Refer to Table 1.2. Calculate the gearing ratio for 2023.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2023). The mark or mark type is shown in brackets.

1. [1] (a) Formula: Gearing = NCL / CE × 100
2. [1] (a) Calculation of Capital Employed (CE = Shareholders' Equity + NCL OR CE = 110m + 100m = 210m)
3. [1] (a) Correct substitution/method: 100m / 210m × 100
4. [1] (a) Final answer: 47.62% OR 47.6% OR 48%
5. [1] (b) Understanding of gearing ratio.
6. [1] (b) Understanding of new share issue as a source of finance.
7. [1] (b) Understanding of bank borrowing as a source of finance.
8. [1] (b) Meaning of dividend yield ratio.
9. [1] (b) Investment needed is $15m will increase forecast gearing from 47.62% to 51.11% which would be considered high.
10. [1] (b) NCL is $100m.
11. [1] (b) Current dividend yield is 31.25%, a good return for investors.
12. [1] (b) The dividend cover ratio is 1.71, HP well able to afford dividends.
13. [1] (b) Interest rates are likely to be increasing, this will mean bank borrowing is more expensive.
14. [1] (b) Profit for the year is $12m and dividend paid is $7m so retained profit is $5m.
15. [1] (b) Profit for the year margin is 12/95 × 100 = 12.63%.
16. [1] (b) The modernisation will lead to higher output of organic pet food in the future and higher sales revenue and profit.
17. [1] (b) The current dividend yield is relatively high which would support decision to issue shares as it would encourage investors to buy shares thus raising the finance and making the share issue a success.
18. [1] (b) Dividend cover ratio indicates that HP can afford current level of dividends and suggest good dividends in future, may encourage investors.
19. [1] (b) Bank borrowing will mean paying interest, so cost is potentially greater than a share issue but gearing is below 50% so banks may be willing to lend to HP not seen as high risk.
20. [1] (b) Analysis of factors influencing decision other than financial data.
21. [1] (b) A new share issue will take more time to arrange than bank borrowing, potentially delaying the modernisation project.
22. [1] (b) Supported judgement as to whether the financial data will/will not enable decision to be made about source of finance: Retained profit appears insufficient as profit for the year is $12m and dividends paid is $7m so $5m of retained profit might be available but this could have been used already. Seems highly unlikely that there is insufficient retained profit for the investment.
23. [1] (b) Gearing is only just below 50% suggesting a degree of risk in further borrowing of $15m. This may favour a new share issue to keep gearing below 50%.
24. [1] (b) Attitude of directors to risk will be significant.
25. [1] (b) Whether to issue new shares may depend on whether this might make HP a takeover possibility.
26. [1] (b) Likely increase in interest rates important as it will increase cost of borrowing making a bank loan less attractive. However, HP may be able to negotiate a loan before this change in monetary policy.
27. [1] (b) Evana's influence as CEO.