Hunter Airservices Ltd operates a fleet of small aircraft. It flies tourists and business people from the country in which it is based to neighbouring countries. The company wishes to expand its business.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2011). The mark or mark type is shown in brackets.

1. [4] (a) (i) Any four points x 1 mark each or two well-explained points x 2 marks: it will not have to pay interest on ordinary shares; ordinary shares will not have to be repaid; no collateral security will have to be provided; ordinary shares convey ownership so shareholders may feel more involved in the work of the company; dividends need not be paid if the company is having difficulties, but interest payments will still have to be met; may need to raise a larger sum to build the hangar than could be raised by a bank loan. Any other relevant point.
2. [4] (ii) Any four points x 1 mark each or two well-explained points x 2 marks: may have an overdraft facility at the bank; may be having cash flow problems; so insufficient funds in its current account; may need short-term finance; as it is expecting payments to be credited to its bank account; interest payments may be low if the overdraft is small or the account is overdrawn only for a short time; may not have trade credit with the fuel supplier. Any other relevant point.
3. [3] (b) (i) Any three points x 1 mark to explain the Balance of Payments: the sum of a country's total income and expenditure on foreign trade (2 marks); includes movements of goods (visibles); and movements of services (invisibles); and movements of capital (the capital account); (difference between exports and imports = 1 mark). Any other relevant point.
4. [3] (ii) Any three points x 1 mark each and up to 2 marks for a well-developed point: Hunter Airservices Ltd provides a service so it is involved in invisible trade; it earns foreign currency by providing air services to foreign tourists and business people; this is an export service that Hunter Airservices Ltd is selling; it therefore contributes invisible exports to the total Balance of Payments. Any other relevant point.
5. [6] (c) Level 2 (4-6 marks) Candidate has shown the extent to which insurance is important to Hunter Airservices Ltd, with reasons, and has mentioned several business risks against which the company should insure. Insurance would be very important to Hunter Airservices Ltd. It flies planes, which are very expensive to buy and to replace, and so would need aviation insurance. If a plane crashed it would need to be indemnified. It probably employs people so it requires employers' liability insurance, which covers the company against a claim made by an employee because of the employer's negligence. It flies passengers so it will need public liability insurance in case of claims made by any of its clients. It is likely to own motor vehicles so will need motor insurance. Some employees may handle money so the company will need a fidelity bond against fraud. Overall, it will need insurance in order to receive compensation in case it suffers a financial loss. It must have insurable interest in anything it insures. It cannot insure other companies' planes in the hope that they will crash. It needs insurance to give it the confidence to trade as any huge claims will be met by an insurance company rather than Hunter Airservices Ltd itself. (Although some insurance principles are mentioned in the above answer, it is not necessary to mention insurance principles to gain full marks.) Level 1 (1-3 marks) Candidate has shown why Hunter Airservices Ltd should have insurance and has mentioned one or more business risks against which it should insure. Hunter Airservices Ltd should have insurance such as accident insurance. People may claim against the company. A plane may crash. A passenger may be injured. Hunter Airservices Ltd would have to pay out large sums of money. Insurance companies pay compensation instead.