The Government has increased interest rates to reduce inflation. Identify and explain two ways an increase in interest rates might affect FF.

Mark scheme

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

1. [8] Knowledge [2 × 1] award one mark for each relevant way identified
2. Analysis [2 × 1] award one mark for a relevant explanation of each way
3. Application [2 × 2] award two application marks for each relevant way
4. Award one mark for each relevant way (maximum of two), such as:
5. • Decreased demand as customers have increased mortgage/loan payments
6. • Increased cost on new loans – less likely to expand
7. • Increased cost of overdraft - increased expenses/reduced profit
8. • Increased costs from higher interest repayments – prices of FF services increases/reduces demand.
9. Award a maximum of three additional marks for each explanation - two of which must be applied to this context – of each of these ways.
10. Indicative response: FF will have increased costs from higher interest repayments on new loans (k) therefore price of photographs may have to rise (ap). This may reduce profit if prices cannot be increased or if prices are increased then demand may fall (an). Other guests at weddings can take photographs so the elasticity of demand may be elastic, leading to falling revenue if prices are increased (ap).
11. NB – answer should be clearly related to interest rates increasing and NOT just inflation increasing.
12. Possible application marks: private limited company; profitable and grown over last 5 years; provides excellent customer service; photographs; photographers; photography; getting married; weddings, birthdays, family photographs; business customers as well as private individuals; taking over another photography business; growing externally rather than internally; business wants to expand further; increased minimum wage by 20%; pay existing photographers 50% above minimum wage; information in Appendix 3.
13. [12] Relevant points might include:
14. Retained profit: • Cheap form of finance as no interest to pay; • Readily available; • Not repaid; • May not be sufficient funds available; • May reduce dividends to shareholders
15. Issue of more shares: • Lose control if sell more than 50% of shares; • Only sell to family and friends so limited amount of shares sold; • Time consuming; • No interest to pay but shareholders will expect dividends
16. Bank loan: • Repayments in regular amounts/spreads the costs; • Borrow large sums; • Varying lengths of time to repay the loan; • Increased costs as needs to be paid each month – may lead to cash flow problem; • Collateral/security may be required; • Increases gearing
17. Knowledge/Analysis/Evaluation – award up to ten marks using the levels-based mark scheme below.
18. Level 1 Outline of the advantages and/or disadvantages of each source of finance.
19. Level 2 Detailed discussion of the advantages and/or disadvantages of each source of finance.
20. Level 3 At least 2 × Level 2 +; 9-10 marks for well justified recommendation as to the best source of finance to choose compared to the other methods.
21. Award up to two additional marks for relevant application.
22. Possible application marks: government increased interest rates; private limited company; profitable and grown over last 5 years; provides excellent customer service; photographs; photographers; photography; getting married; weddings, birthdays, family photographs; business customers as well as private individuals; profit for 2015 = $125000; growing externally rather than internally; information in Appendix 3.