3.

1 Sources of Finance: German Car Keys Limited (GCK)

For decades, German Car Keys Limited (GCK) has made car keys for various car manufacturers. It is 100 % owned by
Schmidt family members. New apps on mobile smartphones may soon replace traditional car keys. Car owners will
have in their phone an “e-key”, which will unlock doors and start the car. Car hire companies like e-keys because
they are cheaper than physical keys and can be easily downloaded.

This innovation in car keys could put GCK out of business. Shareholders are shocked. For years, they believed that
GCK had a secure place in the market. GCK’s market share and profits were high and debt was low. However, rather
than make investments in new product lines, GCK made only minor modifications to the physical car keys and paid
high dividends to satisfy shareholder expectations. As a result, the company does not have a portfolio of products. It
relies on one single product.

GCK conducted market research and identified two other car components it could manufacture. GCK has many
skilled workers, and the factories will have to be upgraded at significant cost. GCK is now looking for ways to finance
the renovation of the factories. If e-keys become popular (as predicted) and action by GCK is not taken quickly, this
old car key company may find itself out of business. [Source: adapted from www.telekom.com / May 2016 SL P2]

(a) Define ‘capital expenditure’ [2]

 1 Mark for a basic definition that conveys partial knowledge

 2 Marks for a clear definition that demonstrates knowledge

(b) Explain one advantage and one disadvantage of GSK paying high dividends to shareholders. [4]

 1 Mark for appropriate advantage / disadvantage of paying high dividends to shareholders (1x ad’ + 1x dis’)
 1 Mark for suitable application to GSK (must be more than just mentioning the name (1x ad’ + 1x dis’)

(c) Outline two factors that GCK must take into consideration when deciding on suitable sources of finance. [4]

 1 Mark for identifying or outlining suitable factors (2 marks for up to a maximum of 2 factors)
 1 Mark for suitable application of each factor to GSK (must be more than just mentioning the name (2 max)

(d) Discuss two appropriate sources of finance for the renovation of GCK’s factories. [10)

 1-2: Little understanding of the demands of the question. One or two sourced of finance identified but with
little reference to GCK.
 3–4: Some understanding of the demands of the question. One or two suitable sources of finance identified
with some discussion as to why they might be appropriate some appropriate terminology is used. Some
reference to GCK
 5–6: Understanding of most of the demands of the question. Two suitable sources of finance identified.
Some discussion of advantages of each one in relation to GCK. Some judgments are relevant but not
substantiated.
 7–8: Good understanding of the demands of the question. Two suitable sources of finance identified. Good
discussion of advantages and disadvantages of each source in relation to GCK. Response is balanced and the
judgments are relevant but not always well substantiated.
 9–10: Good understanding of the demands of the question. Evidence of balance is consistent throughout
the response min. 1ad + 1disad for each source. The judgments are relevant and well substantiated.