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Business Studies · May / June 2016 · Paper 22 · Question 4

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  • 4(a)[8]

    The Government has increased interest rates to reduce inflation. Identify and explain two ways an increase in interest rates might affect FF. [8]

    Knowledge [2 × 1] award one mark for each relevant way identified Analysis [2 × 1] award one mark for a relevant explanation of each way Application [2 × 2] award two application marks for each relevant way Award one mark for each relevant way (maximum of two), such as:

    Decreased demand – as customers have increased mortgage/loan payments
    Increased cost on new loans – less likely to expand
    Increased cost of overdraft – increased expenses/reduced profit
    Increased costs from higher interest repayments – prices of FF services increases/reduces demand. Award a maximum of three additional marks for each explanation – two of which must be applied to this context – of each of these ways. Indicative response: FF will have increased costs from higher interest repayments on new loans (k) therefore price of photographs may have to rise (ap). This may reduce profit if prices cannot be increased or if prices are increased then demand may fall (an). Other guests at weddings can take photographs so the elasticity of demand may be elastic, leading to falling revenue if prices are increased (ap). NB – answer should be clearly related to interest rates increasing and NOT just inflation increasing. Possible application marks: private limited company;

    profitable and grown over last 5 years;

    provides excellent customer service;

    photographs;

    photographers;

    photography;

    getting married;

    weddings, birthdays, family photographs;

    business customers as well as private individuals;

    taking over another photography business;

    growing externally rather than internally;

    business wants to expand further;

    increased minimum wage by 20%;

    pay existing photographers 50% above minimum wage;

    information in Appendix 3. There may be other examples in context which have not been included here.

  • 4(b)[12]

    Thao and Liang need to raise finance to take over another business. Consider the advantages and disadvantages of the following three sources of finance which they could use. Recommend which source of finance Thao and Liang should choose. Justify your answer. [12]

    Relevant points might include: Retained profit

    Cheap form of finance as no interest to pay
    Readily available
    Not repaid
    May not be sufficient funds available
    May reduce dividends to shareholders Issue of more shares
    Lose control if sell more than 50% of shares
    Only sell to family and friends so limited amount of shares sold
    Time consuming
    No interest to pay but shareholders will expect dividends Bank loan
    Repayments in regular amounts/spreads the costs
    Borrow large sums
    Varying lengths of time to repay the loan
    Increased costs as needs to be paid each month – may lead to cash flow problem
    Collateral/security may be required
    Increases gearing Knowledge/Analysis/Evaluation – award up to ten marks using the levels-based mark scheme below. Knowledge/Analysis/Evaluation Level 3 At least 2 × Level 2 + 9–10 marks for well justified recommendation as to the best source of finance to choose compared to the other methods. 7–8 marks for some limited judgement shown in recommendation as to the best source of finance to choose. Level 2 4–6 marks Detailed discussion of the advantages and/or disadvantages of each source of finance. Level 1 1–3 marks Outline of the advantages and/or disadvantages of each source of finance. Level 1 One mark for each L1 statement (max three marks) e.g. No interest to pay on retained profit. Level 2 One × L2 explanation can gain four marks and a further mark can be awarded for each additional L2 explanation (max six marks) e.g. No interest is paid on retained profit. However, there may not be sufficient funds available to finance the takeover. The shareholders will expect a dividend to be paid and if the profit is used for reinvestment then they may not be able to pay this. This may restrict FF in the future and they may not be able to increase their photography service and expand into more business photography. (Four marks for L2 answer + 1 application mark for considering photography services for business.) Level 3 For L3 to be awarded there needs to be at least two L2 marks awarded and then a recommendation which justifies which is the best source of finance to choose. Award up to two additional marks for relevant application. Possible application marks: government increased interest rates;

    private limited company;

    profitable and grown over last 5 years;

    provides excellent customer service;

    photographs;

    photographers;

    photography;

    getting married;

    weddings, birthdays, family photographs;

    business customers as well as private individuals;

    profit for 2015 = $125 000;

    growing externally rather than internally;

    information in Appendix 3. There may be other examples in context which have not been included here.

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