Explain, using an example, one reason why VP might need: • short-term finance • long-term finance.

Mark scheme

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

1. [1] (a) (Short-term Reason) To provide working capital for the business – so that day-to-day expenses can be paid for – an overdraft may be suitable as it is only used if needed/potentially reducing interest paid
2. [1] (a) (Short-term Reason) To prevent cash-flow problem/improve the cash position of the business - by taking short-term bank loan – this will provide finance for a short time to overcome the potential shortage of cash and increase liquidity
3. [1] (a) (Short-term Example) An overdraft may be suitable as it is only used if needed which potentially reduces the interest to be paid (1) when buying food ingredients for the restaurants (app).
4. [1] (a) (Long-term Reason) To purchase long-term non-current assets – as these assets are likely to be very expensive – so a long-term bank loan may be suitable as it is repaid over a long period of time reducing the amount of monthly repayments/outflows each month
5. [1] (a) (Long-term Reason) To expand the business – which requires a large amount of money in order to grow – the issue of shares will not incur interest payments
6. [1] (a) (Long-term Reason) To update the business – often involves new technology which is expensive - so payments may need to be spread over a long period of time such as with a lease
7. [1] (a) (Long-term Example) VP might choose to issue new shares which will not incur interest payments (1).
8. [1] (b) (Increase in interest rates Impact) Higher fixed costs from interest paid if bank loan taken out for expansion of the restaurant chain in another country – likely to lead to lower profit
9. [1] (b) (Increase in interest rates Impact) Customers may buy fewer meals due to interest rates being increased for 3% to 5% to be paid on borrowing leaving less money to spend leading to reduced revenue for VP
10. [1] (b) (Increase in interest rates Impact) As VP is a public limited company it is large and may enjoy financial economies of scale – leading to relatively lower interest rates charged on bank loans than smaller businesses – reducing the impact of the interest payable on the loans
11. [1] (b) (Increase in interest rates Impact) Increased interest received on any reserves held by VP - increase income into the business – leading to an increase in profit
12. [1] (b) (Depreciation of country Z's exchange rate Impact) Imported food ingredients will now cost more – leading to higher variable costs – possibly lower profit margin/higher prices
13. [1] (b) (Depreciation of country Z's exchange rate Impact) Increased cost of imported ingredients may lead to VP changing to purchase from local suppliers – however the quality may be lower
14. [1] (b) (Depreciation of country Z's exchange rate Impact) When VP has expanded to another country and set up new restaurants profits sent back to country Z will exchange for a higher amount of country Z currency – but capital needed for expansion will exchange at a lower rate – higher investment needed
15. [1] (b) (New legal controls Impact) Increased costs of rewriting all menus – time taken to work out and list all the ingredients in meals - will need to be repeated every time a new meal is added to the menu - increases costs both in the short-run and possibly the long-run – reducing profit
16. [1] (b) (New legal controls Impact) If VP wants to keep the same mark-up on costs – may lead to increased price of meals – may lead to lower demand/lower sales - reduced profit
17. [1] (b) (New legal controls Impact) All restaurants will have the same costs – so competitiveness may not change
18. [1] (b) (New legal controls Impact) May attract different target market who didn't appreciate the ingredients used by VP – as these are now listed on menus - may increase sales
19. [1] (b) (Conclusion Justification) Increase in interest rates will have the greatest effect on profit because VP will need to take out large bank loans to finance the expansion in another country leading to a large increase in costs from the interest payable which will reduce VP profits. Depreciation will have little effect as ingredients are only a small proportion of costs and only 30% of ingredients are imported. The new legal controls will have little effect on profit as these are a relatively small cost and the menus are printed regularly anyway when the menus change with the new meals.
20. [1] (b) (Conclusion Justification) Depreciation of the exchange rate of country Z will have the greatest effect on profit as 30% of food ingredients are imported. This will lead to a large increase in variable costs which will reduce gross profit and then profit for VP.
21. [1] (b) (Conclusion Justification) New legal controls that require all restaurants to provide information about the ingredients in their meals will have the greatest effect on profit as menus have to all be reprinted every time a new meal is developed. As VP do this regularly to encourage customers to return so they do not get bored with the same meals it will result in a regular increase in costs and therefore a reduction in profit.