CAIE A-Level Business 5.2 Sources of Finance Question Bank

Explain the term leasing.

Indicative content

Responses may include:

AO1 Knowledge and understanding

- A legal contract to enable the lessee to use an asset in return for a payment.

- The ability to use something for a regular payment/rent.

No further marks can be gained without knowledge and understanding

AO2 Application

A characteristic of leasing, such as;

- The lessee will never own the asset. The asset is always owned by the lessor.

- The lessor is usually responsible for maintenance of the asset.

- The lessor may be responsible for insurance of the asset.

- Allows a business to update their equipment more often.

- An external source of finance.

- Can avoid the finance needed to purchase an asset.

Example of leasing or something that is usually leased by a business.

Accept all valid responses.

Explain one factor that will influence Markus' choice of a source of finance.

Indicative content

AO1 Knowledge and understanding

Knowledge of a factor that may affect the choice of source of finance □:

- Cost of finance

- Flexibility

- Need to retain control

- The use/reason/amount needed

- Level of existing debt/cashflow.

AO2 Application

Limited application □, applies knowledge to Markus/OFD once.

Developed application □ $+\square$ applies knowledge to Markus/OFD twice.

Application of a factor may include:

- OFD is a new business

- OFD will be a private limited company

- Markus will have limited start-up funds

- OFD will operate in a highly competitive market

- Data from Table 1.1

1(b)(ii)

- Answer from Q1b(i) (OFR applies)

- OFD will offer customers one month trade credit

- OFD's suppliers may insist on payment on delivery (immediate payment).

Accept all valid responses.

Exemplar and annotations

A factor would be flexibility □, because OFD needs

Flexibility is a reasonable factor, explained in the $40000 in June but this increases to $114000 by specific context of OFD/Markus by using the data in August 回. Table 1.1.

Markus may want to keep control of OFD, so he

Keeping control is and there are two specific pieces would not want to sell any of the shares of the new of context based on this so two □. private limited company □.

OFD is a new business and Markus has limited

3

Although the appears first, it cannot be awarded start-up funds so the most important factor is how until the has been found. However, there is obvious much debt he already has □. □, so you can go back and award the □.

Markus chose trade credit so that he can have

2

The fact that Markus chose trade credit is irrelevant, inventory which is vital to a new business □. however the use of the source of finance is □. The context of new business linked to this is reasonable, but only one point of application.

How much it costs because the more it costs the

1

Knowledge of a factor. The rest of the answer is not worse his cashflow will get. If the cashflow is poor, he applying it to the context, so ${ }^{\underline{+1+\infty}}$ (Not Answering may build up debts and the business might ultimately Question). fail.

Markus has chosen trade credit, which may mean he

0

Although there is some relevant context, there is no can improve his cashflow in June by reducing the knowledge of a factor, so no marks can be awarded. outgoings by $ 25000. This means that the closing balance will only be ($15000) and mean that he may only need a small overdraft □.

Evaluate whether a bank loan is the most appropriate source of finance for JC's growth.

& &

1(d)

Indicative content

AO1 Knowledge and understanding

Knowledge of Bank loans (max $2{ }^{\kappa} \mathrm{s}$ )

- set amount

- fixed period of time

- fixed interest rate

- requires good credit/reputation

Knowledge of other internal and external sources of finance; (max $2 \square^{\kappa} \mathrm{s}$ )

- retained earnings

- owners investment

- mortgage

- hire purchase

- overdraft

- partner

AO2 Application

Limited application ${ }^{\Delta \text { PF }}$ applies knowledge of appropriateness of sources of finance to DC once. Developed application ${ }^{\text {№ } \text { ® }}$ applies knowledge of appropriateness of sources of finance twice.

- retention of 100\% stake, not a 50\% stake

- $ 25000 investment offered requires a 50% sale of JC

- capital investment to rent business premises/a kitchen, employ staff and invest in promotion

- current gearing ratio of 0

1(d)

AO3 Analysis

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

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

Bank loan as an appropriate source of finance

- retains full control - is able to make investment decisions in his own long term best interest

- keeps all future profits for own benefit - no risk of externals hindering future expansion

- liable for interest and loan repayments - may reduce cashflow which is already poor and will require an alternative short term SoF such as an overdraft or owners investment

Investor as an appropriate source of finance

- loss of complete ownership - may have negative implications on Jake's motivation levels

- ability to control finances would be reduced (as he would have to gain agreement from the investor on any financial decisions) - investor may not want to invest capital on non-owned property

- able to invest to improve marketing/employ staff - no financial repayment risk - all future profits can be reinvested or taken as dividends

Any alternative source of finance compared with the business loan/suitability for JC to be accepted

AO4 Evaluation

Limited evaluation ${ }^{\text {® }}$ - unsupported judgement and/or a weak attempt at evaluative comment

Developed evaluation E - supported judgement and/or reasonable evaluative comment

Developed evaluation in context EE - supported judgement in context and/or reasonable evaluative comment in context.

- does JC need the investment as he was able to keep up with demand, invest in his equipment and as the closing balance is positive and growing each month?

- does Jake have the necessary ability to manage the risk of an external source of finance?

- the most important benefits and drawbacks of a bank loan as a source of finance

- weighing up the objectives and risks of choosing a bank loan

- a judgement on whether a business loan is most appropriate for JC based on the evidence

1（d）

Accept all valid responses．

Bank Loans means a fixed amount of money from the bank but can have high interest rates which would lead to increased costs／outflows ${ }^{\mathrm{AN}}$ and lower profits for the business ${ }^{\text {口ev }}$ which means he will not be able to improve his cash flow issues as shown by the negative cash flow forecast．

Retained earnings can also be another type of source of finance JC can get from its profits．Which means there are no cash outflows required such as when borrowing money．${ }^{\mathrm{aN}}$ This is a method that JC already used for marketing and new equipment ${ }^{\text {月FF }}$ This will allow JC to have a better cash flow but he may not have enough capital to invest into the garage conversion straight away．

A bank loan is the most appropriate method as a source of finance ${ }^{\text {⿴囗大 }}$ as JC requires $ 15000 so he can specifically ask for this amount from the bank to be able to reach its aim for growth．EE

However，this also depends on whether JC is able to take a loan from the bank or not and if so whether the interest rate is affordable E because if it is not affordable then the cost will increase drastically which will further affect the poor cash flow forecast negatively EE