Fig. 1 shows a summary of the balance sheet of O Industries which is a public limited company. Fixed assets $m 15.6 Current assets 8.4 Total assets 24.0 Current liabilities $m 6.2 Non-current liabilities 14.3 Retained profit (earnings) 3.5 Capital employed 24.0 Fig. 1 Use the information in Fig. 1 to help you answer the following questions.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2017). The mark or mark type is shown in brackets.

1. [1] Will be able to sell shares to the public
2. [1] thus making it easier to raise finance
3. [1] Easy to invest / buy and sell shares through stock exchange
4. [1] Shares are easily transferable
5. [1] attracts investors to invest
6. [1] Limited liability
7. [1] means that a shareholder can only lose the amount of his investment / not personal assets
8. [1] Can take advantage of economies of scale
9. [1] e.g. bulk buying
10. [1] It is a legal entity / incorporated
11. [1] separate from its directors/shareholders
12. [1] It has continuity of existence
13. [1] even when the ownership of shares changes / shareholders die.
14. [1] Cash
15. [1] Cash in bank
16. [1] Debtors / accounts receivable / trade receivable
17. [1] Accrued income / accrued revenue / accrued receivable
18. [1] Stock (Inventory)
19. [1] Prepaid Expenses
20. [1] Working capital is current assets minus current liabilities
21. [1] O Industries working capital is: $8.4m minus $6.2m
22. [2] = $2.2m
23. [1] The amount of working capital is comfortably positive
24. [1] therefore O Industries should be able to pay its current liabilities
25. [1] meet its day to day expenses
26. [1] The current ratio of 1.35 / 1.4
27. [1] would be considered satisfactory / Yes
28. [1] Fixed Assets / Non-current assets
29. [1] Overdraft is short-term finance
30. [1] with interest charged on the amount overdrawn
31. [1] at a variable rate
32. [1] which could work out more expensive than a fixed rate of interest on a loan
33. [1] Used primarily to pay bills rather than for long-term projects
34. [1] as they are classed as current liabilities by the bank
35. [1] which can be called in at short notice
36. [1] The bank has the right to demand repayment of an overdraft at any time
37. [1] so it is not suitable for financing a long-term asset such as a building
38. [1] $1.7m would be a relatively high amount for an overdraft / overdraft is usually for lower amounts
39. [1] because it is to be repaid within one year
40. [1] O Industries could issue new shares to existing or new shareholders
41. [1] Could use retained profits
42. [1] O Industries could issue debentures to investors.
43. [1] These are long term loans issued to investors who invest at a fixed rate of interest.
44. [1] A bank loan repayable over five to ten years may be taken out
45. [1] A mortgage on the property may be taken out, this may be repayable over up to thirty years
46. [1] Venture capital may be obtained.
47. [1] This is usually a mixture of loans and share purchase.
48. [1] A cheap way is to issue new shares because no interest has to be paid.
49. [1] But this risks having ownership of O Industries being diluted.
50. [1] The same problem comes with using venture capital.
51. [1] Has enough retained profits to cover the full amount.
52. [1] Money is immediately available and no interest to be paid.
53. [1] The other three methods all incur interest costs.
54. [1] The bank loan or the mortgage probably carry the lowest rate of interest, but both will only lend up to 75% of the value of the new building.
55. [1] The debentures will have a higher rate of interest, but O Industries may be able to borrow 100% of the cost of the building.
56. [1] The retained profits or bank loan or the mortgage would appear to be the best.
57. [1] The choice would depend on whether the shareholders would agree to this, how high the monthly payments would be; with the longer the term, the lower the monthly payments.