Dowson is a large business which owns a number of shops. It sells a range of electrical goods such as computers and televisions. The Finance Director has been looking at some recent financial data, as shown in Table 1. He is pleased with Dowson's liquidity but knows he must reduce its high level of debt including an overdraft of $6m. He said: 'The economy is in recession. Many small retailers have failed. Size is an advantage!' Table 1: Extract of financial data for Dowson 2015 2016 Revenue $280m $300m Profit $175m $180m Current ratio 1.2:1 1.5:1 Acid test ratio 0.8:1 0.5:1 Return on capital employed 10% 10%

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2016). The mark or mark type is shown in brackets.

1. [2] Clear understanding: ROCE means the profit of the business expressed as % of capital invested in the business or correct formula.
2. [2] (Profit/Capital employed × 100)
3. [1] Some understanding – e.g. profit from capital invested or money made on investment
4. [2] Clear understanding – a sustained (over a period of time) reduction in GDP/national income/output
5. [1] Some understanding – 'fall in output' or 'fall in GDP'
6. [1] Able to attract better employees [k] so have the expertise to survive the recession [app]
7. [1] Access to finance [k] as seen as lower risk of failing [app]
8. [1] Discounts for bulk buying [k] so able to charge lower prices for electrical goods [app]
9. [1] Marketing economies or bigger marketing budget [k] as able to justify national advertising [app]
10. [1] Spread risk [k] as can afford to stock a wide range of products [app]
11. [1] Able to dominate the market/large market share [k] so difficult for small retailers to compete [app]
12. [1] High financial risk [k] so banks/suppliers might be reluctant to lend to them [an] so not able to stock a wide range of electrical products [app]
13. [1] Higher expenses [k] which will reduce level of profit [an]
14. [1] Problems if interest rates rise [k] as might not be able to meet repayments [an] increasing risk Dowson also fails [app]
15. [1] Difficult to raise additional finance [k] if lenders fear Dowson not able to repay further loans [an]
16. [1] Cash flow implications/liquidity [k] as acid test ratio is only 0.5: [app] could lead to insolvency [an]
17. [1] Current ratio increased [k] by 0.3 [app][an] so more liquid [an]
18. [1] Acid test lower [k] from 0.8 to 0.5 [app] so not able to pay short-term debts [an] possibly due to high value of its inventory [an]
19. [1] Expenses are high [k] as have a high level of debts, which includes $6 m overdraft [app]
20. [1] Risk that demand might fall [k] due to recession [app] therefore he would be left with excess stock [an]
21. [1] High level of inventory [k] 66% of current assets [app] [an]
22. [1] High level of trade receivables [k] danger that customers might not pay [an] due to recession [app] so business will lack the cash it needs [an]
23. [1] Current ratio shows the business is able to pay its short-term debts [k]