Financing & Strategy
Define "Internal Sources of Finance" and explain why they are often the "cheapest" option for a firm.
Funds from within (Retained profit/assets). Cheapest because there is no interest to pay and no loss of control/ownership.
Distinguish between "Capital Expenditure" and "Revenue Expenditure" in terms of their long-term impact on a firm’s value.
Capital Exp adds to non-current assets (long-term growth); Revenue Exp covers daily ops (short-term survival).
State the primary purpose of the "Balance Sheet" and explain what "Equity" represents to the owners.
Balance sheet shows financial position at a point in time (Assets/Liabilities). Equity is the "residual" value belonging to the owners after debts are paid.
Distinguish between "Gross Profit Margin" and "Net Profit Margin" in terms of what they reveal about efficiency.
GPM shows production efficiency (Sales vs COGS); NPM shows overall management efficiency (after overheads/tax).
Calculate the Net Cash Flow for May if Total Inflows were $12,500 and Total Outflows were $14,200.
-$1,700 (12,500 - 14,200). Note: Use negative sign or brackets.
Explain the trade-off between "Loan Capital" (gearing) and "Share Capital" in terms of ownership and financial risk.
Loans increase debt (financial risk) but keep ownership; shares dilute ownership but don't require monthly interest repayments.
Analyze the impact of a significant increase in "Fixed Costs" (e.g., rent) on a firm’s overall profit margin.
High fixed costs increase the "break-even" point. Even if sales are high, the profit margin shrinks because these costs must be paid regardless of output.
Explain how a Patent acts as an intangible asset and why it provides a competitive advantage (USP) for a firm.
Legal protection of an invention. It creates a barrier to entry for competitors and allows the firm to charge premium prices.
Analyze the significance of a ROCE of 18% if the current market interest rate is only 4%.
It is highly successful; the business is earning 18 cents for every dollar invested, which is much better than the 4 cents they'd get in a bank.
Calculate the Closing Balance for June if the Opening Balance was $5,000 and the Net Cash Flow for the month was -$2,200.
$2,800 (5,000 - 2,200)
Justify the use of a Leasing arrangement rather than a bank loan for a startup airline acquiring its first fleet.
Leasing avoids a massive upfront cash outflow (preserving liquidity) and allows the startup to upgrade planes more easily without the risk of asset depreciation.
Discuss why a firm like the International Baccalaureate (IB) would choose to have multiple "Revenue Streams" (e.g., fees, workshops, royalties).
Diversification. If one stream fails (e.g., workshops canceled), the others (exam fees/membership) keep the organization financially stable
Analyze why external stakeholders like Suppliers and Banks might have conflicting interests when viewing a firm’s accounts.
Banks want to see high security/liquidity for loan safety; Shareholders want to see high profit/growth (even if it's risky).
Justify a strategy to improve the "Acid-test ratio" for a company that currently has a high level of unsold inventory.
Sell stock at a discount to turn it into cash. (Acid-test excludes stock, so turning stock into cash increases the ratio).
Calculate the Payback Period for an investment of $240,000 that generates consistent annual net returns of $60,000.
4 Years (240,000 / 60,000).
Analyse the appropriateness of seeking Business Angels for a high-risk tech startup that lacks physical collateral for a bank loan.
Business Angels provide capital without requiring collateral (unlike banks) and often offer mentorship/expertise, though they take an equity stake.
Evaluate the consequences for a firm that is unable to fund its "Revenue Expenditure" (e.g., salaries and utility bills) for three consecutive months.
Insolvency. Staff stop working, suppliers cut off stock, and the business will eventually be forced into liquidation.
Explain how "Depreciation" (conceptually) connects the Balance Sheet to the Profit and Loss account over time.
Depreciation reduces the value of assets on the Balance Sheet and is recorded as an expense on the P&L, reducing taxable profit.
Discuss why a very high "Current Ratio" (e.g., 4.5) might actually indicate inefficiency rather than financial strength.
It suggests "idle" resources—too much cash sitting in the bank not being reinvested, or too much money tied up in unsold stock.
Calculate the exact Payback Period (Years/Months) for a $100k project:
Year 1: $40k,
Year 2: $40k,
Year 3: $40k.
2 Years and 6 Months. (After 2 years, $80k is paid back. $20k is still needed. $20k / $40k = 0.5 years).
Discuss the extent to which "Retained Profit" is the most sustainable source of finance for a multinational corporation’s expansion.
It’s sustainable because it doesn't increase debt; however, it is limited by how much profit is made and may upset shareholders who want dividends.
Analyze the difference between "Direct Costs" and "Indirect Costs" when a firm is deciding whether to stop producing a specific product line.
Indirect costs (overheads) stay the same even if the product is cut. If the product's "contribution" (Revenue - Direct Costs) is positive, it helps pay the overheads.
Evaluate the importance of Trademarks and Brand Names as intangible assets for a global giant like Apple or Coca-Cola.
They represent Goodwill and consumer loyalty. They allow for "price inelasticity," where customers stay loyal despite price increases.
Evaluate the usefulness of Ratio Analysis when comparing two firms in completely different industries (e.g., a supermarket vs. a software firm).
Limited usefulness. Different industries have different "norms" (e.g., supermarkets have low margins but high volume; software has high margins but high R&D).
Calculate the ARR (%) for a 5-year project: Cost = $200k, Total returns (profit) over 5 years = $350k.
15%.
Step 1: Total Profit = $350k - $200k = $150k.
Step 2: Annual Profit = $150k / 5 = $30k.
Step 3: ($30k / $200k) * 100 = 15%.