Refer to Table 1. Calculate the forecast profit margin for the reusable bottles.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2020). The mark or mark type is shown in brackets.

1. [2(a) Note] Correct units required for full marks
2. [2(a)] Operating profit = operating profit / sales revenue × 100 (1 mark if no relevant calculations)
3. [2(a)] Operating profit = 390 000 – 290 000 = ($)100 000 (1)
4. [2(a)] 100 000 / 390 000 × 100 = 25.64% or 26% or 25.6% (3)
5. [2(a)] 25.64 or 26 or 25.6 (2)
6. [2(a)] OFR applies
7. [2(b) Note] Correct units required for full marks
8. [2(b)] Gearing ratio = non-current liabilities / capital employed × 100 OR Gearing ratio = NCL / SC × 100 (1 mark if no relevant calculation)
9. [2(b)] Non-current liabilities = $3 m + $0.5 m = $3.5 m (1)
10. [2(b)] Capital employed = $5 m + $0.5 m = $5.5 m (1)
11. [2(b)] Gearing = 3.5 m / 5.5 m × 100 = 63.6% or 64% (3)
12. [2(b)] 63.6 or 64 (2)
13. [2(b)] 3.5 m/2 m = 175% (1)
14. [2(b)] Other possible answers: $3.5 m / $5 m ×100 = 70% (2)
15. [2(b)] $3 m / $5 m × 100 = 60% (1)
16. [2(b)] 0.7 or 0.7:1 (1)
17. [2(b)] OFR applies
18. [2(c) Note] L1 of AN and EVAL if only use results or other information
19. [2(c) Note] OFR applies for results.
20. [2(c) Knowledge] Knowledge of venture capital and venture capitalists: individual(s) who invest typically in high risk / high reward business usually in return for an equity stake
21. [2(c) Knowledge] Knowledge of factors that might be important – commitments that may need to be made to obtain venture capital finance
22. [2(c) Knowledge] General comparison with bank loan finance
23. [2(c) Knowledge] Other factors that might affect choice between VC and loan, e.g. interest rates
24. [2(c) Knowledge] Involvement of VC would spread risk
25. [2(c) Application] Comparison of figures from Appendix 1, Use of results, for example high gearing with bank loan finance, as increases from 60% to 63.64%
26. [2(c) Application] If the venture capitalist was used the gearing would drop to 54.5% (3/5.5 × 100)
27. [2(c) Application] Venture capitalist would be entitled to 30% of annual profits, i.e. $30000
28. [2(c) Application] Encouraging forecast profit margin of 26%
29. [2(c) Application] Possible loss of control over future decisions for Kris and Andy
30. [2(c) Application] Comparison of the $500 000 VC investment with the 30% of profits from the venture
31. [2(c) Analysis] This is a new project and quite high risk as it is a new product, and the investment is relatively significant
32. [2(c) Analysis] Involvement of VC would mean that C4T doesn't need to increase loan finance and consequent increase in debt interest. It eliminates any extra repayments.
33. [2(c) Analysis] Lower gearing ratio leaves company less vulnerable and may be potential for future loan finance
34. [2(c) Analysis] VC may bring expertise which may help the future success of C4T and increase profits
35. [2(c) Evaluation] Balance of evidence between accepting the VC proposal or further bank borrowing
36. [2(c) Evaluation] What are owners' objectives now and for the future? Do they want to share in decision making?
37. [2(c) Evaluation] Does VC have any relevant experience?
38. [2(c) Evaluation] What might be the future for VC finance?
39. [2(c) Evaluation] Accuracy of forecast data?
40. [2(c) Evaluation] Encouraging company progress and growth to date, do they want to share future profits as venture capitalist will take 30%?