Refer to Table 1. Calculate for 2021 the:

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2021). The mark or mark type is shown in brackets.

1. [4] ROCE = profit / capital employed × 100 (1) Allow net, operating, profit or profit for the year
2. [4] Profit = 84 – (44 + 36) = $4m (1)
3. [4] Capital employed = 40 + 25 = $65m (1)
4. [4] ROCE = 4 / 65 × 100 (3)
5. [4] ROCE = 6.15% OR 6.2% OR 6.15 OR 6.2 (4) Allow 6.1% (4)
6. [4] Other answers with errors: relevant working MUST be shown. Allow appropriate rounding.
7. [4] 40 / 65 x 100 = 61.54% (3) Expenses not included in calculating profit
8. [4] 2 / 65 × 100 = 3.08% (3) Dividends subtracted from operating profit
9. [4] 4 / 25 x 100 = 16% (3) NCL not included in CE
10. [4] 4 / 40 x 100 = 10% (3) Shareholder equity not included in CE
11. [4] 0.062 OR 0.0615 (3)
12. [4] 0.62 OR 0.615 (2)
13. [4] If no relevant calculation, 1 mark in total can be awarded for any relevant formula from: ROCE = profit / capital employed × 100 Profit = revenue – costs Capital employed = NCL + shareholder equity
14. [4] OFR
15. [3] Gearing = non-current liabilities / capital employed × 100 (1)
16. [3] Capital employed = $65m (1)
17. [3] Gearing = 40 / 65 × 100 (2)
18. [3] Gearing = 61.54% OR 61.5% OR 62% (3) Allow 61% (3)
19. [3] 0.62 OR 0.615 (2) Allow 0.61 (2)
20. [3] Alternative answer Gearing = non-current liabilities / shareholder equity × 100 (1)
21. [3] Gearing = 40 / 25 × 100 (2)
22. [3] Gearing = 160% (3)
23. [3] 1.6 (2)
24. [3] OFR for capital employed from previous question should be allowed.
25. [3] OFR
26. [2] Current Ratio = Current Assets / Current Liabilities OR 3 / 2 OR 3:2 (1)
27. [2] 3/2 = 1.5 OR 1.5:1 (2)
28. [Level 2 Knowledge 2 marks] 2 marks Two relevant points
29. [Level 2 Application 2 marks] 2 marks Two points applied
30. [Level 2 Analysis 4 marks] 3-4 marks Good use of theory and/or reasoned argument to analyse approach
31. [Level 2 Evaluation 4 marks] 3-4 marks Good judgement shown, e.g. well supported conclusion
32. [Knowledge] Definition of PLC – a business whose shares can be bought by the public.
33. [Knowledge] Relevant factors in the decision to go public: Selling shares raises capital for expansion.
34. [Knowledge] Relevant factors in the decision to go public: Capital is permanent and there is no interest to pay.
35. [Knowledge] Relevant factors in the decision to go public: Payment of dividends from profits.
36. [Knowledge] Relevant factors in the decision to go public: Cost of going public – legal, banking and issuing prospectus.
37. [Knowledge] Relevant factors in the decision to go public: May dilute control of the business.
38. [Knowledge] Relevant factors in the decision to go public: Alternative sources of finance available.
39. [Knowledge] Relevant factors in the decision to go public: Gearing of AC.
40. [Knowledge] Relevant factors in the decision to go public: Increased threat of takeover.
41. [Knowledge] Relevant factors in the decision to go public: Greater scrutiny (financial publication).
42. [Application] AC's ROCE of 6.2% as attraction or not for shareholder interest.
43. [Application] AC is a private limited company which limits ability to raise finance through share issue.
44. [Application] Attitude of Omar and family. Omar controls the business currently and centralised organisational structure.
45. [Application] Implications of high gearing of 61.54% (or OFR) for future expansion.
46. [Application] Retained profit only $2m, link to expansion.
47. [Application] Reference to specific expansion plans, e.g. entering consumer fitness market, fitness market in country P (cost of $15m) and diversification by opening fitness centres (cost of $20m).
48. [Application] Interest rates set to increase from 6% to 8%. Link to borrowing and/or ROCE.
49. [Application] Good return for shareholders currently. $2m dividend out of operating profit of $4m.
50. [Analysis] Finance can be raised for expansion and will not have to be repaid. If profits are low, then directors can choose not to pay a dividend to shareholders, aiding the liquidity of AC.
51. [Analysis] Increases possibility of hostile takeover if business performance is unsatisfactory. Risk to Omar and family of losing control of the business.
52. [Analysis] Contrast going public with alternative means of raising finance such as debt finance. Debt finance includes payment of interest which will reduce profits available from which to pay dividends.
53. [Analysis] The actual public issue is expensive as shares need to be advertised using a prospectus. There are also legal, accounting and administration costs involved. Need to compare this with possible interest to be paid on bank loans.
54. [Analysis] AC is highly geared which suggests risk in further borrowing as there will be relatively high interest to pay on finance.
55. [Evaluation] Decision on whether to convert to a plc with supporting business reasoning.
56. [Evaluation] Justification of most important factor affecting this decision.
57. [Evaluation] Elements that the evaluation/judgement might depend on: Whether AC can raise sufficient finance for the future expansion from other sources.
58. [Evaluation] Elements that the evaluation/judgement might depend on: The importance to Omar's family of retaining control of AC. Omar's family will have the final say.
59. [Evaluation] Elements that the evaluation/judgement might depend on: Whether payment of dividends will be made in future as they are not guaranteed. AC may wish to retain more profit for expansion options.
60. [Evaluation] Elements that the evaluation/judgement might depend on: The accuracy of investment appraisal data.
61. [Evaluation] Elements that the evaluation/judgement might depend on: Other external factors such as the economic environment.
62. [Evaluation] Elements that the evaluation/judgement might depend on: Going public may not raise sufficient funds if there is limited demand for the shares.
63. [Evaluation] ARA