Refer to Table 3. Calculate for 2021 the: gearing ratio

Mark scheme

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

1. [1] (a)(i) gearing ratio formula: non-current liabilities / (shareholders' equity + NCL) × 100 OR debt / (debt + equity) × 100 OR long-term liabilities / capital employed × 100.
2. [1] (a)(i) Shareholders' equity + NCL = 2 + 3.5 + 12 = ($)17.5(m).
3. [3] (a)(i) Gearing = 12 / 17.5 × 100.
4. [4] (a)(i) Gearing = 68.57% OR 69%.
5. [1] (a)(i) gearing ratio formula: debt / equity × 100.
6. [3] (a)(i) Gearing = 12 / 5.5 × 100.
7. [4] (a)(i) Gearing = 218.18% OR 218%.
8. [3] (a)(i) 12 / 17.5 = 0.6857.
9. [3] (a)(i) 12 / 14 × 100 = 85.7%.
10. [2] (a)(i) 0.857.
11. [3] (a)(i) 12 / 15.5 × 100 = 77.4%.
12. [2] (a)(i) 0.774.
13. [3] (a)(i) 12 / 2 × 100 = 600%.
14. [2] (a)(i) 6.
15. [3] (a)(i) 12 / 3.5 × 100 = 342.9%.
16. [2] (a)(i) 3.429.
17. [3] (a)(i) 2020 gearing = 9 / 13.5 × 100 = 66.7%.
18. [OFR] (a)(i) OFR applies.
19. [1] (a)(ii) current ratio formula: current assets / current liabilities.
20. [1] (a)(ii) Current assets = 0.7 + 1.1 = ($)1.8m.
21. [2] (a)(ii) CR = 1.8 / 3 = 0.6 or 0.6:1.
22. [1] (a)(ii) 0.7 / 3 = 0.23.
23. [1] (a)(ii) 1.1 / 3 = 0.37.
24. [1] (a)(ii) 0.6m.
25. [1] (a)(ii) 2020 CR = 0.8 / 4.5 = 0.18.
26. [OFR] (a)(ii) OFR applies.
27. [1] (a)(iii) dividend cover formula: profit for the year / total dividend.
28. [1] (a)(iii) 1.5 / 0.5.
29. [2] (a)(iii) = 3 times.
30. [OFR] (a)(iii) OFR applies.
31. [1] (b) (Knowledge) Meaning of converting to plc – shares publicly available on a stock exchange.
32. [1] (b) (Knowledge) Factors in the decision: Raising finance from shareholders as a plc.
33. [1] (b) (Knowledge) Greater divorce between ownership and control of business as a plc.
34. [1] (b) (Knowledge) Dilution of control as plc.
35. [1] (b) (Knowledge) Risk of takeover increased as plc.
36. [1] (b) (Knowledge) Plc status and link to long term growth of business.
37. [1] (b) (Knowledge) Share capital is a permanent form of finance.
38. [1] (b) (Knowledge) Reference to financial information and ratios e.g. gearing.
39. [1] (b) (Knowledge) Pressure from shareholders to pay dividends.
40. [1] (b) (Knowledge) Cost of going public – legal, banking and issuing prospectus.
41. [1] (b) (Knowledge) Alternative sources of finance available.
42. [1] (b) (Knowledge) Gearing of UBH.
43. [1] (b) (Knowledge) Greater scrutiny (financial publication).
44. [1] (b) (Application) Current gearing is high (above 50%). Link to expansion plans.
45. [1] (b) (Application) Further borrowing for expansion and predicted increase in interest rates.
46. [1] (b) (Application) Application of changes to financial performance e.g. improving profitability and liquidity.
47. [1] (b) (Application) Dividends were paid in 2020 despite making a loss.
48. [1] (b) (Application) There are only three shareholders currently.
49. [1] (b) (Application) Profit and liquidity are weak.
50. [1] (b) (Application) Business is relatively new – only founded in 2018.
51. [1] (b) (Analysis) Gearing high so expansion funded by borrowing would potentially be difficult as banks may consider the business too risky.
52. [1] (b) (Analysis) Finance can be raised for expansion and won't have to be repaid. If profits are low, then directors can choose not to pay a dividend to shareholders aiding the liquidity of UBH.
53. [1] (b) (Analysis) Risk of takeover increased if plc thus Amit could lose control of the business.
54. [1] (b) (Analysis) As a plc increased tension between shareholders wanting dividends and short-term profit versus the long-term success of UBH that Amit may be more concerned about.
55. [1] (b) (Analysis) Amit ambitious for UBH and plc conversion could fund his plans for expansion.
56. [1] (b) (Analysis) Borrowing for expansion can result in greater reward for Amit and other shareholders.
57. [1] (b) (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.
58. [1] (b) (Evaluation) Short/long-term impact on shareholders and the business.
59. [1] (b) (Evaluation) Elements that the evaluation/judgement might depend on: Attitude of Amit and the other two shareholders towards maintaining control of UBH.
60. [1] (b) (Evaluation) Cost of the flotation.
61. [1] (b) (Evaluation) Ability to finance further expansion from internal sources and or debt finance.
62. [1] (b) (Evaluation) Selling price of the shares and likely demand for them.
63. [1] (b) (Evaluation) Going public may not raise sufficient funds if there is limited demand for the shares.
64. [1] (b) (Evaluation) Whether payment of dividends will be made in future as they are not guaranteed. UBH may wish to retain more profit for expansion options.
65. [1] (b) (Evaluation) Will there be sufficient interest in purchasing shares and at what price given UBH's financials?
66. [1] (b) (Evaluation) Which is most important factor to shareholders?