Unit 3 Case Study Pack IB Biz 2024 Answers

1
Table of Contents
Case study Answer Page
1. Big Deal 3
2. Hail Cheeser! 4
3. The Bagel Underground 8
4. Lato 11
5. Dishes 13
6. Dunn Auto Repair 16
7. McQuiggan Ramblers 20
8. Carolina Fire Museum 22
9. Lafayette Paint 26
10. JB Tax Solutions 31
11. Racewear 34
12. Crispy Collin’s Chicken & Waffles 38
13. Spring Run Academy 41
14. Cedar Hill Books 44
15. Fresh Cucina 47
16. Frisch 52
17. Spielgeist 57
18. Caldwell Holdings 62
19. Steady on the Street 68
20. Way.Finder Mobile 71
21. Downriver Adventure Company 74
22. Old Brown Shoe Studios 76
23. Stavanger Cleaning 81
24. Yuga Furniture 84
25. On Air Sports 87
26. Müller Foods 89
27. Jupiter Doors 91
28. Hunny 94
2
29. Otter Mountain Theater 97
30. Biscuits n Biscuits 101

3
1. Big Deal
A. Identify two examples of revenue expenditure for Big Deal. 4
Answers do not necessarily need to be mentioned directly in the text, and there are tons of
different examples that students could mention. Here are some examples of common ones:
- Utility bills
- Spending on all of their product supplies
- Wages and salaries for workers
- Promotion and other marketing related expenses
B. Explain an advantage and a disadvantage for Big Deal attempting to keep its 4
revenue expenditure to a minimum.
The basic idea here is that keeping revenue expenditure to a minimum allows Big Deal to keep its
prices low for customers and to improve its profit margins on sales. This is especially important for
Big Deal because it doesn’t offer as much variety of products as other wholesale clubs, and it
doesn’t have as broad of a global market research, so lower prices may be its best unique selling
point. The downside, of course, is that you can’t really make money without spending money, and
so this may hold back the effectiveness of their marketing efforts, their ability to attract and retain
good employees, etc.
C. Explain the relationship between capital expenditure and Big Deal’s ability to 4
expand.
If a firm wants to expand, then it’s going to need capital expenditure unless expansion means just
making more sales revenue in each location through marketing strategies/tactics, etc. For Big Deal
to expand into Eastern Europe would require capital expenditure on new facilities and equipment.
Even if they rented store locations rather than owning them outright, they’d still need capital
expenditure on all of the stuff that goes in a grocery store like refrigerators, cash registers, etc.
D. Explain one reason why capital expenditure is important to Big Deal’s 4

long-term financial sustainability.
Without capital expenditure, the firm is not investing itself. Like the above question mentions,
capital expenditure is crucial to its ability to expand, but it’s also going to be crucial to its ability to
simply maintain and improve its existing market presence. Even if the firm doesn't expand to
Eastern Europe, its equipment is going to need to be replaced periodically, it’ll need to make
upgrades to facilities, and so on. Employees will need upgrades to office computers and
workspaces, etc. from time to time, and without spending at least some money on things like that,
the firm will not be able to maintain its operations.
4
2. Hail Cheeser!
A. Define the term overdrafts. 2
The withdrawal of an amount of money from a bank account that is greater than the amount
currently in the account, in return for a fee.
B. Explain two appropriate forms of external finance that Manuel could use. 4
- Loans: The interest rate will likely be high compared to larger businesses, but he may be
able to repay the interest because he expects a bump in sales at the new location.
- Share capital: He’s already considering selling shares as a private corp, and this is money
that doesn’t need to be repaid. Floating shares on the stock market is not a realistic option
at this point, so this should not be accepted. Venture capital and business angels are also
forms of share capital that could reasonably be explained here.
- Overdrafts: It’s quite possible that if demand really does jump the way that he expects, that
overdrafts in the first few months may help him to get through any periods in which he
needs more cash to pay his rent or get up and running.
- Trade credit: would help him with liquidity, but it may not be a ton of money that he gets
from his suppliers. Still, if he’s considering that retained profit and overdrafts may work,
then it’s reasonable to think that perhaps trade credit could allow him to start up the new
location too.
- Crowdfunding: The student needs to be careful in how they describe this one, because
there are different ways of doing it. In the US at least, the best known platform is
Kickstarter, and a lot of new businesses there basically presell a good that customers will
then receive if the firm gets enough funding to meet their goals and start producing. In the
case of cheese, that doesn’t make much sense, unless they get a gift card or something
like that. Alternatively, Manuel could seek donations, use a platform for peer to peer
business loans, or even sell shares of ownership through crowdfunding, though the latter
then gets more complicated.
- Business angels: It’s conceivable that an angel may be interested (if family/friends are
interested in investing, then maybe it’s not a stretch to suggest a business angel could be
appropriate), but the case study just doesn’t give an indication that he has a strong enough
financial outlook that an angel would be interested in funding him. I’d want a good
explanation from the student on this one.
I would not accept microfinance. It’s not going to get him the amount of financing he needs, and if
he grew up in a family that could afford foreign vacations and who could give him a business loan,
then microfinance is not targeted at people like him.
C. Explain one advantage and one disadvantage of Manuel using internal 4

sources of finance to open the new location.
5
Advantages may include:

- Manuel would retain full control (including profits) over his business
- It does not involve him paying interest to anyone, so it’s the cheapest form of finance
- It doesn’t require him to go through lengthy procedures such as filling out loan applications
or going to investor meetings to convince people to buy shares
Disadvantages may include:

- Realistically, he may not have the ability to do things like use retained profit (may not have
enough), use his personal finance, or sell assets (doing this could really hurt his operations)
- If he’s investing his own money, he may just be increasing the potential for serious financial
problems if business doesn’t pick up the way that he expects
- Even if he could afford to use internal finance, external forms of finance would almost
certainly be larger in value and thus better enable him to invest more into the business than
he could on his own
- External finance could also come with someone else’s expertise (family/friends who may
have knowledge to share)
Accept other reasonable answers as appropriate.
D. With reference to Hail Cheeser!, explain the difference between profit and 4
retained profit.
Profit is revenue minus costs. That profit then may be retained in the business or it may be
distributed to owners of the business. Retained profit is profit that is left after all costs have been
paid as well as any deductions for taxes and dividends. The remainder is then reinvested into the
business.
E. As a small business, explain two challenges for Hail Cheeser! in getting 6

funding to open a new location.
- He’s betting on a big sales boost at the new location, but that is not a guarantee, so lenders
and other financiers will want to look at his current profits, which do not seem impressive.
His track record in business is also not long, and so he may not get debt or equity finance
at all from an institution.
- To go along with this last point, the smaller and newer the business, the higher the interest
rate a bank will typically charge, and that’s assuming that a bank will even give him a loan
in the first place.
- There are some forms of finance that are difficult or outright impossible for him because he
is so small. For example, a business angel probably isn’t going to want to even meet with
him because the profit potential doesn’t seem like it’d be high enough, nor would a VC firm
(which isn’t on the syllabus anymore, but I still think students should know about when we
teach equity finance in general).
- He doesn’t have much in the way of retained profit or personal savings to sink into the
operation, and he probably doesn’t have any assets that he can realistically sell. Manuel’s
profits are his income, and it’s probably too hard for him to put the extra $15k he needs for
the business into it out of his own savings, especially since most of it is in a retirement
account.
6
- Larger businesses might be able to get a higher credit limit on credit cards, but credit card
companies are likely to look at Manuel’s modest cash flow and only give him approval for
smaller credit limits.
- He probably has fewer connections with financiers than a larger organization would.
F. Recommend one of the sources of finance that Manuel is considering for his 10
relocation to the waterfront market.
Students should show understanding of all three financial options, while making a clear
recommendation for one based on the case study and logical analysis.
Arguments in favor of a small business loan may include:

- He’s not giving up any equity, and as a result he not only retains all of his own profits, but
he does not give up any decision making authority either.
- It would allow him to take out enough money that he probably wouldn’t have to turn to
another source for a while. If taking out overdrafts, for instance, he’d perhaps have to
repeatedly go back for more, and he’d incur a fee every time, plus potentially really high
interest rates. He also hasn’t demonstrated that his retained profits are high enough at the
moment, so there’s a good chance that he’d have to delay the move until a time when
retained profits are sufficient. With a loan, he could make the move sooner.
- There may be some kind of government entity like a Small Business Administration that he
could go through that would give him access to cheaper loans than he could get on his
own, as long as he meets the association’s qualifications.
The major drawbacks for loans are that he needs to repay the money with interest, and the
bank would also expect some kind of collateral from him, which could be a significant asset
like a car or a home. This is all assuming that he could even get a loan, which is a very big
question without a clear answer.
Arguments in favor of personal savings and retained profits + overdrafts may include:
- He’s not giving up any equity, and as a result he not only retains all of his own profits, but
he does not give up any decision making authority
- He doesn’t pay any interest on the use of personal savings or retained profits.
- Doesn’t have to go to any investor meetings or through the loan approval process, both of
which can be very difficult and time consuming
There are several major drawbacks here though, especially that it’s really not clear that he
even has enough retained profit and personal funds to do this, so he’s relying on increased
retained profits from the new location, which may take time to materialize on a scale that is
sufficient to fund the business and give him enough money to live on. He’s going to face a
10% penalty in his retirement account, which is quite significant, and also a retirement
account is probably investments, which may have lost value in the short time that he had
them - he could easily be in a buy high, sell low situation in addition to the 10% penalty.
The other huge drawback is that overdrafts are very expensive per dollar of overdraft. With
most banks, he’d be hit with a fee, and then if he keeps the overdraft on his account for a
while then he’s also going to be paying a much higher interest rate than he would on a
typical loan. This is thus very expensive finance.
7
Arguments in favor of reorganizing as a private limited company may include:

- It could dramatically increase his ability to raise capital, particularly when compared with
retained profits and overdrafts
- Shares are not a loan, so they do not need to be repaid
- Other investors may bring expertise or connections that he doesn’t have on his own
- It avoids the fees and withdrawal penalties mentioned in the second option, and he may
find investors willing to fund him if a bank is unwilling to give him a loan, especially because
it says he’d seek investment from friends and family.
The major drawback is that it would be time consuming to convince people to invest with
him (if he’s successful at all), and he’d be giving up a share of his already modest profits.
He uses these profits as his personal income, and the more successful he is in business,
the more money he’d eventually be giving up because those shares are a permanent part
of the business unlike a loan that will be repaid. There’s also the potentially awkward
dynamic of doing business with friends and family, which can be a recipe for disaster with
personal relationships.
8
3. The Bagel Underground
A. Define the term trade credit. 2
An arrangement in which a business receives a good or service without paying up front or paying
interest. The credit provider receives payment at a later date, such as 30, 60, or 90 days later.
B. Explain a benefit and a drawback of Andriy and Daniela using personal funds 4
to finance part of their startup costs.
Benefits may include, but are not limited to:

- The main benefit is that they don’t give up any interest or equity, which means that this form
of finance is “free” in terms of not paying a direct financial cost to access it
- They have full control over the use of the money, unlike many other forms of finance in
which the financier may have some control over how the money is spent
- The amount of money is flexible; if they want to put more or less money into the business at
some point, they are free to do as long as they have the money
- Assuming that they have the money in relatively liquid accounts, there’s no time lag
between deciding they want/need the money and getting it
Drawbacks may include, but are not limited to:

- It’s their money, from savings. Thus if the business doesn’t go well, then they’ve lost their
personal money that they could’ve used for anything else. That’s quite risky.
-
C. With reference to BU, explain the difference between share capital and loan 4
capital.
Share capital is when a firm sells equity in its business; that is, it sells shares of ownership to
investors in return for money. BU is not doing this. Loan capital is when a firm borrows money and
pays interest on that borrowing. This is what BU is doing with the peer to peer lending platform. Its
crowdfunding is, in this instance, in the form of loan capital.
D. With reference to BU, explain the difference between microfinance and peer 4
to peer lending.
Peer to peer lending is not in the syllabus, but it is pretty clearly described in this case study, which
is why I think this question is reasonable to ask. Peer to peer lending in this instance for BU is
when people go through an app to lend to people as part of a portfolio of investments; these
lenders are hoping to get a good return on their investment. Microfinance does sometimes get a
return on investment for people who lend money, but that is very often not the point of the funding,
and it’s done as part of a social enterprise with individual lenders treating their loans like donations.
Loans are very small scale and go to support entrepreneurs who could not get a loan through the
traditional banking system. This is not BU’s situation - there’s no indication that they are unable to
go through the banking situation, and the loan is probably not going to be “micro.”
9
E. Explain one other source of long term funding that Andriy and Daniela could 4
use to finance the startup of BU.
- Share capital: As explained above, they could seek out investors.

- Angel investors: An investor may be willing to fund the ghost kitchen if they can be
convinced that it’s a viable business that will give them enough return on investment.
- Leasing: By leasing a building rather than buying one (which they’d probably be doing
anyway…) they could cut down on the amount of capital required up front. This wouldn’t
pay for everything though.
Do not accept:
- Retained profit: they haven’t even started the business yet, so there is no retained profit.
- Sale of assets: again, without having started the business yet, there are no assets to sell
unless we’re talking about personal assets.
- Overdrafts: Because of the high fees and interest, and the likelihood that they wouldn’t be
allowed to take out an overdraft that’s long enough, this should only be used for the short
term.
F. Recommend whether BU should use crowdfunding through Andriy or 10

Daniela’s preferred methods.
Reasons in favor of peer to peer lending rather than selling bagels and other merchandise may
include, but are not limited to:
- They’re not making a promise to crowdfunders if they do this method. They’re not
guaranteeing that the loans will be repaid, or be repaid in a timely manner (typically there’s
no requirement of collateral with these loans, though students may not be expected to know
that). However, with the sale of bagels and t-shirts and such, they’re telling crowdfunders
that they’re going to deliver these things and thus need to follow through properly to make
customers happy. These crowdfunders are people who will be customers, so they’ll need
to work hard to make them happy and leave a good impression.
- Making t-shirts and other merchandise is another time burden on the business, and it adds
costs as well. If anything goes wrong with the t-shirts or other things they’ve sold, then they
need to make that right with the customers.
- They could potentially raise a lot more money this way, because they’re not trying to get
people (presumably locals) interested in the business itself, but rather the potential for
interest payments. Thus, they could get lenders from a much wider area, potentially
nationally or even internationally. All crowdfunders would care about is the safety of the
loan and getting timely repayment.
- If Andriy’s friend was able to get this funding in less time than a bank, then it’s quite
possible that BU could get this funding faster than through Daniela’s method too.
Reasons in favor of selling bagels and other merchandise rather than peer to peer lending may
include, but are not limited to:
- With the lending option, they’ll have to pay interest, which may be more than they’d spend
with Daniela’s methods, especially if customers are largely choosing the bagel purchase
option. With the bagel purchase option, it’s basically interest free financing because they’re
just getting a pre-order and thus pre-funding of what they were already going to do.
10
- It gets locals more excited about the business itself than in Andriy’s method. She’d
basically be getting demand before the business even opens. The shirts would also serve
as promotional tools which could bring in more customers.
- Typically if they’re not able to get enough people committed through this method to reach
their funding goal, then the project doesn't go ahead and no money changes hands. In that
sense it’s very low risk, and if it doesn’t work then they could always try another method.
- The cost of t-shirts, stickers, and other things could be far less than the donations that
people are giving. Thus, this could be a pretty cheap way of raising money. Assume for
instance that someone donates $25 and gets a t-shirt that only costs the business
something like $5. When you bulk buy t-shirts and stickers, they’re pretty cheap.
11
4. Lato
A. Define the term asset. 2
Property, whether tangible or intangible, that a firm owns that is of financial value.
B. Define the term leasing. 2
When a firm rents the use of an asset over a period of time.
C. With reference to Lato, explain the difference between internal and external 4
sources of finance.
Internal finance comes from resources the firm already has, such as personal funds, sale of
unused assets, and retained profit. For Lato, only the second two would be logical, and the sale of
assets is actively being considered by the CFO. External finance uses financial resources that
come from outside the organization. In the case of Lato that would be the share capital that they
are considering raising, but it could also include any of the other forms of external financing that
are on the syllabus yet not mentioned in the case study.
D. Other than its headquarters and production plants, suggest one other asset 4
that Lato could sell, and a downside of selling that asset.
Answers may include, but are not limited to:
- Intellectual property such as brands, trademarks, copyrights. The downside here is all of
these help the firm earn money, and selling them would help competitors.
- Machinery and other equipment that isn’t necessary for the firm. The downside is that it’s
realistically hard to find such assets that wouldn’t hurt their ability to operate, and even if
they did, they would get a depreciated value for them.
- Any land it owns. The downside here is that they probably don’t even have any, and any
that they did would probably be associated with the buildings on that land, so it’s hard to
separate the two. Obviously selling land with buildings means a downsizing of their
operations or having to lease it back, which would cost them more in the long run.
E. Explain why the use of personal funds would not be appropriate as a source 4
of finance for Lato.
Personal funds are for sole traders. No one who owns shares of a company is going to put their
own money into the business without getting shares in return, because then they’d be funding the
firm in a way that benefits other people without those people having to contribute financially.
F. Explain why Lato may choose to sell a building it owns and then lease it. 4
12
There is an immediate need for cash, which selling their building would satisfy. However, unless
they’re going to downsize their operations by closing a plant or pulling out of markets, then they still
need those buildings to operate. Leasing those buildings would allow operations to continue while
giving the firm the cash that it needs right now.
G. Recommend whether Lato should sell assets or raise share capital to improve 10
its financial position.
Reasons for selling assets may include, but are not limited to:
- As mentioned above, there’s an immediate need for cash, which the sale of assets would
give them.
- If their demand has been flat or declined, as in the case of in-line skates, then it may be
necessary to find ways of cutting costs and downsizing operations if Lato doesn't have
enough confidence that demand will rebound enough. The CFO wanting to shut down a
production plant is an indication that this firm is in a long term decline that cannot be
supported by its existing level of physical assets.
- Raising money this way doesn't dilute the value of outstanding shares like share capital
would. Investors already aren’t happy, and selling shares could further decrease the price
of the shares.
- Selling assets doesn’t necessarily mean that they can’t use those assets anymore; as we
see in the case of the HQ, it could allow them to continue operating while getting the cash
they need now. This could possibly be done with their manufacturing plant too.
Reasons for raising share capital may include, but are not limited to:
- Raising shares is free money, in the sense that it does not need to be repaid. This is an
advantage over the sale of assets particularly in the case of the sale and leaseback,
because the leasing would cost the firm more over time than owning it.
- Selling their assets may look like more of a desperate move, so it may hit the share price by
more than selling more shares would.
- There is an important rise in demand in at least some cities, so they may be on the verge of
increasing their sales and so would not want to be selling assets at this point.
- Along with the rise in demand goes the idea that the CEO wants them to try to take
advantage of that by spending more on marketing. Shareholders may be willing to support
this, or new investors willing to buy shares if they see that potential to take advantage of the
situation given their strong brand name.
13
5. Dishes
A. Define the term business angel. 2
An individual (probably wealthy) who invests their money in a firm in order to get equity; that is, a
share of ownership.
B. Explain one reason why short-term sources of finance would not be suitable 2
for Dishes’ plans to upgrade its offices.
Short term sources of finance, such as overdrafts, trade credit, and crowdfunding do not typically
offer a firm the larger sums of money that they will need to upgrade their offices, nor do they
typically offer financing at affordable rates. Overdrafts are one of the most expensive forms of
finance and should only be used when a firm needs money quickly that it will likely be able to pay
back fairly quickly; that’s not the case with an office building. Trade credit doesn’t even help with an
office expansion, except for maybe some of the supplies that go in the office. Crowdfunding
doesn’t make sense for a large meal delivery app - it’s already grown past the stage in which
people might crowdfund it. Dishes needs to be able to pay off its expansion costs over a longer
time period.
C. Explain two other forms of finance that may be available to a small 4

independent restaurant owned by a sole trader that would not be available to
Dishes.
Answers may include:
- Personal funds: Because Dishes is a large company with investors, putting their personal
funds is off the table. For a small sole trader though, this is likely one of their primary
sources of finance.
- Crowdfunding: People may combine to fund a new small business, but they would not do
so for a large and established business.
- Microfinance: This depends on how small the business is, what the context is, etc, because
this is really for funding small businesses in situations where there is poverty and/or lack of
access to the banking system. None of that is the case with Dishes.
D. Explain the difference between how Dishes has raised share capital so far 4
versus raising it through an initial public offering.
So far they’ve raised money through business angels and venture capital firms (VC is no longer on
the syllabus, but I still think it’s a really important form of finance for students to know about, and
you can see that I’ve explained it in the text). Both of these forms are private investments and do
not allow the general public to put their money into the firm, unless they go through venture capital
firms, where they’d get indirect access to early stage companies. If they did an initial public
offering, then the business angels and VC firms would probably cash out and exit their equity
positions in the firm. The general public would be able to invest in Dishes if they had an IPO.
14
E. Recommend whether Dishes should attempt to raise additional capital 10

through share capital or through loan capital.
Advantages of venture capital and business angels may include, but are not limited to:
- Unlike loans, it doesn’t need to be repaid
- They will not need to pay dividends until they are profitable, and even then it’s not
necessarily the case that they’d make regular dividend payments to investors in the short
term
- These investors may also have expertise, connections, and other guidance for Dishes.
They often take a pretty active role in the firm, and that would definitely be the case in this
situation because investors own 75% of the company.
- Over the last 30 years (at least in the US and Europe), venture capital finance has become
readily available, giving young firms the ability to raise much more money in private equity
financing than they used to be able to, thus giving them the capital that the stock market
allows, without the hassle of going public or the interest payments that loans require. This is
of course not something that students can be expected to know.
Disadvantages of venture capital and business angels may include, but are not limited to::
- These investors firms can really steer the company’s decision making, and this is clearly a
concern for Ana
- Investors may pressure Ana and Nikola to go public before they would like to, because they
would see a quicker return on their investment. Venture capitalists in particular do not tend
to keep equity stakes in companies after an IPO - they want to take the firm to the IPO
stage and get a high return on investment.
- Ana and Nikola only have around 25% equity; if they went through another round of VC
financing, it’s likely that it would result in them having even less control of the firm, to the
point where it’s even easier for them to lose control of strategic decision making or simply
be pushed out in favor of new management.
Advantages of loan capital may include, but are not limited to::
- No equity share is given up. This is a particularly good thing given how much equity the
co-founders have already given up.
- Interest rates are low, so now may be the best possible moment to take on debt, particularly
if they have a good return on capital employed
- Lenders do not have a voting voice in the business
- Ana wants to do a bond in particular, which the case study notes could have a lower
interest rate than a traditional bank loan. Something that the students wouldn’t know is that
this can also be a form of ongoing finance - they could continue issuing bonds as long as
investors are willing to buy them.
Disadvantages of loan capital:

- Interest payments must be met, regardless of profit. Otherwise, they will enter default, and
various things can happen that are really harmful, including a bank seizing assets (if they
do a bank loan instead of bonds), and the long term inability to borrow more.
- Ana wants to raise debt capital through bonds rather than the bank and there’s no
guarantee she’ll be able to do so. This involves convincing a lot of investors rather than just
one bank. It’s probable that they could issue a bond given their size, but it’s not guaranteed.
- If they do end up going through the bank instead of bonds, they may not have enough
collateral to secure a long term loan
15
16
6. Dunn Auto Repair
A. With the information presented in the case study and tables, identify two 2
variable costs for DAR.

- Oil, or any other supplies related to oil changes
- Car parts
- Any accessories to car parts, like bolts, screws, etc.
- Direct wage costs per repair
B. With the information presented in the case study and tables, identify two fixed 2
costs for DAR.
- Utilities (this is really mostly a variable cost, but because here it is listed as per month
because a firm has to keep its lights on etc. no matter what, this should be seen as a fixed
cost)
- Marketing (again, this could have variable elements, but here it’s listed a monthly cost, so it
has to be seen as fixed)
- Mortgage, insurance, and property tax. These can all be listed separately because they’d
be paid separately.
- Keith’s salary
C. With reference to DAR, explain the difference between fixed and indirect 4
costs.
They very often overlap, so something that’s fixed is very often going to be an indirect cost as well.
Fixed costs do not vary with output, however, whereas indirect costs are simply those that are not
directly attributable to a particular product or project by a firm. It is possible for indirect costs to
vary with production levels though, for instance things like utility costs, internet service costs, office
supplies could all be indirect. For DAR the mortgage, insurance, and property taxes are all
examples of fixed costs. Marketing and utilities would be indirect.
D. If Alistair offered in-home oil changes, explain one example of a change to his 2
direct costs.
Examples may include, but are not limited to the following:

- Fuel costs of going to people’s houses
- Costs of providing each oil change would probably go up because they would not be able to
use the large scale supplies and equipment that the shop would have that drive down the
average cost
- It’s possible that direct wages may go up if Alistair would need to pay people more for the
time they’re taking to provide home-service to clients
E. Define the term revenue. 2

17
Money earned from selling goods and services.

I would also accept students saying it in equation form, which is the price of the item sold times the
quantity of items sold.
F. Other than the in-home oil changes, suggest two possible new revenue 4
streams that an auto mechanic such as DAR could attempt to create.
There’s a wide variety of possibilities on this, so here are a few reasonable ones:
- The most obvious is new types of service and repairs that the firm didn’t already do. This is
basically the same thing as what he’s already doing, but in the auto mechanic world there
are very often types of services that are only done by certain mechanics, because each
mechanic cannot be an expert in or have the equipment for everything. For instance, it’s
possible that DAR doesn’t replace transmissions in cars, but he could perhaps find a way of
adding that service.
- Selling auto parts to customers to do replace/repair themselves
- Adding diagnostic services for a fee.
- Selling snacks or other food items while customers wait
G. Explain two challenges that Alistair may face if he were to launch the in-home 6
oil change service.
Examples may include, but are not limited to the following:

- The services would take much more time than his current method, so it would be much
harder to do this in a way that is profitable for him and at a low enough price that customers
would demand it.
- There’s more risk of accidents and breakdowns with the cars that DAR employees would
drive to people’s homes. This would then also drive up the cost of production.
- Cost of production would also go up because of the fuel costs and average costs of doing
the oil change in a less efficient way, as mentioned above.
- It’s just one more thing for him to coordinate, and it would require more hours and expertise
from employees (like Keith, probably) to make it happen.
H. If Alistair does 100 oil changes and 120 repairs each month, calculate the 2
total monthly revenue that Alistair would make.
100*50+120*300 = $41,000
I. Plot the current fixed cost curve for DAR. 2

18
J. Plot the total revenue for DAR for repairs only, up to 30 auto repairs per 2
month.
K. Plot the total cost curve for DAR for repairs only, up to 30 auto repairs per 2
month.
Total Cost = (30*190)+500+150+1700+5000 = $13050
19
20
7. McQuiggan Ramblers
A. Explain what would happen to McQuiggan’s average fixed cost if he were 2

able to increase the production of shoes without expanding to a new facility.
Average fixed costs would go down, because fixed costs would stay the same but units of
production would increase, meaning that the average must decline.
B. Identify two possible variable costs for MR. 2
I’ve put the word possible in here so that students can use info in the case study or propose
common ones that make sense. Here are a few examples:
- Material and/or costs of the shoes
- Delivery costs, if he offers that service
- Credit card processing fees
- Possibly direct wages, though in reality workers are probably paid by the hour or on a
salary
C. Explain a benefit and a drawback of Liam attempting to develop an additional 4

revenue stream beyond sales of custom-made shoes.

- He’s having a hard time keeping up with demand for shoes, so an additional revenue
stream may allow him to sell something and bring in cash without the labor challenges and
time lag that come with typical orders of shoes.
- It allows him to cash in on the rising popularity of the firm after the magazine article; for
instance, he could sell t-shirts or other merchandise
- It diversifies the firm and leaves it less dependent on one item
- The cash flows from the shoes have a significant delay from sale to full payment, whereas
another revenue stream may be much more direct and timely

- He’s already having a hard time keeping up with shoe demand. Though doing something
like t-shirts or another revenue stream may be easier than shoes, it’s still added work that
can be difficult to manage for a sole trader who already needs more staff.
- The attempt to create one may actually end up losing money. People come for the shoes;
we have no idea if they’d actually buy whatever other kind of product or service that he
might have in mind. An attempt to create more revenue would also incur added costs.
D. Identify two possible indirect costs for MR. 2
A few examples:
- General marketing expenses
- Rent
- Utilities
- Insurance
21
- Interest on debt
E. Explain the difference between sales revenue and sales volume. 4
Sales revenue is the money earned from sales, so price times quantity sold. Sales volume is the
number of units sold.
F. Explain two challenges of Liam attempting to reduce his direct costs per unit. 6
Answers may include, but are not limited to the following:

- If it involves using less expensive materials, it can compromise the quality of the shoes.
- It could mean limiting credit card purchases to reduce the fees that go into selling a pair of
shoes, which would upset many customers and could reduce sales
- Direct costs could include running and maintenance costs of certain machines that are only
used specifically for making pairs of shoes. Attempting to lower these would be difficult or
impossible while still making shoes.
- If delivery is one of these costs, then lowering it may mean longer delivery times or just
ending delivery as a service altogether
- Wages may be a direct cost (though as explained above, probably not in the real world in
this case), so there’s no realistic way of reducing those without doing more harm than good.
It’s rarely possible to cut wages, and so firms typically need to lay employees off instead;
there’s no way MR is going to do that.
G. Explain two challenges if Liam were to rent a new production facility. 6

- He’d be committing to 3 years, which means a big added commitment to fixed costs that
would be hard or impossible to get rid of if the firm ran into trouble
- He’d have to fire more employees, which he knows he needs to do but also will require
more time and effort to train them. Hiring and training more skilled workers is rarely an
easy task.
- It could make cash flow problems worse unless he has good credit terms with suppliers; we
don’t know everything about the firm, but we know that shoes are typically bought on credit,
so MR is doing the work and paying costs before getting fully paid. Expanding to the new
facility and thus trying to produce more could make any cash flow problems he may have
worse.
- He doesn’t want to finance it externally, so that would mean eating into his cash cushion or
savings. If this is not enough and he does need external financing, then there’d be a cost to
that money, either in the form of interest or equity.
22
8. Carolina Fire Museum
A. Define the term depreciation. 2
The loss in value of a fixed (non current) asset over time.
B. Identify one example of stock for CFM. 1
Examples may include:

- Products in the gift shop
- Food items, if they sell anything at the gift shop, or in vending machines
- It’s possible that they treat some of their own supplies as stock as well, such as copy paper
and other office supplies
C. With reference to CFM, explain the difference between tangible and intangible 4
assets.
Intangible assets are noncurrent assets that cannot be touched - they don’t exist physically. There
are no examples of these clearly in the case study, but their museum logo and any other
trademarks, their name, and goodwill are all examples. Tangible assets are ones that physically
exist in the world, both noncurrent and current. Their stock, building and premises, etc. are all
tangible assets.
D. Explain the purpose of CFM’s final accounts to two external stakeholders. 4
Donors: Donors may want to see the accounts to see whether or not they should even donate. For
instance, some donors may see their losses in the last year and be compelled to donate because
of that, whereas others may have the opposite reaction. They may also want to know how their
money was spent or how it will be spent if they donate, especially since the text says that some
donors put restrictions on the use of their donated money. It would probably be a government
requirement that people have public access to the accounts whether they’re donors or not; at least,
this is a requirement in the US.
Government: They are mostly interested in whether regulations are being followed and taxes paid,
though in this case as a nonprofit they would not pay tax. They need to make sure that CFM
follows the correct legal format of the final accounts and that the general public has access to the
docs.
Suppliers: They may want to know whether or not this is an organization that they should continue
to supply. In the case of CFM’s profit and loss account, we can see the org losing a lot of money in
one year, and that may make suppliers hesitant to give generous trade credit, for instance.
23
Lenders: They’d want to assess the financial health of the org and see if it is a viable business to
lend money to. The balance sheet shows healthy enough levels of assets and working capital, for
instance, but the P&L account shows heavy losses.
Competitors / Competing museums: It’s pretty doubtful that a competing museum would really find
this of much use, but theoretically another museum or another attraction that competes for the
same visitors may want to look at this to see how they’re managing their finances and to make
comparisons to their own position.
E. Construct a profit and loss account for CFM. 4
First of all, let me acknowledge that I am not sure at the time of writing how many marks a P&L
account or a balance sheet will be worth. In the exams for the prior syllabus, a balance P&L and a
balance sheet were both given 5 marks. In the specimen papers for first exams in 2024 though,
there is a question to construct a P&L account that is given 4 marks. In textbooks though, there is
an assumption that P&L will be worth 5 marks, and a balance sheet 6. What is correct? Right
now, I have no idea. In my mind it would make sense to do 4 for P&L and 6 for the balance sheet,
because the balance sheet is more challenging.
Statement of profit and loss for the year

ended 31 Dec 2022.
($000)
Contributions and grants
(revenue) 244
Museum sales revenue 105
Revenue from other sources 65
Cost of sales (17)
Gross Surplus 397
Salaries and wages (176)
Other expenses (335)
Surplus before interest (114)
Interest expense 19
Surplus before tax (133)
Tax 0
Surplus for period (133)
Retained surplus 0
F. Construct a balance sheet for CFM. 6

24
CFM Statement of Financial Position as at 31 December

2022.
($000) ($000)
Non-current assets
property and equipment 6602
accumulated depreciation (3684)
Non current assets 2918
Current Assets
Cash 147
Debtors 2
Stock 69
Current Assets 218
Total Assets 3136
Current Liabilities
Trade creditors 45
Current Liabilities 45
Borrowings - long term 184
Non-current liabilities 184
Total Liabilities 229
Net Assets 2907
Equity
Retained earnings 2907
Total Equity 2907
G. Discuss the director’s plans to invest more in CFM’s children's activities. 10
Reasons in favor of the investment may include, but are not limited to:
- They lost $133k in the latest year, so they need to do something to improve their ability to
generate surplus. If the director thinks that their best bet is through attracting more
families, then this investment makes sense.
- Having better children’s activities could also allow them to sell more items at the gift shop
as families come to the museum
- Donations and grants have been declining, so finding more ways of getting trade generated
revenue makes sense
- There are still a lot of people who don’t know that the museum exists, so there is untapped
potential for added revenue with better activities and the promotion of those activities
- They seem to have enough liquidity, and their long term borrowings are not very high as a
percentage of net assets, so they seem to have reasonable breathing room to make
investments
Reasons against the investment may include, but are not limited to:
25
- They’re already losing a lot of money over the latest trading period, and investing more
could just widen their losses.
- They’d be making this much more into a kids’ museum, which could be unsatisfying to adult
visitors and donors who want the museum to focus on history and such without the
distraction of kids when they visit
- Constructing these activities is probably a lot more expensive than other things the
museum does; it’s common that a lot of historical artifacts would be acquired through
donations, so that aspect of the museum is probably cheaper to run and expand than the
kids’ part is
- This would have to go hand in hand with additional promotion; considering that a lot of
people still don’t know the museum (it’s likely fairly small and in a location that a lot of
families don’t tend to go to), the investment on its own won’t be enough, meaning the
investment in this would be even more expensive.
- While they do have a pretty good cash position, another year of similar losses would put
them in a much worse position, and this investment would further deteriorate their financial
position if they didn’t see a fairly quick return on investment.
26
9. Lafayette Paint
Here are the full final accounts with answers to A-D plugged in.
Statement of profit and loss for Lafayette Paints , years 1 and 2 ended 31 Dec
(Year 2 is the most recent)
Year 1 ($m) Year 2 ($m)
Sales revenue 2268 3148
Cost of sales 2054 3005
Gross Profit 214 A = 143
Operating Expenses (204) (249)
Other Expenses (144) (146)
Total Expenses (348) (395)
Profit before interest and tax B = (134) (252)
Interest (150) (126)
Profit before tax (284) (378)
Tax (2) (1)
Profit for period (286) (379)
Dividends 0 0
Retained profit (286) (379)
Statement of financial position for Lafayette Paints , as at 31 Dec Years 1 and 2

(Year 2 is the most recent)
Year 1 Year 2 (most recent)
$m $m $m $m
Non-current
assets
Property, plant, and 1841 2024

equipment
Accumulated (835) (917)

depreciation
Non-current assets C = 1006 1107
Current Assets
27
Cash 109 38
Debtors 160 253
Stock 255 327
Current assets 524 618
Total assets 1530 1725
Current liabilities
Bank overdraft 19 16
Trade creditors 179 301
Other short-term 222 353

loans
Current liabilities 420 670
Non-current
liabilities
Borrowings - long 1364 1591

term
Non-current 1364 1591

liabilities
Total liabilities 1784 2261
Net Assets (254)
Equity (536)
Share capital 138 389
Retained earnings (392) D = (925)
Total equity (254) (536)
A. Calculate the value of the missing data for A in the table. 1

3148-3005 = 143
B. Calculate the value of the missing data for B in the table. 1
214-348 = -134
C. Calculate the value of the missing data for C in the table. 1
1841-835 = 1006
28
D. Calculate the value of the missing data for D in the table. 1
-536-389 = -925
E. Define the term equity. 2
The value of the shares of ownership in a firm.
F. Define the term trade creditor. 2
When the customer is allowed to purchase goods or services and pay the supplier at a later
scheduled date.
G. Define the term interest 2
Money paid to a lender as the cost of borrowing.
H. With reference to the case study, explain why a firm’s intangible assets may 4
be difficult to value.
They’re difficult to value because they do not have any value until they are sold. For example,
copyrights, patents, and trademarks all have to have some estimated value for the firm, but there is
no way to know if you are 100% accurate because each one is unique and so there cannot be a
direct comparison of market value in the way that there often is for a tangible asset. The only way
to know for sure is to see what another party is willing to pay for the asset. In the case of LP, they
thought that intangible assets were worth more than they turned out to be, because demand
remained weak after the acquisition and the intangible assets turned out to be not as strong as
they had hoped, in relation to the price they paid for the firms.
I. With reference to LP, explain the concept of goodwill. 4
Goodwill is when the value of a firm is greater than the value of its net assets, which can happen
because there is intangible value to its image and reputation in the marketplace. In the case of LP,
it seems to have overvalued the goodwill of the firms that it acquired, so it would probably
eventually have to write down the value of those intangible assets on its balance sheet to be
accurate about the current worth of what it’s acquired.
J. Comment on elements of LP’s financial position that can be seen in the profit 4
and loss account.
Comments may include, but are not limited to:

- Their revenue grew from year 1 to year 2, but their cost of sales actually rose by slightly
more. This puts them in an even worse position for gross profit.
29
- Their expenses also rose, and the “other expenses” category in particular is looking
problematic. We don’t know what’s included in that category, but the fact that it’s not part of
operating expenses is a bad sign that they have added expenses beyond their core
operations that are necessary to sell paint.
- At least their interest expense went down, which is nice. This could either be because of
debt going off their books as it’s paid or because they’ve been able to refinance some debt
at a lower interest rate, or get an extension on interest payments.
- As a result of all of this, their losses are ballooning - they have 2 straight years of losses,
and in the second year they’ve lost over $300 million. It’s important for students to see the
gravity of the situation by remembering that numbers are in millions.
K. Comment on two elements of LP’s financial position that can be seen in the 4
balance sheet.
Comments may include, but are not limited to:

- They’ve acquired more property, plant, and equipment, though it’s also depreciated further.
Normally having a greater noncurrent asset value may be a good thing, but in this case it
could be presenting additional burdens on the firm in the form of debt that needs to be paid
back and assets tied up in equipment that would be difficult to sell for full value.
- Their liquidity position is looking pretty ugly and has gotten significantly worse in the sense
that cash is a much lower portion of current assets in year 2 than in year 1, and debtors
have risen a lot. Debtors represent sales on credit, which is good in the sense of making
sales, but it’s not as liquid as cash and so could leave them in a vulnerable position in
terms of having a cash shortfall.
- Their short term loans and trade creditors have both increased, possibly meaning that the
firm is trying to find ways of getting more short term liquidity. Increasing the trade creditors
may be a good thing to give them financial breathing room, but it’s questionable if they will
have the cash to pay those creditors back when the money comes due.
- They have negative working capital - current liabilities are greater than current assets,
there’s a liquidity issue here
- Long term borrowing has increased (which is interesting, considering the interest expense
went down), making them more dependent on debt
- The book value of the firm continues to move in a negative direction, and the negative net
assets value has increased. It’s ugly.
L. Discuss the challenges to LP getting its financial position on a sustainable 10

path.
Because every 10 mark question requires students to have balance in their response to get to the
top of the rubric, I would expect students to discuss factors that could limit the challenges or
provide opportunities for the firm to overcome some aspects of those challenges.
Challenges to financial sustainability may include, but are not limited to:
- I wouldn’t ask this question together with one of the 4 mark questions to comment on the
findings from the final accounts, because your first task in this 10 mark answer would be to
go through any of the financial problems that we see from the P&L account and balance
sheet listed above. In addition to what’s already been mentioned:
30
- With interest rates rising and lenders starting to stay away from risky firms, LP would have
a hard time borrowing at an affordable interest rate in order to deal with their short term
liquidity problems
- With weaker demand than expected, there’s not a convincing route for them to make
additional sales, thus their profits cannot be expected to rise much without finding a way of
getting their cost of sales and expenses down
- If the majority of the tangible non current assets that it acquired were equipment, rather
than property and plants, then these assets could be difficult to sell at face value
Potential positive aspects of their financial situation or opportunities to improve financial

sustainability may include, but are not limited to:
- They’re still making gross profits of more than $100m, so while gross and [net] profits are
moving in the wrong direction, perhaps it’s possible that as costs are rising LP could raise
its prices slightly since inflation is high and people may be getting used to this. It may be
that in the initial phases of inflation customers are not yet used to the idea of paying higher
prices, but that now the firm can start to raise them as the expectation of higher prices
settles in.
- Even though analysts think that LP overpaid for the firms and assets it acquired, that
doesn't mean that they’re worthless. If LP needs to free up cash and reduce its expenses,
it could seek to offload those assets or portions of those assets.
- Because its interest expense went down at the same time that the total value of long term
borrowings increased, it’s possible that they are now able to refinance some of their debt or
to take on more borrowing for an interest rate that is affordable. This is contradicted by the
case study saying that rates are rising and it’s harder for risky firms to get loans, but we do
see some hints in the balance sheet and P&L that it’s not all terrible with their long term
liabilities.
The following question is from the profit and loss account only version of the LP case
study:
E. With reference to LP, explain why firms may or may not pay dividends. 4
Dividends are money given to shareholders out of a firm’s profit or reserves. There is no legal
obligation for a firm to pay interest to shareholders, and so it depends on whether the firm is
profitable, how profitable it is, how consistently profitable it is, and how much shareholders
advocate for dividends being paid. It is very common for profitable but fairly young companies that
are growing quickly to not pay dividends, because it wants to retain those profits for use in growing
the business, and shareholders are satisfied with their return on investment being in the form of
increased share price. If a firm has been around for a long time and profits are expected though, at
some point its shareholders are probably going to demand dividends. With LP, they’re not
profitable and they’re possibly going to go bankrupt, so it would be irresponsible for them to pay
dividends.
31
10. JB Tax Solutions
A. Identify two possible intangible assets for JBT. 2

- Copyrights
- Trademarks
- Patents
- Branding
- Goodwill
B. Explain the appropriation account portion of a profit and loss account. 2
The appropriation account shows how the firm distributes its profits into dividends and/or retained
profit (or surplus, if it is a nonprofit organization).
C. Explain why services firms such as JBT may not include the cost of sales on 4
its profit and loss account.
JBT prepares taxes for clients, and so there isn’t a physical product that it’s selling. As a result,
there isn’t a cost of sales in terms of the materials that JBT would need to purchase in order to
make each sale. While they may need to purchase office supplies like printer paper, ink, etc. to
make sales of a client’s tax forms, these physical items are not really the true product that JBT
would be selling, and it would be hard for them to calculate the direct cost of any physical items per
consulting job they performed. Thus, JBT may not keep track of inventory and cost of goods.
D. Explain one aspect of JBT’s balance sheet that a lender may want to analyze 4
before lending the firm money.
Reasons may include, but are not limited to:

- They may want to know the liquidity position of the firm to see if it’s generating enough
cash, or keeping enough cash on hand to be able to meet its existing obligations, as well as
its ability to meet the new obligation of interest payments on loans.
- The existing amount of debt, but short and long term would be a key consideration to see if
the firm has a healthy amount of debt to equity.
- The firm’s net assets / equity could be a good sign of whether or not they have been
well-run so far or if the bank can see if it is wise to take on loans for an expansion.
E. With reference to JBT, explain the difference between the value of retained 4
profits on a profit and loss account and the value of retained earnings on a
balance sheet.
Retained profit is the amount of profit that is kept in the organization and used to fund its ongoing
operations rather than distributed to shareholders, but crucially on the profit and loss account it
32
represents the profit for the trading period only. The retained earnings figure on the balance sheet
is essentially the same thing, but it’s the accumulation of retained profit over a longer time period
than the P&L and represents the value of retained profits that have been retained as of the date on
which the balance sheet was produced. Same concept - different time period.
F. Calculate JBT’s tax as a percentage of profits. 2
2.3/37 =0.0621 = 6.21%
G. Construct a balance sheet for JBT given the information given. 6
JB Tax Solutions Statement of Financial Position as at 31 Dec.

latest year
($000) ($000)
Non-current assets
Property, plant, and equipment 32
Intangible assets 3.8
Accumulated depreciation (1.5)
Noncurrent assets 34.3
Current assets
Cash 4.7
Debtors 6.9
Current assets 11.6
Total assets 45.9
Current liabilities
Bank overdraft 0.3
Trade creditors 1.3
Other short term loans 6.3
Current liabilities 7.9
Non-current liabilities
33
Borrowings - long term 7.2
Non-current liabilities 7.2
Total Liabilities 15.1
Net assets 30.8
Equity
Share capital 24.9
Retained earnings 5.9
Total Equity 30.8

34
11. RaceWear
A. With reference to RaceWear, explain the difference between cost of sales and 4
expenses.
cost of sales is the direct cost of production for the items that a firm sells. For RaceWear this would
be things like its material costs of selling shoes and apparel, plus added direct costs that it
considers part of the cost of sales, which might include things like shipping costs. The expenses
are indirect costs that are not attributable to a specific product that they make, so things like rent,
insurance, administrative costs and salaries, etc.
B. Define the term dividends. 2
Money given to shareholders out of profits or reserves.
C. Define the term debtors. 2
Money that is owed to a business by other individuals or businesses.
D. Construct the profit and loss account for RaceWear given the information 4
above.
Statement of profit or loss for RaceWear for period ending 31 Dec. 2022
($m)
Sales revenue 600
cost of sales (350)
Gross profit 250
Expenses (120)
Profit before interest and tax 130
Interest (10)
Profit before tax 120
Tax 25.2
Profit for period 94.8
Dividends 0
Retained profit 94.8

35
E. Calculate the values of A and B. 2
A: 873+150+85-1069 = 39
B: 1445-938 = 507
F. Construct the balance sheet for RaceWear given the information above. 6
RaceWear statement of financial position as at 31 Dec.

2022, in $m
Non-current assets
Property, plant, and
equipment 873
Goodwill 150
Other intangible assets 85
Accumulated depreciation (39)
Non-current assets 1069
Current assets
Cash 113
Debtors 720
Stock 55
Current assets 888
Total Assets 1957
Current liabilities
Bank overdraft 5
Trade creditors 455
Other short-term loans 7
Current liabilities 467
Non-current liabilities
Borrowings-long term 45
Non-current liabilities 45
Total Liabilities 512
Net assets 1445
Equity
Share capital 938
Retained earnings 507
36
Total Equity 1445
G. Explain one strength and one limitation of investors using RaceWear’s final 4
accounts to analyze its financial position.
Benefits may include:

- P&L shows profitability, and can also be used to see how efficiently the business is run
(cost of sales, overheads, etc.)
- Balance sheet shows the firm’s liquidity and the breakdown of its assets (for instance,
RaceWear really doesn’t have much debt, and the current assets are roughly double the
current liabilities, so the balance sheet shows pretty good financial health)
- They can be used for future projections of profits and liquidity (though these are predictions,
of course, and are not guaranteed)
- Investors can see the return on capital and other important ratios
- Both profits and balance sheet could give investors the ability to argue in favor of dividends
(for example, profits and liquidity both look good, so perhaps the firm can afford to start
paying dividends)
Limitations may include:

- Balance sheet is just a snapshot of one day in the business’s assets and liabilities, so it
really needs to be compared to other time periods and other firms in the industry to get a
more complete picture
- They don’t show cash flow. Even if a business is showing profit on the P&L account, they
could still run into a cash flow problem
- Past performance on P&L and balance sheet is no guarantee of future performance at the
same level
- Firms may sometimes have difficulty getting payment from debtors in a timely manner; they
show up as sales and a current asset, but that doesn’t necessarily mean that the firm has
access to the money. For instance, RaceWear has an awful lot of debtors on its balance
sheet
- Any possible examples of RaceWear conducting window dressing, like booking more sales
on credit that it doesn’t actually have in cash
H. Explain why RaceWear’s final accounts would be important for two 4

stakeholders.
The answers below simply follow textbook answers, but if this were an exam situation, it’s best for
the student to choose two stakeholders for which they can most directly use the case study to
explain the point. As a result, while it’s correct to explain that the media may want to use their final
accounts, it’s probably not the best choice since the answer would be really generic and couldn’t
really use the case study. Answers may include any of the following:
- Shareholders / potential investors: Shareholders would need to use the final accounts if
they’re going to be able to effectively argue that they should be paid dividends. In a more
general sense, they should be looking at them to guide their decisions on any votes the firm
poses to shareholders, or what issues to bring up in shareholder meetings. They of course
37
also want financial info as a guide to whether or not they should keep their investments in
RaceWear.
- Management: Needs to monitor its liquidity position, profits, costs/expenses, and a host of
other information to ensure that the firm is performing well. Managers must use these to
ensure short and long term health of the organization, to ensure that it is run in a way that
returns value to shareholders (including assessing shareholders’ demands for dividends).
Using the case study further, they could use final accounts to assess the success of their
RaceWear branded apparel and other products.
- Employees: There’s no direct evidence of a reason why employees at RaceWear would

want to use the accounts, but in general employees want to know that they’re working for a
financially stable organization, otherwise they may consider looking elsewhere for work.
They could also use RaceWear’s profits and very strong liquidity as leverage for bargaining
for higher wages and/or benefits.
- Government: Always requires public corporations to show financial records, and for any
firm, will require the business to keep accurate records for tax purposes to ensure that the
firm is fulfilling its legal obligations. In some cases, governments also may use final
accounts to assess the government’s own tax policies.
- Competitors: Another sort of generic example that doesn’t use the case study much -
competitors may want to be able to compare their profits and/or financial ratios to a
competitor in their industry like RaceWear. They may also want to look at something like
RaceWear’s gross profit and cost of sales to analyze their strategy in response to
RaceWear’s price-beating guarantee.
- Financiers: Banks will want to see RaceWear’s final accounts to assess their
creditworthiness, which in this case seems quite good. This allows the bank to see whether
they should loan to the firm, and at what interest rate.
- Media: Again, nothing specifically in the case study on this one. The media just generally
wants to be able to report on corporations, and it needs the final accounts to report on their
profit numbers and to be able to explain what’s happening to their share price following
release of quarterly results.
I. Explain two examples of information from RaceWear’s final accounts that 4

activist investors could use to argue that the company can pay regular
dividends.
Answers may include any of the following:
- Liquidity: current assets are almost double its current liabilities

- Low levels of debt, both short and long term, especially as compared to its net assets
- Very strong operating profits (profit before interest and tax)
- Even after accounting for interest and tax, profits are high, and all of it was retained

38
12. Crispy Collin’s Chicken and Waffles
A. Define the term trade creditors. 2
When a firm receives a good or service from another firm and pays them back at a later agreed
upon date.
B. Construct the profit and loss account for Crispy Collin’s Chicken and Waffles 4
given the information above.
Crispy Collin’s
Statement of profit or loss for period ended 31 July
$000s
Sales revenue 85
Cost of sales 42
Gross profit 43
Rent (14)
Marketing expenses (2)

Salaries, administration, and insurance
expenses (20)
Profit before interest 7
Interest (.5)
Profit before tax 6.5
Tax (1.75)
Profit for period 4.75
Retained profit 4.75
C. With reference to Crispy Collin’s, explain how the book value of a company 4
could differ from its market value.
Students must show understanding of both book value and market value. The book value of
$72,000 shows the value of the net assets. The market value could be different if another
firm is willing to acquire them for higher than the value of their net assets, or perhaps even
lower than book value if a firm acquiring Crispy Collin’s thought that the assets on its balance
sheet were overvalued or if it were losing money. Often in the real world, a business will be
acquired for 10-12 times the value of its EBITDA (earnings before interest, taxation,
depreciation, and amortization), or in the case of what we use in the IB, roughly 10 times
profit before interest and tax. Intangible assets like the value of Crispy Collin’s recipes, the
39
brand, goodwill, etc. could also have an impact on the firm’s market value too, and it’s hard to
give these a price value on the balance sheet; often, you don’t fully know the market value of
intangible assets until an acquisition is made.
D. Calculate the residual value of the new set of fryers at the end of the 4th year 4
by using the straight line method. [HL ONLY]
Annual depreciation = (original value - residual value) / lifespan
X = (23500-1000)/15 = 1500
$1500 of depreciation per year
1500*4 = $6000 of depreciation in total
23500-6000 = $17500 at the end of the 4th year
E. Calculate the depreciation per hour of use using the units of production 4
method. [HL ONLY]
(23500-1000)/45000 = $0.5 per hour of use
F. Explain an advantage and a disadvantage of using the units of production 4

method to determine the depreciation of the fryers. [HL ONLY]
The basic advantage of the units of production method is that the owner will be able to see the cost
of running the equipment, which may be a very useful way of looking at it as the equipment nears
the end of its useful life and maintenance costs start to rise. It also would allow him to do a
comparison of the current equipment’s cost of usage in terms of depreciation, vs the new set that
he would like to buy.
The disadvantages of this method are that it’s a more precise measurement of the fryers’
depreciation in a way that he may not find all that helpful, because he has no choice but to run the
fryers all day while the business is open because it needs to make fried food. Thinking about the
depreciation in terms of per hour of use may put him in the mindset of thinking about the fryers
losing value every time that they’re turned on, and it’s not like he can avoid using them. Also, the
units will depreciate more during periods of high use, but those are also periods in which his sales
would be higher.
G. Analyze one argument for and against the firm purchasing the new set of 6
fryers now. [HL ONLY]
Arguments in favor of purchasing the fryers now may include, but are not limited to:
- He’s going to need to buy new fryers at least within 3 years, and if he has the money or a
low enough interest rate to do so now, then he could be getting 3 additional years of better,
more efficient production rather than waiting to experience those benefits.
40
- New fryers should have fewer maintenance issues and just be more reliable overall.
Considering that the fryers are a crucial element of the business, he cannot afford to have
the fryers break down due to age and wear and tear; a new set would minimize that risk.
- He is making profits above and beyond the salary that he pays himself, so he may have
enough of a financial cushion right now that he can afford to buy the fryers.
- The fryers will lower costs from electricity, maintenance and oil, so the fryers could pay for
themselves over the course of their lifespan just by reducing those costs
- If the fryers really can increase their sales, this could also more than pay for the fryers
Arguments against purchasing the fryers now may include, but are not limited to:
- We don’t know how much of the $20k salary/insurance/admin expenses is his salary, and if
it’s a small portion, then he’s really not making much money per financial quarter and
investing in the new fryers, even if it’s through an affordable loan, may be a bit of a risky
financial move.
- If the added financial benefits from the new fryers don’t add up to more than the
interest rate on a loan for the fryers, then they may not be worth it
- There might be a slight learning curve involving training on the new fryers (but
probably not enough to really matter)
- If their current set of fryers still works, then it might be best just to continue with them
even if it involves maintenance costs. Often the cost of a new large asset and the
resulting interest from loans is more than just paying for the periodic maintenance on
an older asset.
- The ability to serve more customers quickly depends on them having the demand to make
that investment necessary, and here we’re not given any information on whether or not that
this is the case. Therefore, it might just be a waste of money.
41
13. Spring Run Academy
A. Using the straight line method, calculate the depreciation of one of the new 2
buses per year.
(115000-12000)/12 = $8583.33 per year
B. Using the straight line method, calculate the depreciation of one of the used 2
buses per year.
(38000+3000-10000)/6 = $5166.67
C. If the director assumes that each bus will drive about 15,000 km per year, 2
calculate the depreciation per kilometer of a new bus with the units of
production method.
(115000-12000)/(15000*12) = $0.57 per kilometer
D. If the director assumes that each bus will drive about 15,000 km per year, 2
calculate the depreciation per kilometer of a used bus during the 6 years that
SRA would use them with the units of production method.
(38000+3000-10000)/(15000*6) = $0.34 per kilometer
E. Explain one reason why the director should factor in depreciation of any 2
buses that it purchases.
The buses are a fixed (non-current) asset that are bought for a certain price but will not retain that
value over their whole lifespan because of wear and tear degrading them. Thus, if they sold the
buses, they will not be able to get the full price they initially paid for them back in that sale, so its
depreciation has to be factored in.
F. Explain an advantage and a disadvantage of SRA using the straight line 4

method for depreciation.

- For accounting purposes, they don’t really need to know the depreciation per km - they just
need to document the loss of the asset’s value over time each time a balance sheet is
produced. It’s common for businesses to just show depreciation of an asset by equal
amounts over time until it’s sold or disposed of.
- The depreciation per year is probably a more reasonable way of people at SRA thinking of
the depreciation of the buses than the units of production method. With vehicles as assets,
the number of years of operation would be a big factor in how potential purchasers of the
bus would view its proper price when SRA tries to sell it.
- If you think about it in terms of the bus losing $X every km its driven like the units of
production method does, then you may be in a mindset of using it as little as possible,
42
which could be harmful because the whole reason they’d want the buses is to attract more
customers and to enable the the students to take more trips.

- Particularly for the new buses, it’s not realistic to assume they lose a certain dollar amount
each year; they lose the greatest value in the first few years, and then their depreciation
curve starts to get flatter as the buses age.
- The cost per unit method factors in depreciation per km, and while years of life matter for
vehicle value, so does the amount of use. A 10 year old bus that has only been driven
50000 km will be worth more than a 10 year old bus that’s been driven 200000 km. The
straight line method doesn’t consider this though.
G. With the use of financial and non-financial factors, make a recommendation 10

on whether the school should invest in the new or used buses.
Financial factors in favor of the new buses may include, but are not limited to:
- The new buses may be able to generate more profit, if students/parents see the new
buses more positively than the used ones.
- New buses may also cost the school a lot less in terms of maintenance costs or fuel
than the used ones, because newer vehicles are typically more fuel efficient
- Every time the school buys and sells buses, the dealer is taking a cut of the buses’
value for their profit. Because the new buses would be kept for 12 years rather than
6 years for the old ones, you could argue that the school is paying less money
relative to the buses’ value to the middle man if it purchases the new buses. This
isn’t a really strong argument though - the markup on the new buses would probably
be more than the markup on the used ones.
- The interest rate would be lower on the new buses, so it’s less money wasted in
unproductive interest payments. If students are curious about the reasoning here, by
the way, it’s likely because the bank views a used asset as having a greater risk of
breaking down and the borrower having problems repaying the debt. Many banks
won’t even initiate loans for vehicles this old at all.
Non-financial factors:
- It may raise school pride/morale if students and other stakeholders see that the
school is using new assets rather than old ones. Children may often grumble about a
school being ‘cheap’ if it buys an old bus (students at my school definitely made fun
of the administration for buying a used bus, even though the thing is perfectly good).
- The better marketing aspect can be considered a non-financial factor too. It may not
necessarily lead to increased revenues in a way that can be calculated with certainty,
but have the overall effect of improving the school’s image.
- You might argue that newer buses are safer (we don’t necessarily know that, but it’s
certainly possible).
Factors in favor of the used buses may include, but are not limited to:
- The used buses are much cheaper to purchase, so would require a much lower loan
amount and thus less money paid in interest, even though the interest rate is higher
43
on the used buses.
- If we focus on depreciation, then the new buses lose a lot more in depreciation over a
6 year period (the most direct comparison) than the old buses do. The new buses
lose $84325.01 each over 12 years (or 57279.6 over the first 6 years), vs. the old
buses losing $19,210.92 each over a 6 year period. Viewed this way, the new buses
are a much bigger cost for the school. Even though the new syllabus does not
require students to know the reducing balance method of depreciation, they should
be able to analyze the idea that the assets will not lose value at the same rate - a new
bus is going to lose value a lot quicker over the first few years that SRA has it than
the old buses will. We can also see that the used buses lose a lot less value per km
than the new ones do.
- The cash they save on going with the cheaper used buses means that they can
spend money on other factors that help generate revenue or save costs. If there’s a
more pressing issue for the school, the money could be better spent elsewhere.
Non-financial factors:
- The argument that people would prefer the new buses and that they could act as a
more effective form of marketing may not be true, or at least not true to a very large
extent, particularly after the first year of owning them and the newness has sort of
worn off. How many people really care that much about a bus being brand new? It’s
debatable, and if this factor doesn’t matter, then you should probably just go with
whatever is more cost effective.
44
13. Cedar Hill Books
A. Define the term capital employed. 2

The total value of capital investment into a business, or share capital + retained profit + long
term liabilities. Another way of thinking about it is net assets plus long term liabilities.
B. Explain how gross profit margin differs from profit margin. 4
Gross profit margin is the gross profit as a percentage of sales revenue, or sales minus cost
of sales over sales. Because profit factors in overhead expenses in addition to cost of sales,
it shows sales revenue minus cost of goods minus expenses over sales revenue.
C. Explain why Cedar Hill Books may want to know its acid test /quick ratio in 4
addition to the current ratio.
The current ratio shows all current assets relative to all current liabilities, which is useful to
see Cedar Hill’s liquidity. In this case, it shows acceptable liquidity, though declining for 3
straight years. The acid test ratio though shows the current ratio with stocks taken out, and
so gives a better measure of very liquid assets (ie, cash) to current liabilities. In the case of
Cedar Hill, we can assume that much of its stock is in the form of books, and generally
speaking, creditors aren’t super excited about being paid in the form of books. It would need
cash to pay creditors, so the acid test ratio here shows that when it’s considering its most
liquid assets relative to liabilities, it has much less true liquidity.
D. With the use of data, analyze Cedar Hill’s financial position over these three 6
years.
There are many different observations that could be made, so here are a few:
- Gross margins are fairly stable, though lower in years 2 and 3 than in year 1. These
numbers are basically in line with the publishing industry, from what I’ve read, but a
student wouldn’t know that and so there’s not much analysis that can be done on a
GPM of 38.5% alone. You’d have to look at the year to year comparison, or GPM in
relation to NPM. It should just be noted that it declined, which is a bad sign, but then
slightly recovered.
- Profit margin significantly declined from years 1 to 2, with an increase in year 3. This
is not at all a good sign, but remember that the case study says that profits can be
very dependent on a few books, and the popular book published 4 years ago was
probably still driving a lot of the 9% NPM seen in year 1. This means that the year 3
numbers may be perfectly normal and shouldn’t be seen as a problematic decline if
the year 1 number was already higher than normal due to that one book. However,
you could note that because the GPM improved while NPM deteriorated in year 3,
overheads must have risen, which is not a good sign. The case study also mentions
that profit margins have declined for certain non-fiction titles because of e-book
borrowing at libraries.
- Liquidity is falling significantly, and it’s important to note this decline in the acid test
ratio in particular. The current ratio has declined, which shows deterioration in
financial position, but is still within an acceptable range. It’s the fact that the acid test
ratio looks like it dropped off a cliff that is more alarming. However, we should
continue to bear in mind that year 1 was much more profitable due to that popular
45
book, so that could have led to a higher than normal amount of cash. Considering
that both acid test and current ratios declined by a similar amount, we should expect
that this represents a drop in the firm’s cash, which is a bad sign in general. Looking
at acid test ratios for the publishing industry, these ratios actually look higher than
average and thus are probably still totally fine, but I would not expect a student to
know that, because I didn’t know that until I looked it up. From the student’s point of
view, this large drop in liquidity should be noted as a potential problem, with the
caveat that it could just be due to the positive cashflow of its most popular book
declining. To really know what’s going on, I’d want to see the efficiency ratios
covered in section 3.6.
- The drop in return on capital is probably entirely due to whatever is causing the drop
in NPM, so again this may be totally fine and related to the effects of that popular
book published 4 years ago wearing off. Even in year 3 of the chart, the ROCE is still
more than double the interest rate, so we should conclude that Cedar Hill is profitably
employing its assets, and is thus in an overall healthy financial situation. In fact, from
year 2-3, the NPM declined while ROCE rose, meaning that they’re more efficiently
generating returns from the money they have invested.
E. Discuss two methods that Cedar Hill may use to improve its profitability ratios. 10
Answers may include, but are not limited to the following. Each is given just a quick overview
of pros and cons, though students would need to go in depth.
- Increasing price: Increases revenue without increasing cost, and could possibly be
done for more popular books. However, it could lower sales and negate the added
profit margins from the price increase, particularly as the company is facing pressure
from e-books and online sales.
- Marketing strategies such as promotion: Leads to more sales, but comes with
increased costs.
- Develop audiobooks: Marketing department is confident that it could raise profits, as

the market is growing. However, the up front investment would probably hurt profits in
the short run, and the strategy of hiring actors would be expensive and may not be
worth it. As with any new product strategy, there’s no guarantee the investment will
pay off.
- Develop more e-books: It’s already been successful and could be a very cheap way
of selling more books, but there is the complicated world of digital rights to navigate,
and this strategy is not going to be popular with every kind of book. Also, they sell
books for kids and young adults. This may work well with young adults, but young
children’s books would seem to probably do quite poorly with this strategy.
- Cutting direct costs such as through using cheaper materials or finding different
suppliers: This cuts costs and thus boosts profits per item, and it may be feasible to
do either of these without noticeably affecting quality. It can be time consuming to
reform the supply chain though, and quality definitely could be affected. This could
be a particular problem with kids books that may need to be durable. Ugh, my kids
are so good at ripping the books they love to shreds; if the book isn’t made of
Titanium, it’ll probably get destroyed in 6 months or less...
- Cutting staff through outsourcing, automation, or delayering: Can of course

significantly cut costs, and it could be very effective if they are able to find production
methods or contractors to print the books at a cheaper cost. It may look bad if
anyone is paying attention to their CSR image though. Automation could involve a
46
big up front expense, and if they outsource overseas, then they increase shipping
costs and leave themselves more vulnerable to any problems in the global supply
chain or country to country trade relationships.
- Investing in technology that saves energy or is more productive: Can pay off in the
form of higher profit margins and more volume of production for years to come.
Involves an up-front cost though, and also probably leads to a need for worker
retraining or stopping production for some amount of time while new equipment/tech
is put in place or training is happening.
- Reducing borrowing: This would lower the amount of company finance going to
interest payments, but considering their ROCE is consistently more than double the
interest rate on borrowing, and sometimes possibly even triple, then it probably
makes sense for them to borrow if it’s being profitably invested. Cutting down on
borrowing could limit sales potential more than it cuts costs.

47
15. Fresh Cucina
A. Calculate the gross profit margin for Fresh Cucina. 1
GPM = 178/519 = 34.3%
B. Calculate the profit margin for Fresh Cucina 1
PM = 38/519 = 7.32%
C. Calculate the current ratio for Fresh Cucina. 1
Current ratio = 135/103 = 1.31:1
D. Calculate the quick ratio (acid test ratio) for Fresh Cucina. 1
Acid test ratio = (135-65)/103 = .68:1
E. Calculate the return on capital employed for Fresh Cucina. 1
Return on capital = 38/(427+218) = 5.89%
F. With the use of two ratios, comment on Fresh Cucina’s liquidity. 4
The current ratio is not very good. A typical rule of thumb is that it should be somewhere between
1.5:1 and 2:1, and because the number is pretty well below that, it may mean that they do not have
enough cash on hand. The acid test ratio of .68:1 looks alarming at first glance because you often
see a 1:1 ratio as a good rule of thumb for a safe liquidity position. Because this is a grocery store
though, we should expect to see a large difference between current and acid test ratios, because
the majority of the firm’s current assets will be held in inventory. If it’s not, then the firm may not
have enough inventory in stock to meet customers’ demand, and thus it may miss out on sales.
Many grocery stores have an acid test ratio of between .25:1 and .3:1 for that reason. While I don’t
expect students to know that grocery stores are often between those numbers, I do teach my
students to think intuitively about what kind of business it is and whether or not they need a lot of
inventory. If we’re talking about a private school as a business, for instance, then having a really
low acid test ratio is alarming, because schools aren’t like retail stores that sell a bunch of
inventory every day. Taking the two ratios overall then, it seems that the company is not in an
outstanding liquidity position, but also not catastrophic. The acid test may actually indicate that the
firm has too much cash on hand, that the problem is more that it doesn’t have enough inventory.
G. Discuss two ways in which Fresh Cucina could improve its profit margin. 10
There are many acceptable answers for this, but the student must acknowledge the positives
and negatives to any suggestions they go with.
48
- Finding cheaper suppliers for some of its ingredients or products it carries. This
comes with the very large drawback though of possibly reducing their product quality,
which directly goes against their unique selling point.
- Finding a way to cut overheads, such as negotiating better interest rates on loans,
negotiating for cheaper rent, finding a cheaper insurance provider, investing in more
efficient energy sources to reduce utility costs, or reducing the marketing budget.
Some of these require an up front investment though, and negotiating for cheaper
rent or interest rates can be unsuccessful (particularly for rent). Renegotiating
interest rates is more realistic if prevailing interest rates are falling, as they sometimes
do.
- Increasing prices. This is always a challenge, particularly in an industry like groceries

with so much competition and such low margins, but it may be suitable due to the
firm’s overall strategy that focuses on quality and premium products.
- Develop new products that have high profit margins, such as expanding its prepared
food offerings. A downside is the likely required investment into product
development, which could decrease liquidity. Expanding these products may also
take up more store space, or result in some products that just don’t really catch on.
I don’t really think that you should give students full credit for suggesting that they reduce
worker wages, benefits, or salaries, because in practice this is very difficult to do unless the
economy is in a substantial recession. The firm may hire any new workers at lower wages
(though even this is a challenge), but it likely cannot feasibly reduce existing worker wages
without significant backlash. Better suggestions along these lines that could earn full credit
would be to find ways of automating processes, outsourcing some business activities,
delayering, or other practices to reduce the need for workers in the first place. Each of these
can reduce costs and thus improve profit margins, and they do so in a way that is probably
more sustainable and is just more feasible for a firm in the real world than cutting worker
wages.
H. With the use of financial ratios, evaluate Fresh Cucina’s financial 10

performance.
HL students could of course use ratios from section 3.6 to answer this question, but I’m
assuming here that students have only seen section 3.5 by this point.
GPM = 178/519 = 34.3%

PM = 38/519 = 7.3%
Current ratio = 135/103 = 1.31:1
Acid test ratio = (135-65)/103 = .68:1
Return on capital = 38/(427+218) = 5.89%
GPM: I don’t think you should give full credit if students choose GPM without comparing it to
another ratio like PM. GPM alone does not give them enough information to effectively
evaluate their performance, unless the student has contextual information like knowledge on
what gross profit margins are typically like in this industry (very often just 1-3% per item, from
what I see, so the overall GPM is typically low; therefore the 34% GPM here really is not
terrible). If a student uses GPM, they should directly refer to the fact that the case study
says margins are low on most products, so there is evidence here that the prepared foods
and other high margin products are likely significantly driving up the overall GPM, showing
financial strength.
49
PM: A profit margin of 7.3% should be a strong indicator that things are going well for the
organization. The IB textbooks do not really give guidance on what a good NPM number
should be, and it does vary by industry, so it’s hard to tell how good this is without getting an
industry comparison or a year to year comparison from Fresh Cucina. The case study refers
to a 2% industry average though, so Fresh Cucina is clearly doing extremely well. To be that
far above the industry average is a good sign, and it shows that their emphasis on prepared
foods is probably working.
Current ratio and acid test ratio: refer back to what I wrote on question 3. For additional
insight, it can be noted that the firm has a 60 day window between receiving money from
debtors and needing to pay its creditors. This suggests that even with a mediocre liquidity
ratio, they should not run into trouble because of the flexibility they have in paying their
suppliers.
Return on capital employed: In general, you want to see a return on capital that is at least
double the interest rate on borrowing, and in this case it’s not. At first glance, the ROCE
number does not look that inspiring. If the firm invests $1, it’s effectively getting only about
$1.06 back in returns, which suggests it could be using capital more efficiently. It’s true that
they’re making nearly 2% more on capital than the interest rate, so it can still be positive for
them to borrow money for future investments, but because there will be variability in the
ROCE number, the 5.9% figure suggests that they could find a way to use capital more
efficiently.
The overall picture seems that the firm’s financial position is strong. Despite some slight
weaknesses in liquidity and return on capital, they are still generating healthy profits, and
liquidity does not seem very problematic.
I. Calculate the stock turnover for Fresh Cucina, assuming that it opened the 1
trading period with a stock of $75 million.
Inventory turnover = (cost of sales/average stock)
Average inventory = opening + closing / 2
341/((75+65)/2) = 4.87 times per year
Or if doing this by days, inventory turnover = average stock/cost of sales * 365
(75+65)/2/341 * 365 = 74.93 days
By the way, these numbers are really low for a grocery store. Would a student know that?
No, and the question doesn’t require them to. The industry as a whole is more like 13 times
per year on average, from what I have found. For full disclosure, these numbers are based
off of a real company called The Fresh Market for 2016, so the inventory turnover number is
basically a real example.
J. Calculate the debtor days for Fresh Cucina. 1
Debtor days = (10/519) * 365 = 7.03 days
K. Calculate the creditor days for Fresh Cucina. 1
Creditor days = (49/341) * 365 = 52.45 days

50
L. Calculate the gearing ratio for Fresh Cucina. 1
Gearing ratio = 218/(427+218) *100 = 33.8%
M. Discuss two strategies that Fresh Kitchen may use to improve its efficiency 10
ratios.

- Lowering prices: This would move goods faster, but it also directly contradicts their strategy
of offering higher profit margin goods like prepared foods. It’s also questionable how much
they could do this, because we’re told that most of their goods have low margins already.
- Increased promotion or other marketing strategies (product changes, packaging changes,

etc.): These strategies could bring in more customers, and students should go into detail
about what kind of marketing strategy they envision, though they may not have gotten to
the marketing section yet, depending on when you teach it. The downsides here are that
many marketing strategies cost money and take time, and these could lower their
profitability ratios to some extent, at least in the short term. There’s also never a guarantee
that things like promotion will lead to more sales.
- Better product selection: They could emphasize only those products that sell quickest. I’d
argue that to some extent they should be doing this anyway, in particular with the prepared
foods. If there are certain prepared foods that aren’t selling well, then they either need to
do a better job of promoting them, tweak the recipes to improve them somehow, or take
them out of rotation and emphasize different prepared foods. A grocer should be able to
see pretty easily how well certain items are selling. The biggest downside here is that there
may be products that don’t sell quickly but customers still expect to be stocked consistently,
and if customers find that those items aren’t available, they may no longer shop there.
Most grocery store customers want to get all of their items at one store instead of having to
shop at multiple grocery stores.
- Using just in time stock methods: Students probably haven’t gotten to this yet because it’s
an operations topic, but they could still be introduced to it now. If the grocery store can
bring in more products based on when they precisely need them, they can cut down on the
amount of storage space dedicated to stock, and this can particularly be true for cold or
frozen items that are very expensive to store. Biggest downsides here are that it can be
hard to predict this, and any disruption in the supply chain due to external events (supplier
problems, bad weather, etc.) can be really harmful.
- Better sales projections: They should be working to improve sales projections on an

ongoing basis anyway, but this may be harder when they’re experimenting with new
prepared food products. The more data analysis they can do, the more they can improve
predictions about what items to stock and in what quantities. However, past performance of
products is no guarantee of future results, so they could be harming themselves if they
don’t adequately project future changes in demand for items.
- Better credit control: It already looks like this firm has a good window between receiving
money from debtors and paying money to suppliers, but the better they’re able to widen this
margin, the more efficient they can be and the more liquidity they guarantee. They could
tighten standards on payment from debtors, or negotiate with creditors. In practice though,
this is often not something that the firm can really easily do. They may be at the mercy of
other businesses if that business is larger than Fresh Cucina. For a US reference,
51
AutoZone pays its suppliers in 360 days, but gets payment from its customers basically
up-front. But AutoZone is a huge company relative to its suppliers, and a small firm
probably can’t do that. Still, negotiations with suppliers on credit extensions can often be
successful.
- Reduce long term debt: The firm could pay off loans early (iiiiiif it had the ability to, which is
always a big if), thus reducing interest paid and lowering the gearing ratio, but that would
clearly harm its liquidity. It could perhaps refinance debt and get a lower interest rate, which
sometimes happens when interest rates in the market are declining. Or it could convert debt
to equity or sell shares, but it has then diluted the value of its outstanding shares or given up
more control of the business.
52
16. Frisch
A. Define the term liquidity. 2
The availability of cash and/or other liquid assets for a firm to pay its liabilities.
B. Calculate the gross profit margin for Frisch’s direct-to-consumer sales. 2
I’m simplifying things here and taking the profit per unit, because we really don’t need the quantity
figures to get to the gross profit margin. Price - direct cost will get us unit contribution, and we can
then take that figure over the price to find the profit margin. Many students will multiply the price
and cost numbers by sales quantity, but this is actually an unnecessary step.
28-7.75= 20.25. 20.25/28 = 0.72321429 = 72.32%
C. Calculate the gross profit margin for Frisch’s retail sales. 2
16-6.85 = 9.15. 9.15/16 = 0.571875 = 57.19%
D. Calculate the profit margin for Frisch. 2

((20.25*125000)+(9.15*280000)-200000)/((28*125000+16*280000))
((20.25*12500)+(9.15*28000)-200000)/((28*12500+16*28000))
Gross profit (I’ve already taken out the variable costs here since we did that in the last questions):
(20.25*12500)+(9.15*2800) = $278745
278745- 200000 = $78745 profit before interest and tax. 78745 as a percentage of total revenue is
78745/(28*25000+16*2800)= 0.10572637 = 10.57%
E. Calculate the current ratio for Frisch. 2
(260+200+164)/(88+268) = 1.75:1
F. Calculate the quick ratio (acid test ratio) for Frisch. 2
(260+200)/(88+268) = 1.29:1
G. Calculate the return on capital employed for Frisch. 2
78745/(177000+28000+822000) = 0.07667478 = 7.67%
H. Explain an advantage and a disadvantage of Frisch offering discounted gift 4

bundles.
53

- They’re more likely to be purchased as gifts for other people as opposed to going to regular
customers. Therefore, they could be encouraging people to spread the word about the
company and expand their customer base.
- Even though the gross profit margin is going to be lower on them, they could make up for
that by having more profit overall due to greater total revenue numbers
- Related to this, people may spend more on items because they feel like they’re getting
better value.
- It’s possible (but by no means certain) that Frisch could lower its shipping costs on these
items because it is shipping more items at the same time. (On the other hand, the opposite
may actually be true because the packages would be bulkier.)

- Profit margins on them would be lower, both because of the lower price and possibly
because of the added shipping cost
- Depending on how big and sophisticated Frisch’s operations are, it could be an added
burden to package the gift packages, to the point where it’s not really worth it. They would
definitely be more complicated to put together than their current offerings, and with a lower
volume of sales on these it may be too much of an operational hassle.
I. Explain the importance of return on capital employed as a measurement of 4

how effectively Frisch is using its funds.
Because ROCE shows how much profit is generated in relation to the funds that the firm has, it
shows how effective it is to invest a dollar into Frisch. With their return on capital employed of
7.67%, it basically means that Frisch is converting that percentage of its assets and invested
capital (long term liabilities can be thought of as acting as an investment into the business) into
cash. Thus, investors get a snapshot of the potential returns on investment if they put their money
into the business.
J. With reference to financial factors, explain an advantage and a disadvantage 4

of Frisch starting to sell its products in physical retail stores.
Answers here are similar to the one above for the gift bags.
Advantages:
- Because they’re facing increased competition from bigger firms online, they may find their
pricing power and thus profit margins eroded. Moving to a distribution channel that offers
greater volume of sales may thus be a sensible way of generating additional profits.
- Along with this, we can see that they only had 2800 units of sales in the last quarter through
physical retail, but Olivia is working on nationwide distribution, which means that sales
could really increase in the future. There would be tons of people in these stores who’ve
never heard of the brand through their online sales/ads.
Disadvantages:
- The gross profit margin is quite a bit lower in physical retail.
54
- We don’t know what the sales price of the toothpaste in retail stores; if it is lower than the
online price then customers may see the difference and purchase it in stores rather than
online, meaning Frisch gets a lot less profit per item
- They probably get delayed cash flow from this sales channel. Because Frisch would be a
supplier to the stores, those stores would probably buy Frisch products on trade credit,
meaning the firm would likely get the cash 30 or more days later. With online sales, they get
the cash virtually immediately (a credit card payment may only have a lag time of 1-3 days
for the payment to be processed).
K. Explain why it is useful for investors to consider Frisch’s quick ratio rather 4
than only its current ratio.
The current ratio shows a simple measure of liquid assets to liabilities. However, within that set of
liquid assets - cash, stocks, and debtors, stocks are a lot less liquid than cash and debtors. If
Frisch has an obligation to pay off shortly, it’s not like they can say to their creditor, “Hey, here’s a
bunch of toothpaste as payment.” Because toothpaste is a fast moving consumer good, there may
not be a tremendous lag time between producing the products and receiving cash from its sale, but
it’s still a lot less useful than truly liquid cash. The quick ratio shows that distinction because it
takes stocks out of the equation.
L. Discuss two ways in which Frisch may attempt to improve its financial ratios. 10
At a minimum, in a typical 10 mark question, students need to talk about two positive aspects of
their suggestion, and two negative aspects in order to get to the full 10 marks. For this question, I
would say to students that this would mean having 1 pro/con for each of the two methods they
choose to discuss, rather than 2 pros and cons for each, because doing 2 for each would make the
response far longer and go beyond what is typically expected in a 10 mark question.
Methods of improving GPM and profit margin may include, but are not limited to:
- They could raise prices, but this is not very realistic considering that their prices are already
really high. We don’t know how many tablets come in a pack, but regardless, people are
generally not used to paying such a high upfront price for toothpaste.
- They could find ways of bringing down the production cost, including cheaper materials,
identifying efficiencies in the production process, getting better equipment or software for
managing production etc. Realistically though while many students tend to suggest things
like “use cheaper materials,” this is a lot easier said than done. There is no guarantee that
they could do this without compromising quality, or that they could do it at all. Regarding
finding productive efficiencies, this is also easier said than done, and oftentimes it could
involve needing to invest in new/better equipment, software, etc. while that may improve
profit margins in the long run, in the short run it would probably harm profits and liquidity.
They may need to take on debt to accomplish these goals, and while this may be entirely
sensible, the interest could erode their profitability at least in the short run.
- Profit margin alone: Cutting administrative costs is a common suggestion. Again though,
students need to be clear about how exactly they envision Frisch doing this; it cannot be
just a vague “cut admin costs.” They could reduce salaries or layoff salaried workers, but
realistically firms can very rarely cut salaries, and reducing workers is always going to come
with big tradeoffs. In the case of such a young company, it’s incredibly unlikely that they
55
could do this. As I write this, Twitter is imploding, providing a superb example of how much
you actually need your employees. So admin cost cuts would probably have to come from
finding a cheaper provider of insurance, which is muuuuch more feasible, or finding ways of
reducing other overheads by cutting marketing expenses (again, hard to do without hurting
revenues), finding a cheaper place to rent office space or letting employees work from
home, etc. For all of these examples, there is simply no guarantee that Frisch could actually
do this.
- I would not accept simply selling more / earning more revenue as a viable answer without a
good explanation. For one thing, this will not improve the gross profit margin, only the gross
profit. Secondly, the only way that this would improve the net profit margin would be if the
firm somehow expanded its sales without its overhead expenses rising in proportion. To
some extent this may be doable, as some expenses would not necessarily rise just
because they’re selling more items, but there are many aspects of overheads that you
would expect to increase in expense as they turn over more revenue. A student would have
to explain specifically how they could do more revenue while keeping certain fixed costs the
same, or at least not rising at the same rate as revenue did, to get full credit for that answer.
ROCE:
- Anything that improves the gross margin and profit margin will also improve ROCE as long
as the long term liabilities don’t rise to a greater percentage.
- They could sell assets to improve their efficiency, but realistically for a small and new
organization like Frisch, it’s usually going to be impractical to sell assets. A startup needs
to be very strategic about the assets that it does acquire, so it’s highly unlikely they have
much in the way of assets that are feasible to offload.
- Longer term, it’s probable that the most important way for them to improve ROCE is to
scale up operations so that they experience economies of scale. For instance, their sales
volume in physical stores is quite low (though remember, these are quarterly numbers, not
annual)
Liquidity ratios:
- Simply selling more toothpaste through using any methods in the marketing mix is the most
important thing that could improve their liquidity. They are attempting to do this by launching
new products and selling in physical retail. Even if the profit margins are lower, it’s still
profitable and brings in cash. In the case of selling toothpaste tablets, it also doesn’t really
come with much in the way of added overheads.
- They could do better credit control through various methods such as demanding cash
payments from customers or shorter payment periods for debtors, asking for longer credit
terms from suppliers, etc. Obviously this is another “easier said than done” situation though,
particularly on the side of debtors. They probably don’t have much of a problem getting
quick cash from their online sales anyway, and from their sales to retailers, they’re probably
dealing with firms that are bigger than Frisch is and thus they would not be in a position to
demand quicker payment from the debtor. The more likely method here is to ask their
suppliers for longer credit terms, at least temporarily, if they ran into problems. Their
suppliers may be willing to do this in order to keep up that trading relationship.
- Given that they have good net profits and decent return on capital employed (though we
actually don’t know about the ROCE number, because we have no industry or interest rate
comparison), it’s quite possible that they could take out a reasonably low interest rate loan
to give themselves extra liquidity. They may not get a good interest rate though, and they’d
be getting liquidity at the expense of added costs.
56
- Improving stock control methods and using things like just in time could help them to turn
over inventory quicker and have more liquidity in the form of usable cash. This leaves them
less margin for error though. Many small businesses in this situation have found
themselves unable to meet demand if there is a supply chain delay or an unexpected
increase in demand. Just in time is very difficult to manage well.
57
17. Spielgeist Games
A. Calculate the change in gross profit margin for Spielgeist from 2021 to 2022. 2
2022: 4684/6294 =74.42%
Change = 74.42-75.13 = -0.71%
B. Calculate the change in profit margin for Spielgeist from 2021 to 2022. 2
2022: 1182/6294 = 18.78%
Change = 18.78-25.14= -6.36%
C. Calculate the change in return on capital employed for Spielgeist from 2021 to 2
2022.
2022: 1182/(10817+1261) = 9.79%
Change = 9.79-9.67 = .12%
D. Calculate the change in the current ratio for Spielgeist from 2021 to 2022. 2
2022: 4813/2993 = 1.61:1

Change = 1.61-1.48 = 0.13
E. Explain two reasons that Spielgeist may want to have a large amount of 4
liquidity.

- It is always good to have at least some amount of cash on hand in case business
conditions deteriorate or there is some external shock.
- It may want to have cash built up in case it identifies a good investment opportunity. It
would probably take a lot of money to create a streaming platform that would work well, for
instance. For instance, there may be other acquisitions that Spielgeist wants to be able to
complete if the opportunity arises.
- It’s possible that Spielgeist is earning a decent return on the liquidity by investing it in
interest-bearing accounts and investments that are still considered liquid, and that this
small return is better than trying to invest it in riskier ways that would tie up the money
longer term.
- Other things that they could do with extra cash include buying back shares, paying
dividends, and investing it. None of these may be particularly appealing because they eat
into the firm’s cash cushion, and while investing it sounds like a good idea in theory, they
may not be able to identify enough productive investment opportunities to make this a good
use of cash.
58
F. Explain why keeping track of the quick ratio would not be useful to investors 4
for a digital gaming company such as Spielgest.
They don’t even list stock/inventory on their balance sheet, which makes sense because
their games would all be digital and they don’t really have a physical inventory of products.
Their only stock might be things like supplies that they use internally for operations but don’t
actually sell to customers. Thus, the quick ratio isn’t going to be different from the current
ratio, and it wouldn’t lead to any useful insights on their liquidity. The rationale for the quick
ratio is that it strips out stock to reveal the firm’s liquidity in terms of assets that can be used
as cash quickly, but for this firm that level of analysis is not necessary.
G. With the use of financial information, examine Spielgeist’s financial 10

performance from 2021 to 2022.
Positive aspects of their financial performance may include, but are not limited to:
- Return on capital employed has risen a bit, and while we don’t know the interest rate on
savings if the firm kept money in the bank instead of investing it, a firm this large and
profitable in a growing industry is probably able to borrow at a reasonable cost, and it’s
highly unlikely that they could get an interest rate on savings that’s even half as much as
their ROCE number. It says that interest rates are still below their historic average.
- The current ratio is in acceptable range, and it increased a bit from 21 to 22. This number
should be seen as especially good because they have no stock, so this liquidity is largely
usable. Their cash alone is more than their current liabilities.
- With interest rates on the rise, their cash cushion should leave them in a better position
than many other firms to minimize the impact of rising borrowing costs.
- While profit margin declined a lot, it’s still an extremely healthy level of profits. It may also
just be that the 21 number was a little higher than normal.
- Gearing ratio decreased
Negative aspects of their financial performance may include, but are not limited to:
- You could argue that they have too much cash, considering that it’s more than $1b more
than their current liabilities, and in percentage terms is around 30% more. Some of that
money could be put to better use in longer term investments or simply returning more
money to shareholders.
- The gross profit margin declined a bit. Realistically though, to say that this is actually
problematic is to be overly critical given the rest of the firm’s performance.
- Profit margin declined by more than 6%, which is pretty substantial in this instance,
because thinking of it another way, 18.78 is about 25% lower than 25.14.
- Given that GPM declined only a little, and profit margin declined by a lot, then this means
that expenses are increasing a lot in proportion to revenue.
H. Discuss the merits of Spielgeist merging with a video streaming company. 10
For full marks the student should really bring in both financial and nonfinancial factors as
they are analyzing.
Non-quantitative advantages of the merger may include, but are not limited to the following:
- Economies of scale: they may be able to benefit from each other’s R&D, technology
systems, management expertise, ability to make bulk purchases, or any number of
other cuts in average cost of production related to scale.
59
- The entertainment industry is consolidating around a smaller number of very large

firms, and if Spielgeist doesn’t merge, then it may find itself one of the smaller firms
with more limited offerings. There could be a sort of network effect in which
customers gravitate towards larger firms with a wider selection, which enables those
firms to spend on even more selection, attracting more customers. Gaming is often
very social too, which can also generate network effects around the services that
most gamers are using.
- Case study clearly states that they may be able to offer the widest selection of
entertainment if they merge
- Borrowing costs are low at the moment
- The two firms’ products could benefit from collaboration, like some kind of tie-up with
films/tv shows and games
Non-quantitative disadvantages of the merger may include, but are not limited to the
following:
- The potential for diseconomies of scale, such as communication problems
- Possible culture clash between the organizations
- It’s not entirely clear how the merger of their services would work, and you can make
the case that sometimes things seem like a more natural fit than they actually end up
being (for example, the disastrous merger of AOL and Time Warner in 2000)
- There may be regulatory hurdles for the merger if the government applies antitrust
legislation or investigation
Quantitative disadvantages of the merger may include, but are not limited to the following:
- Spielgeist has a good return on capital (we aren’t told the interest rate on borrowing,
which should be a basis of comparison, but we are at least told that it is low), so this
may indicate that additional investment required to merge the streaming systems
would be worth it.
- Spielgeist has a good liquidity position [current/acid ratio, creditor/debtor days], and it
arguably should be spending some of that cash on R&D or big investments like this
merger
- Gearing ratio is quite manageable, so they probably have a lot of runway for more
spending
- It made more than $1bil in operating profits, so the debt looks manageable, its NPM
is above the industry average, and it seems that if any firm is in a place to take a risk
like this, it’s Spielgeist
- Spielgeist has a large part of its book value in goodwill, which is a notoriously difficult
thing to measure. If it is overvaluing its prior acquisitions, then the return on capital
and gearing ratio would start to look worse, meaning that they’re not in a great
position to invest in merging the two services
- It already has more than $1bil in long term debt, and this could add to it
I. Calculate the change in debtor days for Spielgeist from 2021 to 2022. 2
60
2022: 583/6294 = 0.0926279 * 365 = 33.81 days
Change = 33.81-37.96 = -4.15 days
J. Calculate the change in creditor days for Spielgeist from 2021 to 2022. 2
2022: 703/1610 = 0.43664596 *365 = 159.38 days

159.38-204.06 = -44.68 days
K. Calculate the change in gearing ratio for Spielgeist from 2021 to 2022. 2
1261/(1261+11331) = 10.01%
Change = 10.01-11.18 = -1.17%
L. Analyze Spielgeist’s efficiency based on its efficiency ratios. 6
The firm is not very highly geared, and the gearing ratio declined a bit, which is a positive
sign for its efficiency. While the total debt levels are high (more than $1bil each in short term
and long term obligations), they are not extremely high in comparison with the book value of
the company. I would also want to compare this to the return on capital employed, which is
in the neighborhood of 9% at a time when interest rates are near historic lows. This
suggests that they have a manageable debt level, and what borrowing they do take on is
being productively employed to bring in more profits. They could probably take on a lot more
debt and still be relatively safe. The creditor days are above the debtor days, which is better
than the other way around. The creditor days number seems high, but if their trade creditors
are willing to extend them this much credit, then it’s actually a good thing. They have enough
cash that they wouldn’t have a problem paying creditors sooner if it were demanded. We
cannot see inventory turnover because there is no stock.
M. Discuss the merits of Spielgeist merging with a video streaming company. 10

For full marks the student should really bring in both financial and nonfinancial factors as
they are analyzing, because the financial factors alone won’t address this particular type of
strategic move.
Non-quantitative advantages of the merger may include, but are not limited to the following:
- Economies of scale: they may be able to benefit from each other’s R&D, technology
systems, management expertise, ability to make bulk purchases, or any number of
other cuts in average cost of production related to scale.
- The entertainment industry is consolidating around a smaller number of very large

firms, and if Spielgeist doesn’t merge, then it may find itself one of the smaller firms
with more limited offerings. There could be a sort of network effect in which
customers gravitate towards larger firms with a wider selection, which enables those
firms to spend on even more selection, attracting more customers. Gaming is often
very social too, which can also generate network effects around the services that
most gamers are using.
- The case study clearly states that they may be able to offer the widest selection of
entertainment if they merge
- Borrowing costs are low at the moment, but they are rising. Making this move now
61
may be less costly than in the future.
- The two firms’ products could benefit from collaboration, like some kind of tie-up with
films/tv shows and games
Non-quantitative disadvantages of the merger may include, but are not limited to the
following:
- The potential for diseconomies of scale, such as communication problems
- Possible culture clash between the organizations
- It’s not entirely clear how the merger of their services would work, and you can make
the case that sometimes things seem like a more natural fit than they actually end up
being (for example, the disastrous merger of AOL and Time Warner in 2000)
- There may be regulatory hurdles for the merger if the government applies antitrust
legislation or investigation
- Spielgeist seems to have a fairly good return on capital (we aren’t told the interest
rate on borrowing, which should be a basis of comparison, but we are at least told
that it is low), so this may indicate that additional investment required to merge the
streaming systems would be worth it.
- Spielgeist has a great liquidity position, and it arguably should be spending some of
that cash on R&D or big investments like this merger
- The gearing ratio is extremely good, so they probably have a lot of runway for more
borrowing and spending
- It made more than $1bil in operating profits last year, so the debt looks manageable,
and though its profit margin fell in 2022, it’s still quite high and suggests that
Spielgeist is in a very good position to try a big move like this.
- Spielgeist has an awfully large part of its book value in intangibles, which is a
notoriously difficult thing to measure, and difficult to convert into cash if it ever needed
to sell assets. If it is overvaluing its intellectual property etc., then its net assets value
would not be as high as they claim on this balance sheet, meaning that they’re not in
a great position to invest in merging the two services
- It already has more than $1bil in long term debt, and this could add to it
62
18. Caldwell Holdings

A. Calculate the profit margin for CH. 1
-38/1170 = -3.25%
B. Calculate the current ratio for CH 1
2264/1573 = 1.44:1
C. Calculate the quick ratio for CH. 1
(2264-1585)/1573 = 0.43:1
D. Calculate the return on capital employed for CH. 1
-38/(241+1605) = -2.06%
E. With the use of data, a comment on CH’s liquidity. 4
CH’s liquidity position is not good. While their current ratio looks like it’s just slightly below the
acceptable range, and thus they look like they have a decent amount of liquidity, their quick ratio
actually shows them in a very alarming situation in terms of liquidity. The great majority of their
current assets are in stock, and cash is actually the lowest of the 3 current assets. You might make
the case that they sell a lot of fast moving consumer goods and so their inventory turnover could
be high enough that this is OK for them because they will quickly convert their assets into cash,
they also sell plenty of things that don’t have enough turnover to justify their level of stock. If
students are given the stock turnover question along with this, they’ll see that their stock turnover
in days is incredibly high, further highlighting that their quick ratio is an uuuuugly ugly number.
They’re seriously relying on a good holiday shopping season, and if it doesn’t go very well, then
they’re putting themselves at major risk of bankruptcy. If students are given the creditor days
question too, then they can see that creditor days ratio is also incredibly high, probably indicating
that they’re having big problems paying their creditors on time (thus they have a liquidity problem),
not that creditors are somehow generous enough to offer them credit repayment terms of more
than a year.
F. With reference to CH, explain why investors look at profit before interest and 4
tax when calculating profit margin.
At least on American style income statements, this number is typically referred to as operating
profit. That is, what is the profit generated from their core operations - things that the firm has more
direct control over. Using this number instead of the overall profit for period number at the bottom
allows investors to do a more direct comparison to the firm’s historical performance and to other
companies as well. Interest rates go up and down depending on economic conditions, and even
the healthiest firm will see its interest rate on new debt rise as inflation increases and the central
bank raises interest rates. Taxes also can vary from year to year if legislators change rates or the
63
business is able to claim certain exemptions in one year. Thus the profit before interest and tax
gives us a better core number for how CH is performing. The $-38m number shows us that even
before we factor in the fluctuations in interest and taxation, CH had a bad financial year.
G. Evaluate Caldwell Holdings’ proposed methods of improving its financial 10

position.
Points in favor of these strategies may include, but are not limited to the following:
- Return on capital is negative, so their return on investment may improve by selling assets
and downsizing. The returns on assets with their current strategy don’t seem to be going
very well.
- They have a liquidity problem as seen by the quick ratio, and they’ve put themselves in a
very risky position, so these moves could free up needed cash.
- As online retailers undercut their prices and offer better shipping options, this move may
make Caldwell more competitive. They have products like tires that customers are used to
going into physical stores for, so there is definitely still some value to having stores. This
move could allow them to focus on what they do well in their stores, and allow them to get a
wider variety of items to customers quickly without having to dedicate expensive real estate
to sales.
- At least in the short term, this could improve their disastrous net profit margin (and loss of
over $1bil last year) by reducing overheads and bringing in positive cash flow.
Possible points against these strategies:

- Most of their stores have 10 year leases, so it’s not clear to what extent they can even get
out of these lease agreements to downsize stores, at least without having to pay some kind
of fee to their landlords or finding another tenant to take over the lease.
- Picking up goods in store is not the same as the free online shipping that its competitors
offer. This may not help if customers don’t want to come into the stores, and it may not
attract new customers who weren’t already thinking of shopping at Caldwell.
- Smaller stores may reduce the chance of customers impulse buying a wider variety of
Caldwell’s products.
- Smaller stores may reduce the marketing benefits that come from having large and clearly
visible stores.
- It doesn’t explicitly address the problem of having an outdated website. The new strategies
did not clarify whether or not a website revamp would happen at the same time.
- It may seriously harm one of Caldwell’s unique selling points. It’s likely that customers
expect it to be a store that has a wide variety of products in-house, but if it becomes smaller
and offers fewer items available for immediate purchase/pickup, then it may not be able to
present a compelling reason for shoppers to go there.
H. Assuming that CH began the year with a stock of $989m and closed it with 1
$1585m, calculate the stock turnover ratio for CH.
931/((989+1585)/2) = 0.72 times per financial year

64
or
(989+1585)/2/931 = 1.38238453*365 = 504.57 days
I. Calculate the debtor days ratio for CH. 1
343/1170*365 = 107 days
J. Calculate the creditor days for CH. 1
1114/931*365 = 436.75 days
K. Calculate the gearing ratio for CH. 1
1605/(1605+241) = 86.94%
L. Explain a benefit and a drawback if CH were to decrease its gearing ratio. 4

- It would be spending less money on interest payments, freeing up cash for more productive
uses
- It might get a lower interest rate on future loans because it would not be seen as being in
as risky of a position
- It would be less exposed to potential changes in interest rates. When a firm is this highly
geared, they’re probably reliant on continued borrowing. When they pay off debt, they
probably need to replace it with more debt, and thus at that point they’re at the mercy of
whatever the prevailing interest rate is for firms like them.

- They’re probably highly geared for a reason - they don’t have a lot of liquidity, and they’re
losing money. Trying to reduce their gearing ratio would also reduce their available cash.
- Long term borrowing allows a firm to invest in its future, and if CH is going to improve its
website, its logistics network and so on to be more competitive, it’s going to need loans to
do that. Raising money through share capital may not give them what they need, because
investors probably aren’t too keen to put more money into CH, or if they are, they’d do so at
a fairly low valuation given the financial situation.
M. With reference to CH, explain the difference between bankruptcy and 4

insolvency.
Bankruptcy refers to a legal status that is declared when a firm cannot pay off its obligations, and
there is a court-led process to sort out which creditors will get paid in what amounts, and in what
order. Insolvency is the financial position of being unable to pay off debts. For CH, it is
approaching insolvency because it has such a high amount of stock, declining sales, and
extremely low stock turnover. With a poor shopping season, it could find itself unable to pay off its
obligation for these reasons of underlying financial weakness and no clear path out of it if creditors
are unwilling to lend further or to extend repayment terms.
65
N. Discuss CH’s financial ratios shown here could be used to understand its 10
financial problems.
This question would draw upon several factors mentioned above, so I’m not going to elaborate on
some of them here as they’ve already been discussed. Not all of these are ratios, or ratios that the
syllabus specifically covers, but they’re all still basically comparisons of different sections of their
final accounts, and thus act like ratios. Things we can see in the financial statements to understand
their problems may include, but are not limited to the following:
- The balance sheet can show the ugly position of their liquidity, their high amount of both
short and long term debt in relation to their equity or capital employed, the very low amount
of retained earnings and low value of share capital in relation to liabilities, and the fact that
their non-current assets are less than their stock. Their creditor days ratio is also incredibly
high, probably indicating that they’re having big problems paying their creditors on time, not
that creditors are somehow generous enough to offer them credit repayment terms of more
than a year.
- The profit and loss account can show their annual losses, the extremely high cost of sales
in relation to their sales revenue (seriously, GPM here is awful), the total number and/or
change in their expenses, and the amount they’re paying in interest.
On the other hand, final accounts cannot reveal everything, because they will not show us:
- The cash flow, which shows the timing of usable money in and out of the firm. If we saw the
cash flow statements and/or forecasts, we could get a much more complete picture of how
close the firm is to insolvency.
- There are various ways in which P&L accounts and balance sheets can be unethically or
illegally manipulated to make the firm’s position look better than it actually is. Students no
longer need to know a specific content standard related to ethics in accounting, but they
should generally know that they could be manipulated.
- There’s never a guarantee that today’s ratios are going to be tomorrow’s ratios. For
instance, if they have a good holiday shopping season or some other turnaround in sales,
the numbers would start looking better.
- Differences in accounting practices may result in numbers looking slightly different from firm
to firm, meaning that we have to take these numbers with some amount of caution.
- Ratios only show numbers; there are any number of non-financial factors that we’d want to
take into consideration, such as the quality of CH’s marketing efforts, the productivity and
motivation of its employees, etc.
O. Discuss two ways that CH could improve its efficiency. 10

Students must discuss at least one benefit and drawback of their two chosen methods, and
reach a conclusion for full marks. Answers may include, but are not necessarily limited to the
following:
- Pricing strategies: (improves turnover) You could argue for decreasing prices, or if students
have learned marketing already, then any of the pricing strategies that the student can
justify. Lowering prices could result in more sales, and they may need to do this to
compete with other merchants anyway. However, profit margins would decrease, and it
risks cheapening their brand or starting a price war.
- Promotion: (improves turnover) Using promotional strategies could bring more people in the
door and raise the brand’s image, but it also could be money wasted if the reason for poor
66
financial performance is due to fundamental problems in their business model. It could also
basically lower the profit margins because of the cost of advertising.
- Re-evaluating/changing which items to stock: (improves turnover) Businesses can typically

benefit from getting rid of items with few sales and emphasizing their best sellers, and it fits
with the new plan of downsizing. At the very least, they could cut down on the number of
items physically in stores, and sell the others through its new online distribution model. But
that’s also a bit risky for Caldwell because it would harm their ability to offer a wide range of
products, it’s already hard to compete with online merchants who can probably offer a wider
range of products.
- Just in time stocking: (improves turnover) Students likely haven’t learned this year, but JIT
would help cut down on stocking and warehousing costs. The firm would lower the amount
of stock they have at any given moment, thus lowering the denominator in the formula for
the number of times per year they turn over inventory. It also reduces the value of creditors
because you have fewer items in stock that suppliers are waiting to be paid for. This would
mean though that there could be times where customers want something and it is not
available. Any sudden increase in demand or delays in Caldwell’s supply chain would be
problematic.
- Anything that reduces inventories of either finished or unfinished goods: (improves

turnover) Seems like they’re going to do this with the new plan to downsize, and this again
reduces the denominator in the equation, and reduces costs for storage. It could easily
delay sales and anger customers though.
- Better credit control, including any of the following: (improves creditor/debtor days)
- Make sales in cash only: Lowers debtors, but will probably reduce the total amount
of sales. It may be important to note here that if a customer uses a credit card, then
that’s still a quick sale and is probably treated almost like cash, because the
merchant gets paid between 1-4 days after the transaction. Students may believe
that taking only cash sales means only physical cash.
- Lower the creditor terms to debtors, insisting that they pay more quickly. Has the
same benefits/drawbacks as cash sales. Or you could offer incentives to pay in
cash, but that lowers profit margins.
- Use debt factoring. This gets the money to Caldwell faster, but at a fee.
- Delaying payment to suppliers, or renegotiating credit terms. This may be quite
feasible for a big firm like Caldwell that likely has long standing relationships with
suppliers, but there’s no guarantee suppliers would agree, especially when they
may be nervous about nonpayment in the event of a Caldwell bankruptcy.
- Increasing revenues: (improves gearing ratio) This one improves the denominator in the
gearing ratio equation, but it is also obviously hard to do, so they’d need to suggest what
method the firm should use to raise revenue. A firm should always be trying to do this
anyway. Many of the answers listed in question 2 would apply here.
- Raise money by selling shares instead of getting loans: This increases the denominator in
the gearing equation, but it also dilutes the value of shares, possibly upsetting existing
shareholders. If Caldwell does this enough, it could even be delisted from stock exchanges
(for example, JC Penney in the US was delisted from the New York Stock Exchange
because its share price was so low and it eventually declared bankruptcy.)
- Repay loans: (improves gearing ratio) As noted on an earlier question, they’d have to
negotiate for a lower loan amount (in reality though, this is probably not going to happen),
or pay down debt. With their current liquidity situation though, how would they do that right
now without creating a bigger short term problem?
67
- Swap debt for equity: (improves gearing ratio) They could have sold convertible loans
(can be converted into equity at some point), but this again dilutes the value of
existing shares and gives up more ownership in Caldwell. No, I do not expect any
student to be aware of this possibility.
68
19. Steady on the Street
A. Other than the information shown in the state two additional items that could 2
appear as an inflow on a cash flow forecast for SoS.
- Loans
- Income from investments or interest from savings accounts or other interest-bearing
accounts.
- Alternative sources of revenue, such as selling merchandise like shirts, hats, mugs, etc.
that have SoS’s logo on them.
- Income for services performed: it’s possible that a government or a nonprofit organization
may pay them for services like cooking meals for homeless people and so on when
government services or other organizations are unwilling or unable to do so.
- Sale of any assets they have like furniture, unneeded equipment or equipment that they
want to upgrade, or even the house itself if they were willing to then rent it out. This last one
is highly unlikely, but let’s remember that this is a couple who is generous enough to use
their own home to care for homeless people.
B. Assuming that SoS’s managers construct the extra set of showers in month 2 6
and that the increased utility cost begins in month 3, construct a cash flow
forecast for SoS for a four-month period.
Cash flow forecast for SoS for next four months
All figures in $ Month 1 Month 2 Month 3 Month 4
Opening balance 11725 11797 6031.75 5727.87
Cash inflows
Donations 3476 3476 3476 3476
Grants 1092 1092 1092 1092
Total cash inflows 4568 4568 4568 4568
Cash outflows
Utilities expenses 625 625 925 925
Goods and services costs 3825 3863.25 3901.88 3940.90
Interest expense 45 45 45 45
Bathroom construction 5800
Total cash outflows 4495 10333.25 4871.88 4910.9
Net cash flow 73 (5765.25) (303.88) (342.9)
Closing balance 11797 6031.75 5727.87 5384.97

69
C. Explain two challenges to SoS preparing a cash flow forecast. 4

- The case study states that donations are unpredictable. Cash inflows from revenue can be
difficult to predict for any organization, but this one has a particularly challenging situation in
that regard.
- Unless government grants are guaranteed for a certain period of time, there’s no certainty
behind these inflows continuing in the future either.
- Inflation is rising, making it harder to predict cash outflows. When inflation rises it doesn’t
do so equally for all goods and services; therefore, it may be difficult for SoS to determine
how to price those increases into their forecasts properly.
- Construction costs are notorious for rising beyond initial estimates
- They’ve had a big increase in demand for their meals, even from people who aren’t
homeless. They can’t be sure what the future needs will be, and they seem committed to
doing everything they can to meet those needs if they arise. This isn’t like a normal firm
that can just find ways to cut costs - their “product” IS their cost here.
- External events like bad weather can bring huge increases in costs as they try to meet the
needs of the community.
D. With reference to SoS, explain the difference between costs and cash 4
outflows.
Costs are money that a firm must pay as a result of producing goods and services, and in this case
they are directly related to SoS providing meals, showers, and so on. Cash outflows are money
that goes out of the organization, which may or may not be because of the typical costs of
performing operations, and may not happen at the same time that costs are incurred. For
instance, a monthly utility bill is a cost (it would vary in this case depending on how many homeless
people are using their facilities, for instance), but the outflow doesn’t necessarily happen in the
same month in which those costs are incurred. They probably pay their utility bill in the month after
the cost is billed to them.
E. Analyze two challenges to SoS making capital investments as a nonprofit. 6
Investment takes up cash flow from an organization in the hopes that it will bring additional cash
flow later on as the investment pays off in the form of greater revenues and profits. That is how
things normally work for a for-profit firm or social enterprise, however, and not how things work for
a nonprofit organization such as SoS that does not have any trade generated revenue. This means
a few things, including, but not limited to:
- Their investments are not meant to directly generate additional revenue
- There is no guarantee that by making these investments to serve more people, that it will
lead to more donations coming in as people or governments see the expanded good work
they’re doing
- The investment not only costs them money up front, but it leads to them spending more
money in the future as the capital (the showers) is used
- They cannot demonstrate to a lender that it is financially feasible for the lender to loan them
money in the expectation that it will be repaid in the way that it is for a for-profit firm
70
- Their donations and income in general is less predictable than revenue-generating firms,
and thus they can’t be sure if they’ll be able to afford the investment
71
20. Way.Finder Mobile
A. Prepare a cash flow forecast for WF for the next 4 financial quarters of 2023, 6
assuming that $86.4m in postpaid sales appear on the Quarter 1 statement
from sales in last year’s final quarter.
Cash flow forecast for WF for next year, quarterly
All figures in $m Q1 Q2 Q3 Q4
Opening balance 8.10 9.60 12.65 17.20
Cash inflows
Cash from prepaid sales 58.40 59.20 60.00 60.80
Cash from postpaid sales 86.40 87.60 88.80 90.00
Total cash inflows 144.80 146.80 148.80 150.80
Cash outflows
Capital expenditures 18.00 17.10 16.25 15.44
Dividends 2.00 2.00 2.00 2.00
Direct costs 76.00 76.75 77.50 78.25
Admin and interest 40.00 40.50 41.00 41.50
Tax 7.30 7.40 7.50 7.60
Total cash outflows 143.30 143.75 144.25 144.79
Net cash flow 1.50 3.05 4.55 6.01
Closing balance 9.60 12.65 17.20 23.21
B. Define the term cash flow. 2
The movement of money in and out of a firm’s accounts.
C. Explain the relationship between profits and cash flow for WF. 4
Profits generate cash flow, but not necessarily immediately. WF makes $146m (and rising) in
revenue each quarter, and to find the profit you would subtract the costs and expenses from that
number. However, WF does not necessarily get the all of that money in cash at the time of sale
(here 60% of their sales are postpaid, so they don’t get the money until the month after the service
was delivered to the customer), and they also don’t necessarily pay costs/expenses in the same
month in which they are booked on the profit and loss account.
D. Comment on WF’s liquidity based on their cash flow forecast. 4
If their forecast is accurate, they look like they are in fine shape for liquidity. Their first quarter
72
projection is not outstanding, with a projection of only a net cash flow of $1.5m off of revenue of
$146. Given the size of the firm (which we can sort of judge by the revenue figures), this is not a
very high cash inflow number. However, their liquidity improves each quarter, and by the end of
the year they should have built up a pretty good buffer of liquidityfor their size; however, without
knowing their current liabilities numbers we cannot be sure.
E. Explain the relationship between WF’s capital expenditures and cash flow. 4
Capital expenditures act as cash outflows for the firm, unless they’re financing it with more
borrowing than the money they’re actually spending on the capex. Here we’re clearly given a
number as an outflow. The hope though is that capex leads to improved revenues as people see
that the firm has better and better service and is able to offer a compelling advantage over other
phone/internet carriers, or at least that they continue to offer reliable service as the network is
maintained and looks reliable in relation to its competitors. That increase in revenue, and
presumably profits, should lead to greater cash flow in the long run. Right now the capex is greater
than their increase in revenue, but WF would not engage in capex unless it thought that future
revenues would be greater. Indeed, we do see projections that revenue will grow and capex will
decline, leading to more cash.
F. Discuss two ways that Way.Finder Mobile could improve its cash flow as it 10
works to expand its networks.
First off, it should be noted that it doesn’t seem to particularly need to do so, but it is something
that should nonetheless be looked at after the acquisition, as it will presumably be making these
interest payments for quite a while, and revenue/cost projections are never guaranteed.
Possible ways to improve cash flow may include, but are not necessarily limited to the following:
- Improved sales, by using any of the 7 Ps of marketing: The best way to improve cash flow
in the long run is to sell more. This may involve burning a bit more cash in the short term on
promotions etc., but in the long run if the marketing efforts are successful, then more sales
and profits will mean more cash inflows. A large part of them improving cash flow this way
is by continuing to build out its network and simply offer great products and services to
customers. The whole question is about how they can improve cash flow as they expand
though, because that expansion is expensive. To some extent they’re going to see that the
capital expenditure will pay for itself in the form of higher sales, but they need good
marketing strategies to make that happen.
- Increasing cash sales: This is the obvious one, but an increase in sales may require them
to spend more on marketing, which can hurt cash flow in the short term before sales pick
up. In this case it may mean more sales of prepaid plans, which are probably going to offer
them lower long run profits than the postpaid plans that are probably based on some type
of contract. It may also involve lowering prices to make more sales, which would improve
cash flow but could harm profit margins. Or it could involve product development to make
more sales, but product development is not guaranteed to pan out, and it can involve
expensive R&D.
- Selling assets: Large firms sometimes can free up cash by selling off large assets like
intellectual property or brands, but this results in improved short term cash flow possibly at
the expense of long term ability to generate revenue and profits. We don't know enough
about the firm to suggest particular assets to sell with any degree of confidence that it’s
realistic, and it is furthermore challenging to sell assets when the firm is clearly trying to
grow through the acquisition and capex.
73
- Sale and leaseback: WF could sell assets like real estate and then lease them back,
resulting in a large up front payment and then spreading out rent costs over a long time
period. The investment bank Goldman Sachs has done this with many of its regional
branches, for instance. In the long run though this could end up in the firm paying more
money than if they owned these assets outright. They’re gaining liquidity at the expense of
long term added costs.
- Better credit management: Again, no evidence that they have a problem with this, but any
way of getting longer credit terms with creditors and demanding/incentivizing quicker
payment from debtors could help. The firm is probably large enough that they are able to
get generally favorable terms with their suppliers. If they ran into problems, they could also
ask for an extension on their interest payments on their loans, which banks are often willing
to give on a temporary basis. The downsides are that it may not work, and that by
demanding shorter terms with their debtors they may miss out on sales or alienate
customers.
- Use cheaper suppliers: This lowers cost of production, which reduces cash outflows. It’s
risky in terms of maintaining product/service quality. They also are a company that provides
mobile phone and internet services, so it’s not entirely clear which products could be
targeted for changing suppliers. Maybe their wifi router supplier could change, or the
sources of materials they use in building and maintaining networks could change?
- Seek additional finance or refinance existing debt: Seeking additional financing won’t
improve cash flow in the long run, and will in fact do the opposite. However, this question is
about improving the cash flow while they spend money to expand their network and
infrastructure, and so seeking external sources of finance like share or loan capital could be
feasible here. It is also possible from time to time for firms to refinance their debt if interest
rates decline. Refinancing is not a syllabus topic though and students will not be expected
to know this as an option.
74
21. Downriver Adventure Company
A. Define the term net cash flow. 2
The difference between cash inflows and cash outflows in a given time period.
B. Prepare a cash flow forecast for DAC for April through July. 6
Cash flow forecast for DAC for April-July

All figures in $ April May June July
Opening
Balance 10,000.00 10,210.00 13,272.50 29,600.63
Cash Inflows
Store Sales 3,000.00 5,250.00 9,187.50 16,078.13
River guides 2,800.00 3,600.00 8,000.00 14,000.00
Total Inflows 5,800.00 8,850.00 17,187.50 30,078.13
Cash Outflows
Wages 3,500.00 3,500.00 5,500.00 5,500.00
Utilities 300.00 345.00 396.75 456.26
Insurance 0.00 0.00 1,200.00 0.00
Mortgage 1,500.00 1,500.00 1,500.00 1,500.00
Tax 290.00 442.50 859.38 1,503.91
Total Outflows 5,590.00 5,787.50 9,456.13 8,960.17
Net Cash Flow 210.00 3,062.50 16,328.13 21,117.96
Closing Balance 10,210.00 13,272.50 29,600.63 50,718.59
C. Explain two ways of improving cash flow that may be appropriate for DAC. 4
Accept a wide range of answers for this one. Some examples may include:
- Taking out a loan or some other form of external finance (reasonable ones like overdrafts...I
wouldn’t necessarily give full credit to a suggestion like selling shares, because it’s just a 2
person team of husband and wife who wants the business to go to their kids)
- Reducing credit terms for customers, or negotiating longer terms with suppliers
- Selling assets like unused kayaks/rafts
- Selling and leasing back their store property
- Any methods to cut overheads (though I’d be hesitant to give full credit to the suggestion of
reducing salaries, unless the student specifies that they could reduce salary expenses by
cutting positions or outsourcing/automating some labor)
- Investing in the bus could improve cash flow if it led to revenues over and above the
interest payments on the loan
D. Explain two reasons why DAC must maintain sufficient liquidity. 4

75
Answers may include any of the following:
- They’re a seasonal business, so they need strong liquidity in the summer months to save
up cash for use during the slower periods
- It’s extremely weather dependent, so having low liquidity could easily lead to a cash crisis if
the weather turns bad and quickly lowers sales
- Their mortgage, some utilities, and possibly some staff wages still need to be paid
regardless of demand
- General answers like the need to constantly have cash on hand to pay suppliers, taxes,
wages, and any other costs/expenses that they incur in their normal operations.
E. Analyze two challenges of DAC forecasting its cash flow. 6
Drawbacks may include:
- The projections are heavily dependent on the weather, so they may end up being wildly
inaccurate
- There may be unexpected increases in costs (utilities, cost of materials and/or food that they
sell at the store, etc.)
- Assumptions of their demand may not be accurate. They are likely based off of prior year
results, but any number of factors could impact demand in the current year
F. Explain one way in which the potential investment in the bus could impact 2
DAC’s cash flow.

- In the short term, it could negatively impact their cash flow if the bus merchant requires a
downpayment, which is typical for large automobile purchases.
- If no down payment on the bus is required, then it’s possible that this investment could
improve cash flow. It is cash from a bank that pays for the investment, not their own. If
having the bus does increase the number of customers they serve, then revenues coming in
could be higher than the interest payments that they are making.
The loan itself would not be a cash outflow, because they would use that to directly pay for
the bus.
76
22. Old Brown Shoe Studios
A. Define the term investment. 2
Spending on capital or assets in order to generate greater value over time than the expense.
B. Calculate the payback period of the new studio investment. 2
Year Cash flow Paid off?
1 12000 no
2 22000 no
3 35000 no
4 50000 yes
95000-69000 = $26000 still to be paid off in year 4.

50000/12 = $4166.67 of cash flow per month in year 4.
26000/4166.67 = 6.2 months to get to the remaining $26000 to pay off at the rate the investment
earns profit in year 4
Answer is 3 years, 6.2 months
C. Calculate the payback period of the vinyl record production investment. 2
Year Cash flow ($000s) Paid off?
1 20 no
2 35 no
3 50 no
4 70 no
5 95 yes
Profit is 20+35+50+70+95 = $270k

In the first four years, the profit is 20+35+50+70 = $175k
190-175 = $15k still to be paid after year 4
Divide $15k by the $95k profit in the 5th year, and multiply by 12 months.
(15/95)*12 = 1.89 months
Answer is 4 years, 1.89 months

77
D. Calculate the average rate of return of the new studio investment. 2
(12+22+35+50+65-95 )/5/95 = 18.74%
E. Calculate the average rate of return of the record production investment. 2
Vinyl record production ARR:

(20000+35000+50000+70000+95000-190000)/5/190000 = .0842 X 100 = 8.42%
F. Explain a benefit and a drawback of Ada using payback period as investment 4

appraisal tool.

- She’s able to tell, obviously, which project pays back faster. If she cares about the timing of
cash flows to be able to pay operating expenses or to give her more cash to invest
personally or for other purposes, then a payback period is useful. Given that Ada is a sole
trader who started the business 20 years ago, if she is nearing retirement or wants to sell
the studio eventually, then this could be of further use.
- It shows her whether or not each project is even viable enough to consider more
sophisticated methods of investment appraisal. Realistically, the payback period is a
decent starting point for investment appraisal.
- Like any building, there will periodically be maintenance that needs to be done on the
studio, and knowing the payback period in relation to the possible maintenance and
upgrade costs would be helpful.

- It’s not a very advanced form of investment appraisal, as it only shows how quickly she’d
get the money back, not which one is actually going to be more profitable.
- Thus, it encourages short term thinking
- There is always the possibility of errors and misplaced assumptions regarding the timing of
the cash flows. We wouldn’t assume that this business is very seasonal, but there may be
variations in cash flows in certain periods of the year, meaning that the projections of when
precisely the investments would pay themselves off would be inaccurate.
G. Other than what is shown on these investment appraisal methods, explain two 4
additional factors that Ada may consider when making an investment
decision.

- The longevity of the investments is the primary one. I have only included figures out to 5
years for simplicity, but both of these would be investments that would last a great many
years, and Ada would want to factor those true time periods in.
- The ease of implementing both investments would be a big factor. For instance, the vinyl
record production is completely different than producing music, and thus it may be an awful
lot harder for her and involve hiring additional staff who actually know how to run that side
of the business. In all likelihood, she’d probably want to focus on the music production side
even if she invested in the vinyl production.
78
- Along with this goes the impact on and the acceptance of her employees of each of the
investments
- HL students could bring up the time value of money
I would not accept future demand for music recording or record production as answers, because
Ada should have already factored that into her projections of net cash flows. If she didn’t do this
already, then she’s really bad at investment appraisal.
H. Recommend if Ada should invest in the new studio or vinyl record production. 10
Benefits of the new studio instead of the vinyl record production:

- The investment is half the cost of the vinyl record production
- The payback period is about 6 months sooner than vinyl
- The ARR is substantially higher than the vinyl production
- It’s a lot less risky than the vinyl production because it’s something that she already knows
how to do, is good at, and has clear demand for. If she has long wait times for recording
slots, then this would help her to shorten that time and meet artists’ demands.
- Vinyl records are seeing a big increase in popularity right now, but she needs to make an
investment decision for the much longer term than just 5 years. The case study calls the
surge in demand surprising.
- Even though I wrote this case study, I find it really hard to believe that a single studio like
this run by a sole trader could create a large enough vinyl record production facility that it
could produce at a high enough volume to make the investment worthwhile. There aren’t
that many vinyl production companies anymore because even with the popularity, it’s still a
bit of a niche and requires big capital investments and guaranteed demand to make it
worthwhile.
Benefits of the vinyl record production instead of the studio:

- There’s a clear demand for it that isn’t being met by current levels of production
- Even though there’d be significant maintenance every 5-10 years, this would be an
investment that would last a very long time, and the potential for high resale value if she
sells the equipment is a very strong point in favor. Thus, this investment could yield a much
better return than the 8.74% that we see in this case study if we are able to factor in the
resale value.
- Even though the ARR and payback period are lower on the vinyl, we can see that her
projections show increasing returns each year. Even if returns flatline, they’re looking like
they’ll be higher over the long term than the new studio. It’s quite possible that the ARR
would end up being higher over the life of the investment for vinyl than for the studio.
- This investment wouldn’t compromise the small and personal feel of her studio, which is
something she expresses concern about.
HL ONLY ANSWERS
F. Calculate the net present value of the new studio investment. 2
Year Discount Factor Net cash flow from Net cash flow from
New Studio ($000s) Vinyl Record Production
Space + Equipment ($000s)
79
0 (95) (190)
1 .926 12 20
2 .857 22 35
3 .794 35 50
4 .735 50 70
5 .681 65 95
.926*12 = 11.112
.857*22 = 18.854
.794*35 = 27.79
.735*50 = 36.75
.681*65 = 44.265
Total: 138.771, or $138,771
138771-95000 = $43,771
G. Calculate the net present value of the vinyl record production investment. 2
.926*20 = 18.52
.857*35 = 29.995
.794*50 = 39.7
.735*70 = 51.45
.681*95 = 64.695
Total: 204.36, or $204,360
204360-190000 = $14,360
H. Explain how using Ada’s discount factor assumptions instead of her financial 4
advisor’s could alter the investment appraisal.
It would make the investments look much more profitable, because the time value of money would
have decreased. A difference of up to 2-3% on discount factor assumptions is massive, and over
the presumed lifespan of these investments it would lead to very different conclusions on their
profitability. Because a lower discount rate assumes things like lower interest rates on borrowing
and lower rates of inflation, Ada is assuming that money given up now has a lower opportunity cost
than her financial advisor does. Under her financial advisor’s assumptions, the vinyl record
production facility would be profitable over the first 5 years, whereas if we took Ada’s lower
numbers it would look substantially more profitable.
K. Recommend if Ada should invest in the new studio or vinyl record production. 10
For this question in the HL version, I would just add in the fact that the NPV shows the vinyl record
production option to be a lot less profitable over the first five years, and you might even want to
make the argument that if she thinks she might need a cash buffer over that timeframe that she
80
should definitely not invest in the vinyl production. Given the large net cash flow numbers in years
4 and 5 though, we can still make the case that the low NPV number should be assumed to climb
in the later years of the investment. With Ada’s discount factor assumptions though, we can
assume that both investments would look like solid opportunities.
81
23. Stavanger Cleaning
A. Calculate the payback period for the investment in the new steam cleaners. 2
Show your working.
Year Cash flow Year Cashflow

0 -20000 7 6000
1 3000 8 6000
2 6000 9 6000
3 6000 10 6000
4 6000 11 6000
5 6000 12 6000
6 6000
Payback:
3000+6000+6000+6000 = $21000 by end of year 4, so payback must be 3 years and some
number of months
20000-15000 ($15000 is the total for years 1-3) = $5000 still to be paid back in year 4
6000/12 = $500 in monthly cash flow during year 4 if he is getting $6000 for the year
At the rate of $500 per month, how many months will it take to pay back the remaining
$5000?
5000/500 = 10 months to pay back the remaining $5000 in the 4th year
Payback period = 3 years, 10 months
B. Calculate the average rate of return on the investment in steam cleaners. 2

Show your working.
3000+(6000*11) = $69000 in net cash flow over the cleaners’ lifespan
69000-20000 initial investment = $49000 in profits over steamers’ lifespans
49000/12 = $4083.33 profit per year
4083.33/20000 = 20.42% ARR
Or we can do this all in one math step by calculating (69000-20000)/12/20000 = 20.42%
C. Define the term net cash flow. 2

The difference between inflows and outflows of cash through a business in a given time period.
D. With reference to SC, explain why the timing of cash flows may be important 4
when making investment decisions.
82
The investment appraisal methods on the IB syllabus will show an investor the timeframe over
which something will be paid back, the average rate of return on investment per year, and the
present value of an investment’s future cash flows, but they will not show the precise timing of
when the money actually flows into a business. Remembering that cash flow is all about the
timing, whereas profit is how much is earned when costs are taken out, a business will also want to
know when the money will be coming in and going out, because that impacts their financing needs.
For instance, if SC did not have enough cash on hand in the month when several things went
wrong, it would’ve needed to use some other source of financing such as a loan, overdraft, or
drawing upon Harold’s personal savings. Profits earn a firm money, but cash is what they actually
need to make purchases.
E. With reference to SC, explain the difference between an investment and 4

revenue expenditure.
Investments are spending on capital or assets in order to generate greater value over time than the
expense. For SC, this would be any purchase of equipment that is expected to generate more
revenue than the costs incurred in purchasing and running the equipment, such as the new steam
cleaners. Revenue expenditure is spending on daily operations costs/expenses, such as cleaning
supplies like window cleaner, wages to staff, fuel and utility costs, etc.
F. With the use of quantitative and non quantitative analysis, evaluate Harold’s 10
potential decision to invest in the 4 new steam cleaners.
Quantitative factors may include but are not necessarily limited to the following:
- At 3 years and 10 months, the payback period is less than a quarter of the steamers’
lifespan, so you could argue that this is probably worth it. However, that’s 3 years in
which Harold is paying interest on the loan at 8.25% interest, and that hasn’t been
factored into the information we’re given. The interest paid would count as an
overhead, and to keep things simple, the 20000 investment times 8.25% interest =
$1650 in interest just in the first year. If he factors this in, then his profits for the first 4
years are actually lower than the information stated (which is just his added revenue
minus his direct costs).
- The average rate of return is over 12% higher than his interest rate, and he is only
paying interest for less than 4 years. More importantly, it’s more than double the
interest rate, which is a better way of thinking about it. After those 4 years, he’s
earning an interest free 20.42% return, which should be seen as very good. There
isn’t really much downside when we’re considering the ARR.
- A caveat is that his estimates are just estimates. He does not know that he is going
to hit these figures. He’s assuming he can pay them back in 4 years if everything
goes right, but if his numbers don’t pan out, then he may have problems meeting the
interest payments to the bank.
- His market isn’t growing much, so this gives him a way of expanding his market and
earning more profits.
- The new steamers could come with more maintenance costs over their lifespan that
he’s not factoring in and are hard to predict.
Non quantitative factors may include but are not limited to the following:
83
- This is a market that he is not experienced in, and appealing to this market and
meeting its expectations may not be the same as the consumer market.
- This move could help him diversify. If he sees demand drop in one aspect of his
business (either the consumer or business market), then the other could still provide
revenue.
- Since he only thinks he’d need 1-2 new employees, his current employees will be
working more hours. They may see this as a good thing because they can earn
more, but some could also see it as a bad thing if they do not feel they need the extra
hours, or if it makes their work-life balance difficult. If his staff is overworked, then
morale and quality of service may decline. There’s also no indication that he’s
planning on paying overtime wages, but this may be necessary to some extent.
- There may be logistical issues to consider, such as storage and transport of the
steam cleaners. If he’s a very small business, then simply finding space in his
business or in his cars/vans/whatever transport he uses for the cleaners might
actually be a bit difficult.
Accept other answers as appropriate.

84
24. Yuga Furniture
A. Calculate the payback period for Location A. 2
45+55+55+55+55= 265 (million), meaning A is paid back in year 5. The answer must be 4 years
and some number of months.
45+55+55+55 = 210 (million) paid by end of year 4
250-210 = 40 million still to be paid in year 5
55/12 = $4.583333333 million monthly rate of return in year 5, or $4,583,333
40 million / 4,583,333 = 8.73 months to pay back $40 million at this rate
Payback = 4 years, 8.73 months
B. Calculate the payback period for Location B. 2
25+30+50+50+50 = 205, so B is also paid back in year 5

25+30+50+50 = 155 (million)
180-155 = 25 million still to be paid in year 5
50/12 = 4.166666667, or 4,166,666 monthly cash flow in year 5
At this rate, it takes 25000000/4166666 = 6 months to pay back the remaining $25million in year 5
Really though, I could easily have done some mental math and seen that if it returns $50 million in
12 months, then it’d return $25 million in 6 months
Payback = 4 years, 6 months
C. Calculate the average rate of return for Location A. 2
45+(55*7)+50+50= $530 million

530-250 initial investment = $280 million profit
280/10 = $28 million per year
28/250 = .112 = 11.2% average rate of return
D. Calculate the average rate of return for Location B. 2
25+30+(50*6)+45+45 = $445 million

445-180 = $265 million profit
265/10 = $26.5 million per year
26.5/180 = 14.72% average rate of return
E. Explain one benefit and one limitation to Yuga Furniture using the payback 4
period as a basis for financial analysis.

- For firms that need to prioritize sufficient cash flow, this lets them see how quickly they will
get the cash back. No indication that Yuga Furnitures has necessarily has a cash flow issue
though
- Because it shows how fast projects pay back, it may be a really good measurement for
firms that for any number of reasons must see quick returns (for example if the market
changes quickly, or there is weakness in the economy, or new investment opportunities
may occur not far down the road)
- Can be compared to the investment’s lifespan, or the time period in which the investment
85
will need to be upgraded or replaced (the Yuga Furnitures factories would need to be
upgraded in 10 years)

- Doesn’t show profitability in any given year, or overall
- Doesn’t take into consideration the time value of money, and things like fluctuations in
inflation or interest rates can impact the true value of the cash flows
F. Explain one benefit and one limitation to Yuga Furniture using the average 4
rate of return as a basis for financial analysis.
- Shows overall profitability as a percentage of investment, which is very useful to compare
to interest rates and inflation rates. If an investment isn’t much more profitable than simply
saving the cash in a bank, for instance, then a project may not be worth it.

- Doesn’t show payback time, which can be very important in situations described in the
previous question.
- Because it’s an average, it ignores the timing of cash flows (in these examples, the first
year brings in a lot less than later years, for example)
- Still ignores time value of money (such as inflation rate impacting actual value of cash
flows)
G. On the basis of financial and non financial factors, recommend location A or 10

location B for Yuga Furniture’s project.
The student cannot receive full marks without at least one financial and one non financial
consideration for both options. Answers may include the following:
Location A
- Has a strong average rate of return, and because inflation is low, the ARR is a number that
is probably healthy in relation to inflation.
- The payback period is less than half of the time in which the factory will need to be
renovated. You could argue that this is good, because the factory will only need to be
renovated/retooled at that point, not completely rebuilt from scratch. But still, taking nearly
half the lifespan of the project to get your money back seems a bit long.
- The area has skilled workers, which could be crucial depending on the nature of the work in
the factory. However, the wages are higher, which could be a serious drawback if Yuga
doesn’t necessarily need a highly skilled workforce.
- Good infrastructure is critical to communications and getting supplies in and products

shipped out. This lowers the chance that projects will be delayed or that the firm will have
any problems fulfilling orders.
- Regulations are stronger and pressure groups can slow things down, so there’s no
guarantee that their cash flow projections are accurate or that the factory will even be
86
completed by the time they are expecting.
Location B
- Has a higher ARR than location A, and this could be excellent if inflation stabilizes as
expected. Inflation has been volatile in the past though, and there is never a guarantee of it
stabilizing as expected. We’re also not told what that inflation rate is, so there’s a chance
that it’s still not worth it.
- Has a shorter payback period, which can be really beneficial when both have relatively long
paybacks. It also seems more likely that this will payback in the expected time, because of
location A’s frequent problems getting projects approved and online. However, the
difference between the payback periods for each is not that long, and location B has
significant amounts of uncertainty regarding inflation and the infrastructure improvements. 4
and a half years could still be a long time to wait when things are so uncertain.
- It doesn’t have as many skilled workers, so even if building the factory is easier, this could
be a problem. However, improved education may start to solve this, and it may also not be
much of an issue if they aren’t very reliant on skilled labor. We’re not told to what degree the
company even needs skilled labor.
- Wages are lower and unemployment is higher, so finding cheap workers should be easier.
- The fact that it is closer to market could be huge, giving them both shorter transit times and
lower transportation costs. This could help them meet the rising demand better than
location A.
- Regulations are lower, so producing can be easier and cheaper. There’s a possibility that
deliberately locating here though could hurt their CSR image if the regulations on things like
worker rights and environmental protection are lax.
87
25. On Air Sports
A. Define the term net present value. 2
The difference between the present value of cash inflows and the present value of cash
outflows over a period of time.
B. Calculate the net present value of the returns OAS would receive for 4
broadcasting the axe throwing league if it pays $6 million up front.
Cash Flow
Year ($m) NPV ($m)
1 2 1.8518
2 2 1.7146
3 2 1.5876
4 2 1.47
5 2 1.3612
6 2 1.2604
7 2 1.167
8 2 1.0806
Tota NPV: 11.4932. 11.4932m-6m = $5493200
C. Calculate the average rate of return on OAS’s purchase of broadcasting rights 2

to the axe throwing league assuming that On Air pays $6 million up front.
8 years * $2mil per year = $16mil for 8 years
$16mil - the $6mil up front investment = net cash flow of $10mil
$10mil / 8 years = $1250000 annual profits
$1250000/$6000000 = 20.1% ARR
D. Calculate the payback period for OAS’s purchase of broadcasting rights to the 2
axe throwing league assuming that On Air pays $6 million up front.
This one is incredibly simple…

$2m+$2m+$2m = $6m, so 3 years
E. Using the discount factors provided, calculate the total net present value of all 4
the payments that the axe throwing league would receive from On Air in
option 2 (in which the league is paid $1 million up front and then $2 million per
year over years 5-8).
Using the info already calculated above for years 5-8, 1.3612+1.2604+1.167+1.0806 =
$4.8692 million. Add in the $1 million up front, and it is $5.8692 or $5869200 in net present
88
value.
F. Explain two reasons why the On Air CFO may prefer to offer the sports 4
league the second option of $9 million rather than $6 million up front.

- The net present value of the $9 million that they would pay to the league is actually a little
less than the $6 million when the $6 million is paid up front.
- It gives On Air the ability to invest the $5 million that it isn’t paying the league in year 1 on
something else that could be more profitable for 4 years, or save the money. This could be
very valuable to On Air, particularly if it has another investment opportunity in those years
that it thinks would be worth a larger return.

89
26. Müller Foods
A. List two aspects of Müller that could be designated as cost centers. 2

- Customer service
- IT maintenance
- Human resources
- Accounting
- Research and development
- Other maintenance staff
B. List two aspects of Müller that could be designated as profit centers. 2

- Individual products
- Going along with the one above, a branch or a division of the company, such as like a
cheese division or beverage division
- Sales departments
- Different geographical branches of Müller
C. Explain two factors that Müller’s budget managers should consider when 4
constructing a budget.

- Sales forecasts and other projections on market trends
- Available finance, and the ability to secure external finance if needed
- Analysis of what competitors are doing (with marketing, product development, and so on)
- Risk tolerance of major stakeholders such as shareholders
- Any other organizational objectives, like cost cutting
D. List two items that would be listed both on Muller’s master budget and on its 2
profit and loss account.
- Sales revenue
- cost of sales (in the form of materials, and possibly electricity depending on whether they
see this as a fixed or variable cost)
- Expenses (broken up into salaries, rent, advertising, and possibly electricity depending on
whether they see this as a fixed or variable cost)
E. Calculate the variance for each figure on the budget above, and indicate if it is 4
favorable or adverse.
26000-25495 = $505 million adverse

1000-1039 = $-39 million adverse. Or taking the absolute figures, it is $39m adverse.
90
F. Explain one benefit of budget variance analysis to Müller. 2

- They help plan and guide the firm. For instance, they can see here that they made less
revenue than they’d planned on, and also that they spent more on marketing than the
budget had planned for. This can help the firm identify problematic areas, as well as areas
of strength.
- It can help with coordination and spending control across departments, as the budget can
help each team work to eliminate areas of adverse variance or at least to keep it to a
minimum, and to try to maximize the favorable variance.
G. Explain a benefit and a drawback of Müller using zero based budgeting. 4
Benefits:
- It makes sure that the business isn’t sort of on ‘cruise control’ approving larger budgets
each year regardless of whether those budgets are necessary. Incremental budgeting can
often lead departments to spend money just because it is there, and they fear that they will
not get as much money budgeted in the next period if they do not use all of this period’s
budgeted funds
- If Müller is going to respond effectively to the e-commerce and store-brand threats, then it
may need to find ways of cost cutting, and this may be the quickest and most effective way
of doing it
- It can be used to identify areas that really didn’t need as much money in the budget as they
previously received
Drawbacks:
- It can lead the firm to cut back on really important areas of spending, such as marketing. In
the real world, Kraft-Heinz has done this in the last few years, and many analysts have
argued that the company has ended up cutting so much that it cut ‘muscle’ or really
productive uses of funds, rather than just cutting ‘fat’
- It can lead managers to take fewer risks in innovation, because they are worried about
always having to justify every expense
- It could really slow down the organization, as the funding approval process is ongoing.
When dealing with new e-commerce businesses that are focusing on innovation this could
be a serious drawback for Müller
- It could lead to competition for funds among departments, thus creating a spirit of rivalry in
the organization rather than cooperation and a sense that everyone is working together for
the same goals
91
27. Jupiter Doors
A. Define the term budget. 2
An estimate of income and expenditure over a given period of time.
B. Explain one benefit and one drawback to Jupiter Doors dividing its business 4
into profit and cost centers.

- Can help to isolate areas of the business and set targets which can then be compared to
their actual performance.
- Allows Jupiter to compare the performance of each of its regional sales offices and their
contributions to overall profits. This could be used as a basis for which ones need to
address problems or make either strategic or tactical changes.
- It may help to indicate which regional offices might need to be closed in the future, whether
that is due to the branch manager/employees’ fault or it is due to factors pertaining to the
local market (crime, local economic conditions, etc.)
- Can create healthy competition between different centers of the business.

- Any competition that may be induced by the division of business offices into profit and cost
centers may actually lead to unhealthy competition if managers or employees feel that their
performance is being evaluated by their ability to stick to the budget. They may cut corners
to avoid costs, or may engage risky or unethical behavior to magnify sales.
- May not work well with overheads that can’t be easily attributed to any one center.
- There are often external factors that need to be considered when looking at any budget,
and these factors may make a center look better or worse for reasons outside its control.
For instance, local crime rates and real estate markets could have big impacts on regional
variation, and weather could also be a factor.
C. Using Table 1, calculate the variances for each of the four regional sales 4
offices.
The question did not ask students to indicate if variances were favorable or adverse, but it’s simple
to do and helps answer question 4.
Budgeted Actual Favorable or

Region Variances
Revenue Revenue adverse
1 220 224 4 favorable
92

4 185 176 9 adverse
D. Using Table 2, calculate the variances for Jupiter Doors. 4
Question did not ask students to indicate if variances were favorable or adverse, but it’s
simple to do and helps answer question 4.
Budgeted Actual Favorable or

figures figures Variances adverse
840 848
Sales revenue 8 favorable
436 440
cost of sales 4 adverse
Overheads 377 380 3 adverse
Net profit 27 28 1 favorable
E. Using the variances calculated, comment on the budgetary performance of 4

the Jupiter Doors corporation.
Starting with the regional branches, all but 3 exceed their budgetary projection, so revenues
are rising overall, and the 1 that was below expectations was outweighed by the favorable
variance by the other 3 branches. On the profit and loss information, they are again
performing well with revenues, which is to be expected from the regional numbers. However,
the costs and overheads were both above projections, which is not good. The cost of goods
should be expected to be higher than the budgeted figure since they are selling more doors,
so that’s not necessarily a problem. The issue is that their overheads also rose, though it’s
possible that this could reflect beneficial indirect expenses such as marketing that helped
create stronger sales in the first place. Overall, the variances led to better than expected
performance.
F. Explain one benefit and one drawback to Jupiter Inc. conducting variance 4
analysis.
- Quite simply, it allows managers to see expected vs actual performance of the business,
and thus use this as a basis for making changes to improve things or making changes to
future budgets
- Can allow management to focus on problems by their order of importance or magnitude.

For instance, there is a large budget variation in region 4, which may be an important area
to focus on, more so than for instance the variance in the cost of sales.

93
- It just shows numbers, and not the cause of the variances. A rise in the expenses for
Jupiter, for example, is unexplained by the data. The adverse variance looks bad in the
data, but there might be a perfectly good reason for it.
- May lead people in business to have an unreasonable expectation of positive variance.

Even though the goal is to hit the targets, if targets are exceeded in one period then it can
sometimes set the tone that exceeding targets is now to be expected.
G. Explain two reasons why Jupiter Doors may experience adverse variance in 4
one of its regional sales offices.
Answers may include the following:

- Could be as simple as poor performance by the sales staff or management in region
4
- The company posted 5 quarters of losses in the last recession, so there could be
some kind of economic weakness in region 4 that is hurting sales. Economic
recoveries do not always happen evenly across a country’s regions, and it’s possible
that falling sales in this region indicate that the economy there is in a recession or is
about to head into one
- They may be doing fine, but the budgeted revenue was unrealistically high
- The case study says that local crime rates have a big influence, and it could be that
decreased crime in an area led to fewer consumers or businesses feeling that they
needed doors with strong security
94
28. Hunny
A. Using the information from the profit and loss account and her manager’s 5*
recommendations, construct a budget for the next financial year.
*Why have I made this question worth 5 marks? It just sort of feels like the right amount of marks. I
don’t actually know for sure how the IB would handle a question that compels students to construct
a budget though, in terms of marks.
All figures in $000s Budgeted figures Actual figures
Income:
Sales revenue 403.7
Interest earned .18
Total income 403.88
Expenses:
Salaries and wages 73.605
Materials 198.45
Rent 28.98
Advertising 10.35
Electricity 5.04
Total Expenses 316.425
Net Income 87.455
Explanation of math for above budget based on changes to profit and loss account
All figures in $000s Budgeted figures Actual figures
Income:
Sales revenue 367*1.1 = 403.7
Interest earned .18
Total income 403.88
Expenses:
Salaries and wages 58+12.1*1.05 =

73.605
Materials 189*1.05 = 198.45

95
Rent 27.6*1.05 = 28.98
Advertising 11.5*.9 = 10.35
Electricity 4.8*1.05 = 5.04
Total Expenses 316.425
Net Income 87.455
B. Explain how constructing a budget could help Chloe in running Hunny. 4

- It can help create financial discipline in the organization, meaning that she’s better able to
control expenses
- That then could lead to her being able to take home more income and be able to afford a
home.
- On a related note, it could help her to hold employees accountable as well if her budgets
are strictly enforced
- It can help her identify strengths and weaknesses of her firm and its operations
- It can have motivating effects in terms of striving to reach certain sales levels and to
operate efficiently
C. Explain two reasons why Hunny may experience variance in its budgeted 4
figures.
Examples of answers may include, but are not limited to the following:
- Stuff happens, right? There are tons of different external factors that could either impact
sales or spending.
- Her budgeted figures simply may not be all that realistic. For instance, cutting advertising
budget by 10% may just not be feasible while continuing to sell more
- Staff may have a voice in the salary/wage budget, particularly if wages are rising elsewhere
and employees have other options
- Costs are largely determined by Hunny’s suppliers, and while there may be some ability to
negotiate with them or go with cheaper suppliers, ultimately for most costs Chloe simply
wouldn’t have much choice but to absorb the higher prices for supplies or pass those on to
customers
D. If Hunny’s profit and loss account shows a variance of $150 more in interest 1
income than Chloe budgets for, state whether this is favorable or adverse
variance.
Favorable
E. Discuss the benefits and drawbacks of the budget recommendations Chloe’s 10

manager has made.
Benefits of her recommendations may include, but are not limited to the following:
96
- Reducing the advertising budget by 10% will save her over $1000 per year, and if she is
able to do that without sacrificing sales, then that’s $1000 more directly into her apartment
- The revenue is still projected to rise by more than the other costs, which would make sense
if she’s doing a greater volume of production and is able to continue seeing economies of
scale or is able to raise prices a bit
- The lack of an increase in interest income is probably realistic - she can’t really control the
interest earned through bank accounts and it’s not likely to be that much anyway, especially
given the numbers from the P&L account. It is probably best for her to not count on much
added income from that source
- If things like rent, which she has no real control over, do not end up increasing, then she’ll
be able to save even more money than the budget plans out.
- These numbers give her something to strive for, and seeing them in the budget can have a
motivating effect on her and employees to make the improvements happen.
Drawbacks of her recommendations may include, but are not limited to the following:
- Cutting the advertising budget may have an adverse effect on revenue. Compared to her
overall sales numbers, the advertising budget doesn’t seem like it’s enormous, and so she
may be doing target ads that are pretty effective at bringing in customers.
- She may actually be able to cut her ad budget by even more, considering that demand is
increasing, and she’s getting more tourists coming through. Word may be getting out about
her shop without her actually spending much money on advertising.
- There are several factors that she can’t control, like rent, so these budget figures may
actually not end up being that realistic
- She may actually be being too conservative with a projection of a 10% increase in revenue,
and setting a bar too low may weaken Chloe and other employees’ ambitions to maximize
sales
97
29. Otter Mountain Theater
A. Define the term overdrafts. 2
A withdrawal from a bank account above and beyond the balance in the account, in return for a fee
and typically a high interest rate.
B. With reference to OMT, explain the difference between capital and revenue 4
expenditure.
Capital expenditures is the purchase of fixed assets, which in OMT’s case could be spending on
their own building, or other purchases like computer systems, equipment for set building, or really
any asset that’s going to last them more than a year. Revenue expenditure is spending on day to
day operating expenses rather than fixed asset. For OMT these can include advertising expenses,
wages and salaries, and so on.
C. Explain two reasons why OMT’s additional financing options may be limited 4
due to its non-profit social enterprise status.

- They can’t issue shares as a nonprofit
- Their ability to get a bank loan could be lower than a for-profit because
D. Define the term overheads. 2
Indirect costs that are not attributable to any one project, division, or product line but are
nevertheless incurred for the business to function.
E. Calculate the value of OMT’s gross profit in each of the two financial years 2
shown.
Prior financial year:

(906+580-91.5)/(906+580) = 0.9384253 = 93.84%
Latest financial year

(809+455-98.1)/(809+455) = 0.92238924 = 92.24%
F. Calculate OMT’s profit margin in each of the two financial years shown. 2
Prior financial year:

(906+580-91.5-899-12.8-67-168)/(906+580) = 0.1666891 = 16.67%
Latest financial year

(809+455-98.1-852-104-84-294)/(809+455) = -0.13299051 = -13.30%
98
G. Comment on two aspects of OMT’s financial performance that can be seen in 4

the case study given.

- GPM is holding relatively steady, which makes sense because it does not seem that cost of
sales is a major portion of this organization’s costs. It doesn’t produce a tangible product
(at least as its main revenue source - it may sell things like gift mugs, shirts, etc.), so GPM
is pretty high both years.
- Profit margin is down sharply, and they experienced a large loss in in the latest year
- Their current ratio is actually improving, so they’re holding enough cash on hand.
SL: However, given the fact that they are said to be heavily in debt, an ESL student should
be able to see that they’re funding their current assets through long term liabilities at least
to a pretty large extent.
HL: Should be able to see that the gearing ratio is quite high in both years, and rises quite a
lot in the latest year. This is a firm that is definitely debt burdened in relation to its sales.
- They’re spending more on overheads, and in consulting fees in particular in the second
year. None of the expenses except for salaries and wages are going in the right direction,a
dn this is particularly troublesome considering that their revenue declined massively in the
second year.
H. In addition to what is mentioned in the case study, explain two additional 4

revenue streams that may be possible for OMT.

- They could sell acting classes
- Sales of physical items and gifts, similar to what Amy is planning with the crowdfunding
- Gift cards
- Any kind of premium experiences like a VIP gathering/party with food or meet and greet
session with actors and such before or after a performance
- They could possibly put on smaller performances outside the theater for events or groups
- Service fees on ticket sales
I. Explain two challenges in OMT improving its profit margin. 4

- As a nonprofit that has some paid actors it is reasonably professional, but probably not up
to the standards of an entirely for-profit theater organization, and so it would probably be
challenging to charge higher ticket prices.
- It’s probably also hard to charge higher ticket prices due to news reports that the
organization is heavily in debt and the director resigned; customers may feel like the org
has been mismanaged.
- It’s hard to cut staff and other costs without sacrificing the quality of the performances or
the org’s ability to operate in other ways.
- It is heavily reliant on debt as it is and things look unsustainable, so it’s very hard for it to
make long term investments that would improve the profitability in the long run
- A lot of their funding comes from donations and government funding, unrelated to their
direct trade related revenue, so even if they put on a series of good performances, they
may not be able to make that translate to increased funding from either of these 2 sources.
- The government is unlikely to approve the new loan, and they’re probably upset about
99
mismanagement, so it could be hard to convince them to pour more money into the org that
would act as income (as opposed to a loan, which is not income).
J. Explain what an increase in OMT’s long term loans will do to its return on 2
capital employed (ROCE), if all else is held equal.
The return on capital employed is a ratio of profits before tax/interest to net assets and long term
liabilities. Thus, if the long term loans increased it would increase the denominator of the equation,
making the ROCE percentage decline. A student may state that a loan could increase its ability to
make profits, but this question specifically says that we’re holding all else equal.
K. Explain one way in which OMT could attempt to improve its liquidity, and one 4
drawback to that method.

- The most fundamental thing that it needs to do is shorten the time it takes to put on a
performance, because it incurs costs during the preparation and rehearsal phase. It’s really
hard to shorten this time period though because this theater is not fully professional, and
even if it was, there’s a lot to this art form that can’t just be easily sped up.
- It may try to sell more tickets in advance, especially since people generally want to know
they have tickets well ahead of time rather than trying to buy them close to the show date.
OMT could even offer discounts on early purchases if need be, or try to sell more
subscriptions to gain additional cash flow. Right now though it may be hard to convince
people to buy tickets when they’re not even sure the show will be performed, and even in
normal circumstances it could be hard to convince enough people to buy early enough for
when OMT needs the cash to pay off its production costs.
- They could negotiate longer trade credit terms with suppliers of equipment, set materials,
costumes, scripts, and so on. However, this is often not possible, and because they’re a
small organization, they don’t have a ton of bargaining power most likely.
- They’re spending an awful lot of money on advertising and consulting, especially when we
view the consulting fees in relation to the prior year. A lot of this probably needs to be cut,
as it may represent spending that is related to mismanagement and operations that
could/should be conducted in-house by OMT staff. In practice though, they may be getting
a lot of valuable help from marketing firms and consultants and would be unable to replicate
the high quality of work on their own.
M. Discuss the challenges in OMT obtaining sustainable external financing to 10

improve its ability to function.
Reasons why obtaining suitable finance may be challenging:

- It’s stated that the city council is unlikely to approve the loan, and that even if they do it will
come with stringent requirements on OMT. Even if they get the loan, there may be oversight
requirements that they feel makes it too challenging for them to operate the way that they
need to.
- Sales are declining, and thus it may be harder to convince either the government to extend
a loan in these circumstances, to get overdrafts on reasonable terms (or at all) from the
100
bank, or to convince people to support them with donations/crowdfunding
- They can’t even get the scripts to their next play right now, meaning that they can’t easily
convince people that there will even be a next performance and thus that this is an
organization that should be funded.
- They already have “shocking” amounts of debt (and HL students will notice the extremely
high gearing ratio), and it’s harder to get funding from any source when it’s already been
reported that they’ve been mismanaged and have high debt levels.
- They’re spending what seems to be absurd amounts of money on consulting - again, why
would someone want to extend more financing to OMT without serious cost controls?
Reasons why obtaining suitable finance may be a management challenge:

- They’re a nonprofit organization that’s been around for a very long time and has a good
track record of performances; there may be plenty of people who are willing to crowdfund
this organization through Amy’s planned sales methods or through simple donations.
- The theater is likely a good selling point for local tourism and just the quality of life in the
city, and so the city council may want to do what is necessary (within reason) to prevent
them from failing.
- It does at least have a decent current ratio, I guess…so maybe that gives them a buffer to
be able to pay off overdrafts and convince a bank to let them take out an overdraft for a
reasonable fee.
- The case study says that personal donations are increasing, and so if that’s true and yet
that line item in the financial data actually went down, then it must mean that government
funding declined in relation to donations. The government then may be willing to extend a
loan as it sees OMT is getting better at other fundraising methods.
O. Given the variance, calculate the originally budgeted figure for advertising. 1
84000-29000 = $55000
P. Other than advertising, state one other item that would be shown on OMT’s 1
budget if it followed the standard format.

- Sales revenue
- Interest earned
- Salaries and wages
- Materials
- Rent
- Electricity
101
30. Biscuits n Biscuits
A. State whether spending on electricity is revenue or capital expenditure. 1
Revenue expenditure
B. Other than loans, state two forms of long term external financing that may be 2
appropriate to BnB.

- Issuing shares to existing or new investors (could include business angels)
- Leasing
NO NOT accept:
- Trade credit (not long term)
- Overdrafts (not long term)
- Crowdfunding (not appropriate for a very well established business like this)
- Microfinance (not designed for big businesses)
- Any of the 3 internal financing options
C. With reference to BnB, explain the difference between internal and external 4
financing.
Internal financing uses the resources within the firm’s existing financial resources, including its
retained profits and personal funds, and sale of assets. Personal funds are not applicable to a
corporation like BnB, but they could and do fund themselves as much as possible through retained
profits, and it’s possible they could sell assets like unused equipment or locations, or intellectual
property if they ran into financial problems. External financing uses the financial resources of
outside organizations and/or individuals through lending or selling shares of ownerships. BnB uses
both of these, though it tries to keep loan financing to a minimum.
D. Explain an advantage and a disadvantage to BnB using share capital to pay 4

for capital expenditures.
Advantages may include, but are not limited to:

- It allows them to minimize their borrowing, which means that they’re losing less money
through interest payments
- It can keep them financially disciplined, growing within their means rather than taking on too
much risk of overextending the business. Given their financial info presented, opening 4
stores a year seems like it should be doable without taking on much if any debt.
- If people are willing and able to buy the shares without upsetting anyone over dilution of
share value, it’s basically free money and gives them the ability to expand or to make
investments like the solar panels with much less risk than if they borrowed.
Disadvantages may include, but are not limited to:

- Selling more shares means giving up more equity in the company for existing owners. We
don’t know how many owners of the corporation there are and to what extent this would
102
dilute their shares of ownership, but it’s always something that should be considered.
- Along with that, selling more shares will also give control to more people or giving more
control to certain existing shareholders if it is existing ones who buy up most of the shares.
That leaves less decision making authority to current shareholders, and major ones may
include Abner’s family, given that he is the grandson of the founder. We don’t know to what
extent the family is involved, but it’s entirely possible that family control may be something
that they value.
- Due to BnB wanting to minimize the impact of the above issues, raising money through
share capital (as opposed to loans) could limit the speed and flexibility of their expansion
plans. They’re expanding fairly conservatively, but even this could be a bit more difficult if
they are relying on share capital and they don’t want to dilute the value of shares too much.
E. With reference to BnB, explain the difference between fixed and variable 4
costs.
Fixed costs are ones that do not vary based on the level of production. For BnB this could be tons
of different things like rent of any offices or stores that it doesn’t own, insurance or debt payments
that are fixed per time period, salaries or wages (wages can be said to be fixed if the firm is paying
people per hour and is guaranteed to have certain staff levels and operating hours), etc.
Variable costs change with the level of output, which in BnB’s case includes things like ingredients
and packaging for the food, to some extent their electricity and other utility usage (the more
biscuits they make, the more they probably use resources like electricity, gas, and water), and
possibly cleaning costs if the need to clean equipment and facilities varies based on how much
business they’re doing.
F. Explain one way in which fixed costs could present challenges for BnB. 2
Fixed costs do not change in the short run, meaning that there are several different kinds of
problems that could arise in the business that would put them in a position where the need to pay
fixed costs would present challenges. The most important one that could happen is if there is a
downturn in demand, then BnB would still be obligated to pay things like rent, salary, and insurance
at the same rate despite the lower revenue, unless they found ways of cutting costs like laying off
employees.
It could also lock them into longer term prices for things during periods where prices are falling. For
instance, if they hired someone at a high salary for a set time period and then prevailing wages fell,
or they locked in a rent price and rents then fell, they could be paying more than they want to.
G. Define the term revenue. 2
The sales quantity times price. Or, money earned from sales of goods or services.
H. State one possible indirect cost for BnB. 1

- Any of the fixed costs mentioned above
- Advertising expenses not related to a particular store
103
- Administrative costs like running HR or daily office expenses
- IT costs
I. Explain two reasons why a government may want see BnB’s final accounts. 4
- To make sure that they’re paying their property taxes

- To investigate possible wrongdoing on the part of the firm, such as illegal accounting
practices, withholding employee wages, giving improper bonuses to executives, or any
other examples of violations of regulations
J. Explain why it may be difficult for BnB to value an intangible asset on its 2
balance sheet.
You do not truly know the value of an intangible asset until it is sold. If BnB has any intellectual
property like patents or trademarks of names, logos, etc., then the firm doesn’t actually know fair
market value with certainty while the asset is owned by BnB.
K. Comment on one positive and one negative aspect of BnB’s financial ratios as 4
compared to the industry average.
To get the full 4 marks, students really need to go beyond saying simple observations like, “the
GPM is worse than the industry average.” They should explain what that means / why it matters for
a firm like BnB.
Positive answers may include, but are not limited to:

- Profit margin is quite a bit higher than average. In the food industry to have a difference of
almost 2 percentage points is really good, because profit margins are often fairly low. Also,
given that their GPM is lower, this shows that they are doing a great job of controlling
overheads.
- Return on capital employed is outstanding. We should always compare this to the interest
rate they could get on savings, but let’s be serious here, when was the last time that a
company could get a return anywhere near the 14% range on a savings account? It is in
very rare circumstances that a company would find itself in an interest rate environment in
which 14.95% looked bad in relation to interest on savings, or even interest on borrowing.
Given their longevity and profitability, they are unlikely to be in a situation where they’re
borrowing at a high interest rate, and also remember that they try to rely very little on debt
(as seen by the low gearing ratio), so if they’re turning retained profit mostly into this kind of
return on capital, they’re doing very well.
Negative answers may include, but are not limited to:

- GPM is lower than industry average, meaning that for each meal they sell they’re making
less profit on it. That lower starting place in profits means that it’s harder for them to make a
net profit because before any indirect costs are considered, they already have a lower
difference between meal cost and money earned from a meal. This may reflect higher input
costs, given that they charge slightly higher than average.
- The current ratio is lower, but barely lower. HL students may note that given their stronger
stock turnover ratio the slightly lower current ratio may not be a problem. And if students
say that the current ratio is low overall, they should remember that the industry comparison
104
suggests that a number in this range is normal for this industry, so the fact that it doesn’t fit
the rule of thumb of 1.5-2 range should not be seen as a negative.
- Quick ratio is below the industry average, meaning that they have more of their current
assets tied up in stock that is less liquid than actual cash. However, remember that the
case study says they rely on a quick turnover of customers, so they are probably working
through stock very quickly. HL students should note that this is validated by their lower
than average (in a good way) stock turnover. Their liquidity thus is fine.
L. Calculate the ARR for the solar panels only over the first 5 years. 2
(9240+3100+3300+3500+3700+3900-42000)/5/42000 = -0.07266667 = -7.23%
M. Calculate the ARR for the solar panels + battery storage system over the first 2
5 years.
(11300+5100+5400+5700+6000+6300-54000)/5/54000 = -0.05259259 = -5.23%
N. Explain a benefit and a drawback of Abner using the payback period as a 2

method of investment appraisal.

- He can judge it in relation to the expected life of the solar panels and see if it pays back
soon enough to make it worthwhile
- If the firm needs quick cash flow, which doesn’t really seem to be the case here, then it
could be helpful for him to see how long it will take to earn back the cash that the firm
needs
- Realistically, it’s most useful as a starting point for his investment appraisal, to then see if
better methods like ARR and NPV are even worth looking into.

- It’s just not a very good form of investment appraisal, because unless BnB really needs the
cash (doesn’t seem that they do), the return on investment in terms of profits is much more
important
- It ignores the timing of cash flows, which can maybe skew the true payback period from
what it says here. It’s probably not that much different given the cash flows are actually just
cash savings from electricity that they need to use every day, but they may use more
electricity in really hot or really cold weather, meaning there are greater savings in those
periods than others.
- We don’t know how realistic it is, and as Abner has read about, it may actually be the case
that one or two bad storms that knock out power would make the payback period way
shorter.
O. Evaluate whether BnB should purchase the solar panels for five of its 10
restaurants.
Reasons in favor of the panels may include, but are not limited to:
105
- As stated above, it’s entirely possible that these panels could pay for themselves much
quicker than Abner’s mathematical projections indicate, and thus they would earn BnB a
much higher return on investment as well
- Particularly if they add the battery storage system as well to let them use exclusively solar
power, it would leave these stores in a position to have much more reliable service to
customers, which could be a strong unique selling point. In a power outage when other
restaurants are closed, BnB may be the only one open.
- It could give them a USP just in terms of customers valuing the fact that they’re trying to be
more environmentally sustainable
- He’s only trying it on five of the restaurants; in the context of them having 91 locations and
opening 4-5 per year with strong profits and return on capital, this is not an extremely risky
thing for the firm to try. If it doesn’t give them the desired impact, then they don’t need to
extend this investment to the rest of their stores.
- Despite Abner projecting that the payback period is “fairly long,” if you do some math based
on the assumption that the returns in each year will either continue to climb at this rate or
even just flatline, it’s not going to take them more than around 8 years to pay back the
panels, out of a lifespan of 25-35 years. If they can afford the investment, then this seems
like a good long term investment, though we don’t know the long term ARR.
Reasons against the panels may include, but are not limited to:
- Abner projects that the payback period will be “fairly long,” and if students don’t do some
extended math they won’t see how long (it’s only in the range of 8ish years) then could
state that it seems like Abner generally prefers to have payback periods that are less than
this one.
- The ARR over the first 5 years is negative in both cases. While it will assuredly be positive
over the panels’ entire lifespan, we don’t know what that ARR will be, and it’s quite possible
that it would be lower than many other investments that they could make.
- There is no guarantee that the panels would actually come in useful during power outages -
this may never happen, or not anytime soon.
- Customers may not care about this as a USP, if that’s a justification students used on the
positive side.
- If they don’t add the battery storage system too, then the solar system wouldn’t even be
useful in the non-sunny hours, and they’d still have to rely on the local power grid. Even
with the battery backup, if there were extended periods of time where it wasn’t sunny
enough to generate the required power, they’d still have to rely on the grid.
- Their current ratio is not very high, and a lot of that is taken up by stock. We don’t know
their total numbers with finances like cash, but it seems like they may need to borrow to
invest in these panels, and we know the firm doesn’t like to carry much debt, and we also
don’t know the interest rate on borrowing.
- There may be periodic maintenance issues with the panels or the roof that are not factored
into this equation. For instance, if your roof needs to be replaced in 2 years, you probably
don’t want to put solar panels on it until the roof is replaced.
P. Assuming that BnB purchases a new set of computers for one of its corporate 4
offices, explain why the straight line method of depreciation may be more
appropriate than the units of use method.
Solar panels don’t have a very direct relationship with individual units of production, especially for a
restaurant in which there will be a lot of variation in the costs/prices of each order customers make.
106
Therefore, it’s not very easy to view the panels in terms of per unit of production, presumably units
here meaning meals. You’d have to use estimates and averages which may not be accurate
enough, especially considering that there could be plenty of periods in which the panels are
running the store’s electricity but there isn’t much customer demand. In those periods, the units of
production per dollar invested in the panels would be quite low. Therefore, the straight line method
makes more sense in this case if Abner can just take an average of solar panels’ life expectancy
and figure out much they will depreciate per year based on that.
Q. Explain one method that BnB could use to improve an efficiency ratio, and 4
one drawback of that method.

- Implement more just in time production methods, though this is always going to mean that
the firm has less margin for error when things go wrong. They’re probably already using
JIT to the extent that they can anyway, considering that they’d have lots of perishable
goods.
- Try to negotiate longer credit repayment terms on trade credit so as to free up cash and to
rely less on long term debt. However, this is always easier said than done. There’s no
guarantee that they could actually convince creditors to extend terms.
- Demand cash only payments from customers, again so that they don’t have to rely on debt
as much. In this case though, they’re probably already getting cash relatively quickly,
because it’s not like people would be buying a biscuit and paying for it 30 days later.
- Getting rid of items in stock that don’t sell very quickly. They’re probably doing this already
to the extent that they can, and the problem with doing this more is that even if an item is
slow to sell, it may be fairly profitable, and more items on the menu may bring in more
customers, even if a particular item isn’t ordered as often as others.
R. Explain one aspect of BnB that may act as a cost center. 2
Examples may include, but are not limited to:

- IT services/support within the company: these would cost money but only help the firm
internally and would not directly generate profits
- Human resources management: same as above
- If they have a research and development department for new food products, this would also
incur costs without directly generating profits. It's’ the stores themselves that sell the
products that would generate the profits.
- Other business function departments - Finance and accounting, and marketing. Both help
the firm make money in an indirect way, but they incur costs rather than directly making the
money.

Unit 3 Case Study Pack IB Biz 2024 Answers

Uploaded by

Copyright:

Available Formats

You might also like

Unit 3 Case Study Pack IB Biz 2024 Answers

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Unit 3 Case Study Pack IB Biz 2024 Answers

Uploaded by

Copyright:

Available Formats

1

Case study Answer Page

3. The Bagel Underground 8

6. Dunn Auto Repair 16

8. Carolina Fire Museum 22

10. JB Tax Solutions 31

12. Crispy Collin’s Chicken & Waffles 38

13. Spring Run Academy 41

14. Cedar Hill Books 44

15. Fresh Cucina 47

18. Caldwell Holdings 62

19. Steady on the Street 68

20. Way.Finder Mobile 71

21. Downriver Adventure Company 74

22. Old Brown Shoe Studios 76

23. Stavanger Cleaning 81

24. Yuga Furniture 84

25. On Air Sports 87

26. Müller Foods 89

27. Jupiter Doors 91

29. Otter Mountain Theater 97

30. Biscuits n Biscuits 101

A. Identify two examples of revenue expenditure for Big Deal. 4

D. Explain one reason why capital expenditure is important to Big Deal’s 4

A. Define the term overdrafts. 2

C. Explain one advantage and one disadvantage of Manuel using internal 4

Advantages may include:

Disadvantages may include:

Accept other reasonable answers as appropriate.

E. As a small business, explain two challenges for Hail Cheeser! in getting 6

Accept other reasonable answers as appropriate.

Arguments in favor of a small business loan may include:

Arguments in favor of reorganizing as a private limited company may include:

3. The Bagel Underground

A. Define the term trade credit. 2

Benefits may include, but are not limited to:

Drawbacks may include, but are not limited to:

- Share capital: As explained above, they could seek out investors.

F. Recommend whether BU should use crowdfunding through Andriy or 10

A. Define the term asset. 2

B. Define the term leasing. 2

When a firm rents the use of an asset over a period of time.

Answers may include, but are not limited to:

A. Define the term business angel. 2

C. Explain two other forms of finance that may be available to a small 4

Answers may include:

E. Recommend whether Dishes should attempt to raise additional capital 10

Disadvantages of loan capital:

6. Dunn Auto Repair

Answers may include:

Examples may include, but are not limited to the following:

E. Define the term revenue. 2

Money earned from selling goods and services.

Examples may include, but are not limited to the following:

I. Plot the current fixed cost curve for DAR. 2

A. Explain what would happen to McQuiggan’s average fixed cost if he were 2

B. Identify two possible variable costs for MR. 2

C. Explain a benefit and a drawback of Liam attempting to develop an additional 4

Benefits may include, but are not limited to: