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Business Studies · May / June 2023 · Paper 21 · Question 4

0450

As printed in the paper

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  • 4(a)[8]

    Explain, using an example, one reason why VP might need:

    short-term finance
    long-term finance. One mark for reason for short-term/long-term finance (max 1). Award a maximum of three additional marks for the explanation of the reason why VP needs short-term/long-term finance, one of which must be in context, and one must include an example. Answers for short-term finance might include:
    To provide working capital for the business – so that day-to-day expenses can be paid for – an overdraft may be suitable as it is only used if needed/potentially reducing interest paid
    To prevent cash-flow problem/improve the cash position of the business – by taking short-term bank loan – this will provide finance for a short time to overcome the potential shortage of cash and increase liquidity For example: To provide working capital for the business (1)

    so that day-to-day expenses can be paid for (1). An overdraft may be suitable as it is only used if needed which potentially reduces the interest to be paid (1)

    when buying food ingredients for the restaurants (app). Answers for long-term finance might include:

    To purchase long-term non-current assets – as these assets are likely to be very expensive – so a long-term bank loan may be suitable as it is repaid over a long period of time reducing the amount of monthly repayments/outflows each month
    To expand the business – which requires a large amount of money in order to grow – the issue of shares will not incur interest payments
    To update the business – often involves new technology which is expensive – so payments may need to be spread over a long period of time such as with a lease For example: To expand the business (1)

    as VP is planning to expand in another country (app) which requires a large amount of money to grow (1). VP might choose to issue new shares which will not incur interest payments (1). Application could include: fast food;

    restaurant;

    vegetarians;

    meals;

    public limited company/shareholders;

    food outlets across the country;

    diners;

    500 restaurants;

    25 000 employees;

    ingredients;

    expand into another country.

  • 4(b)[12]

    Using Appendix 3 and other information, consider how the following three changes in country Z may affect VP. Which change is likely to have the greatest effect on VP's profits? Justify your answer.

    Increase in interest rates.
    Depreciation of country Z’s exchange rate.
    New legal controls which require all restaurants to list the ingredients in their meals. Level Description Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of two or more changes. Well- justified conclusion. Candidates discussing all three changes in detail, in context and with well-justified conclusion including why the alternative changes are rejected should be rewarded with the top marks in the band. 9–12 Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one change. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more changes in detail and applying them to the case should be rewarded with the top marks in the band. 5–8 Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the changes with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining all three changes in context should be rewarded with the top marks in the band. 1–4 No creditable response. Relevant points might include: Increase in interest rates
    Higher fixed costs from interest paid if bank loan taken out for expansion of the restaurant chain in another country – likely to lead to lower profit
    Customers may buy fewer meals due to interest rates being increased for 3% to 5% to be paid on borrowing leaving less money to spend leading to reduced revenue for VP
    As VP is a public limited company it is large and may enjoy financial economies of scale – leading to relatively lower interest rates charged on bank loans than smaller businesses – reducing the impact of the interest payable on the loans
    Increased interest received on any reserves held by VP – increase income into the business – leading to an increase in profit Depreciation of country Z exchange rate
    Imported food ingredients will now cost more – leading to higher variable costs – possibly lower profit margin/higher prices
    Increased cost of imported ingredients may lead to VP changing to purchase from local suppliers - however the quality may be lower
    When VP has expanded to another country and set up new restaurants profits sent back to country Z will exchange for a higher amount of country Z currency – but capital needed for expansion will exchange at a lower rate – higher investment needed Introduction of new legal controls that require all restaurants to provide information about the ingredients in their meals
    Increased costs of rewriting all menus – time taken to work out and list all the ingredients in meals – will need to be repeated every time a new meal is added to the menu – increases costs both in the short-run and possibly the long- run – reducing profit
    If VP wants to keep the same mark-up on costs – may lead to increased price of meals –– may lead to lower demand/lower sales – reduced profit
    All restaurants will have the same costs – so competitiveness may not change
    May attract different target market who didn’t appreciate the ingredients used by VP – as these are now listed on menus - may increase sales Conclusion of which is likely to have the greatest effect on profits Justification may include:
    Increase in interest rates will have the greatest effect on profit because VP will need to take out large bank loans to finance the expansion in another country leading to a large increase in costs from the interest payable which will reduce VP profits. Depreciation will have little effect as ingredients are only a small proportion of costs and only 30% of ingredients are imported. The new legal controls will have little effect on profit as these are a relatively small cost and the menus are printed regularly anyway when the menus change with the new meals.
    Depreciation of the exchange rate of country Z will have the greatest effect on profit as 30% of food ingredients are imported. This will lead to a large increase in variable costs which will reduce gross profit and then profit for VP.
    New legal controls that require all restaurants to provide information about the ingredients in their meals will have the greatest effect on profit as menus will have to all be reprinted every time a new meal is developed. As VP do this regularly to encourage customers to return so they do not get bored with the same meals it will result in a regular increase in costs and therefore a reduction in profit.
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