(a) Refer to Tables 2 and 3. Calculate HD's:

Mark scheme

Marking points from the official mark scheme (May/June 2022). The mark or mark type is shown in brackets.

1. [1] ROCE = operating profit / capital employed × 100
2. [1] OR
3. [1] Capital employed = equity + non-current liabilities + reserves
4. [1] OR
5. [1] non-current assets + current assets – current liabilities (1 if no rewardable calculation)
6. [2] Capital employed = 4 + 10 + 10 = 24
7. [3] ROCE = 8 / 24 × 100
8. [4] = 33.3(%)
9. [3] 8 / 14 × 100 = 57(%) (if correct equation stated)
10. [3] 8 / 20 × 100 = 40(%) (if correct equation stated)
11. [2] Any other answer that is 8 / y × 100 is 2 marks if correct equation for ROCE is also stated.
12. [0] OFR
13. [1] Non-current liabilities (NCL) / shareholder equity × 100
14. [1] OR
15. [1] debt / shareholder equity × 100 (1 mark if no rewardable calculation)
16. [1] shareholder equity = 10 + 10 = 20
17. [1] NCL / capital employed × 100 (1 mark if no rewardable calculation)
18. [1] Capital employed = 4 + 10 + 10 = 24
19. [2] Gearing = 4 / 24 × 100
20. [3] = 16.7% or 17%
21. [2] Gearing = 4 / 20 × 100
22. [3] = 20%
23. [0] Note: If candidate uses incorrect capital employed figure from 4(a)(i) then OFR applies and candidate can still gain full marks.
24. [1] Maximum of 1 mark for any of the following
25. [1] Profit after tax / dividends payable
26. [1] Profit after tax = 8 - 4 = 4
27. [1] Dividend cover = 8-4/4 = 4/4
28. [2] Two marks for dividend cover = 1
29. [1] Other answer
30. [1] Operating profit / Dividends paid: 8 / 4 = 2
31. Joint venture – two or more businesses agree to work closely together on a particular project and create a separate business division to do so.
32. Factors in the decision
33. Impact on profitability
34. Financing
35. Gearing ratio
36. Business objective
37. Investment appraisal results
38. Core competency
39. Liquidity
40. Impact on employees
41. Making use of the business context:
42. Circuit boards/software – HD core competence
43. Niche market – limited sales opportunity
44. Two year estimated life – short
45. MW idea, HD develop and market, MW manufacture so capacity utilisation not an issue
46. Use of information from Tables 2 and 3
47. profit after tax $4 m – finance available?
48. Gearing is low at 16.7% – link to finance
49. Liquidity - current ratio is high at 5:1 – link to finance
50. Reference to forecast profit/profitability of venture (HD Revenue $5 m, profit $0.5). Profitability of 10%. Contrast with current operating profit margin of 20%
51. One marketing employee - link to HD's role in marketing the product
52. High labour turnover of design engineers – link to capacity to take on extra design work
53. Building of chains of arguments relating to advantages and/or disadvantages of joint venture
54. Low capital cost so easily affordable
55. Comparison of existing company profitability (20%) to forecast profitability for the joint venture (10%) per year.
56. Small but significant % of HD revenue and profits. If revenue for 2022-June 2023 stays same as for 2021-22 joint venture will contribute 11.1% revenue and 5.9% profits.
57. Proposal matches HD core competencies so more likely to be successful
58. Development requires resources from HD – employee time in particular. This could be a problem with only one marketing employee
59. Niche market implies low sales, possibly high competition
60. Does MW have the ability/skills to manufacture the new product?
61. New project could motivate employees
62. No detailed relevant financial data available yet
63. Accuracy of forecasts on revenue and operating profit?
64. Reliance on another business for the project success.
65. Only award EVAL if the candidate has also demonstrated APP.
66. A justified recommendation to accept or not
67. A justified recommendation to explore the proposal and acquire more information
68. The project may open up new markets so is worthwhile if it covers costs.
69. HD need to act to solve increasing problems.
70. Is the forecast financial data accurate enough to make a decision?
71. Does the financial forecast indicate enough revenue to make project worthwhile?
72. Does HD need MW to target this niche?