State two features of a public limited company.

Explain two disadvantages for FR if it extends its 360-degree feedback appraisal system to its supermarket employees.

Recommend whether FR should choose Option 1 or Option 2.

The main features of a public limited company, some of which may apply to a private limited company, include:

• Government rules, laws, and regulations strictly govern public limited companies.
• Shareholders do not participate in the day-to-day management of the business of a company.
• Shareholders’ liability is limited to their investment in the company.
• The board of directors has decision-making power, most of which it delegates to the chief executive officer. The board, nonetheless, makes policy and strategic decision by majority rule.
• The company has separate legal existence from its owners (shareholders).
• The company raises capital by selling shares.
• The shares of a company are freely transferable and do not require consent of other shareholders.
• Shares can be bought-sold only via a stock exchange.
• Anyone can purchase shares.
• Financial statements/accounts are made public and are easily accessible.
• Legal continuity.

Accept any other relevant feature.

Award [1] for each relevant feature stated up to [2]. Maximum award: [2].

Disadvantages with potential for application include:

• It will increase the business costs as collecting data and performing the appraisals for all employees will mean additional paper work and possibly hiring more managers and/or paying overtime for the extra work. Department managers are already complaining about their workload and this will make it worse. This is particularly relevant as there are far more supermarket employees (6000) than head office employees (250).
• It will increase workload on department managers particularly as the business has hired an additional 1000 part-time staff. Department managers already have concerns about workload and doing 360-degree feedback appraisals on all employees will increase workload even more.
• The whole process is time-consuming for everyone involved and could reduce the efficiency of FR’s core activity, running supermarkets. (For application, candidates must refer to the number of employees).

Disadvantage where opportunity for application is limited include:
Employees may select “raters” that are “fans”. This can lead to skewed results and department managers may disagree with an employee’s choice of raters, which may further increase staff turnover of departmental managers.

Accept any other relevant disadvantage.

Award [1] for identifying or describing the disadvantage for FR and a further [1] for a development with respect to FR. Award a maximum of [2].

[2] cannot be awarded per disadvantage if the response lacks either explanation or application.

For example: For an identification or a description of a disadvantage without application, award [1]. For an explanation of a disadvantage with no application, award [1].

For explanation of a disadvantage and application, award [2].

Mark as [2] + [2]. Maximum award: [4]

N.B. The disadvantage has to be specific to a 360-degree feedback appraisal system, not to appraisal in general.

Refer to Paper 2 markbands for 2016 forward, available under the "Your tests" tab > supplemental materials.

There is no “correct answer”. Answers could include:

Option 1

Pros
This option is less expensive in the long term. The business will need to raise $17m (500 x $34 000). Currently interest rates are very low and therefore the interest charges will only raise the business costs by a relatively small amount. E.g. 3 % per annum ($510 000 in year 1).

At the end of the five-year period the business intends to replace the vans – as it owns them it can sell them to raise some finance towards their replacement.

As FR already has a $50m bank loan it might be assumed they have a good relationship with their bank and further borrowing would not be a problem.

Cons

The business will need to negotiate an additional loan from its bank and may need to provide the bank with additional financial documents and possibly collateral. Should the business fail to repay the loan then the collateral would be seized by the bank.

It is not a cost-free option even when interest rates are low, as a $17m loan would incur interest charges of 3 % per annum ($510 000 in year 1). If using simple interest this totals to $19.55m over five years.

If the trend to buying online is not maintained and shoppers gradually return to shopping face-to-face, then FR may have a large number of vans that it no longer needs but is paying for over five years. Whilst these could be re-sold there would be a significant loss made as second-hand prices will be a lot lower than the $34 000 purchase price.

FR would be liable for the maintenance and repair of vans.

Option 2

Pros
Leasing is more flexible. The business will need to lease the vans for at least 24 months. At that point if it finds that consumer trends have changed then it can either not renew the leases on 500 vans or lease a much smaller number, say 200. This will save the business money in the long run e.g. leasing just 200 vans will cost only $2.6m per year.

If after 24 months demand is not seen to be there then the business could end the lease and purchase vans, saving money in the long run.

One of the tax advantages to leasing a van could include claiming up to 100 % sales tax back on the monthly payments. Also, leasing payments are expenses and, thus, lower pre-tax profits and income tax expense.

In addition, lessors are usually liable for maintenance and servicing of the vans on a regular basis.

N.B. Terms and conditions of fleet leasing vary. In some instances, lessors are not responsible for maintenance or service. In other cases, fleet lessors are responsible for service and maintenance, though they often contract out the management of the service and maintenance to a third company for a monthly fee.

Given the limited experience of our candidates, which could well inform their knowledge about vehicle leases, candidates can argue that FR will not be responsible for maintenance and servicing (a pro of leasing) or that FR might still be responsible for maintenance and servicing (a con of leasing).

Cons

This may have higher long-term costs. A lease of 500 vans will cost the business $6.5m annually (500 × $13 000). Over five years this would be $32.5m which is almost twice the cost of the option A. This is a significant difference in terms of costs.

At the end of each lease period the business does not own the vans and has to negotiate a new leasing agreement.

The business will pay penalties at the end of the lease agreement if the leased vans are damaged in any way.

It is expected that candidates provide a conclusion with a substantiated judgment.

Marks should be allocated according to the Paper 2 markbands for 2016 forward.  

If a candidate evaluates / addresses only one option, award a maximum of [5].

A balanced response is one that provides at least one argument for and one argument against each option.

Candidates may contrast one option with another for a balance as long as at least two arguments are given for each option.

Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.

Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in the answer.

Most candidates knew at least one feature of a public limited company. Many knew two.

Many candidates struggled with the question. Even when they knew what a 360-degree feedback appraisal is, they were weak at applying their response to the question.

Many candidates knew the expectations of the 10 mark question and did a solid-enough job. Candidates often made use of the stimulus. Candidates understanding of leasing tended to be weak, and candidates were often vague or imprecise about which op.