Describe one step in the development of a brand.

Calculate which store made the highest net profit before interest and tax (no working required).

Calculate which store had the highest profitability (show all your working).

Calculate TPS’ equity.

Calculate TPS’ return on capital employed (ROCE) (show all your working).

Explain one effect that the $50 000 long-term debt may have on TPS’ profit and loss account.

Common steps in developing a brand include:

• consideration of the business’ strategy
• identification of the target market
• doing market research
• focusing on any one of the four Ps for purposeful positioning
• development of market vision around the USP
• selection of a name and logo
• development of a marketing strategy.

Accept any other relevant step. Candidates do not have to use identical wording to the above.

Award [1] for identification of a step and [2] for an appropriate description of it.

Store 2 made the highest profit.

Award [1] for the correct answer. Working not required.

$$\begin{gathered} \frac{\$24 000}{\$180 000}=13.33 \% \\ \frac{\$27 000}{\$223 000}=12.11 \% \\ \frac{\$18 000}{\$170 000}=10.59 \% \end{gathered}$$

Store 1 had the highest profitability.

Award [1] for correct working and [1] for correct answer. Own figure rule applies.

On this question, to get marks for correct working, candidates must provide all three calculations and perform all three calculations correctly. Disregard minor errors of rounding provided that those errors are irrelevant to correct
determination of which store had the highest profitability.

 $200 000 [total assets] − $120 000 [total liabilities] = Equity

   = $80 000

Award [1] for the correct answer.

Step 1: add up the profits from the three stores.

$24 000 + $27 000 + $18 000 = $69 000

Step 2: Calculate ROCE.

$\frac{\$69 000}{\$50 000 (\mathrm{loan} \mathrm{capital})+\$80 000 \left[\mathrm{Equity}\right] }=53.08 \%$

Award [1] for correct working and [1] for correct answer. Own figure rule applies.

The $50 000 in long-term debt would have to be repaid with interest. That interest expense would have three effects:

• The interest expense would be subtracted from net profit before interest and tax, thereby lowering TPS’ net profit before tax.
• The corporate tax rate would be applied to TPS’ net profit before tax. Because this figure is lower than it would have been had TPS not had an interest expense, TPS’ income tax expense is reduced.
• Because a tax rate is less than 100 %, the interest expense is greater than the tax savings. Therefore, TPS’ net profit after interest and tax is lower than it would have been had TPS not had an interest expense.

Award [1] for identification of an effect (or demonstration of some understanding). The candidate has to link interest expense (from the debt) to the profit and loss account and/or to changes in tax. Award an additional [1] for a complete, clear explanation. Candidates do not have to explain all three of the bulleted points above, only one.

Many candidates performed well on this question.

Many candidates choosing question 2 answered this question correctly.

Many candidates choosing question 2 answered this question correctly, though some candidates did not know how to calculate profitability.

Surprisingly, more than a few candidates did not know how to calculate equity.

Though some could calculate return on capital employed (ROCE), many candidates had difficulty with this question.

Many candidates were too vague in their response to this question and did not specify exactly the impact of long-term debt on the profit and loss account.