Agribusiness - annotated exemplar level 3 91870

Analyse the effect of financing options of a strategic capital expenditure decision on a business (3.9)

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This annotated exemplar is intended for teacher use only. The student work shown does not always represent a complete sample of what is required. Selected extracts are used, focused on the grade boundaries, in order to assist assessors to make judgements at the national standard.

Low Excellence

Commentary
Student work extract

Student 1 (PDF, 117KB)

For Excellence, the student needs to comprehensively analyse the effect of financing options of a strategic capital expenditure on a business.

This involves evaluating the consequences using financial and non-financial information, and justifying the best option for the business. The justification includes evaluating the impact of this option on the business.

The student has comprehensively explained a mortgage and an equity partnership as financing options to convert a farm from sheep/beef to dairy (1).

Financial information (2) and non-financial information (3) have been used to explain the consequences of each option.

The student has recommended a mortgage as the most viable option for financing the farm conversion (4). In justifying this option, the student has focused on low interest rates, maintaining the present shareholding structure, and decision-making (5).

For a more secure Excellence, the student would provide further detail of how the equity structure would change under the equity partnership option. The financial implications for the XXXs of an equity partner wishing to exit the business would also be explained in detail. A representative and quantified interest rate could be used in the student’s justification for the mortgage.

High Merit

Commentary
Student work extract

Student 2 (PDF, 113KB)

For Merit, the student needs to analyse, in depth, the effect of financing options of a strategic capital expenditure on a business

This involves giving a thorough explanation of the effect of financing options of a strategic capital decision. This includes examining the consequence(s) using financial and non-financial information, and selecting the best option for the business.

The student has thoroughly explained a mortgage extension and vendor finance as viable options for financing a harvester (1). Crowd funding has been thoroughly explained though recognised as an inappropriate financing option (2).

Consequences are supported by financial information/understanding (3). Non-financial information has also been used (4). The student has recommended vendor finance as the best option (5).

To reach Excellence, the student could provide further justification of why vendor finance is a better option for the orchard business than adding the cost of the harvester to the mortgage. For example, the student could recognise that a relatively small amount of $120,000 spread over a 30-year mortgage would accrue too much interest, whereas the asset financing represents short-term borrowing.

The points made in the conclusion could apply under either of the viable financing options and are not isolated to the decision to use asset or vendor finance (6).

Low Merit

Commentary
Student work extract

Student 3 (PDF, 103KB)

For Merit, the student needs to analyse, in depth, the effect of financing options of a strategic capital expenditure on a business

This involves giving a thorough explanation of the effect of financing options of a strategic capital decision. This includes examining the consequence(s) using financial and non-financial information, and selecting the best option for the business.

The student has thoroughly explained IPO and private equity partner options that an egg business could use to finance its new farms (1). A bank loan was explained in detail prior to the student deciding that mortgage finance was more appropriate for the size of the principal (2).

While the student has not calculated any interest or repayment amounts for the bank loan/mortgage or equity partner options, the financial understanding is demonstrated in the accurate use of references to expenses, revenue and liabilities (3).

The student has used several pieces of non-financial information in explaining the consequences of the options (4). The student has recommended an equity partner as the best financing option (5).

For a more secure Merit, the student could include further financial evidence to strengthen their explanations of the options. For example, the student could research and calculate mortgage repayments and discuss how equity partners are rewarded for their investment.

The student would also need to demonstrate an understanding that equity partners assume a portion of the ownership of the business and, depending on the agreement, are likely to be involved in decision-making.

High Achieved

Commentary
Student work extract

Student 4 (PDF, 100KB)

For Achieved, the student needs to analyse the effect of financing options of a strategic capital expenditure decision on a business.

This involves explaining the effect of financing options of a strategic capital expenditure decision and the consequence(s) on a business.

The student has explained vendor financing, a bank loan and crowd funding as possible financing options for Sanford to buy a fishing vessel (1).

Interest rates for the first two options have been researched and repayments have been calculated (2). Consequences of options on Sanford have been explained (3).

To reach Merit, the student could recognise that the amount required of $4.2M is better suited to a mortgage than a bank loan, as interest rates are lower. The second table would be adjusted to reflect bank loan interest rates rather than mortgage interest rates.

The student would also demonstrate an understanding that finance sought from Sanford’s existing shareholders is not an example of crowd funding (4).

Low Achieved

Commentary
Student work extract

Student 5 (PDF, 102KB)

For Achieved, the student needs to analyse the effect of financing options of a strategic capital expenditure decision on a business.

This involves explaining the effect of financing options of a strategic capital expenditure decision and the consequence(s) on a business.

The student has explained a bank loan, vendor financing and crowd funding as possible financing options for a farm (1). They have researched a loan interest rate and calculated repayment amounts (2).

The stress of repaying a loan over a medium term, and loan applicants’ ages being potential barriers to borrowing $3.245M, have been identified as consequences (3).

For a more secure Achieved, the student could account for the difference between the finance required and the loan principal (4). They would also demonstrate more accurate understanding of how equity partnerships operate. The use of the farm as security would be further explained (5).

High Not Achieved

Commentary
Student work extract

Student 6 (PDF, 96KB)

For Achieved, the student needs to analyse the effect of financing options of a strategic capital expenditure decision on a business.

This involves explaining the effect of financing options of a strategic capital expenditure decision and the consequence(s) on a business.

The student has briefly explained a bank loan and a merger as potential financing options to allow ABC Eggs to establish new farms (1). A third option, taking on an equity partner, has been explained in more detail (2).

To reach Achieved, the student could include in their explanation of a bank loan reference to interest being payable. The use of security for the loan in a ‘worst case scenario’ would need to be explained (3).

The student would also need to expand on what an equity partner having ‘active involvement’ would mean for decision making and ownership of the business (4).

 
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