Edexcel International A Level Business: Planning a business and raising finance (YBS11) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover section 2.3.1, Planning a business and raising finance, of Unit 2 in the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business (YBS11) specification, Issue 1, September 2017. They use the command words the specification lists, with its published mark tariffs where one applies. Amounts are in dollars. Read the study guide first, use the revision notes to recall, and see the earlier unit-level practice set. Course hub: Edexcel A Level Business. Checklist: printable checklist.

Questions

1. Define the term “business angel”. [2]

2. Define the term “unlimited liability”. [2]

3. Amberlea Smoothies is a franchise. A franchisee pays an entry fee of 30,000 and then 7% of annual revenue. A franchisee’s revenue is 240,000, 270,000 and 300,000 in years 1 to 3. Calculate the total the franchisee pays the franchisor over the three years. [4]

4. Zephyr Loop Ltd has 100,000 shares, of which the founder owns 60,000. A venture capital firm buys 40,000 new shares at 2.50 each. Calculate the amount raised and the founder’s percentage of the shares after the sale. [4]

5. Maplewick Cycles, a repair shop, applies to a bank for a loan of 60,000. Its business plan includes a cash-flow forecast showing a monthly cash surplus of 2,600 before loan repayments. The repayments would be 1,400 a month. Explain one way the business plan helps the bank decide whether to lend. [4]

6. Juniper Quay Grocers buys 8,000 of produce from a supplier on 30 days’ credit. It sells all the produce within 12 days. Explain why trade credit is a suitable method of finance for this purchase. [4]

7. Birchwood Brew, a new coffee roaster, needs a roasting machine. Buying costs 36,000, and the owner expects to sell it for 7,000 after four years. Leasing costs 820 a month for 48 months, including servicing. Analyse whether leasing or buying is more suitable for Birchwood Brew. [6]

8. Sana runs Pebblecrest Print as a sole trader, with annual profit of 84,000. Idris offers to invest 30,000 and share the business as a 50:50 partner, bringing design skills. Analyse the effects on Sana of moving from sole trader to partnership. [6]

9. Wickerby Candles, a new business, made a profit for the year of 18,000. The owner wants to buy equipment costing 45,000 and is considering using only retained profit. Discuss the suitability of retained profit for this purchase. [8]

10. Lantern Row Ltd, a restaurant, needs 150,000 to open a second site. It currently earns an operating profit of 38,000 a year before interest. Options: a bank loan at 9% interest a year; a business angel who would take 30% of the company; or a crowd-funding campaign. Assess the most suitable method of finance for Lantern Row Ltd. [10]

11. Northvale Foods Ltd is owned by one family, who hold all 20 million shares. The directors propose a stock market flotation as a plc, issuing 5 million new shares at 3.20 each. Costs of flotation are expected to be 6% of the amount raised. Assess whether flotation is the right decision. [10]

12. Reedbank Repairs is a community bicycle workshop that trains unemployed people and reinvests its profit in the training. Explain why it is described as a social enterprise. [4]

Answers

1. A business angel is a wealthy individual who invests their own money in a business [1], usually taking a share of ownership and often offering advice [1]. [2] Examiner insight: A definition gains marks when it names who provides the money and what they receive. “Gives money” alone is too thin for two marks.

2. Unlimited liability means the owner is personally responsible for all the debts of the business [1], so personal assets could be used to pay them [1]. [2] Examiner insight: The second point matters. Saying the owner “has to pay” without saying personal assets are at risk does not separate this from limited liability.

3. Total revenue = 240,000 + 270,000 + 300,000 = 810,000 [1]. Royalty = 7% of 810,000 = 56,700 [1]. Add the entry fee: 56,700 + 30,000 [1]. Total = 86,700 [1]. [4] Examiner insight: Show the working and include the one-off fee. An answer that gives only the royalty total leaves out a cost the question states.

4. Amount raised = 40,000 × 2.50 = 100,000 [1]. Shares after = 100,000 + 40,000 = 140,000 [1]. Founder’s share = 60,000 ÷ 140,000 [1] = 42.9% [1]. [4] Examiner insight: Use the new total, not the original 100,000, as the denominator. Note that the founder moves from majority to minority, which is the point to carry into any evaluation.

5. The plan contains a cash-flow forecast [1]. It shows a surplus of 2,600 a month against repayments of 1,400 [1], leaving 1,200 a month after repayment [1], so the bank can see the loan is likely to be repaid and the risk of lending is lower [1]. [4] Examiner insight: Answers gain credit when the figure is used from the stem and the conclusion is about the lender’s decision, not just a description of what a plan contains.

6. The produce is sold by day 12 but the supplier is not paid until day 30 [1], so Juniper Quay receives the sales cash 18 days before it pays (30 − 12) [1]. The supplier is in effect financing the stock without interest if the bill is paid on time [1], which leaves cash free for wages and other costs [1]. [4] Examiner insight: A strong answer uses both the 30 days and the 12 days. A generic statement that trade credit “delays payment” does not use the stem.

7. Lease cost = 820 × 48 = 39,360 [1]. Net cost of buying = 36,000 − 7,000 = 29,000 [1], so leasing costs 10,360 more [1]. However, leasing needs no outlay of 36,000 now [1], which matters to a new business short of cash [1]. The lease includes servicing, but the business does not own the machine or gain the resale value [1]. [6] Examiner insight: Analysis here means following a chain from the numbers to a business consequence. The comparison of total costs is the start, not the end. This is not a judgement question, so a recommendation is not required.

8. Idris adds 30,000 of capital [1] and design skills, which could help the business grow [1]. Sana’s share of profit would fall from 84,000 to 42,000 at current profit [1], so profit would need to rise above 84,000 for her to gain [1]. Partners generally have unlimited liability, so Sana remains personally exposed [1] and may now be affected by debts and decisions arising from Idris’s actions as well [1]. [6] Examiner insight: Pick up the 50:50 figure and show what it does to Sana’s income. Credit tends to go to answers that look at the effect on Sana rather than listing partnership features.

9. For: no interest is paid [1] and no outsider gains control [1]. Against: at 18,000 a year, 45,000 would take 2.5 years even if all profit were kept (45,000 ÷ 18,000) [1], and the owner could take no drawings [1]. A new business may not yet have a reliable profit [1], and delaying the equipment may let competitors move ahead [1]. A loan or lease could allow earlier purchase, at a cost of interest or payments [1]. Judgement: retained profit is suitable only if the equipment is not urgent and the profit is dependable; otherwise a combination is more suitable [1]. [8] Examiner insight: A discuss answer shows competing arguments and reaches a brief assessment. Both sides plus the 2.5-year calculation are needed; one side alone caps the answer.

10. Loan interest = 150,000 × 0.09 = 13,500 a year [1], which is 35.5% of the 38,000 operating profit [1] and leaves 24,500 [1]. A loan keeps ownership with the existing owners [1], but repayments must be met whatever sales are [1]. The angel’s 30% of current profit is 11,400, less than the interest [1], but it is a permanent share of future profit, though no repayment is required and advice may help [1]. Crowd funding may not reach 150,000 and cannot be relied on [1]. For a restaurant with uncertain early sales, the angel reduces the cash-flow risk [1]. Judgement: the angel is more suitable if the owners accept sharing control; if control matters most, the loan is better and the interest is affordable [1]. [10] Examiner insight: Strong assessments weigh options against each other with figures from the stem and finish with a supported judgement that states what it depends on.

11. Amount raised = 5,000,000 × 3.20 = 16,000,000 [1]. Costs = 6% × 16,000,000 = 960,000 [1], so net funds = 15,040,000 [1]. The family keep 20 ÷ 25 = 80% of the shares [1], so control is not lost at first. For: a large sum with no repayment date [1] and a higher profile that helps later share issues [1]. Against: more public disclosure [1], pressure from shareholders for dividends and short-term profit [1], and takeover risk if more shares are sold later [1]. Judgement: worthwhile if the funds are needed for growth that borrowing cannot fund and the family accept scrutiny [1]. [10] Examiner insight: Calculations give the case its context, but an assess question needs a reasoned judgement. A list of pros and cons with no decision falls short.

12. A social enterprise trades to meet social or environmental aims [1]. Reedbank Repairs trains unemployed people, a social aim [1]. It reinvests its profit in that training instead of maximising returns for owners [1]. Because profit is not its only aim, it may be able to attract grants or support, though it still needs to cover its costs [1]. [4] Examiner insight: An explanation is supported by details from the case. Quoting the training and reinvestment facts earns more than a definition on its own.

Where marks are usually lost

• Defining a term in a few words with no second point.
• Leaving out the fee, interest or other cost stated in the stem.
• Using the wrong denominator in a percentage ownership calculation.
• Repeating the stem figures without saying what they mean for the business.
• Writing “analyse” answers that list features but give no chain of reasoning.
• Giving only advantages or only disadvantages in a discuss or assess question.
• Finishing a judgement question without a decision.
• Describing liability in legal detail instead of stating it in general terms.

Next steps

• Review the revision notes and the study guide.
• Go back to the course hub and tick off the checklist.
• Take one of the free diagnostics.
• Book a free trial class.

Frequently asked questions

What do these planning and finance practice questions cover? They cover section 2.3.1 of Unit 2 in Pearson Edexcel International A Level Business (YBS11): business plans, internal and external finance, forms of business, and limited and unlimited liability.

How should you define a term in Edexcel IAL Business? Give a precise definition with a second developing point, rather than a few vague words. A one-phrase definition often misses a mark.

What costs should you include in a finance calculation? Include every fee, interest charge or other cost stated in the question. Leaving out a cost in the stem is a common error.

How should you answer a discuss or assess question on finance? Give both advantages and disadvantages linked to the business in the case, then finish with a decision. Answers that list features without a chain of reasoning or a judgement earn less.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification, Issue 1, September 2017, Pearson Education Limited: Unit 2, section 2.3.1.