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 2
Business in context
Learners’ discussion might include:
• It is expensive to become a public limited company so this is only suitable for large businesses. Private
limited companies offer limited liability, which is an essential protection that enables a business to grow
without exposing owners to too much risk. Many businesses in India are still family-owned and the
private limited company status means that families can retain control over their businesses.
• Going public gives access to substantial finance. This can be used for expansion and to reduce the
debts of the business. This will reduce Century Metal Recycling’s interest payments and therefore
increase profits.
• A share issue will raise the profile of the business and increase interest in its activities.
• Century Metal Recycling may need to grow to be competitive in the market.

Activities
Activity 2.1
1 Learners’ answers might include:
• Significant personal financial rewards. The two founders became multimillionaires instantly on the
sale of shares.
• Access to the substantial capital required to expand the business through takeover of other
internet businesses. This would consolidate Twitter’s place in the market.
2 Learners’ answers might include:
• Risk of hostile takeover bid. As a public limited company, other firms can purchase shares in
Twitter and there is the threat of another business gaining control of Twitter.
• Disclosure of information to the public, including competitors. A public limited company has to
publish financial accounts, giving competitors access to sensitive financial data about Twitter and
its operations.

Activity 2.2
1 The private sector. Footie Ltd is a private limited company and therefore owned by shareholders rather
than the government. Public-sector businesses are owned by the government.
2 To maintain current shareholder control of the business. Footie Ltd is a long-established family
business. It is likely that the directors are shareholders and decided that, along with the other
shareholders, they wished to retain control of the future direction of the business. In a public limited

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

company (plc), there is a greater division between ownership and control. If Footie Ltd became a plc,
then the threat of takeover would be greater than it currently is.
No need to raise finance. As profits have increased by $18 million, the company has ‘no need of
further capital to fund further expansion’. There is little incentive to pursue a public flotation with its
associated costs. A public flotation is usually motivated by a need to raise capital.
3 Benefits to the business
• Raise more capital. This could be used to expand the firm more rapidly and consolidate its
position as the largest conventional shoe brand in the world.
• Will not have to use debt finance for expansion. Borrowing increases gearing and means that the
business has more debt to service (pay interest on). This increases the risk to the business if there is
an economic downturn as the interest will still have to be paid.
Benefits to existing shareholders
• Easier to sell shares that are held and realise a capital gain. This would enable shareholders to
release their wealth into a more liquid form.
• If shareholders held on to their shares then they could benefit from a rapidly increasing share
value if Footie plc used the capital effectively.

Activity 2.3
1 Learners’ answers might include:
• Pizza Delight is an established brand with 100 restaurants in other countries. This could save
Harry from having to spend heavily on marketing as the brand is already known. The case study
suggests that Pizza Delight will be providing national advertising of the business.
• Harry has no business experience so the advice and help that Pizza Delight provides will be useful
and help prevent mistakes being made.
2 Learners’ answers might include:
• He has to pay a percentage of total revenue each year to Pizza Delight. Therefore, if he has a poor
year’s trading, when profit is low or non-existent, he will still have to make payments to Pizza Delight.
• The franchise contract restricts Harry’s decision-making within the business. Thus, Harry will
not fully achieve his desire to be free from taking orders from others and is restricted in using his
talents to prepare food.
3 In favour of a franchise
• The franchise is supported by national advertising.
• It is an established brand name in the market.
• It partially meets Harry’s objective to be in control of his work but reduces the burden and risk of
opening an entirely new business. The text refers to Harry’s lack of business experience as being his
main problem.
Against a franchise
• Pizza Delight is well established in other countries. If it is relatively unknown in Harry’s country
then the benefit of being a franchisee is significantly reduced.
• The franchise has a high cost of $100 000 and a percentage of profits has to be paid for it each year.
• Restrictions on the design of restaurant and sourcing of supplies limit the control that Harry
would have.
• The cost of the franchise might mean that Harry has to take out a large loan with interest costs to
pay, adding to annual expenses.
• Harry would still have to find premises and recruit and motivate staff.
Evaluation: If Harry is concerned about his lack of business expertise then clearly the franchise offers a
significant advantage. However, taking the franchise will severely restrict how the business is run and Harry
will not even control what is sold. His experience as the second chef at an upmarket hotel and his desire to
prepare food for his own customers suggest that Harry might be dissatisfied with having to prepare pizzas
to Pizza Delight’s recipe. Therefore, Harry should set up his own restaurant rather than take out a franchise.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

Activity 2.4
1 Learners’ answers should consider the benefits of different forms of business structure with reference
to information provided in the case. Some key issues include:
Sole trader
• Salman retains complete control of the garage.
• Unlimited liability is an issue. Expansion may expose Salman to greater risk due to the increased
level of finance required within the business.
Partnership with sons and daughter
• Appropriate in achieving his goal to involve his children in the business.
• Deed of partnership should be drawn up.
• It could be a source of finance if his children have savings to invest. However, for his children
investment exposes them to the risk of unlimited liability.
Private limited company
• It is not expensive to form a private limited company.
• Incorporation provides the major benefit of limited liability. If Salman has savings to invest
then he can remain in complete control by being the only shareholder or he could offer shares
to his children.
• This would be considered a more suitable form if the business is to continue to expand.
Salman’s decision will be influenced by his attitude to risk, desire to retain control and the amount of
finance needed to expand the business.

Activity 2.5
1 Learners’ answers might include:
• Nestlé will benefit from Fonterra’s existing production facilities in Trinidad and Tobago. Therefore,
Nestlé will benefit from the economies of scale linked to the increased purchasing power of the
joint venture when purchasing milk and other ingredients. This will result in lower unit costs and
therefore a higher profit margin.
• Nestlé will not have to concern itself with production and can focus on the higher-margin marketing
of the finished brands rather than the low-margin transformation process within a production and
processing facility. This will reduce the investment needed to expand sales in the Caribbean.
2 Learners’ answers might include:
• The complementary strengths that the two firms bring to the joint venture will increase the chances
of success. Nestlé is a leading marketer of branded dairy products so has particular strength as
a marketing organisation. Nestlé’s expertise will be in recognising customer needs and building
brand value within the market. In contrast, Fonterra has production and processing facilities so
will be able to produce high-quality chocolate products.
• The two companies will be able to take advantage of economies of scale by operating together.
For example, there may be increased opportunities for bulk-buying milk, sugar and cocoa.
Through bulk buying, the joint venture may be able to negotiate lower unit costs, leading to
improved price competitiveness or higher profit margins for the end product. This therefore
increases the chances of success.
• Employees are expected to work together. There may be rivalry between employees and the
existing cultures of the two businesses may not be compatible, resulting in conflict and slowing
down decision-making.
• Evaluation: chances of success will depend on the ability of the two groups of managers to work
together and whether the potential cost savings exceed the costs of setting up the joint venture.

Activity 2.6
Learners’ own answers.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

Exam-style questions
Short answer questions
1 Private sector – owned by private individuals and groups; public sector – government-owned
and -controlled.
2 Sole trader has unlimited liability but the owners of a limited company (shareholders) have
limited liability.
3 Owned by shareholders, controlled by board of directors. Most public limited companies have
thousands of shareholders, who cannot also be the directors of the business. Conflict may arise
because shareholders are primarily interested in short-term gains in share price and payment of
dividends whereas directors may have other goals, including long-term growth and investment.
4 Learners’ answers will vary, e.g. the two businesses might have different areas of expertise, as one might
have local, cultural knowledge which is useful for marketing in another country and the other might
have expertise in manufacturing.
5 To regain full control of strategic decision-making and the aims set for the business. This will allow
directors to focus on the long-term success of the business rather than short-term profit to pay
dividends to shareholders.
6 Legal identity allows a business to own assets and provides owners with limited liability. Therefore, it
is easier for the business to plan for the future and raise finance. If owners die or wish to sell shares,
this does not affect the existence of the business but only results in a change of ownership. Day-to-day
operations therefore continue unaffected.
7 By reducing the risk of investment, it makes ownership more attractive and therefore increases
the ability of a business to raise finance. Shareholder liability is limited to the amount invested in
buying shares.
8 Sole trader – the owner is the sole decision-maker, therefore ownership and control lie with the same
person. Public limited company owners are shareholders with voting rights but day-to-day control is
with directors; therefore, there is division between ownership and control.
9 Learners’ answers will vary, e.g. a partnership can raise finance from partners whereas a public limited
company (plc) sells shares to the public. Therefore, a plc has greater availability of potential finance. In
a partnership, there is unlimited liability so there is increased risk for partners if the business fails with
significant debts. Shareholders in a plc have limited liability so there is less risk.
10 Learners’ answers will vary, e.g. the entrepreneur may wish to have control over all marketing decisions,
such as pricing and products to be sold. A franchisee has to buy supplies from the franchiser and
follow guidelines about how the business prices and markets its products.
11 Private limited company – shares cannot be sold to the public and are not listed on a stock market so
there is much less potential to raise large sums of finance from selling shares. A public limited company
(plc) can issue more shares at any time. Therefore, a plc has greater access to finance but there is a
greater risk of takeover.
12 A business with social objectives that re-invests profits to benefit society rather than maximising
returns to owners. Profits are necessary for social enterprises to survive.
13 The owners may have ethical standards that lead them to want to contribute to society and avoid
damaging the environment.
14 Jointly owned businesses operated by members for their mutual benefit to produce or distribute goods
or services, as in consumers’ cooperatives or farmers’ cooperatives.
15 Primary industries extract minerals from the earth (for example) but tertiary-sector businesses provide
services to all types of businesses and consumers.
16 Learners’ answers will vary, e.g. increased sales are likely due to the recognised name and brand of the
franchiser. National advertising will promote the brand and increase demand for the franchisee.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

Essay questions
1 a Learners’ answers will vary, e.g.
• Limited companies are owned by shareholders. Private limited companies have at least one
shareholder and cannot sell shares to the general public. A public limited company (plc) has
at least two shareholders. Sole traders are owned by just one person with access to much less
capital as they cannot sell shares.
• Shareholders in limited companies have limited liability. This means that the liability of
owners for the debts of the business is limited to their investment in the business. Sole traders
do not have limited liability, and the answer should explain why this is important.
b A rapidly expanding private limited company may be attracted to converting to a plc because of
increased access to finance. A public share issue can raise substantial funds to finance expansion
and avoid the need for debt finance, which carries the disadvantage of interest having to be
paid whatever the economic conditions. Explain why other sources of finance have possible
disadvantages.
Factors to consider include:
• Level of debt finance already obtained. If borrowing from financial institutions is relatively
low, a business may prefer to take further loans rather than face the transition to plc.
• Need for further finance to expand. Making a share issue is expensive due to the costs of
preparing a prospectus, hiring a merchant bank, advertising and legal costs. The business
would need to raise a substantial sum of money for the conversion to be worthwhile.
• State of the economy and the stock market. A successful share issue may depend on the funds
available on the stock market. During the financial crisis of 2008, with volatile stock markets,
issuing shares was a potentially risky strategy.
• Objectives of owners. If owners wish to retain control of the business, becoming a plc will be
an unattractive option. Assess the impact of this objective on the plc decision.
• Once a business is a plc, there is increased risk of takeover as shares are traded on the
stock market.
• Financial disclosure is greater as a plc.
Evaluation: the attitude of current shareholders towards controlling the business needs to be
weighed against the need to raise finance for further expansion.
2 a Learners’ answers will vary, e.g.
• Support and advice to the franchisee reduces mistakes (e.g. over the location of a suitable site),
reducing the risk of the new business failing.
• The franchiser’s recognised brand, supported by national advertising, makes it easier for the
new franchised business to build a customer base and increase sales when it starts trading.
b Learners’ answers might include:
• A joint venture gives local knowledge and expertise (e.g. tastes can vary significantly between
countries), reducing risk for the business that is new to the country.
• Shared financial investment reduces the cost of expanding sales.
• Distribution networks to retailers are already established, enabling food products to be placed
effectively to increase sales.
• There is a potential conflict of culture or leadership styles which may result in decision-
making difficulties.
• Joint venture businesses will share profits.
• Evaluation should include a conclusion/judgement about whether the use of joint ventures is
the best way to increase sales in other countries for businesses in this industry.

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Data response questions

1 Joe to expand his business
a i Able to take own decisions.
ii A business formed by two or more people with shared investment and responsibilities.
b i Secondary. He buys in raw materials (e.g. coffee beans) and processes them into finished products.
ii Tertiary. Cafés offer customer services and are not involved in extraction or manufacturing.
c Joe’s business is currently in the secondary sector. He understands the need to buy in raw materials
and transform them into finished products. A café is in the tertiary sector and Joe and his
employees may have no experience in offering services directly to consumers. This may reduce the
chance of the cafés being a success.
Joe needs to make the location decision very carefully. The best sites for secondary manufacturing
activity are unlikely to be the best sites for a café. Joe will need to use different factors when choosing
café locations. An inappropriate café location will mean insufficient customers to make a profit.
d Partnership
• Unlimited liability will remain. Joe’s personal assets will be at risk if the partnership incurs
significant debt.
• Profits will have to be shared.
• A deed of partnership will be necessary to clearly identify how profits are to be shared.
• There may be disputes between Joe and his new partner(s) about the future direction of the
business.
• Partners will bring capital into the business and potentially valuable skills to complement
Joe’s.
• It is a simple legal structure to set up.
• Taxation will be different to a private limited company. Partners will pay income tax on profits
rather than corporation tax.
Private limited company
• Joe will benefit from limited liability. If the new cafés are not successful, Joe’s liability for debts
will be limited to the money he has invested in the business.
• Joe can invite a number of investors to buy shares in the business to raise the necessary capital.
It may be easier to attract investors because liability is limited. A partnership is more limited
in its ability to raise capital as there is a limit on the number of partners.
• There are more legal formalities to complete when establishing a limited company. For
example, a Memorandum of Association and Articles of Association must be submitted to the
relevant authorities.
• Financial disclosure is greater for a limited company. The public and competitors will be able
to access financial documents.
• The business will have legal personality. Thus, in case of injury to a customer, it is the business
rather than the owners that is sued.
Evaluation may focus on a number of issues:
• The degree to which Joe wishes to retain control of the business. Although both legal
structures will dilute his control over the business, if he chooses a limited company then he can
retain overall control by ensuring he has a majority of the shares.
• The risk involved in his plans. If purchasing the cafés is risky then he may prefer to benefit
from limited liability.
• The amount of capital needed. It may be easier to attract investors to a limited company.
• The requirements of potential investors. What do they wish to invest in?

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2 Capital Waste Disposal Ltd (CWD)

a i  Able to raise capital from the sale of shares (not to the public).
ii The first offer of a company’s shares to the public allowing capital to be raised for investment.
An IPO is part of the process of a private limited company transitioning to become a public
limited company.
b Initially, Rajesh started the business as a sole trader. This is a simple business structure and easy to
set up. However, Rajesh would have had unlimited liability. As a business grows, there is increased
risk from unlimited liability as debts could become substantial. Rajesh converted his business to
a private limited company to gain finance for expansion and to benefit from limited liability.
The success and further growth of the business made conversion to a public limited company
possible. This raised more finance for expansion and also made Rajesh wealthy.
c Advantage: Raises significant amounts of capital to enable growth of the business. This may have
been critical in CWD gaining 56% of the waste disposal market.
Disadvantage: Potential loss of control for Rajesh. He is no longer able to make decisions without
considering how shareholders are affected.
d As it is a large business, CWD should either be a private or a public limited company to protect
owners’ personal wealth. The main differences relate to finance, control and the need to publish
financial data. In this case, Rajesh has remained as the CEO but major shareholders could replace
him if they control a sufficient proportion of the shares. Rajesh does not like interference from
shareholders. This suggests he would prefer to have kept the business as a private limited company.
However, that would have constrained its growth in the market. Rajesh is recommending that
shareholders accept the bid from the multinational. This would enable CWD to continue as part
of a much larger corporation. However, this highlights a major disadvantage of becoming a public
limited company – the threat of takeover.
Evaluation/conclusion will vary: learners need to make a decision about the most appropriate form
of business and support the conclusion with an overall argument based on this business.

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