Page 298 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 5 Financial information and decisions

Exam-style case study

The Paradise Group
Appendix 1
The Paradise Group is a public limited company in
Financial data for the Hideaway Hotel and the other hotels in the
Country Z. The company owns a chain of six hotels.
Although company profi ts have grown rapidly over Paradise Group for 2012/13
the past two years the Finance Director, Winston
Stanley, is concerned about the performance of one Hideaway Other Paradise
of the hotels, The Hideaway, which has performed Hotel Group hotels
less well than the others in the group. He has $1 m $8 m
Revenue
produced the data shown in Appendix 1 for The $4 m
Gross profit $0.5 m
Hideaway and other Paradise Group hotels. $2 m
Profit $0.1
The company’s accountant, Eve Wan, has raised Capital employed $0.5 m $5.7 m
concerns about the group’s cash position. The
overdraft shown on the balance sheet increased from
$0.1m in 2012 to $0.5m in 2013. Although Winston
Appendix 2
understands Eve’s concerns, he stated in a meeting
with her that, ‘Profi t is what our business is all about Extract from the fi nancial statements of the Paradise Group of Hotels
and this has been increasing year on year for the past
fi ve years, so there is nothing to worry about.’ Eve is
2013 2012
still worried and has prepared a cash-fl ow forecast
$m $m
for the next six months.
296 2.1
Profit aft er tax 2.5
The Board of Directors has been approached by the 1.5
Dividends paid 1.8
CEO of the privately owned City Budget Hotels. The 5.5
Non-current assets 5.9
owners of City Budget Hotels are looking to sell
Current assets 2.1 1.1
the two hotels they own in Country Z. The hotels are 1.4
located in regions of Country Z where the Paradise Current liabilities 1.8 5.2
Group does not currently have any properties. Net assets 6.2
The asking price for the two hotels is $2.4 million. Share capital 1.0 1.0
Paradise Group directors are keen to proceed with Retained profits 2.8 2.1
the purchase of these two hotels, but are undecided Non-current liabilities 2.4 2.1
about how best to fi nance this investment. Winston Capital employed 6.2 5.2
has sent the memorandum shown in Appendix 3 to
all other directors of the Paradise Group. However,
other directors are not convinced about the
advantages of a share issue and support the CEO’s Appendix 3
view that a long-term bank loan is the better option.
Memorandum

From: Winston Stanley

To: All directors

As we have not issued all of the company’s share capital,
I think this will be the best way to raise the capital needed
to fi nance the purchase of City Budget Hotels.