ECO-01 2014-15 SOLVED Course Code : ECO - 01
Course Title : Business Organisation Assignment Code : ECO 01/TMA/2014-15
Coverage : All Blocks Maximum Marks: 100
Attempt all the questions. 1. Describe various sources to raise long term capital by a company. (20) Answer: Different Ways to Raise Capital Capital is to business what nutrition is to life. Whether it is about starting a business or expanding an already existing business, "stage appropriate" funding is always a good thing, because capital can be used in tandem with growth. You could have the best of ideas, plans and people, but without capital, none of the dreams will come true. Though ways to raise capital is often seen as a challenge, it need not be as tricky or difficult a situation as it is made out to be. As an entrepreneur you have many options when it comes to ways to raise capital diverse sources and investors.
WAYS TO RAISE CAPITAL PERSONAL CAPITAL
Option one when it comes to ways to raise capital is using your own savings or your credit cards.
When you have money of your own, why look at external sources? But before you opt for this, make
sure you have a good talk with subject matter experts, look into the long-term consequences, and
decide which form of equity fund is the best way for raising capital via equity. You could have
savings, mutual funds, life insurance or credit cards (the last being the most risky funding option), so
when you use the funds for your business venture you will need to understand which of the options
have scope of bringing in better returns on investment.
When your own funding is not an option, there is another great way to raise capital friends and
relatives. Though it may seem shameful to ask them for capital, it seems to be quite a popular option
because according to a survey it is the option of choice for 30% of entrepreneurs who are looking for
ways to raise capital. If you decide to go this way for funding, you must have your attorney draw up a
business contract because though you approach people you know for funds in an informal, non-
business way, business is best done transparent, telling them how their investment will profit and
ensuring that you will keep up your part of the agreement is the most professional way to do business.
ANGEL INVESTORS Private investors are those who are interested in making money with their capital through non-
traditional markets. These angels could be anyone someone you know, your banker, your attorney,
like-minded individuals, or an individuals who for the love of business, seek out new opportunities to
invest in return for equity ownership. These people can give you ways to raise capital, guidance for
start-ups, improve your ideas and mould your business, but they usually demand high returns for their
VENTURE CAPITAL The next option for ways to raise capital are venture capitalists who provide funds to your company if
your business can prove that it has a solid track record and a potential return on investment. Make sure
you find a venture capital firm that has similar goals and ideals as yours. Ensure that you have a risk
management plan, the foresight to predict where you see your company down the line, and do consider
all possible contingencies.
Remember, venture capitalists do not in start-up companies and they invest in people, not just
A good place to look for while looking for ways to raise capital is your office your own employees.
If you have a committed workforce that really believes in the organisational goals, then you might
even find an employee who would help you financing and become a potential investor. If your
potential or current employee is likely to become your investor, you get a really committed workforce
that is driven by reasons other than the salary.
Before going public with your company, you should consider all the possible risks while looking at
ways to raise capital. Capital equity is more risky than any other type of funding. There are tons of
legal points that surround this project, especially if its for budding business enterprises. Public equity
involves a great amount of stress in terms of running the company and a considerable loss of control.
The advice of a knowledgeable attorney is absolutely essential. Its good to take a consultation before
deciding on ways to raise capital, or discussing it while choosing the option.
LOANS Who do you turn to when theres no one to turn to Banks! Yes, as the least expensive route to get
funds, banks are your answer on ways to raise capital for business. With as less as 2 percent, starting a
business is simpler than ever before. There is also a great deal of documentation and paperwork to be
done. However, as an entrepreneur you will have to have a clean state credit history to get a loan.
Different banks might have different parameters to offer loans. You have the choice of a secured loan
or an unsecured loan the difference being you having to pledge your assets Vs. you paying lesser
interest. Alternatively, you could also look at money brokers who deal in circulation of funds between
investors and entrepreneurs. Money brokers act as a bridge in financing and can almost always
guarantee that you get the amount of money you want/need, for a percentage of the gross amount that
is their fee. The retainer fee is always paid up-front, so be ready for that. No isnt that an easy way to
MINIMUM COST & MAXIMUM RETURN Yes, obtaining capital is the first and foremost concern when it comes to taking your business to the
next level. But an equally important challenge is to have a way to raise capital that isnt very heavy on
the pocket and puts the capital to use such that you are able to maximize return on invested capital. So
before you act, deliberate on the ways to raise capital best suited for your business, make sure you
budget right, adhere to the timelines, analyze the method of investment, formulate a backup plan,
buffer for contingencies and garner more value from your investment.
2. Company form of organization is the most ideal form for all types of business. Discuss. (20)
Answer:A company is a voluntary association of persons, recognized by law, having a distinctive
name, a common seal, formed to carry on business for profit, with capital divisible into transferable
shares, limited liability, a corporate body and perpetual succession. An analysis of this definition will
bring out the distinctive characteristics of a company.
Creature of law: A company is a creation of law, and is sometimes called artificial person. It exists only in contemplation of law and therefore has no physical shape or form. Although invisible and intangible, as a legal person, it enjoys almost all the rights of natural person. It has a right to enter into contracts and own property. It can sue and can be sued. The legal personality is one of its distinctive features. 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. As the company is an artificial creature of law, distinct and separate from its members, a shareholder can both own its share and be its creditor. 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. Limited liability of members: The limited liability is another important feature of a company. A person, by buying shares in a company, acquires an interest in the company, and is at liberty to dispose of these shares whenever he likes. 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 a paisa out of his private property in order to help meet the companys obligations. Perpetual Succession The incorporation process brings into being a corporate body distinct and separate from the member 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. As we have noted above, the life of the company being independent of the lives of its member, its life expectancy is not limited to that of various founders. Members may come and members may go, but the company goes on uninterrupted (until, of course, wound up according to law). The law creates the company and the law brings it to an end. 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. Divorce between Ownership and Management The personality of the company is separate and distinct from those humans who compose it-the shareholders. Therefore, the shareholders cannot bind the company by their acts. Since the investors of capital are a heterogeneous group of people residing far and wide, they cannot manage the affairs of the company. They leave this task to their representatives-the Board of Directors. This characteristics of a company militates against the Golden Rule of Capitalism, which will be discussed later The chief implication of the above analytical description of the company mat be summarized as follows: 1. It is a voluntary association 2. Of mutually agreeing persons, natural and legal; 3. It is an autonomous legal unit, 4. Distinct from its associating members 5. In name, in the duration of its life, and its liability to creditors; 6. It exists because the State has by statute enabled to exist. In all respects company organizations differs radically from a partnership business. 3. Differentiate between the following: (a) Primary market and secondary market (b) Wholesaler and Retailer. (10+10) Ans: a). Difference Between Primary and Secondary Markets
Primary and Secondary markets refer to markets, which assist corporations obtain capital funding. The
difference between these two markets lies in the process that is used to collect funds. The
circumstances under which each market is used to raise capital, alongside the procedures to be
followed in raising funds are quite distinct. The following articles provide a clear understanding of
each market, their functions, and how they are different from each other.
What is Primary Market? The Primary market refers to the market where new securities are issued for the purpose of obtaining
capital. Firms and public or government institutions can raise funds from the primary market through
making a new issue of stock (to obtain equity financing) or bonds (to obtain debt financing). When a
corporation is making a new issue, it is called an Initial Public Offering (IPO), and the process is
referred to as the underwriting of the share issue. In the primary market, the securities are issued by
the company that wishes to obtain capital and is sold directly to the investor. In exchange for the funds
that the share holder contributes, a certificate is issued to represent the interest held in the company.
What is Secondary Market?
The secondary market refers to the market where securities that have already been issued are traded.
Instruments that are usually traded on the secondary market include stocks, bonds, options and futures.
Certain mortgage loans can also be sold to investors on the secondary market. Once a security has
been purchased for the first time by an investor on the primary market, the same security can be sold
to another investor in the secondary market, which may be at a higher or lower price depending on the
performance of the security during its period of trading. There are many secondary markets
worldwide, and famous few include the New York Stock Exchange, The NASDAQ, the London Stock
exchange, the Tokyo stock exchange and the Shanghai Stock Exchange. Primary Market vs Secondary Market
The primary and secondary markets are both platforms in which corporations fund their capital
requirements. While the functions in the primary stock exchange are limited to first issuance, a number
of securities and financial assets can be traded and re traded over and over again. The main difference
is that, in the primary market, the company is directly involved in the transaction, whereas in the
secondary market, the company has no involvement since the transactions occur between investors.
What is the difference between Primary Market and Secondary Market? Primary and Secondary markets refer to markets which assist corporations obtain capital
funding. The difference between these two markets lies in the process that is used to collect
The Primary market refers to the market where new securities are issued by the company
that wishes to obtain capital and is sold directly to the investor
The secondary market refers to the market where securities that have already been issued
are traded. Instruments that are usually traded on the secondary market include stocks, bonds,
options and futures.
The main difference is that, in the primary market, the company is directly involved in the
transaction, whereas in the secondary market, the company has no involvement since the
transactions occur between investors.
b) Difference between Wholesaler and Retailer:.
Major difference between wholesalers and retailers are as follows:
Wholesalers Retailers (1) They are connecting links
between the manufacturers and the
(1) They are connecting links
between the wholesalers and the
(2) They purchase goods in large
quantities from the manufacturers.
(2) They purchase goods in small
quantities from the wholesalers.
(3) They deal in limited number of
(3) They deal in variety of products
for meeting the varied needs of
(4) They need more capital to start
(4) They can start business with
(5) The display of goods and
decoration of premises is not
necessary for them.
(5) They lay more emphasis on
window display and proper
decoration of business premises in
order to attract the customers.
(6) Their business operations extend
to different cities and places.
(6) They usually localise at a
particular place, area or city.
(7) They do not directly deal with the
(7) They have a direct link with the
(8) They do not extend free home
delivery and after sales services.
(8) They provide free home
delivery and after sales services to
(9) They provide more credit
facilities to retailers.
(9) They provide lesser credit
facilities to the consumers and
usually sell goods on cash basis.
(10) They may not possess expert
knowledge regarding selling
(10) They must possess expert
knowledge in the art of selling.
(11) They enjoy the economies of
bulk buying, freights and price etc.
(11) They do not avail such
(12) They are not usually classified
in different types.
(12) They can be divided into
categories viz., small scale and
large scale retailers.
(13) Their services can be dispensed
with or can be eliminated from the
chain of distribution.
(13) They are integral component
of the distribution chain and cannot
4. What is Stock Exchange? Discuss. Also describe in detail its functions. (20)
Ans: Stock Exchange (also called Stock Market or Share Market) is one important constituent of
capital market. Stock Exchange is an organized market for the purchase and sale of industrial and
financial security. It is convenient place where trading in securities is conducted in systematic manner
i.e. as per certain rules and regulations. It performs various functions and offers useful services to
investors and borrowing companies. It is an investment intermediary and facilitates economic and
industrial development of a country.
Stock exchange is an organized market for buying and selling corporate and other securities. Here,
securities are purchased and sold out as per certain well-defined rules and regulations. It provides a
convenient and secured mechanism or platform for transactions in different securities. Such securities
include shares and debentures issued by public companies which are duly listed at the stock exchange,
and bonds and debentures issued by government, public corporations and municipal and port trust
Stock exchanges are indispensable for the smooth and orderly functioning of corporate sector in a free
market economy. A stock exchange need not be treated as a place for speculation or a gambling den. It
should act as a place for safe and profitable investment, for this, effective control on the working of
stock exchange is necessary. This will avoid misuse of this platform for excessive speculation, scams
and other undesirable and anti-social activities.
London stock exchange (LSE) is the oldest stock exchange in the world. While Bombay stock
exchange (BSE) is the oldest in India. Similar Stock exchanges exist and operate in large majority of
countries of the world.
Definitions of Stock Exchange According to Husband and Dockerary, "Stock exchanges are privately organized markets which are used to facilitate trading in securities."
The Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as, "An association, organization 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."
Functions of Stock Exchange - Main Functions In The Market: 1. Continuous and ready market for securities Stock exchange provides a ready and continuous market for purchase and sale of securities. It provides
ready outlet for buying and selling of securities. Stock exchange also acts as an outlet/counter for the
sale of listed securities.
2. Facilitates evaluation of securities Stock exchange is useful for the evaluation of industrial securities. This enables investors to know the true worth of their holdings at any time. Comparison of companies in the same industry is possible through stock exchange quotations (i.e price list). 3. Encourages capital formation Stock exchange accelerates the process of capital formation. It creates the habit of saving, investing
and risk taking among the investing class and converts their savings into profitable investment. It acts
as an instrument of capital formation. In addition, it also acts as a channel for right (safe and
4. Provides safety and security in dealings Stock exchange provides safety, security and equity (justice) in dealings as transactions are conducted
as per well defined rules and regulations. The managing body of the exchange keeps control on the
members. Fraudulent practices are also checked effectively. Due to various rules and regulations,
stock exchange functions as the custodian of funds of genuine investors.
5. Regulates company management Listed companies have to comply with rules and regulations of concerned stock exchange and work
under the vigilance (i.e supervision) of stock exchange authorities.
6. Facilitates public borrowing Stock exchange serves as a platform for marketing Government securities. It enables government to
raise public debt easily and quickly.
7. Provides clearing house facility Stock exchange provides a clearing house facility to members. It settles the transactions among the
members quickly and with ease. The members have to pay or receive only the net dues (balance
amounts) because of the clearing house facility.
8. Facilitates healthy speculation Healthy speculation, keeps the exchange active. Normal speculation is not dangerous but provides
more business to the exchange. However, excessive speculation is undesirable as it is dangerous to
investors & the growth of corporate sector.
9. Serves as Economic Barometer Stock exchange indicates the state of health of companies and the national economy. It acts as a barometer of the economic situation / conditions.
10. Facilitates Bank Lending Banks easily know the prices of quoted securities. They offer loans to customers against corporate securities. This gives convenience to the owners of securities. 5. Write short notes on the following. (54) (a) Warehousing (b) Departmental Organization (c) Factors influencing choice of channel (d) Advertisement. Ans: a) Warehousing: Warehouse is a storage structure constructed for the protection of the quality and quantity of the stored produce. The need for a warehouse arises due to the time gap between production and consumption of products. Warehousing or storage refers to the holding and preservation of goods until they are dispatched to the consumers. By bridging this gap, storage creates time utility.
Storage enables a firm to carry on production in anticipation of demand in future. Warehouses enables the businessmen to carry on production throughout the year and sell their products, whenever there is adequate demand. Need for warehouses arises also because some goods are produced only in a particular season but are demanded throughout the year. Similarly, certain products are produced throughout the year but demanded only during a particular season. Types of Warehouses : Private Warehouses These warehouses are owned and operated by big manufacturers and merchants to fulfill their own storage needs. Big business firms which need large storage capacity on a regular basis and who can afford money, construction and maintain their private warehouses. The private warehouses are licensed to private persons and only the goods imported by or on behalf of the licensee are stored in such warehouse.
These warehouses are a specialized business establishment that provide storage facilities to the general
public for a certain charge. It may be owned and operated by an individual or a cooperative society. It
works under a licence from the government. They are generally located near the junctions of railways,
highways and waterways.
A public warehouse is also known as 'duty paid warehouse'.
Public warehouses are very useful to the business community as they can meet their storage needs
easily and economically by making use of the public warehouse, without heavy investment.
These warehouses are licenced by the Government to accept imported goods for storage until the
payment of customs duty. They are located near the ports. They are either operated by the Government
or work under the control of customs authorities. The warehouse is required to give an undertaking or
'Bond' that it will not allow the goods to be removed without the consent of the custom authorities.
The goods are held in bond and cannot be withdrawn without paying the customs duty. Such
warehouses are very helpful to importers and exporters.
Benefits of Warehousing Warehouses enable storage of goods when their supply exceeds demand and by releasing them
when the demand is more than immediate productions. This on one hand ensures a regular
supply of goods in the market and on the other hand it helps to stabilize prices by matching
supply with demand.
Warehouses provide for safe custody of goods. Businessmen can thus minimize the risks to
goods from loss,damage,fire,theft etc. Perishable products can be preserved in cold storage.
Also,the goods kept in a warehouse are generally insured.
A warehouse provides facilities for processing, packing, blending, grading etc, of the goods for
the purpose of sale. The prospective buyers can inspect the goods kept in a warehouse.
Warehouses provide a receipt to the owner of goods for the goods kept in the warehouse. The
owner can borrow money against the security of goods by making an endorsement on the
warehouse receipt. By keeping the imported goods in a bonded warehouse, a businessman can
pay customs duty in installments.
b) Departmental organisation: It is considered as a suitable form of organisation of public Enterprises. The departmental form of public sector operates under the control and guidance of the concerned ministry. The Departmental form of public sector includes the railways, broadcasting, post and telegraphs, telephone services, etc. Following are the some of the important features/characteristics of Departmental Organisation. 1. Administration by the Government/ controlled by the ministry: - The Enterprises is run as a Government Department. For instance, All India Radio, and Doordarshan come under the ministry of information and broadcasting. The minister concerned is accountable for the working of the department. He is answerable to the people, i.e. to the any queries relating to the working of the enterprise 2. Decision-Making: - The major policy decisions are taken by the concerned ministry, whereas, day-today administration is looked after by the officials appointed with executive power. 3. Finance: - Government of India finances the department form of public sector, and the surplus, if any goes to the government exchequer. 4. Major policy changes: - The officials in-charge of the department has to take government sanction for expansion programmes and for major policy changes. 5. Monopoly position: - prior to 1991, most of the department were working as monopolies. However, of late, there has been privatization of such department including broadcasting, defence and even railways to a certain extent. 6. Establishment: - A departmental undertaking is established by a particular ministry. For instance, the department of railways is established by ministry of railways. 7. Suitability: - The departmental form of business organisation is suitable for defence and public utilities. For instance, it is suitable for public utilities such as railways, post and telegraphs, and so on.
c) Factors influencing choice of channel: Important factors affecting the choice of channels of distribution by the manufacturer are:
(A) Considerations Related to Product When a manufacturer selects some channel of distribution he/she should take care of such factors
which are related to the quality and nature of the product. They are as follows:
1. Unit Value of the Product: When the product is very costly it is best to use small distribution channel. For example, Industrial
Machinery or Gold Ornaments are very costly products that are why for their distribution small
distribution channel is used. On the other hand, for less costly products long distribution channel is
2. Standardised or Customised Product: Standardised products are those for which are pre-determined and there has no scope for alteration.
For example: utensils of MILTON. To sell this long distribution channel is used.
On the other hand, customised products are those which are made according to the discretion of the
consumer and also there is a scope for alteration, for example; furniture. For such products face-to-
face interaction between the manufacturer and the consumer is essential. So for these Direct Sales is a
3. Perishability: A manufacturer should choose minimum or no middlemen as channel of distribution for such an item
or product which is of highly perishable nature. On the contrary, a long distribution channel can be
selected for durable goods.
4. Technical Nature: If a product is of a technical nature, then it is better to supply it directly to the consumer. This will help
the user to know the necessary technicalities of the product.
(B) Considerations Related to Market
Market considerations are given below:
1. Number of Buyers: If the number of buyer is large then it is better to take the services of middlemen for the distribution of
the goods. On the contrary, the distribution should be done by the manufacturer directly if the number
of buyers is less.
2. Types of Buyers: Buyers can be of two types: General Buyers and Industrial Buyers. If the more buyers of the product
belong to general category then there can be more middlemen. But in case of industrial buyers there
can be less middlemen.
3. Buying Habits: A manufacturer should take the services of middlemen if his financial position does not permit him to
sell goods on credit to those consumers who are in the habit of purchasing goods on credit.
4. Buying Quantity: It is useful for the manufacturer to rely on the services of middlemen if the goods are bought in smaller
5. Size of Market: If the market area of the product is scattered fairly, then the producer must take the help of middlemen.
(C) Considerations Related to Manufacturer/Company
Considerations related to manufacturer are given below:
1. Goodwill: Manufacturers goodwill also affects the selection of channel of distribution. A manufacturer enjoying
good reputation need not depend on the middlemen as he can open his own branches easily.
2. Desire to control the channel of Distribution: A manufacturers ambition to control the channel of distribution affects its selection. Consumers
should be approached directly by such type of manufacturer. For example, electronic goods sector
with a motive to control the service levels provided to the customers at the point of sale are resorting
to company owned retail counters.
3. Financial Strength: A company which has a strong financial base can evolve its own channels. On the other hand,
financially weak companies would have to depend upon middlemen.
(D) Considerations Related to Government Considerations related to the government also affect the selection of channel of distribution. For
example, only a license holder can sell medicines in the market according to the law of the
In this situation, the manufacturer of medicines should take care that the distribution of his product
takes place only through such middlemen who have the relevant license.
A manufacturer should select such a channel of distribution which is less costly and also useful from
2. Availability: Sometimes some other channel of distribution can be selected if the desired one is not available.
3. Possibilities of Sales: Such a channel which has a possibility of large sale should be given weight age.
Advertising is how a company encourages people to buy their products, services or ideas. An
advertisement (or "ad" for short) is anything that draws good attention towards these things. It is
usually designed by an identified sponsor, and performed through a variety of media. Ads appear on
television, as well as radio, newspapers, magazines and as billboards in streets and cities. They try to
get people to buy their products, by showing them the good rather than bad of their products.
Advertisers influence our identity by making adverts. Many people agree that they influence our
identity and they have a huge impact on our life. They influence our identity by using things such as
techniques, stereotypes and targeting our audience. Our personal identity is who we are and what
things make us up such as occupation, beliefs, personality, self esteem, lifestyle, relationships, friends,
how we look and what we wear. Advertisers use techniques to grab people's attention. For example, to
make a burger look tasty in advertising, it may be painted with brown food colours, sprayed with
waterproofing to prevent it from going soggy and sesame seeds may be super-glued in place.
Advertising can bring new customers and more sales for the business. It can be expensive but can help
make a business make more money.
Types of advertising
Advertising happens in many different ways. Many products are advertised on television, although not
all channels permit advertising. The advertisements usually appear during breaks between a television
show. They are usually for products, other television shows or movies and are not normally much
longer than 30 seconds. Some radio stations have audio advertisements that play between programmes.
An advertisement for a movie is called a trailer. It shows a short collection of clips from the movie,
and shows the date it will be released in cinemas.
Advertising also takes place on websites. These may appear as "banner ads" or "popups". They are
often still images or flash animations. The owner of the website will get money when a user clicks on
the advertisement. Sometimes they will get a percentage of the money if they buy a product.
Billboards advertise products on city streets. These may simply be freestanding billboards or may be
part of street furniture such as a bus shelter. Buses and taxis are often covered in adverts, while budget
airlines sometimes allow advertising inside their planes. Adverts also appear in newspapers,
magazines and sports programmes. Many stadiums have adverts set around them. Sports teams,
tournaments, television programmes and public events sometimes have sponsors.
Advertisers use many different techniques to get people to notice their adverts, often using deliberately
shocking or provocative images. Images of pretty or sexy women are also often used by advertisers in
this way. Once they have managed to make people notice their advert, they need to 'sell' the product or
brand. They may try to make the product look appealing, however often advertisers use humour to get
people to remember the brand without actually promoting the product. Poor adverts can damage sales
or spoil a brands identity.
Advertising is often strictly regulated, for instance in the United Kingdom it is illegal to advertise
tobacco, except in the shop where it is sold and this is also restricted. In France it is illegal to advertise
alcohol, meaning that when many European football teams play in France, they cannot play in their
usual shirts as breweries often advertise on sports shirts. It is also illegal to advertise on some
television channels, the BBC in the United Kingdom and RTE in the Republic of Ireland are not
allowed to permit advertising and instead make their revenue from selling a compulsory television