Long Type & (HOTS) Questions - Business Arithmetic, Entrepreneurship, Class 12 | Additional Study Material for Commerce PDF Download

Q1. Explain some important sources of raising finance in business. (TBQ) (6 marks)
Ans.
(i) Capital Markets : It is an organised mechanism meant for effective and smooth transfer of money capital or financial resources from the investors to the entrepreneurs. Capital Markets can :
(a) Mobilize the financial resources on a ration-wide scale.
(b) Secure the required foreign capital and know-how to promote economic growth at a faster rate.
(c) Ensure the most effective allocation of the mobilized financial resources.
(ii) Angel Investor : Business angel or informal investor or an angel investor, 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 convertible debt or ownership equity. They fill the gap in start-up or early stage financing between “friends and family”, by providing seed funding and formal venture capital.
(iii) Venture Capital : It is a type of private equity capital provided as seed funding to early -stage, high potential, high risk, growth up companies/entrepreneurs who lack the necessary experience and funds to give shape to their ideas.
(iv) Specialized Financial Institutions (SFIs) : SFIs were established to meet the long-term financial requirement of such enterprises who were facing greater difficulties than others in procuring long-term finance. These institutions are not only committed to financial services but are also devoted towards playing a role of a promotional “mentor” and technical advisor to a wide range of the upcoming and existing entrepreneurs. Thus, these SFIs make an important source of medium and long-term financing amongst all the financial institutions in India to the industry.

Q2. “An entrepreneur can raise the required capital in the Primary Market.” Explain the various methods of raising the funds in the Primary Market by an entrepreneur. (TBQ) (6 marks)
Ans.
(i) Public issue : It is the most popular method of raising capital. This involves raising of funds directly from the public through the issue of prospectus. When an entrepreneur offers to the public for subscription he is required to comply with all the restrictions and formalities pretaining to the initial issues, prospectus drafting and launch.
(ii) Rights Issue : It is the method of raising finance from existing shareholders by offering securities to them on pro-rata basis, i.e., giving them a right to a certain number of shares in proportion to the shares they are holding. In case the existing shareholders are not willing to subscribe, they can recource the same in favour of another person.
(iii) Private Placement : It means direct sale by a company of its securities to a limited number of sophisticated investors.
(iv) Offer to Employees : In stock option plan or offer to employees, company offer its shares to its employees at a rate lower than market price. This method enables employees to become shareholders and share the profits of the company.

Q3. When an entrepreneur decides to go public and become a public company, he/she tends to be in advantageous positions and get many benefit out of it. Explain the benefits. (TBQ) (6 marks)
Ans. Advantages to an entrepreneur on going public are as follows :
1. Access to capital : The primary advantage to an entrepreneur by going public is access to capital. This capital is not to be repaid and does not involve an interest charge.
2. Other advantages :
(i) Mergers and acquisitions : Public stock of a company can be used for businesses to grow through acquisitions.
(ii) Higher valuations : Public companies are typically valued more than private companies.
(iii) Benchmark trading price : The trading price of a public company’s stock serves as a benchmark of the offer price of other securities.
(iv) Capital formation : Raising capital later is typically easier because of the extra liquidity for the investors.
(v) Incentives : Stock options and stock incentives can be very helpful in attracting employees.
(vi) Reduced business requirements : While an underwritten initial public offering requires significant earnings, the lack of earnings does not keep a private company from going public.
(vii) Less dilution : There is less dilution of ownership control compared to an IPO.
(viii) Liquidity : A public company privides liquidity for management, minority shareholders and investors.
(ix) Prestige : Added prestige and visibility with customers, suppliers, as well as the financial community.

Q4. While there are benefits of going public, at the same time additional obligations and reporting requirements on the companies and its directors means disadvantages. What are they, explain. (TBQ) (6 marks)
Ans.
(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 costs 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.

Q5. Explain the importance of stock exchange from the view point of companies. (TBQ) (6 marks)
Ans.
(i) Recognition : The market values of companies’ shares are published in important dailies. This enhances the reputation of good companies/entrepreneurs.
(ii) Wide Market : The securities of some companies are listed in some stock exchanges. The Market for the securities of such companies is considerably widened. Thus, larger amounts of capital may be raised from different types of investors.
(iii) Higher share values : People have a tendency to buy shares that have some premium value. Demand of such shares increases. This leads to further increase in the price of such shares.

Q6. Explain the importance of stock exchange from the view point of investors. (TBQ) (6 marks)
Ans.
(i) Dissemination of useful information : Stock exchange publishes useful information regarding price lists, quotations, etc., of securities through newspapers and journals. The interested persons buy and sell their securities on the basis of information provided by the stock exchanges.
(ii) Ready market : Persons desirous of converting their shares into cash may easily do so through a member of stock exchange.
(iii) Investors’ interests protected : Stock exchanges formulate rules and regulations so that members may not exploit the investors.
(iv) Genuine guidance about the securities listed : The investors can safely depend upon the information provided by the stock exchanges.
(v) Barriers of distance removed : Stock exchange removes the barriers of distance with regard to securities listed there.
(vi) Knowledge of profit or loss on investments : The investors can estimate the profit or loss on the total amount of investments in securities, by comparing the original amount invested and the price of securities on a particular day.

Q7. Explain the importance of stock exchange from veiw point of society. (TBQ) (6 marks)
Ans.
(a) Rapid capital formation : People get tempted to invest in securities when they study the trend of necessary prices of shares of good companies. This habit leads to investment of savings in corporate and government securities. The income from these securities may further be invested in buying more securities. This flow of funds leads to rapid capital formation.
(b) Economic development : Through easy funds mobilization the boosted production fetches more capital, enhancing economic development.
(c) National projects : As stock exchange promotes the capital formation rate, the projects which brings National Prosperity can be easily undertaken.

Q8. Write down the features of stock exchanges. (TBQ) (6 marks)
Ans.
(a) Association of persons : A stock exchange is an association of persons or body of individuals which may be registered or unregistered.
(b) Recognition from Central Government : Stock exchange is an organized market. It requires recognition from the Central Government.
(c) Market for securities : Stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold.
(d) Deals in second hand securities : It deals with shares, debentures, bonds and such securities already issued by the companies. In short, it deals with existing or second hand securities and hence it is called Secondary Market.
(e) Regulates trade in securities : Stock exchange does not buy or sell any securities from own account. It merely provides the necessary infrastructure and facilities to its members and brokers who trade in securities. It regulates the trade activities so as to ensure free and fair trade.
(f) Allow dealings only in listed securities : In fact, stock exchanges maintain an official list of securities that could be purchased and sold on its floor. Securities which do not figure in the official list of stock exchang e are called unlisted securities. Such unlisted securities cannot be traded in the stock exchange.
(g) Transactions effected only through members : All the transactions in securities at the stock exchange are effected only through its authorized brokers and members. Outsiders or direct investors are not allowed to enter in the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through the authorized brokers only.
(h) Financial barometers : Stock exchanges are the financial barometers and development indicators of national economy of the country. Industrial growth and stability is reflected in the index of stock exchange. (Any six)

Q9. Explain the functions of stock exchange. (TBQ) (6 marks)
Ans.
(a) Continuous and ready market for securities : Stock exchange provides a central market for purchase and sale of securities. It provides ready and continuous outlet for buying and selling of securities. Buyers and sellers strongly believe that they would be able to buy and sell securities when they want.
(b) Facilitates evaluation of securities : Stock exchange is useful for the evaluation of industrial securities. It publishes price quotation of the shares of the companies that have been listed with them after thorough analysis of demand and supply position. This enables investors to know the true worth of their holdings at any time.
(c) Checks on brokers : Stock exchanges control the activities of brokers and protect the investors from being deceived. Now, if any broker is found indulging in malpractices as overcharging or giving wrong information, his/her licence may be cancelled.
(d) Provides safety and security in dealings : Activities of the stock exchange are controlled by the provisions of the Securities Control (Regulation) Act and all this creates confidence in the minds of investors. As transactions are conducted as per well defined rules and regulations, fraudulent practices stand checked effectively ensuring safety, security and justice in dealings.
(e) Regulates company management : Listed companies have to comply with rules and regulations of concerned stock exchange and work under the vigilance of stock exchange authorities.
(f) Facilitates raising new capital : Because of stock exchange, for either development, organization or expansion, the need for more capital by the existing companies is easily met out.

Q10. Explain the features of Angel Investors. (5 marks)
Ans.
(i) Most angel investors are current or retired executives, business owners or high net worth individuals who have the knowledge, expertise and funds that help start-ups match upto industry standards.
(ii) As angel investors bear extremely high risk and are usually subject to dilution from future investment rounds. They expect a very high return on investment.
(iii) Apart from investing funds, most angel provide practice advice, guidance, industry connections and mentoring start-ups in its early days.
(iv) Their objective is to create great companies by providing value creation and simultaneously helping investors realize a high return on investments.
(v) They have a sharp inclination to keep abreast of current developments in a particular business arena, monitoring another generation of entrepreneurs by making use of their vast experience.

Q11. Explain in detail “Venture Capital”. (6 marks)
Ans. Venture capital is a type of private equity capital provided as seed funding to early-stage, high-potential, high risk, growth up companies/entrepreneurs who lack the necessary experience and funds to give shape to their ideas. Venture capital is an equity based investment in a growth-oriented small to medium business to enable the investors to accomplish objectives, in return for minority shareholding in the business or the irrevocable right to acquire. It is more accurate to view venture capital broadly as a professionally managed pool of equity capital. Venture capital is a way in which investors support entrepreneurial talent with finance and business skills to exploit market opportunities and obtain long-term capital gains.
Venture capital has been used as a tool for economic development in a variety of developing regions. In many of these regions, with less developed financial sectors, venture capital plays a role in facilitating access to finance for small and medium enterprises (SMEs), which in most cases would not qualify for receiving bank loans.

Q12. Explain the stages in which an entrepreneur should seek venture capital finance. (6 marks)
Ans. Entrepreneurs can typically seek venture capital to assist at any of the following stages in the company’s development :
(i) Early stage financing.
(ii) Last stage financing/bridge/pre-public stage These are explained as under :
(i) Early stage financing : This stage includes :
(a) Seed capital.
(b) Pre-start up and start up.
(c) Second-round financing.
(a) Seed capital finance : It refers to the capital required by an entrepreneur for conducting research at pre -commercialization stage. During this stage, the entrepreneur has to convience the investor (venture capitalist) why his ideal product is worth while. The investor will investigate into the technical and the economical feasibility of the idea. In some cases, there is some sort of prototype of the idea/product that is not fully developed or tested. As the risk at this stage is very high, investor may deny to assist if he does not see any potential in the investor.
(b) Start up finance : If the idea/product/process is qualified for further investigation and/or investment, the process will go to the second stage. This is called the start-up stage. A business plan is presented by the entrepreneur to the VC firm. A management team is being formed to run the venture. If the company has a board of director, a person from the VC firm will take a seat at the board of directors. While the organization is being set up, the idea/product gets its form. The prototype is being developed and fully tested. In some cases, the clients are being attracted for initial sales. The management-team establishes a feasible production line to produce the product. The VC firm monitors the feasibility of the product and the capability of the management team from the board of directors.
(c) Second round financing : At this stage, we presume that the idea has been transformed into a product and is being produced and sold. This is the first encounter with the rest of the market, the competitors and an attempt to squeeze in the market and get some market share from the competitors. At this stage, larger funds than the 

other early stage financing are required for expansion, modernization, diversification. Here the entrepreneur should be extra careful because only if he and his team is able to prove their capability of standing against the completion, only then is the VC firm interested in financing.
(d) Last stage financing/bridge/pre-public stage : This is the last stage of the venture capital financing process. The main goal of this stage is for the venture to go public so that investors can exit the venture with a profit commesurate with the risk they have taken. At this stage, the venture achieves a certain amount of market share. This gives the ventures some opportunities like merger with other companies, eliminate competitors, etc. The entrepreneur must examine the product’s market position and if possible, reposition it to attract new market segmentation.

Q13. Explain the organization and management of a stock exchange. (6 marks)
Ans. The organization, management, membership and functioning of stock exchange in India are governed by the provisions of the securities contracts (Regulation) Act, 1956. This Act permits only recognized stock exchanges to function under the rules, regulations and by-laws approved by the Central Government.
The governing body is responsible for policy formulation and proper functioning of the exchange, having wide range of powers namely :
(i) Elect the office bearers and set up committees.
(ii) Admit and expel members.
(iii) Manage the properties and finances of the exchange.
(iv) Interpret rules, regulations and by-laws.
(v) Adjudicate disputes.
(vi) Conduct the affairs of the exchange.

Q14. Define the following terms related to stock and stock market trading :
(i) Open
(ii) High
(iii) Limit order
(iv) Offer

(v) Close

(vi) Bid

(vii) Low
(viii) Volume
(ix) Market order

(x) Transaction
(xi) Short selling
(xii) Offer quantity
(6 marks)
Ans.
(i) Open : The first price at which the stock opens when market starts in the morning.
(ii) High : The stock price reached at the highest price level in a day.
(iii) Limit order : The order get executes at your mentioned price. (iv) Offer : The selling price is called offer price.
(v) Close : The stock price at which it remains after the end of market timings or the final price of the stock when the market closes for the day.
(vi) Bid : The buying price is called Bid Price.
(vii) Low : The stock price reached the lowest price level in day.
(viii) Volume : Volume is nothing but quantity of shares.
(ix) Market order : The order gets executes at current market prices.
(x) Transaction : One cycle of buying and selling of stocks is called one transaction.
(xi) Short selling : First selling and then buying only happens in day trading or future trading.
(xii) Offer Quantity : The total number of shares available for selling is called offer quantity.

Q15. Differentiate between primary market and secondary market. (6 marks)
Ans.

Q16. Write a note on secondary market. (6 marks)
Ans. Secondary market is the market for the sale and purchase of previously issued securities. Here the securities are sold by existing investors to other investors. Sometimes the investor is in need of cash and another investor wants to buy the shares of the company as he could not get directly from company. Then both the investors can meet in secondary market and exchange securities for cash through intermediary called broker. In secondary market companies get no additional capital as securities are bought and sold between investors only. If there is no secondary market then investors could get back their investment only after redemption period is over or when company gets dissolved. This liquidity offered by secondary market encourages even those investors who want to invest for small period of time.

Q17. What are the features of venture capital ? (6 marks)
Ans. The main features of venture capital are as follows :
(i) Investment are made in those enterprises which are new and use new technology to produce new products, having an expectation of higher profits.
(ii) Generally, the investments are in equity instruments.
(iii) The venture capital investment is highly illiquid.
(iv) Investors return is taxed as capital gain rather than as ordinary income.
(v) The venture capital investor cannot interfare in day-to-day management of the enterprise but to protect and enhance the investment, he keeps close contact with the entrepreneur or promoter.
(vi) In India, venture capital funds are governed by the Securities and Exchange Board of India (SEBI) guidelines.

Q18. What are the considerations in Venture Finance ? (6 marks)
Ans. A venture capitalist has to consider the following points before extending venture capital to an entrepreneur :
(i) Due Diligence : It refers to the process of investing the merits of a project or prospective investment. It includes qualification of the founding entrepreneur, size and growth characteristic of venture market, existing and potential competition, technical feasibility, etc.
(ii) Cost of Venture Capital : The cost of venture capital depends upon the investor’s perception of risk. The venture funds investor generally demands larger stake in equity in earlier stage than later stage. Investors in early stage expect 30% to 50% of compound annual return.
(iii) Exit Option : Venture capital is a patient investment by the venture capital supplier. Realization of capital gain occurs from 3 to 10 years from start-up. Venture investors need to know how and when they can expect to cash in their investment. Exit option includes selling the company, turning it into a publicly held company and buying back the investor’s share by the company itself or by its promoters.

Q19. What do you understand by capital market ? How can the capital market in India be broadly classified into different categories ? (6 marks)
Ans. A capital market may be defined as an organized mechanism meant for effective and smooth transfer of money capital or financial resources from the investors to the entrepreneurs. The capital market in India may be broadly classified into :
(i) Organized Sector : Organized sector include :
(a) Individual investors.
(b) Corporate and institutional investors as LIC, Banks, etc.
(c) Government and semi-government agencies.
(d) Corporations, International financing agencies, etc.
(ii) Unorganized Sector : These include :
(a) Indigenous bankers in urban areas.
(b) Money lenders in rural areas.

Q20. What is meant by primary market ? Briefly explain the concept of “Right Issue for existing companies”. (6 marks)
Ans. Primary market is basically meant to facilitate transfer of resources from the savers to the entrepreneurs seeking funds for :
(i) Setting new enterprises.
(ii) Expanding.
(iii) Diversifying Right Issue : Right Issue is a method of raising additional finance from existing shareholders by offering securities to them on pro-rata basis i.e., giving them a right to a certain number of shares in proportion to the shares they are holding. It is proposed through a circular to all the existing shareholders only. It is not mandatory to purchase these shares if any shareholder is not willing to subscribe. They can reject or disclain and others can subscribe for it.

Q21. What is seed capital ? (6 marks)
Ans. Capital needed to set up a new business or enterprise is called seed capital. It can be obtained from owners or his/her relatives or from outside sources. It is that money used for the initial investment in a project or start up of company to prove the feasibility of the project and quality of start up capital. To avail this source of finance entrepreneur may concern and contact various agencies and financial institutions.

(HOTS)
Q1. Why primary market is also known as new issue market ? (2 marks)
Ans. When an entrepreneur decides to issue securities like shares, debentures to the public for the first time for the purpose of obtaining capital funds, such issues of securities are referred as “new money issues”. Therefore, primary markets are also known as “new issue market”.