News For You operate a chain of newsagents and confectioners shops in the south of England, and is

considering the possibility of expanding its business across a wide geographical area. The business was

started in 20X2 and annual turnover grew to $10 million by the end of 20X6. Between 20X6 and 20X9

turnover grew at an average rate of 2% per year.

The business still remains under family control, but the high cost of expansion via the purchase or

building of new outlets would mean that the family would need to raise $2 million in equity or debt

finance. One of the possible risks of expansion lies in the fact that both tobacco and newspaper sales are

falling. New income is being generated by expanding the product range inventoried by the stores, to

include basic foodstuffs such as bread and milk. News For You purchases all of its products from a large

wholesale distributor which is convenient, but the wholesale prices leave News For You with a relatively

small gross margin. The key to profit growth for News For You lies in the ability to generate sales growth,

but the company recognises that it faces stiff competition from large food retailers in respect of the prices

that it charges for several of its products.

In planning its future, News For You was advised to look carefully at a number of external factors which

may affect the business including government economic policy, and in recent months the following

information has been published in respect of key economic data.

(i) Bank base rate has been reduced from 5% to 4.5%, and the forecast is for a further 0.5%

reduction within six months.

(ii) The annual rate of inflation is now 1.2%, down from 1.3% in the previous quarter, and 1.7% 12

months ago. The rate is now at its lowest for twenty-five years, and no further falls in the rate are

expected over the medium/long term.

(iii) Personal and corporation tax rates are expected to remain unchanged for at least twelve months.

(iv) Taxes on tobacco have been increased by 10% over the last twelve months, although no further

increases are anticipated.

(v) The government has initiated an investigation into the food retail sector, focusing on the problems

of 'excessive' profits on certain foodstuffs created by the high prices being charged for these goods

by the large retail food stores.

Required

(a) Explain the relevance of each of the items of economic data listed above to News For You.

(13 marks)

(b) Explain whether News For You should continue with its expansion plans. Clearly justify your

arguments for or against the expansion. (12 marks)

(Total = 25 marks)