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Paper 2 Aqa Business

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AQA AS Business
Case study – Paper 2: Answers

SAGA

1. price at flotation = 185 pence; price on 15/10/14 = 158 pence
% change = 27p / 185p x 100 = a fall of 14.6%. 2. 33% is 20m so 20m/ X x 100 = 33% so X = 20m x 100 / 33 = 60,606,060.

3. If Saga can reduce its debt levels this would mean less interest costs and so higher profit. This could help the share price recover as investors could now expect to be paid more dividend. The article says that debt financing costs reduced Saga profits by over £20m. Alternatively the extra profit could be used by Saga and be reinvested into areas where Saga wants to grow (e.g. care homes). Funded by profit, an internal source of finance, future business growth could make the shares worth more so their price will rise and shareholders will hold an investment in Saga which is more valuable.

4. When demand is price elastic it means that changes in price have a more than proportionate impact on demand. If, e.g., Saga were to increase its insurance prices by 5% and the PED is -1.5, then demand will fall by 7.5% and there would be a fall in Saga insurance revenues. However, if Saga reduced prices by 10% then demand would rise by 15% and revenues would rise. Operating in markets where low price might be important (because people might not be fussy about who provides the insurance as long as there is cover), if Saga can offer competitive rates then it might be able to increase its market share. To be able to offer lower prices / rates but also remain profitable, Saga must reduce its cost base. On the other hand, Saga, using its trusted brand image, might be able to persuade buyers that it is different / better/ safer than competitor insurance businesses – it might stress that it will talk to older people on the phone rather than only through emails . This would make demand less price sensitive as…...

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