A-LevelBusiness StudiesFinance and accounting9609/31 · May/June 2017 · Q418 Marks

Accounting decisions The Appendix contains a summary of TTC's accounts for the year to 31 May 2017. The Finance Director wants to improve liquidity, reduce gearing and increase recorded profitability over the next financial year. He has already decided to delay payments to all suppliers by an additional month. He has to decide whether to make the changes shown in Table 3 during the next financial year. Table 3: Finance Director's decisions Proposed change: Planned initial impact on accounts: 1. Reduce the dividend payment from $12m to $6m. Increase cash and retained earnings 2. Sell and leaseback the premises of 10 TTC travel agencies (non-current assets) for $15m to a property company that is keen to buy them. The cash received could pay off some long term loans. Reduce gearing ratio Appendix: Summary of TTC accounting data Income statement summary (year ending 31 May 2017) Statement of financial position summary (as at 31 May 2017) Revenue $346m Non-current assets $138m Gross profit $58m Current assets including: Inventories $17m $2m Non current liabilities $75m Profit for year $23m Capital employed $135m Dividends $12m Total shares issued 12m Retained earnings $11m Current market share price $10 (a) Refer to the Appendix. Calculate: (i) gearing ratio (ii) dividend yield. (b) Discuss the likely impact on TTC's shareholders if the two changes referred to in Table 3 are made during the next financial year.

(a)(i)gearing ratio[3]
(a)(ii)dividend yield.[3]
(b)Discuss the likely impact on TTC's shareholders if the two changes referred to in Table 3 are made during the next financial year.[12]

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Mark scheme

Marking points from the official mark scheme (May/June 2017). The mark or mark type is shown in brackets.

[Calculation (a)(i)] (Non-current liabilities / Capital employed) × 100
[1 for (a)(i)] $75m / $135m × 100
[3 for (a)(i)] 55.6%
[Calculation (a)(i) Alt] (Non-current liabilities / shareholders equity) × 100
[1 for (a)(i) Alt] $75m / $60m × 100
[3 for (a)(i) Alt] 125%
[Calculation (a)(ii)] (dividend per share / market share price) × 100
[1 for (a)(ii)] Dividend per share = 12 ÷ 12 = 1
[1 for (a)(ii)] (1 / 10) × 100 = 10
[3 for (a)(ii)] 10%
[Knowledge (b)] Gearing - measures financial risk being taken and this falls substantially with this decision
[Application (b)] Proposed that dividend be reduced by $6m (50%)
[Application (b)] $15m received for travel agencies could reduce long term loans from $75m to as little as $60m
[Analysis (b)] Both moves could help with financing of the proposed new expansion option – by making company appear less risky and more liquid in terms of cash held and acid test
[Analysis (b)] Shareholders – retained profit will increase and this might be available for future dividends (if in cash) or for assisting in financing the expansion options – which should lead to business growth and future profits
[Analysis (b)] Reduced gearing ratio will cut interest costs and potentially increase net profit
[Evaluation (b)] Shareholders – might be concerned by sale of existing assets – was the right price obtained for them? Are the proceeds going to be invested successfully?
[Evaluation (b)] Short term impact on shareholders is negative as dividends reduced

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