Business Management HL
Finance and accounts (HL): ratios and investment appraisal — Unit 4 HL
- 1.
A company reports gross profit of $400,000 and sales revenue of $1,000,000 for the year. Calculate the gross profit margin.
[2 marks] - 2.
Marking analysis: A learner attempts the following task: “A company reports gross profit of $400,000 and sales revenue of $1,000,000 for the year. Calculate the gross profit margin.” Their response addresses only this point: “Uses the formula: gross profit margin = (gross profit / sales revenue) × 100.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] - 3.
Using the same company (sales revenue $1,000,000), net profit for the year is $150,000. (a) Calculate the net profit margin. (b) Given that gross profit margin was 40% (from the previous question), explain what the difference between the gross and net margins suggests about the size of the company's operating expenses relative to revenue.
[4 marks] - 4.
Marking analysis: A learner attempts the following task: “Using the same company (sales revenue $1,000,000), net profit for the year is $150,000. (a) Calculate the net profit margin. (b) Given that gross profit margin was 40% (from the previous question), explain what the difference between the gross and net margins suggests about the size of the company's operating expenses relative to revenue.” Their response addresses only this point: “Uses the formula: net profit margin = (net profit / sales revenue) × 100.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] - 5.
A company has operating profit of $200,000 and capital employed of $1,000,000. Calculate the return on capital employed (ROCE), and explain what this ratio measures.
[3 marks] - 6.
Marking analysis: A learner attempts the following task: “A company has operating profit of $200,000 and capital employed of $1,000,000. Calculate the return on capital employed (ROCE), and explain what this ratio measures.” Their response addresses only this point: “Uses the formula: ROCE = (operating profit / capital employed) × 100.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] - 7.
A company has current assets of $300,000 (including $100,000 of inventory) and current liabilities of $150,000. (a) Calculate the current ratio. (b) Calculate the acid test (quick) ratio. (c) Explain why the acid test ratio is generally considered a more cautious measure of liquidity than the current ratio.
[5 marks] - 8.
Marking analysis: A learner attempts the following task: “A company has current assets of $300,000 (including $100,000 of inventory) and current liabilities of $150,000. (a) Calculate the current ratio. (b) Calculate the acid test (quick) ratio. (c) Explain why the acid test ratio is generally considered a more cautious measure of liquidity than the current ratio.” Their response addresses only this point: “Uses the formula: current ratio = current assets / current liabilities.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 9.
A company has non-current (long-term) liabilities of $400,000 and capital employed of $1,000,000. (a) Calculate the gearing ratio. (b) State whether this company would generally be considered highly geared or lowly geared, and explain one risk of being highly geared.
[4 marks] - 10.
Marking analysis: A learner attempts the following task: “A company has non-current (long-term) liabilities of $400,000 and capital employed of $1,000,000. (a) Calculate the gearing ratio. (b) State whether this company would generally be considered highly geared or lowly geared, and explain one risk of being highly geared.” Their response addresses only this point: “Uses the formula: gearing ratio = (non-current liabilities / capital employed) × 100.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] - 11.
A company is considering a project requiring an initial investment of $50,000, which is expected to generate net cash inflows of $20,000 per year for 4 years. Calculate the payback period for this project, to one decimal place of a year.
[4 marks] - 12.
Marking analysis: A learner attempts the following task: “A company is considering a project requiring an initial investment of $50,000, which is expected to generate net cash inflows of $20,000 per year for 4 years. Calculate the payback period for this project, to one decimal place of a year.” Their response addresses only this point: “Calculates cumulative cash flow after year 1: $20,000; after year 2: $40,000.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] - 13.
Using the same project (initial investment $50,000, net cash inflow $20,000 per year for 4 years), calculate the average rate of return (ARR).
[5 marks] - 14.
Marking analysis: A learner attempts the following task: “Using the same project (initial investment $50,000, net cash inflow $20,000 per year for 4 years), calculate the average rate of return (ARR).” Their response addresses only this point: “Calculates total cash inflow over the project's life: 20,000 × 4 = $80,000.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 15.
A company is considering an investment of $50,000, expected to generate net cash inflows of $20,000 per year for 3 years. Using a discount rate of 10% (discount factors: Year 1 = 0.909, Year 2 = 0.826, Year 3 = 0.751), calculate the net present value (NPV) of this project, and state whether the company should accept it based on this result alone.
[6 marks] - 16.
Marking analysis: A learner attempts the following task: “A company is considering an investment of $50,000, expected to generate net cash inflows of $20,000 per year for 3 years. Using a discount rate of 10% (discount factors: Year 1 = 0.909, Year 2 = 0.826, Year 3 = 0.751), calculate the net present value (NPV) of this project, and state whether the company should accept it based on this result alone.” Their response addresses only this point: “Calculates the present value of Year 1 cash flow: 20,000 × 0.909 = $18,180.” Evaluate the response against the complete 6-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[6 marks] - 17.
Explain one advantage of using NPV over payback period as an investment appraisal method, and one disadvantage of NPV compared to payback period.
[2 marks] · no calculator - 18.
Marking analysis: A learner attempts the following task: “Explain one advantage of using NPV over payback period as an investment appraisal method, and one disadvantage of NPV compared to payback period.” Their response addresses only this point: “Explains a valid advantage of NPV, such as it accounting for the time value of money (unlike payback), and considering all cash flows over the project's entire life, not just those up to the payback point.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] · no calculator - 19.
Explain how window dressing (manipulating financial statements to appear more favorable) could mislead a stakeholder relying on ratio analysis, using the example of a company temporarily delaying payments to suppliers just before its year-end to improve its current ratio.
[2 marks] · no calculator - 20.
Marking analysis: A learner attempts the following task: “Explain how window dressing (manipulating financial statements to appear more favorable) could mislead a stakeholder relying on ratio analysis, using the example of a company temporarily delaying payments to suppliers just before its year-end to improve its current ratio.” Their response addresses only this point: “Explains that delaying supplier payments keeps cash within the business longer, temporarily inflating current assets (cash) relative to current liabilities right at the point the balance sheet is prepared.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] · no calculator - 21.
A firm's cost of sales for the year was $600,000 and its average inventory was $100,000. Calculate (a) the inventory turnover ratio and (b) the average number of days inventory is held, to 1 decimal place.
[3 marks] - 22.
Marking analysis: A learner attempts the following task: “A firm's cost of sales for the year was $600,000 and its average inventory was $100,000. Calculate (a) the inventory turnover ratio and (b) the average number of days inventory is held, to 1 decimal place.” Their response addresses only this point: “Uses inventory turnover = cost of sales / average inventory.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] - 23.
A firm has trade receivables (debtors) of $50,000 and annual credit sales of $400,000. (a) Calculate debtor days to 1 decimal place. (b) Explain why a rising debtor-days figure could threaten the firm's liquidity.
[3 marks] - 24.
Marking analysis: A learner attempts the following task: “A firm has trade receivables (debtors) of $50,000 and annual credit sales of $400,000. (a) Calculate debtor days to 1 decimal place. (b) Explain why a rising debtor-days figure could threaten the firm's liquidity.” Their response addresses only this point: “Uses debtor days = trade receivables / credit sales × 365.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] - 25.
Explain two limitations of using ratio analysis to judge a company's performance.
[2 marks] · no calculator - 26.
Marking analysis: A learner attempts the following task: “Explain two limitations of using ratio analysis to judge a company's performance.” Their response addresses only this point: “Explains that ratios use historical data and may not predict future performance.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] · no calculator - 27.
A firm's current ratio is 0.8. Explain one way it could improve this ratio in the short term, and one risk of that action.
[2 marks] · no calculator - 28.
Marking analysis: A learner attempts the following task: “A firm's current ratio is 0.8. Explain one way it could improve this ratio in the short term, and one risk of that action.” Their response addresses only this point: “Explains a valid method, such as taking a long-term loan to raise cash (increasing current assets without raising current liabilities) or selling surplus non-current assets.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] · no calculator - 29.
Distinguish between internal and external sources of finance, and explain one advantage and one disadvantage of using retained profit to fund expansion.
[3 marks] · no calculator - 30.
Marking analysis: A learner attempts the following task: “Distinguish between internal and external sources of finance, and explain one advantage and one disadvantage of using retained profit to fund expansion.” Their response addresses only this point: “States that internal sources come from within the business (e.g. retained profit, sale of assets) while external sources come from outside (e.g. loans, share issues, overdrafts).” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator