CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE
• Resources can be allocated more efficiently. The manager will be able to see which activities can
occur simultaneously and this will reduce the overall project time. For example, printing leaflets
and producing adverts can be done at the same time.
Exam-style questions
Decision-making questions
1 Jamaica Photos ( JP)
1 Critical path network diagram for Jamaica Photos Ltd:
B H
4 2
0 A 2 C 6 E 9 G 12 I 14
1 2 3 4 5 6
0 2 2 2 6 3 9 3 12 2 14
D
2
F
8
2 ABEGI
3 As critical activities have no total float, any delay in completing an activity will delay the
completion of the project. In this case, there would be a more prolonged adverse impact on
production and therefore customer delivery times.
4 Free float = EST (next activity) − duration − EST
Total float = LFT − duration − EST
Activity Free float Total float
C 2 2
D 2 2
F 4 4
H 1 1
5 Learners’ answers might include:
• The technique aids the project team to calculate the minimum time for switching production
from one site to the other. Identifying the project time will help minimise disruption to
production and customers. The analysis provides a clear target for the project team and a basis
for awarding a bonus on completion of the closure.
• If delays occur to critical activities, the analysis will help the project manager identify if there
are resources that can be diverted to try to keep the project on time.
• Knowledge of the LFT provides a useful control tool for the project manager. It identifies
when processing at Kingston should be suspended so as to ensure the project is completed
in the minimum time. This indicates that, as long as processing is suspended by day four, the
project can be completed within 14 days.
6 There are a number of reasons why the analysis does not guarantee successful completion of the
project on time, including:
• The timings are only estimates. This is a unique project and therefore managers cannot be sure
exactly how long each element will take. For example, testing the new integrated processing
system may take longer than two days because of unexpected difficulties. Machinery could
easily be damaged during its dismantling, transport or rebuilding.
• The accuracy of the estimates depends on the ability and knowledge of the managers planning
the closure.
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CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE
• External factors, over which the project team has no control, can affect the closure. For
example, contractors used for transporting the machinery may prove to be unreliable.
However, in evaluation, analysis will aid the completion of the project with a minimum of
disruption, as it will ensure that the project has been planned and consideration given to which
activities can be completed simultaneously. It will help identify when resources are needed and at
what point activities need to occur. Further, by identifying critical activities, it will help project
managers to focus on those activities that have no float to try to prevent any delays.
Evaluation should include an assessment of the value of CPA in this case together with a
recognition that no planning technique can guarantee project success.
2 Using a network diagram
1 Node 1 2 3 4 5 6 7 8 9 10
EST 0 10 20 20 34 22 59 42 74 82
LFT 0 52 48 20 62 64 59 70 74 82
2 Critical path = EHKL = 82 days
3 Activity A B C D F G I J
Total float 28 42 36 28 42 28 42 28
4 Day 25. The EST for Activity D is 20 days so, if goods arrive on day 25, the activity will be
delayed. However, this will not delay the completion of the project because Activity D has 28 days
of float. Therefore, receiving goods on day 25 is much earlier than necessary as the latest start time
for Activity D is 48 days. Goods could be organised to arrive then.
Day 15. The EST for Activity D is 20 days, so there is no benefit in ordering goods to arrive so
early as they cannot be used until day 20. This would mean that the business is paying for goods
long before it needs to.
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CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE
Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded may
be different.
Coursebook answers
Most of the answers are in ‘outline’ form indicating the appropriate points and skills that learners need
to include in their answers. They provide the necessary guidance to allow learners to develop and extend
the points for a fuller answer that contains the relevant skills. In many instances, there may be other valid
approaches to answering the question.
Unit 4
End-of-unit questions
Asia Resort Hotels (ARH)
Decision-making questions
1 Benefit. By identifying operational areas where ARH’s performance is below that of industry leaders,
action can be directed to making improvements. For example, through benchmarking ARH has
discovered that its food waste levels and energy consumption per guest are some of the highest in the
region. ARH can now devise changes to reduce food waste and energy consumption. This will reduce
costs and make more efficient use of inputs, resulting in increased profits.
Limitation. Although Chas has identified weaknesses of ARH, action depends on managers
implementing, and workers accepting, change. There is a natural tendency for managers to explain why
the circumstances of their department make it difficult to replicate the performance of the industry’s
best. For example, the HR director dismisses using quality improvement groups by arguing that ARH
employees do not like change and are not used to being asked their opinions.
2 a i 18 weeks
ii 9 weeks
b Benefits:
• Planning makes it more likely that the 18-week deadline will be met.
• CPA identifies critical activities ABCFGH. Managers can focus on these activities to prevent
delays to completion of the swimming pool renovation. Managers can ensure allocation of
sufficient resources at the right time as the earliest start times are identified.
• Activities can be monitored and corrective action taken if necessary.
• Knowledge of total and free floats can be used by managers to manage resources.
For example, if critical activities are delayed, it might be possible to move resources from
activity E to help get the project back on schedule.
Limitations:
• Durations are only estimates.
• A lot of the activities lie along the critical path. There are only two non-critical activities
with float.
• ARH’s operations director has constructed the network diagram, which may or may not
be accurate.
• The contract has gone to a small firm that may not have sufficient resources to meet all the
deadlines as laid down by ARH.
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Evaluation: critical path analysis can be a useful planning technique to help ARH meet the
18-week deadline for the project. However, as the construction company was not responsible for
developing the network, it is unlikely to be accurate.
Business strategy question
1 Relevant comments might include:
• Diversification spreads risk so that if there is a downturn in one part of the business, other parts
may still be generating revenue and profits.
• Takeover of the small chain of fast-food restaurants was risky because of the food poisoning
incident. There was a danger that there could be long-term damage to sales. However, ARH
could benefit by incorporating the fast-food brand into its hotels. ARH acquired the assets of the
restaurant chain at a low price so could sell those assets to recover its investment if the chain was
not profitable.
• The joint venture with the IT business was an important opportunity to take advantage of the
benefits of online booking. ARH currently faces low capacity utilisation, which is a critical
problem as it has high fixed costs. An online presence is essential to attracting customers. However,
the joint venture started in 2015 and ARH still has low capacity utilisation. This suggests that the
venture may not have been as successful as hoped.
• The business offering ride-hailing taxi services makes use of an employee suggestion. This shows
that ARH values the opinion of employees, which could improve motivation.
• Takeover of a failing chain of shoe shops was a significant risk despite the experience of the
ARH director. In many countries, sales are increasingly moving online and retailers with physical
premises have high fixed costs to pay.
• Takeover of three amusement parks in 2021 required investment to modernise two of them.
This investment could complement ARH’s hotel operations as accommodation could be offered
as part of a package to customers. There is evidence that one of the parks has been
successfully modernised.
• Non-hotel services account for 30% of revenue. However, ARH is having to take on extra debt to
develop this business division.
Evaluation could assess the following issues: Has the diversification strategy been well planned? Is
it based on evaluation of each opportunity? Should ARH have focused on markets with significant
growth potential or markets that would complement what it currently does? What indicators are there
that the strategy has been successful? Is the cash flow position an indicator of neglect of core business?
Make a clear and supported overall judgement.
2 Cambridge International AS & A Level Business – Stimpson & Farquharson © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE
Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded may
be different.
Coursebook answers
Most of the answers are in ‘outline’ form indicating the appropriate points and skills that learners need
to include in their answers. They provide the necessary guidance to allow learners to develop and extend
the points for a fuller answer that contains the relevant skills. In many instances, there may be other valid
approaches to answering the question.
Chapter 29
Business in context
Learners’ discussion might include:
Need for finance
• For investment to set up the business and to expand; for purchasing capital equipment, e.g. sewing
machine, building a factory.
• For day-to-day trading activities, e.g. paying for stock, materials, overheads and labour.
• When facing cash flow problems.
Commercial bank might be unwilling to lend because of:
• Security. It may have required security for lending to Aala and she may not have had assets such as a
house to provide security.
• The high risk of Interloop’s ‘ambitious’ expansion plans and aims to enter a new market.
Activities
Activity 29.1
Learners’ own answers.
Activity 29.2
1 Working capital = current assets – current liabilities
Inventories of phones = 0.1 × 200 000 = $20 000
Extended credit terms = $30 000
Cash reserves $5 000
Trade payables $15 000
Total increase in working capital = $55 000 – 15 000 = $40 000
2 MPR could keep smaller inventory levels, i.e. hold fewer mobile (cell) phones in each shop. However,
this could impact customer service and the ability to meet customer demand. JIT inventory ordering
risks loss of customers as customers will expect to be able to purchase a mobile phone immediately.
MPR could offer fewer customers extended credit terms. However, this also risks a loss of revenue as
customers will be attracted by longer credit terms.
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CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE
MPR could only use suppliers that are willing to offer credit. However, this could limit the range
of mobile phones that MPR could offer as not all suppliers will be willing to give credit or they will
charge for credit.
Activity 29.3
1 a A venture capitalist is an organisation that specialises in lending money to, or purchasing shares
in, businesses that find it difficult to raise money from other sources. They specialise in high-risk
investments that have the potential for good profit.
b The day-to-day finance needs of a business, e.g. paying wages and buying inventory such as
ice cream.
2 a (80 000 – 20 000) ÷ 2 = $30 000
b 0.1 × 60 000 = $6 000
0.12 × 60 000 = $7 200
3 This will provide limited liability to Omah and Sara, and therefore reduce the risk of losing personal
assets if the business fails. If Sara and Omah form a partnership, there is no legal distinction between
the business and the owners, and this lack of legal personality means that it is the owners who are sued
if something goes wrong.
It would also give the option of inviting other investors to purchase shares in the business to raise the
start-up capital required. Omah and Sara could maintain control of the business as long as they retain
over 50% of the shares. However, there is a cost to forming a limited company and annual accounts
must be submitted.
4 Learners’ answers might include:
• Venture capital may be more expensive because it is typically taken because banks are unwilling to
lend money.
• Sara and Omah will retain control of the business if they secure a bank loan.
• The venture capitalist wants a 40% stake in the business, leaving 30% each to Sara and Omah.
This would mean that neither Sara nor Omah control the business by themselves, so the venture
capitalist may also exert some control over the direction of the business.
• Sara wants to be her own boss. If a venture capitalist supports the start-up, there is more likely to
be interference in the direction of the business.
• If an equity stake is given, the venture capitalist will take a dividend from the business indefinitely.
A bank loan has a fixed repayment date and interest payments stop once the loan is repaid.
• Evaluation could include a justification for one source of finance rather than the other with the
overriding factor being whether the two owners want to retain 100% control or not.
Activity 29.4
1 High risk; lack of experience; possibly a poor business plan or none at all.
2 It only requires a small sum; the scheme encourages entrepreneurship. However, interest rates may be
high; Nelson may take risks in a venture that is not a good idea.
3 It requires a larger amount of investment for a business start-up; crowd funding would allow lots of
investors to risk a small contribution, so they are more willing to invest. Serena’s idea is high risk but
could be high reward.
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Activity 29.5
1 Source of finance Long-term Short-term Available to Available Available
finance finance unincorporated to private to public
businesses limited limited
companies companies
Sale of shares to the ✓ ✓
public
Sale of debentures ✓ ✓ ✓
Leasing ✓ ✓ ✓ ✓
Debt factoring ✓ ✓ ✓ ✓
Loans from family ✓ ✓ ✓
Take on partners ✓ ✓ ✓
Rights issue of shares ✓ ✓ ✓
Ten-year bank loan ✓ ✓ ✓ ✓
Bank overdraft ✓ ✓ ✓ ✓
Activity 29.6
1 Long-term finance is required because of ATC’s high level of debt and the interest payments arising
from that debt. There is weak demand for cars and this will affect its ability to pay the interest. ATC
is looking to restructure its finances. Share capital is preferable as it is permanent finance and, during
difficult trading conditions, ATC can decide not to pay dividends and therefore reduce cash outflows.
2 ATC is attempting to raise a very large sum of capital. Therefore, it will require a significant
proportion of shareholders to support the rights issue if it is to be successful. However, many
shareholders will be reluctant to support the share issue as they will question whether the board of
directors is managing the business effectively. The need for finance is a result of a decision to take
over car factories from a failing US car company. This decision now looks to have been a mistake as
it appears that ATC has too much debt finance. There is a danger that the money from the share issue
will not be spent effectively and that the share price will fall further. Therefore, shareholders may lose
money from further investment.
Evaluation could include a consideration of the following: there is no doubt the business needs
additional long-term finance and there is a danger that the business will face liquidity problems, which
could threaten its survival. Much will depend on shareholder assessment of whether the share offer
price of $34 provides a realistic chance of a capital gain.
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Activity 29.7
1 Learners’ answers might include:
Business ownership Reasons why source of finance selected is appropriate
and amount needed
Social enterprise Crowd funding comes from a wide range of individuals. The owner retains control
business trading as of the business. As it is a social enterprise, it is potentially attractive to individuals
sole trader: to invest in.
$50 000
Small private limited Developing IT software may be a high-risk investment and so less attractive to
company: $1m the commercial banking sector. Substantial investment is required and a small
business may lack assets to offer as security for a loan. Venture capital investment
may overcome these issues.
Large private limited Leasing requires a set monthly payment and spreads cost over time. The leasing
company: $6m company may also take responsibility for maintenance of the vehicles. Cost can
be competitive due to the buying power of the leasing company.
Public limited A substantial sum of finance is required, so share capital offers a low-cost source.
company: $300m Permanent capital is provided and does not have to be paid back. As a takeover
increases market power, shareholders may be attracted by the potential returns
on offer.
Exam-style questions
Short answer questions
1 Learners’ answers will vary, e.g. expansion of business that requires more property, machinery etc.;
takeover of another business; extra inventory for a major festival or promotion.
2 Learners’ answers will vary, e.g. internal sources come from the resources of the business, including
sale of assets; retained profit.
3 Period of time in which it is to be repaid, e.g. a short-term overdraft may be paid back within one year,
a long-term loan over ten years.
4 Learners’ answers will vary, e.g. if it is high risk, especially if the entrepreneur has limited business
experience; if there are no assets as collateral, which the bank could sell to repay the loan if the business fails.
5 Learners’ answers will vary, e.g. it gives a potentially large number of investors; it may create interest
in the business.
6 a It is not guaranteed to raise the full amount required.
b There is a risk that they may lose money by investing in a start-up, which has no trading record
and might have been turned down by banks.
7 By delaying payments to suppliers (trade payables), it keeps cash in the business.
8 It injects immediate cash into the business in exchange for the loss of a percentage of the value of the
debts owed to the business.
9 Long-term loans raise the indebtedness of the business and interest charges to be paid for up to
ten years (or more), whereas the business only needs short-term working capital finance to pay for a
short-term increase in inventories.
10 Learners’ answers will vary, e.g. there is a lack of potential investors as income levels are low, on
average; owners are unlikely to have personal savings in a country where average incomes are low.
11 This increase in loans to overall capital (called an increase in gearing) is risky because the business will
still have to pay interest charges and loan repayments even if profits fall and if a loss is made.
12 Learners’ answers will vary, e.g. the gearing ratio will be an important factor as it influences the degree
of risk the manager could take, especially if future interest rates rise; equity (or share) capital will not
increase interest charges for the business but dividends will be expected by shareholders and business
control may change.
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CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE
13 Learners’ answers will vary, e.g. purpose of loan; predicted future net cash flows; current liquidity;
current cash flow (likely to want to see previous years’ published financial records).
14 Learners’ answers will vary, e.g. availability of a wide range of small investors who may be willing to
take a risk on an invention that is not yet established; it reduces the need for loans, which have to be
repaid with interest, which a new start-up business might not be able to pay.
15 Learners’ answers will vary, e.g. the risk of loss of control if a high proportion of shares are sold; the
risk of hostile takeover; increased public scrutiny.
16 The industry is fast moving so machinery may soon become obsolete or out of date. By leasing,
the company can keep updating to newer models and have increased flexibility if the components
demanded change.
17 Learners’ answers will vary, e.g. a rights issue rewards shareholders with the exclusive opportunity
to buy more shares; it avoids interest repayments; the company can declare takeover intentions to
shareholders and not a bank.
18 Inventory is held in a supermarket for a limited period of time, e.g. perishable goods are purchased and
sold within days. Building a ship takes time and therefore there is significant work-in-progress at any
one time.
19 Learners’ answers might include:
• Obtain a commercial mortgage. This is long-term finance so payments are lower per month.
Payments can be fixed so that there is less risk.
OR
• Form a limited company and invite investors to purchase shares. This permanent source of finance
lowers indebtedness but reduces the control of the original business owner.
20 Revenue expenditure is on regular day-to-day business expenses. Capital expenditure is on assets such
as property that the business will keep for more than one year.
Essay questions
1 a
Learners’ answers will vary but should include two of:
• Owner’s capital. This is often from the entrepreneur’s savings, or from friends or family, which
can be a problem if the business fails.
• Debt finance. Loans from banks for which interest has to be paid. The entrepreneur may need
to provide an asset as security for borrowing.
• Bank overdrafts. This is a short-term form of finance with a relatively high rate of interest.
It is flexible as the amount of finance used can vary from day to day.
• Trade credit. To purchase inventory of raw materials. However, suppliers may be reluctant to
offer this until the business has been trading for some time.
• Equity capital. An entrepreneur might choose to form a limited company to increase the
finance available by inviting other individuals to invest in the business.
b Cost. Debt finance includes interest that must be paid whatever the trading conditions. Overdrafts
have high rates of interest; however, the cost can be low if finance is required temporarily.
Ownership and control of the business. Equity finance is available if the sole trader forms a limited
company. However, this reduces the control of the original owner of the business.
Risk. Incorporation provides owners with limited liability so reduces the risk of losing personal
possessions.
Size of existing borrowing. If the business has substantial debt already, taking out more loans may
result in liquidity problems as cash inflows take time to increase following expansion.
Evaluation could include whether the entrepreneur has savings (e.g. from redundancy payment
from their last employer); willingness of the entrepreneur to give up some control of the business
for venture capital or selling shares in a limited company.
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2 a
To finance expansion. Finance might be needed to purchase capital assets to expand the output of
the business and pay for the marketing and human resources required.
To support the business through a recession. In a recession, demand for products falls and this can
cause cash flow problems. Additional finance is therefore required to aid survival.
b Learners’ answers might include:
• Gearing. The structure of the business’s finances, i.e. the proportion of finance that is provided
by debt relative to equity. Analysing why high gearing is potentially risky.
• Current and future interest rates. These will determine the cost of further debt finance.
• Shareholder objectives. How much risk are shareholders willing to take? Successful expansion
financed by loans can result in high rewards for shareholders but there is increased risk too.
• Existing ownership and dilution of ownership.
• Level of retained profit to finance expansion. Profit is an internal source of finance and is
cheap, although there is an opportunity cost involved.
• Liquidity of the business. The working capital of the business will determine whether part of
the expansion cost can be met from existing cash in the business.
• Cost of leasing. Leasing can be an effective way of gaining use of capital equipment without
the cost of outright purchase.
Evaluation might include the cost of expansion plans compared to available internal finance;
willingness of existing directors or owners to risk potential loss of control from a public listing of
the company.
Data response questions
1 Sharma Taxis (ST)
a i Cash is not needed to purchase the asset.
ii The day-to-day finance needs of a business such as paying wages and buying inventory.
b i 0.8 × 10m = $800 000
ii Trade receivables result from offering regular business clients credit terms of up to two
months. This enables those clients to delay payment for the services of ST. This increases the
working capital required by ST. More effective management of trade receivables by offering
reduced credit terms or making sure that debtors pay on time will speed up cash inflows for
ST and reduce the working capital required.
c Disadvantage: it will dilute ownership of the business and will reduce the control of the
original owners.
Advantage: it avoids debt finance along with the associated risk of operational profits being
insufficient to cover interest payments.
d For:
• Interest is an expense to the business and therefore reduces taxable profits.
• It avoids further dilution of ownership of the business.
• It is usually quickly available but a sale of shares can take some time to arrange.
Against:
• Interest payments have to be paid whereas dividends do not.
• A loan will have to be repaid.
• Interest rates can change, leading to a potentially costly increase in interest payments.
Evaluation could include an assessment of the importance of the existing gearing ratio of the
business; the existing sources of internal finance might be considered first; Joe might want to
avoid diluting the ownership of the business as a priority.
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