Business Studies · May / June 2023 · Paper 12 · Question 4

0450

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CPF is a clothing retailer. It is a private limited company. It has 4 shops and 30 employees. The Finance Director is concerned about the amount of current assets because working capital is 4 important. The amount of retained profit is also low. CPF’s directors are planning to expand the business by opening a new shop. A suitable source of long-term finance will need to be identified. The plan to expand will affect many of CPF’s stakeholder groups.

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4(a)[2]
Define ‘retained profit’. Award 2 marks for a full definition. Award 1 mark for a partial definition. Profit (left, or) reinvested back into the business, (after all payments have been made) [2]
OR Profit (remaining after all expenses, tax and dividends have been paid), which is ploughed back into the business [2]
Partial definition e.g. profit /money to reinvest [1]
OR profit left after dividends / shareholders paid [1]
Other appropriate responses should be credited. 2 Notes
4(b)[2]
Define ‘current assets’. Award 2 marks for a full definition. Award 1 mark for a partial definition. Items owned by/belong to business and used within one year [2]
OR Resources that the business owns and expects to convert into cash before the date of the next statement of financial position [2]
Partial definition e.g. items in the business for less than one year/12 months/within a financial year [1]
OR assets owned Other appropriate responses should be credited. 2
4(c)[4]
Outline two possible reasons why working capital is important for CPF. Award 1 mark for each relevant reason (max 2). Award 1 mark for each relevant reference to this business (max 2) Points might include:
To pay day-to-day expenses/(short term) debts or examples such as pay wages [k] for its 30 employees [app]
To pay for unexpected expenses/emergencies [k] especially as the business is looking to expand [app]
To ensure the business has a good credit reputation [k] for the 4 shops [app]
Ensures the business can take advantage of special offers/discounts on bulk purchases [k] of its clothes [app]
To cope with seasonal demand [k] Other appropriate responses should also be credited. 4 To use words from the stem as application, the reference must be appropriate (i.e. make sense) in relation to the point being made. The following words are likely to be appropriate for this question:
(4)
shops/retailer/stores
30 (employees)
Clothes
Private limited company
Plans to expand
Retained profit is low Other appropriate examples can be credited. Notes
4(d)[6]
Explain one way each of the following stakeholder groups might be affected by CPF’s plans to expand its business. Award 1 mark for identification of each relevant way (max 2). Award 1 mark for each relevant reference to this business (max 2). Award 1 mark for each relevant explanation (max 2). Points might include: Employees:
Opportunities for promotion [k] for the 30 employees [app] so may be able to benefit from higher wages [an]
Work extra hours [k] at the new shop [app] so gain extra payments/which may lead to mistakes [an]
Greater variety/different tasks/work to do [k] making the work more interesting/less boring for them [an]
More job security [k] increasing motivation [an]
Employees may have to move location [k] so long time to get to work/travel costs increase [an] Suppliers:
Additional orders/sales/produce more [k] of clothing [app] leading to additional revenue [an]
Security/certainty of regular orders [k] so able to plan effectively [an]
May struggle to meet extra demand [k]
May have to distribute goods to a new area [k] increasing transport costs [an] Other appropriate responses should also be credited. 6 To use words from the stem as application, the reference must be appropriate (i.e. make sense) in relation to the point being made. The following words are likely to be appropriate for this question:
(4/new) shops/retailer/stores
30 (employees)
Clothes
Private limited company
Low retained profit Other appropriate examples can be credited. Some points can be [k] or [an] but only award once. Notes
4(e)[6]
Do you think it is better for a private limited company to use debt (e.g. a loan) or equity (issuing more shares) as a source of long-term finance? Justify your answer. Award up to 2 marks for identification of relevant points. Award up to 2 marks for relevant development of points. Award up to 2 marks for a justified decision as to whether it is better for a limited company to use debt (e.g. a loan) or equity (issue shares) as a source of long-term finance. Points might include: Debt:
May be difficult to raise additional finance [k] if banks/suppliers concerned about its ability to repay existing loans [an]
No change of ownership [k] so lenders have no say in decisions [an]
Can receive all the money at once/at the same time [k]
Must pay interest [k] which increases costs/cash flow problems [an]
Need to repay [k]
Need security [k] which can lose if unable to repay debt [an] Equity/issue shares:
No interest/finance costs to pay [k] so no extra cash outflows [an]
Permanent source of capital/no need to repay [k]
Can only sell to friends and family/small number of shareholders [k] which can limit the amount of capital raised [an]
Dividends expected/paid to shareholders [k] so less retained profit [an]
Give up some ownership [k] Other appropriate responses should also be credited. 6 This is a general question so there are no marks for application. Some points could be written as either advantages or disadvantages of different sources but only award once. Some points can be written as [k] or [an] but only award a point once. Notes Justification might include: Using debt may be difficult to raise additional finance [k] if banks are concerned about its ability to repay existing loans [an]. Selling shares means no interest [k] so no extra cash outflows [an]. Equity is better because if the business has financial difficulties debt is still expected to be repaid [eval] which increases the risk of the business failure. [eval]

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