Using the data in Table 1.2, calculate the dividend cover for 2024. Evaluate whether PAIR should increase dividends to shareholders in 2025.

Mark scheme

Marking points from the official mark scheme (May/June 2025). The mark or mark type is shown in brackets.

1. [1] Relevant dividend cover formula: Dividend cover = profit for the year/dividend paid
2. [1] Profit for the year = operating profit – interest and tax OR Profit for the year = 10.4 m – 6.4 m = $4 m
3. [1] Dividend cover = 4 / 0.56
4. [1] = 7.14 OR 7.1 OR 7 (times)
5. A01 Knowledge and understanding
6. [1] Shareholders provide capital for the business.
7. [1] Dividends are the reward for risking investment in the business.
8. [1] Knowledge of relevant shareholder ratios including dividend cover and dividend per share.
9. Reasons for increasing dividends
10. [1] To attract future investors.
11. [1] Keep existing shareholders happy.
12. Reasons for not increasing dividends
13. [1] Lack of profits.
14. [1] Lack of working capital
15. [1] Future growth plans.
16. AO2 Application
17. Limited application, APP applies knowledge to PAIR once.
18. Developed application, APP + APP applies knowledge to PAIR twice.
19. [1] Dividend cover has increased significantly from 3.2 in 2023 to 7.1 in 2024.
20. [1] Revenue and profits have increased.
21. [1] Increase in OPM from 9% to 10.95%.
22. [1] Possible flotation of PAIR on stock market.
23. [1] Liquidity problems suggested by deterioration in current ratio.
24. [1] Gearing has increased by 5% points.
25. [1] PAIR's commitment to R&D expenditure.
26. [1] Shareholder dissatisfaction with dividends.
27. AO3 Analysis
28. Limited analysis AN - candidate shows one link in the chain of analysis.
29. Developed analysis L2 AN - candidate shows two or more links in the chain of analysis.
30. [1] PAIR may wish to raise finance for expansion by going public. It is therefore important to attract potential investors to invest AN This can be achieved by increasing dividends to make share ownership more financially attractive and increase the initial share price offer. L2 AN
31. [1] The dividend cover has increased from 3.2 to 7.14 which indicates that PAIR can afford to pay more dividends to shareholders AN
32. [1] The current ratio is only 0.8:1 indicating that PAIR may be unable to pay its short-term liabilities and therefore faces a potential liquidity crisis AN therefore PAIR cannot afford to pay higher dividends to shareholders as it will put further strain on its working capital. L2 AN
33. AO4 Evaluation
34. Limited evaluation EVAL limited supported judgement and/or a weak attempt at evaluative comment.
35. Developed evaluation L2 EVAL supported judgement and/or reasonable evaluative comment.
36. Developed evaluation in context L3 EVAL supported judgement in context and/or reasonable evaluative comment in context.
37. [1] Justified conclusion whether PAIR should pay higher dividends.
38. [1] Can't afford to due to limited working capital.
39. [1] Kaarina owns 70% of shares so she can ignore other shareholders.
40. [1] Continued investment in R&D is essential to maintain PAIR's leading market share therefore need to keep retained profits high.
41. [1] Supported judgement as to the most important factor in the decision.
42. [1] Financial data is limited for making the decision.
43. [1] Attitude and goals of Kaarina is critical to the decision as she is the major shareholder. She appears to be more interested in other goals rather than maximising her short-term returns.