of these?

- Can GBS afford another course of action as well as the purchase if it goes ahead?

- These points support the conclusion that more detailed research into sales and cost savings including checking the existing data is needed before making a decision.

- Is there a time scale for making the decision?

- Are there other possible ways for growth to occur? Need to investigate before deciding.

- In view of other possible options/actions in the case more research would be justified before deciding.

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.