ECO 01 Solved Assignment 2021 – 22

IGNOU Free Solved Assignment 2021 – 22

TUTOR MARKED ASSIGNMENT

COURSE CODE: ECO-01

COURSE TITLE: BUSINESS ORGANISATION

ASSIGNMENT CODE: ECO-01/TMA/2021-22

COVERAGE: ALL BLOCKS

Maximum Marks: 100

Attempt all the questions:

1. Briefly explain various sources from which companies may raise long term capital (20)

Ans: There are two sources of finance: Long term finance and Short term finance

1) Sources of Long Term Finance:

– Equity Shares

– Preference Shares

– Retained Shares

– Debentures

– Term loans

– Loan from Financial institutions

a) Equity shares: Equity shares are instruments to raise equity capital. The equity share capital is the backbone of any company’s financial structure. Equity capital represents ownership capital. Equity shareholders collectively own the company. They enjoy the reward of ownership and bear the risk of ownership. The equity share capital is also termed as the venture capital on account of the risk involved in it. The equity shareholders’ liability, unlike the liability of the owner in a proprietary concern and the partners in a partnership concern, is limited to
their capital contribution.

b) Preference Shares: According to Sec. 43 (a) of the Companies Act 2013, a share that carries the following
two preferential rights is called ‘Preference Share’:

(i) Preference shares have a right to receive dividend at a fixed rate before any dividend given to equity Shares.

(ii) Preference shares have a right to get their capital returned, before the capital of equity shareholders is returned in case the company is going to wind up.

In case of preference shares, the rate of dividend is fixed and the dividend on these shares must be paid before any dividend is paid to equity shareholders. Directors, however, may decide not to pay any dividend to any class of shareholders even if there are sufficient profits.

c) Retained Earnings: Retained earnings are internal sources of finance for any company. Actually is not a method of raising finance, but it is called as accumulation of profits by a company for its expansion and diversification activities. Retained earnings are called under different names such as self-finance; inter finance, and plugging back of profits. As prescribed by the central government, a part (not exceeding 10%) of the net profits after tax of a financial year have to be compulsorily transferred to reserve by a company before declaring dividends for the year.

d) Debentures: Debentures are debt securities issued by a joint stock company. Amounts collected by way of debentures form part of the loan capital of a company and are repayable after a fixed period. Debenture holders get fixed rate of interest on their debentures as a charge against profit. They are creditors of the company.

Bonds, like debentures, is an acknowledgement of debt issued under the common seal of a company. The only difference between bonds and debentures is that rate of interest is not pre-determined in case of bond, but in case of debentures rate of interest is fixed.

e) Term Loans: A loan which is financed by the banks and financial institutions for medium term upon the primary security of assets and collateral security of other assets is known as term loan. This type of loan is primarily used for expansion of business that is why it is also called project financing. A fixed rate of interest is charged on term loans and it is always payable in installments.

2) Sources of Raising Short Term Finance

– Trade creditors

– Customers Advances

– Commercial Banks

– Finance Companies

– Commercial Paper house

– Personal Loan Companies

– Government institutions

– Factors or Brokers

Sources of Short Term Financing

1. Trade Creditors: Trade creditors are probably the most important single source of short term credit. Trade
creditors are those business establishments which sell good to others on credit. That is, they do not require payment on the spot; rather they are to be paid after some days from the date of sale.

2. Customers Advances: Customers often finance the seller through advance payment for the goods. The prices of the goods to be purchased are paid in advance, i.e. before the receipt of the goods. This practice is prevalent where the seller does not wish to sell goods without prepayment and the buyer also cannot purchase goods from other sources. The seller might require advance it the quantity of goods ordered is so large that he cannot afford to tie up more fund in raw materials or in good-in-process. Special type machine manufactures often demand advance payment in order to protect them from the loss caused by cancellation of contract at a time when the machine has been built up or is in work in process.

3. Commercial Banks: The commercial banks of a country generally supply funds to the business concerns on a short-term basis, either with security or without security if the customer is financially established. The banks, collecting scattered savings of the people, invest a portion of the deposits in the business for a short period of
time.

4. Finance Companies: Finance companies usually lend money to business. They are specialized financial institutions and their primary function is to advance funds to the business

5. Commercial Paper House: They are specialized financial agencies and they are created to purchase promissory notes and to sell them, in turn, to other investors who desire to have some shot of short-term liquid assets. The firm having high credit standing can use this source for obtaining short-term funds.

6. Personal Loan Companies: These companies make small loans to individual generally for consumption purposes. The small business undertakings can procure fund form such companies

7. Governmental Institutions: There are some governmental and semi-governmental corporations which are authorized to advance short term funds to business concerns. Their importance is of course not so much less than other sources.

8. Factors or Brokers: In one basic respect, factoring is different from other forms of financing. In other forms funds are granted to one individual largely on the basis of his property. Factoring is based on a different philosophy. In considering a company’s request for funds we are more interested in the men behind the company their ability, their hopes and aspirations for the future.

9. Miscellaneous Sources: There are many more sources from which can secure funds for short period. They are—friend and relatives, public deposits, loan from officer and the company directors and foreign exchange
banks.

2. “Company form of organization is the most ideal form for all types of business.” Discuss. (20)

Ans: There different forms of business ownership, i.e., Sole Proprietorship, Partnership, Joint Hindu Family Business, Company and Cooperative Society. We must have noticed that no particular form of business organisation can meet all kinds of our requirements. Some may require more financial and managerial resources while others involve large risk. That is the reason why we find different forms of business organisations prevailing in our economy. So while selecting a form of business organisation, we must analyse different factors and try to choose the most suitable form according to our financial and managerial capabilities.

A joint stock company is suitable where the volume of business is large, the area of operation is widespread, the risk involved is high and there is a need for huge financial resources and manpower. It is also preferred when there is need for professional management in its operations. In certain businesses like banking and insurance, joint stock company form is the most suitable. Now-a-days, it is a preferred form for most areas of business because of the preference for operating on large scale. A joint stock company is very popular form of business organisation because it has the following advantages over other form of business organisation:

a) Distinct legal entity: Being a creature of law, a company is a legal entity, something distinct from the persons who are its members. A shareholder is not liable for the acts of the company, even though he holds almost all of the shares. Also the shareholders cannot bind the company by their acts. They are not its agents. The life of the company is independent of the lives of its members. Even if all the members die, the company does not come to an end because of their demise.

b) Limited liability of members: The limited liability is another important feature of a company. If anything goes wrong with the company, his liability is limited by the nominal amount of the shares held by him. In other words, while he stands to lose the money he has invested, he cannot be called upon to pay out of his private property.

c) Perpetual Succession: The incorporation process brings into being a corporate body distinct and separate from the members who constitute it. The right given to shareholders to transfer their shares without in any manner affecting the position of the company gives the company continuity. As a natural consequence of incorporation and transferability of shares, the company has perpetual succession or interrupted existence.

d) Common Seal: The law requires every company to have a seal with its name engraved on it. As the company has no physical form, it cannot sign its name of a contract. Therefore, originally all documents and contracts required the affixing of the seal. But now most of the transactions are signed by the directors who act as its agents. When it is affixed on nay document, two directors must witness its affixation.

e) Large Resources: A joint stock company can raise large financial resources because of its large number of members and it can raise funds through debentures, public deposits, loans from financial institutions without much difficulty.

f) Benefits of Large-scale Operation: The joint stock company is the only form of business organisation which can provide capital for large-scale operations. It results in large-scale production consequently leading to increase in efficiency and reduction in the cost of operation. It further opens the scope for expansion.

g) Liquidity: The transferability of shares acts as an added incentive to investors as the shares of a public company can be traded easily in the stock exchange. The public can buy shares when they have money to invest and convert shares into cash when they need money.

h) Professional Management: Companies, because of the complex nature of their activities and large volume of business, require professional managers at every level of organisation. Because of the size of their business and the financial strength they can afford to appoint such managers. This leads to efficiency in management of their
affairs.

i) Research and Development: A company generally invests a lot of money on research and development for improved processes of production, designing and innovating new products, improving quality of product, new ways of training its staff, etc.

j) Tax Benefits: Although the companies are required to pay tax at a high rate, in effect their tax burden is low as they enjoy many tax exemptions under Income Tax Act.

Form the above discussion; it is clear that a company enjoys various advantages over other form of business organisation that is why it is considered to be most suitable form of business organisation.

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3. Distinguish between the following: (2 x 10) = 20

(a) Primary market and Secondary market

Ans: Primary market which is also called new issue market represents a market where new securities i.e. share, debentures and bonds that have never been previously issued are offered. It is a market of fresh capital. The main function of this market is to facilitate the transfer of funds from willing investors to the entrepreneurs who need funds. but with the changing time, the nature of primary market is also changing. There exist two types of primary market:

a) Market where firms issue securities for the first time through Initial Public Offer (IPO).

b) Market where firms which are already trading in secondary market raise additional capital through Seasoned Equity Offering (SEO).

Secondary market also called stock exchange represents a market where existing securities i.e. shares and debentures are traded. Its main function is to create a link between the buyers and sellers of securities so that investments can change hands in the quickest and cheapest manner.

According to Securities Contract (Regulation) Act, 1956, the term stock exchange has been defined as, “an
association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.”

Thus, a stock market is a market where dealings in the listed securities are made by the members of the exchange on their own behalf or on behalf of others.

From the above explanation it is clear that there are some differences between primary and secondary market which are given below:

Basis	Primary Market	Secondary Market
1. Meaning	It is the market where the securities are issued for the first time. It is also referred as New issue market.	It is the market where the existing securities are traded. It is also called stock Exchange.
2. Price determination	The prices of the securities are determined by the company.	The prices of the securities are determined by the forces of demand and supply of the securities.
3. Buying and selling	Here, only buying of the securities take place.	Here, buying and selling of the securities, both take place.
4. Participants	Securities are sold by the company directly to the investors.	Securities are traded by the investors. Company is not involved in trading.
5. Purpose	Purpose of primary market is to provide capital for setting new business.	The main purpose of secondary market is to provide liquidity to the investors.
6. Capital formation	Primary market promotes capital formation directly.	Capital market promotes capital formation indirectly.

(b) Public limited company and Co-operative organization

Ans: Distinction between Co-operative Society and Joint Stock Company

Basis	Co-operative Society	Joint Stock Company
1. Formation	A co-operation society is formed under the Co-operative Societies Act, 1912 or other state co-operative acts.	A Joint Stock Company is incorporated under Joint Stock Companies Act.
2. Membership	A Co-operative society can be formed with ten members. There is no maximum limit for the members.	A public limited company can be started with seven members and there is no maximum limit.
3. Basic object	The primary object of a society is to serve its members.	A joint stock is run on commercial lines and its basic aim is to earn more and more profits.
4. Transfer of shares	A member cannot transfer his shares to anybody else. A member is allowed to withdraw his share from the society after giving a proper notice.	A shareholder can sell his shares at any time. But he cannot withdraw his share from the company. Share money is returned only at the time of liquidation of the company.
5. Voting rights	In a co-operative society the system is ‘one-person one-vote’ irrespective of number of share held.	In a company, the voting rights are on the basis of ‘one share one vote’. There is no limit on number of votes a person can have.
6. Distribution of surplus	The surplus arising from the working of a society is distributed among member on the basis of their transactions with the society. As per Indian Societies Act one fourth of the surplus is transferred to a general reserve and upto ten per cent of it is spent on the welfare of the members.	The profits of a company are distributed as dividend among shareholders. The dividend is issued on the paid-up capital of the company. Preference shareholders get a fixed rate of dividend.
7. Ownership and control	The members of the society generally belong to a particular area. They take keen interest in the working of the society. The society is managed by an executive elected from members.	The ownership and control is in two different hands. The shareholders are scattered all over the country. The management is in the hands of Board of Directors.

4. Write short notes on the following: (2 x 10) = 20

(a) Listing of a security on a stock exchange

Ans: Listing of Securities on a stock exchange

Listing of securities means permission to quote shares and debentures officially on the trading floor of the stock exchange. Every security issued by companies cannot be traded at a stock exchange. The stock exchange fix certain standards which the company must fulfill before getting the securities listed.

Requirements for Listing

Any company intending to get its securities listed at an exchange has to fulfill certain conditions. The following informations must be filed with exchange for getting a security listed:

1. Memorandum and Articles of Association.

2. Copies of all prospectuses or statements in lieu of prospectuses.

3. Copies of Balance Sheets, audited accounts, agreements with promoters, underwriters, brokers, etc.

4. Letters of consent from Controller of Capital issues now replaced with SEBI.

5. Details of share and debentures issued and shares forfeited.

6. Details of issue of bonuses and dividends declared.

7. History of the company in brief.

8. Agreement with managing director, etc.

9. An undertaking regarding compliance with the provisions of the Companies Act, 1956 and Securities Contracts (Regulation) Act, 2013 as well as rules made therein.

10. A list of the highest ten holders of each class or kind of securities of the company.

The stock exchanges are empowered to withdraw or suspend the admission granted for trading following any breach of conditions. The securities are classified into (a) cleared securities and (b) non-cleared securities. Cleared securities enjoy forward trading facilities while non cleared securities have only cash trading and are on the cash list. If the shares are fully paid and have listing privilege for three years and exchange may grant the status of cleared securities. The securities must be widely distributed and have public interest only then they can become cleared securities.

Objectives of Listing: The main objectives of listing of securities are:

1. To ensure proper supervision and control of dealings in securities.

2. To protect the interests of shareholders and the investors.

3. To avoid concentration of economic power.

4. To assure marketing facilities for the securities.

5. To ensure liquidity of securities.

6. To regulate dealings in securities.

7. To require promoters to have a reasonable stake in the company.

(b) Entrepreneurship and characteristics of an entrepreneur

Ans: Entrepreneurship: Entrepreneurship can be described as a process of action an entrepreneur undertakes to establish his enterprise. It is a creative activity. It is the ability to create and build something from practically nothing. It is a knack of sensing opportunity where others see chaos, contradiction and confusion. Entrepreneurship is the attitude of mind to seek opportunities, take calculated risks and derive benefits by setting up a venture. It comprises of numerous activities involved in conception, creation and running an enterprise.

Characteristics of Entrepreneurship: Entrepreneurship is characterized by the following features:

1. Economic and dynamic activity: Entrepreneurship is an economic activity because it involves the creation and operation of an enterprise with a view to creating value or wealth by ensuring optimum utilisation of scarce resources.

2. Related to innovation: Entrepreneurship involves a continuous search for new ideas. Entrepreneurship compels an individual to continuously evaluate the existing modes of business operations so that more efficient and effective systems can be evolved and adopted.

3. Profit potential: “Profit potential is the likely level of return or compensation to the entrepreneur for taking on the risk of developing an idea into an actual business venture.” Without profit potential, the efforts of entrepreneurs would remain only an abstract and a theoretical leisure activity.

4. Risk bearing: The essence of entrepreneurship is the ‘willingness to assume risk’ arising out of the creation and implementation of new ideas.

5. Comment very briefly on the following statements: (4 x 5) = 20

(a) There is no element of risk in business.

Ans: Business Risk: Uncertainty is an important feature of any business. Fluctuations in demand or prices, wrong estimates of demand and supply, changes in government policies are some of the examples of uncertainly, which influence the business. Such uncertainties are collectively known as business risk. Business risk means possibility of some occurrence, which might lead to some loss for the business. No business can run without some element of risk in it. In fact, business means assuming risk. So, we can say that business is not possible without risk.

The nature of business risks shall be clear from the following features:

a) Uncertainty gives rise to business risk: Uncertainty is an important feature of any business. Fluctuations in demand or prices, wrong estimates of demand and supply, changes in government policies are some of the examples of uncertainly, which influence the business.

b) Risk is an essential element: No business can run without some element of risk in it. In fact, business means assuming risk.

c) Reward for undertaking risks in profit: “No risk, no gain” is an important principle which is applicable to all types of businesses.

d) Degree of risk depends upon the nature of business: The nature of business and the volume of operations determine the degree of risk.

Causes of business risks may be classified as follows:

a) Natural Causes: Human beings have no control over the nature. Unforeseen events like heavy rains, famine,
earthquake etc. affects business adversely.

b) Human causes: These include dishonesty, carelessness and negligence of employee, riots, strikes etc.

c) Economic Causes: Economic causes relate to fluctuations in demand and price or changes in the market conditions.

d) Physical Causes: These include all technical or mechanical causes, which affect the working of the business.

(b) Loans are sanctioned for short term only.

Ans: Loans are the lump sum loan advanced with a fixed maturity period of more than one year. Loans are usually secured and provide medium to long term funds to the borrowers. The entire loan sanctioned is paid or credited to the account of the customer. The entire amount of the loan is chargeable to interest. Repayment is made either on maturity or in installments. Sometimes to ensure proper utilisation of the loan sanctioned it is released in installments after examining the progress of the work for which it is sanctioned. Like overdraft it is not a continuing sort of arrangement. Each loan is a separate contract. From the above discussion we can say that loans are sanctioned for long term not for short term.

(c) There is no difference between the money market and capital market.

Ans: Given statement is incorrect. Money market and capital market is totally different. Money market is market for short term funds and capital market is market for long term funds. Some of the important difference between
money market and capital market is given below:

Basis of Distinction	Money Market	Capital Market
1) Period	Money market is a market for short term funds.	Capital market is a market for medium and long term funds.
2) Constituents	These include call money market, bill market and discounting market.	These include new issue market, stock market, stock brokers and intermediaries.
3) Participants	Only the institutional investors operate in the money market.	Individual and institutional investors operate in the capital market.
4) Instruments	Trade bills, certificate of deposits, commercial papers etc. are the instruments of money market.	The instruments in the capital market include shares, debentures, bonds etc.
5) Liquidity	The instruments of money market have very high degree of liquidity.	The instruments of capital market always take time to convert into cash.
6) Safety	Investment are safe as compared to capital market.	Investments are unsecured due to high volatility in market.
7) Regulation	Money market is regulated by the Reserve Bank of India (RBI).	Capital market is primarily regulated by the Securities and Exchange Board of India (SEBI).

(d) All the business risks are insurable.

Ans: No business can run without some element of risk in it. In fact, business means assuming risk. So, we can say that business is not possible without risk. Risks involved in business can be covered with the help of insurance. But all the risks of business cannot be insured. On the basis of insurance, business risks can be classified into two parts – insurable business risks and non-insurable business risks. Insurable business risks are those which have the below
mentioned features:

1. The risk should be accidental or random in nature. The loss causing factor should not be within the control of the insured. Thus, the loss which has occurred already or which is very likely to occur cannot be insured. For instance, a building which is on fire or which is already destroyed by fire cannot be insured against fire.

2. The amount of loss should be measurable and possible to estimate. This condition is necessary to set the premium at appropriate levels.

3. There should be a sufficiently large number of units exposed to the same risk. In other words, there must be a large number of people interested to insure against the same risk. This requirement follows from the law of large numbers, since an insurance operation is safe only when the insurer is able to predict fairly accurately its expected losses.

4. The units facing the same risk must be spread over large geographical area. In other words, the risk must be spread over a wide geographical area so that the happening of a single event in a small region may not cause heavy burden to the insurer. For instance, if an insurance company had accepted against fire for the buildings located in one area only, an incidence of fire in that area can destroy all those builds. The insurance company may become bankrupt with that single incidence as it has to pay to all the insured. Therefore, it is necessary that the values exposed to loss should not be concentrated in one area.

Normally, pure risks fulfill all the above four features and they are insurable. There are certain risks which do not fulfill these four requirements explained above, and cannot be insured against. They are called non-insurable
risks. These non-insurable risks include:

1. Risks due to war (except cargo at sea) and certain risks such as radio activity arising from nuclear explosion.

2. Risks incapable of measurement such as unforeseen changes in fashion, marketing of new products, etc.

3. Risks too small and recurring too frequently, or risks so large and recurring so infrequently. For instance, a hotel cannot insure the crockery against breakages.

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