Short Type Questions - Business Arithmetic, Entrepreneurship, Class 12 | Additional Study Material for Commerce PDF Download

Q1. Which sources provide the supply for long-term funds ? (TBQ) (4 marks)
Ans. External sources which are :
(a) Capital markets,
(b) Angel investors,
(c) Venture capital,
(d) Specialized financial institutions.

Q2. Name the sources from where demand for capital comes. (TBQ) (4 marks)
Ans.
(i) Acquire fixed asset.
(ii) Promote or establish the business.
(iii) Make market investigations.
(iv) Develop product.
(v) Keep men and machines at work.
(vi) Encourage management to make progress and create value.
(vii) Meet unexpected/unplanned business expenses.

Q3. Entrepreneur can use the capital raised for a variety of purposes. What are they ? (TBQ) (4 marks)
Ans.
(i) Growth and expansion.
(ii) Retiring existing debt.
(iii) Corporate marketing and development.
(iv) Acquisition of capital.

Q4. Name the methods through which capital can be raised in Primary Market. (4 marks)
Ans.
(i) Public issue,
(ii) Rights issue,
(iii) Private placement,
(iv) Offer to the employees.

Q5. How stock options lead to enable employees to become shareholders and share the profits of the company ? (TBQ) (4 marks)
Ans. Stock options lead to enable employees become shareholders and share the profits of the company as in this method shares are offered to employees at a price lower than the market price.

Q6. Why do entrepreneurs need funds ? (3 marks)
Ans.
(i) To set new enterprises.
(ii) For expanding.
(iii) For diversifying.

Q7. Why are Capital Markets important for entrepreneurs ? (TBQ) (3 marks)
Ans. Capital Markets are the most important source of finance for the entrepreneurs as this market can :
(i) Mobilize the financial resources on a nation-wide scale.
(ii) Secure the required foreign capital and know-how to promote economic growth at a faster rate.
(iii) Ensure the most effective allocation of the mobilized financial resources.

Q8. What do you mean by Capital Market ? How can the Capital Market in India be broadly classified into different categories ? (TBQ) (3 marks)
Ans. Capital Market means an organized mechanism meant for effective and smooth transfer of money capital or financial resources from the inventory to the entrepreneur. In India Capital Market can be classified as :
(i) Primary Market and
(ii) Secondary Market.

Q9. “Public issue is the most popular method of raising capital by an entrepreneur.” Explain the method and any advantages of it. (SQP) (4 marks)
Ans. This method involves raising of funds directly from the public through issue of prospectus.
Advantages :
(a) Access to capital,
(b) Mergers and acquisitions,
(c) Higher valuations,
(d) Bench Mark Trading price,
(e) Capital formation,
(f) Incentives,
(g) Liquidity. (Any two)

Q10. Where does stock options lead to ? (3 marks)
Ans.
(a) Higher efficiency,
(b) Low labour turnover,
(c) Better industrial locations,
(d) Low flotation cost,
(e) Wider/ higher generation of funds. (Any three)

Q11. What are the additional obligations and reporting requirements of going public ? (4 marks)
Ans. Some of the additional obligations and reporting requirements of going public are :
(i) Increasing accountability to public shareholders.
(ii) Need to maintain dividend and profit growth trends.
(iii) Becoming more vulnerable to an unwelcome takeover.
(iv) Need to observe and adhere strictly to the rules and regulations by governing bodies.
(v) Increasing cost in complying with higher level of reporting requirements.
(vi) Relinquishing some control of the company following the public offering.
(vii) Suffering a loss of privacy as a result of media interest.

Q12. The secondary market enhances the marketability of securities and provides liquidity to investors. Comment. (3 marks)
Ans. From the investor’s point of veiw, secondary market imparts liquidity to the long-term securities held by investors by providing an auction market for these securities. It operates through the medium of stock exchanges which regulate the trading activities in this market and ensure a measure of safety and fair dealings to the investors.

Q13. Mr. Raghav retired as CEO of a well reputed IT company after having worked for 40 years in USA. He returned to India with a desire to encourage entrepreneurial returns in IT sector. He was approached by Nitin,  a budding entrepreneur in IT sector whose venture was in a start-up stage and was falling short of funds. Apart from investing funds, Mr. Raghav also provided proactive advice, guidance and industry connection and thus, simultaneously helps them in raising high return on investments. Identify and explain the source of raising finance used by Nitin. (SQP) (3 marks)
Ans. Angel Investor : He is an affluent individual who provides capital for a business start-up and early stage companies having a high-risk, high-return matrix usually in exchange for a convertible debt or ownership equity.

Q14. Who manages SEBI ? (4 marks)
Ans. SEBI is managed by its members, which consists of :
(a) Chairman who is nominated by Government of India.
(b) Two members, i.e., officers from Union Finance Ministry.
(c) One member from the Reserve Bank of India.
(d) The remaining 5 members are nominated by Union Government of India, out of them atleast 3 shall be wholetime members.

Q15. State the powers of SEBI. (4 marks)
Ans. For the discharge of its functions efficiently, SEBI has been vested with the following powers :
(a) To approve by-laws of stock exchanges.
(b) To enquire the stock exchange to amend their by-laws.
(c) Inspect the books of accounts and call for periodical returns from recognized stock exchanges.
(d) Inspect the books of accounts of financial intermediaries.
(e) Compel certain companies to list their shares in one or more stocks exchanges.
(f) Levy fees and other charges on the intermediaries for performing its functions.
(g) Grant license to any person for the purpose of dealing in certain areas.
(h) Delegate powers exercisable by it.
(i) Prosecute and judge directly the violation of certain provisions of the Companies Act.
(j) Power to impose monetary penalties.

Q16. Explain briefly the three functions of SEBI rolled into one body. (TBQ) (3 marks)
Ans. SEBI has three functions rolled into one body :
Quasi-legislative,
Quasi-judicial and Quasi-executive.
It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes an order in its judicial capacity.

Q17. Why are venture capitalists typically very selective while doing the investment ? (TBQ) (4 marks)
Ans.
(a) They may invest in one in four hundred opportunities presented to it.
(b) Looks for the extremely rare, yet sought after qualities, such as :
(i) Innovative technology.
(ii) Potential for rapid growth.
(iii) A well-developed business model.
(iv) An impressive management team.
(c) Looks for an “exit” in the time frame of typically 3-7 years.
(d) Is inclined towards returns with exceptionally high growth potential.

Q18. Explain following terms :
(i) Buying and selling of shares.
(ii) Share trading.
(iii) Bid quantity.
(iv) Squaring off.
(4 marks)
Ans.
(i) Buying and selling of shares : Buying is also called demand or bid and selling is also called supply or offer.
(ii) Share trading : Buying and selling of shares is called share trading.
(iii) Bid quantity : The total number of shares available for buying is called Bid Quantity.
(iv) Squaring off : This term is used to complete one transaction. It means if you buy then you have to sell (means square off) and if you sell than you have to buy (means square off).

Q19. Name some venture capital institutions in India. (4 marks)
Ans. At present, many venture capital company funds have been set up in India, in both the public and private sectors. Some of them are :
(i) Industrial development bank of India’s venture capital fund.
(ii) Technology Development and Information Company of India Ltd. (TDICI).
(iii) Risk Capital and Technology Finance Corporation Ltd.
(iv) Gujarat Venture Finance Ltd. (GVFL).
(v) National Venture Fund for Software and IT Industry.
(vi) The Canbank Venture Capital Fund, The Credit Capital Venture Fund Ltd., etc.

Q20. Write a note on Angel Investors. (4 marks)
Ans. Angel Investors are wealthy investors who invest in entrepreneurial firms, usually during start up. They provide cash to young investors and take equity in return. Angels are usually successful people or professionals who have built companies and spent a part of their professional career in mentoring start ups. Angels invest their own money and actively mentor the company. Angels generally expect lower return than the venture capital firms.
Angels are high net worth individuals, usually successful people or professionals who provide early stage capital to start up business in return of either debt or equity or both. They provide funds to firms which are generally too small to be noticed by venture capital firms.
Some of the well known angel investing networks in India are Chennai ponds, The Mumbai Angels, etc. Angels can be classified into two groups :
(i) Affiliated.
(ii) Non-affiliated.

Q21. Who are Affiliated Angel Investors ? (4 marks)
Ans. An affiliated angel is someone who has some sort of contact with you or your business but is not necessarily related to you. It is better to start investor research by seeking an affiliated angel since he is already familiar with the business.
Affiliated Angels can be any one from the following :
(i) Professional : Such as doctors, lawyers, accountants, etc. who have surplus money for investment.
(ii) Business Associates : These are people who come in contact in the normal course of business. These include :
(a) Suppliers/Vendors.
(b) Old customers.
(c) Employees.
(d) Competitors.

Q22. Who are Non-Affiliated Angel Investors ? (4 marks)
Ans. A Non-Affiliated Angel Investor has no connection with you or your business. Non-affiliated Angels can be professionals, top or middle management people, or successful entrepreneurs.
Enterprises can approach non-affiliated angel investors through :
(i) Advertisement.
(ii) Business broker.
(iii) Telemarketing.
(iv) Networkings.
(v) Intermediaries.

Q23. State the benefits and drawbacks of angel investors. (4 marks)
Ans. Benefits : The Angel Investors provide cash to kick the enterprise to next stage or to start up the enterprise. They also provide mentoring service with their experiences and since their money is involved they will already seek success of the business.
Drawback : There is a loss of 10 to 50% control over own business as angel investors provide cash against equity and in future there is a chance of being out from the self created company.

Q24. How can an entrepreneur raise funds by selling the issue mainly to the institutional investors ? (4 marks)
Ans. An entrepreneur can directly sale its securities to a limited number of sophistiicated investors. Entrepreneurs can raise funds by selling the securities mainly to the institutional investors like :
(i) Unit Trust of India.
(ii) Life Insurance Corporation of India.
(iii) State level Financial Corporations, etc.

Q25. How does capital market satisfy firstly savers and at the same time investors ? (4 marks)
Ans. Capital market is a place where savers as well as investors get maximum satisfaction. The capital market satisfies the tastes of savers and the needs of investors through its various financial instruments and institutions. As per entrepreneurs requirement they enter either of the following markets available under capital market :
(i) Primary market.
(ii) Secondary market.

Q26. Write a short note on venture capital. (4 marks)
Ans. Venture capital is an important source of equity for start up companies. Venture capital firms provide equity for business and expect 20 to 40% equity stake in a company and high returns on their investment within 3 to 5 years. In India, venture capital was introduced in new long term fiscal policy of December, 1986. The main objective of venture capital is to provide equity finance to ventures using new technology in order to commercialise the technology and help new entrepreneurs in setting up new units.

Q27. Venture capital is a high risk-high return business. Comment. (4 marks)
Ans. The high risk is due to the fact that projects are untested and are undertaken by people with no experience. The targeted long-term returns from venture capital investment are very high. While investing in venture capital, the common profit targets of investors are “triple the money in three years” or “multiply money seven times in five years” or “earn a compound annual rate of return of 48%, followed by 35-40% in second stage and 25% per annum in third stage”.

Q28. Explain the reasons for establishment of SEBI. (4 marks)
Ans. With the growth in the dealings of stock markets, lot of malpractices are started in stock markets such as price rigging, unofficial premium new issue, delay in delivery of shares, violation of rules and regulations of stock exchange and listing requirements. Due to these malpractices the customers started losing confidence and faith in stock exchange. So government of India decided to set up an agency or regulatory body known as Securities Exchange Board of India (SEBI).

Q29. What is the purpose and role of SEBI ? (4 marks)
Ans. SEBI was set up with the main purpose of keeping a check on malpractices and protect the interest of investors.
It was set up to meet the needs of three groups :
(i) Issuers : For issuers it provides a market place in which they can raise finance fairly and easily.
(ii) Investors : For investors it provides protection and supply of accurate and correct information.
(iii) Intermediaries : For intermediaries it provides a competitive professional market.

Q30. State the objectives of SEBI. (4 marks)
Ans. The overall objectives of SEBI are to protect the interest of investors and to promote the development of stock exchange and to regulate the activities of stock market.
The objectives of SEBI are :
(i) To regulate the activities of stock exchange.
(ii) To protect the rights of investors and ensuring sefety to their investment.
(iii) To prevent fradulent malpractices by having balance between self regulation of business and its statutory regulations.
(iv) To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.