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ECO – 01: Business Organization Solved Assignment June 2018
- “Company form of organization emerged essential because of the limitations of the sole proprietorship and partnership forms of organizations”. Discuss.
Solution : Yes Company form of organization emerged essential because of the below Advantages of Company form of Organisation:
The company form of organisation has been successful in almost all countries of the world. This form is suitable where large resources are required and the production has to be carried out on a large scale. The number of joint stock companies has shown a phenomenal increase in the twentieth century.
Some of the merits of company form of organization are discussed below:
- Accumulation of Large Resources:
The main drawback of the sole trade and partnership concerns has been the scarcity of resources. The resources of a sole trader and of partners being limited, these enterprises have always suffered for want of funds. A company can collect large sum of money from large number of shareholders. There is no limit on the number of shareholders in a public company. If need for more funds arises, the number of shareholders can be increased. Joint stock companies are suitable for those businesses where large resources are required.
- Limited Liability:
The liability of members in a company form of organisation is limited to the nominal value of the shares they have acquired. If a person has purchased a share of Rs. 100, his liability is limited to Rs. 100 only. If the share is partly paid, then he can be required to pay only the unpaid value of the share. In no case the total payment will exceed Rs. 100. The limited liability encourages many persons to invest in shares of joint stock companies. Many persons will be reluctant to invest in those enterprises where liability is unlimited.
- Continuity of Existence:
When a company is incorporated, it becomes a separate legal entity. It is an entity with perpetual succession. The members of a company may go on changing from time to time but that does not affect the continuity of a company. The death or insolvency of members does not in any way affect the corporate existence of the company. The continuity of a company is not only in the interests of the members but is also beneficial for the society. The discontinuation of a company may cause wastage of resources and inconvenience to the consumers.
- Efficient Management:
In company form of organisation, ownership is separate from management. It enables the company to appoint expert and qualified persons for managing various business functions. The availability of large-scale resources enables the company to attract talented persons by offering them higher salaries and better career opportunities. The efficient management will help the company to expand and diversify its activities.
- Economies of Large Scale Production:
With the availability of large resources, the company can organise production on a big scale. The increase in scale and size of the business will result in economies in production, purchase, marketing and management, etc. These economies will enable the company to produce goods at a lower cost, thus resulting in more profits. The company will help consumers by providing them with cheaper goods and will also be able to accumulate more resources for further expansion.
- Transferability of Shares:
The shares of a public company are freely transferable. A shareholder can dispose of his shares at any time when the market conditions are favourable or he is in need of money. The company does not return share-money before its winding up but shareholders can easily sell their shares through stock exchange markets.
Stock Exchange provides a ready market for the purchase and sale of shares. The facility of transferring shares encourages many persons to invest. This provides liquidity to the investor and stability to the company. On the other hand, partnership form of organisation does not provide free transferability of shares.
- Ability to Cope with Changing Business Environments:
The present business enterprises operate under uncertain economic and technological environments. Technological changes are taking place every day. The needs of consumers are varied and changing, to cope with the changing economic environment every business is required to invest money on research and developmental programmes. Sole trade concern or partnership firms cannot afford to spend money on research work. Joint stock companies can afford to invest money on research projects. It will enable them to cope with changing business conditions.
- Diffused Risk:
In sole trade and in partnership business, the risk is shared by a small number of persons. Further uncertainties discourage them from taking up new ventures for fear of risk. In company form of organisation, the number of contributories is large; so risk is shared by a large number of persons. The burden to be shared by different individuals becomes insignificant. It enables companies to take up new ventures.
- Democratic Set-up:
The values of shares are generally small. It enables persons with low incomes to purchase the shares of companies. Shareholders come from all walks of life. Every individual has an opportunity to become a shareholder. Secondly, the Board of Directors is elected by the members. So members have a say in deciding the policies of the company. The company form of organisation is democratic both from ownership and management side.
- Social Benefits:
The company form of organisation mobilises scattered savings of the community. These savings can be better used for productive purposes. The companies also enable financial institutions to invest their money by providing them avenues. It also enables the utilisation of natural resources for better productive uses. Large-scale production enjoys a number of economies enabling low cost of production. The society is supplied with enough quantity of goods.
- What is capital structure? Explain the factors one should keep in mind while deciding capital structure of the company. (20)
Solution: The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.
The primary factors that influence a company’s capital-structure decision are:
- Business Risk
Excluding debt, business risk is the basic risk of the company’s operations. The greater the business risk, the lower the optimal debt ratio.
As an example, let’s compare a utility company with a retail apparel company. A utility company generally has more stability in earnings. The company has les risk in its business given its stable revenue stream. However, a retail apparel company has the potential for a bit more variability in its earnings. Since the sales of a retail apparel company are driven primarily by trends in the fashion industry, the business risk of a retail apparel company is much higher. Thus, a retail apparel company would have a lower optimal debt ratio so that investors feel comfortable with the company’s ability to meet its responsibilities with the capital structure in both good times and bad.
- Company’s Tax Exposure
Debt payments are tax deductible. As such, if a company’s tax rate is high, using debt as a means of financing a project is attractive because the tax deductibility of the debt payments protects some income from taxes.
- Financial Flexibility
This is essentially the firm’s ability to raise capital in bad times. It should come as no surprise that companies typically have no problem raising capital when sales are growing and earnings are strong. However, given a company’s strong cash flow in the good times, raising capital is not as hard. Companies should make an effort to be prudent when raising capital in the good times, not stretching its capabilities too far. The lower a company’s debt level, the more financial flexibility a company has.
The airline industry is a good example. In good times, the industry generates significant amounts of sales and thus cash flow. However, in bad times, that situation is reversed and the industry is in a position where it needs to borrow funds. If an airline becomes too debt ridden, it may have a decreased ability to raise debt capital during these bad times because investors may doubt the airline’s ability to service its existing debt when it has new debt loaded on top.
- Management Style
Management styles range from aggressive to conservative. The more conservative a management’s approach is, the less inclined it is to use debt to increase profits. An aggressive management may try to grow the firm quickly, using significant amounts of debt to ramp up the growth of the company’s earnings per share (EPS)
- Growth Rate
Firms that are in the growth stage of their cycle typically finance that growth through debt, borrowing money to grow faster. The conflict that arises with this method is that the revenues of growth firms are typically unstable and unproven. As such, a high debt load is usually not appropriate.
More stable and mature firms typically need less debt to finance growth as its revenues are stable and proven. These firms also generate cash flow, which can be used to finance projects when they arise.
- Market Conditions
Market conditions can have a significant impact on a company’s capital-structure condition. Suppose a firm needs to borrow funds for a new plant. If the market is struggling, meaning investors are limiting companies’ access to capital because of market concerns, the interest rate to borrow may be higher than a company would want to pay. In that situation, it may be prudent for a company to wait until market conditions return to a more normal state before the company tries to access funds for the plant.
- “The relationship between a banker and customer is primarily that of a debtor and a creditor”. Discuss. (20)
Solution: When a customer opens an account with a bank and if the account has a credit balance, then the relationship is that of debtor (banker / bank) and creditor (customer).
In case of savings / fixed deposit / current account (with credit balance), the banker is the debtor, and the customer is the creditor. This is because the banker owes money to the customer. The customer has the right to demand back his money whenever he wants it from the banker, and the banker must repay the balance to the customer.
In case of loan / advance accounts, banker is the creditor, and the customer is the debtor because the customer owes money to the banker. The banker can demand the repayment of loan / advance on the due date, and the customer has to repay the debt.
A customer remains a creditor until there is credit balance in his account with the banker. A customer (creditor) does not get any charge over the assets of the banker (debtor). The customer’s status is that of an unsecured creditor of the banker.
The debtor-creditor relationship of banker and customer differs from other commercial debts in the following ways:
The creditor (the customer) must demand payment. On his own, the debtor (banker) will not repay the debt. However, in case of fixed deposits, the bank must inform a customer about maturity.
The creditor must demand the payment at the right time and place. The depositor or creditor must demand the payment at the branch of the bank, where he has opened the account. However, today, some banks allow payment at all their branches and ATM centres. The depositor must demand the payment at the right time (during the working hours) and on the date of maturity in the case of fixed deposits. Today, banks also allow pre-mature withdrawals.
The creditor must make the demand for payment in a proper manner. The demand must be in form of cheques; withdrawal slips, or pay order. Now-a-days, banks allow e-banking, ATM, mobile-banking, etc.
- Differentiate between the following:
(a) Government company and public limited company.
Public limited workers have a limited source of earnings and the Employers record their tax return on behalf of the staff.nonetheless they might desire to destroy their head to devise their fee reductions for the wet days and declare the deductions as authorised with the aid of the regulation. their destiny relies upon on the business enterprise that’s vulnerable to marketplace circumstances to stay to tell the story. As on in the present day’s economic circumstances,as a rule the two the couple could slog 24×7 to fulfill the costs, and supply extra suited education and residing standards to their young infants and make contributions in direction of their fee reductions if any fund left. For extra suited destiny they sacrifice their modern-day. jointly as for government workers their entire earnings is going into their fee reductions account and their source of earnings from different components relies upon on their skill to fall according to their superiors with none duty and tension to respond to all and sundry from the Tax branch..Their usual of residing is a splash greater than the fear-unfastened guy even a Peon or a classification IV worker owns palatial villas interior the city area. which even a CEO of a Public limited business enterprise unearths it complicated to very own and safeguard. The very existence of quite some the Beer Bars interior the city is who make contributions to the Tax kitty relies upon in this area of workers. whether that’s a Public limited business enterprise or a private companies,they are able to not stay to tell the story without offering pay offs to the Netas and Babus in each and every stroll of its existence. Now our P.M. is on a thank you to convey out a regulation against corruption against Public limited business enterprise, that’s plenty extra in all threat to guard government workers and lead them to immune against any unfavourable outcomes jointly as in direction of action instituted following a criticism against corruption quotes. The Tax government are frightened some few lakhs if not accounted with the aid of the internal maximum companies than trillions lost with the aid of our Netas and Babus. they are going to spend crores to prosecute people who exceeded over to tutor those few lakhs even whether that’s with the aid of imprecise interpretation of the regulation. no person questions in regards to the costs incurred with the aid of all and sundry interior the regularly occurring public Sector whether it contains questionable distant places journeys. .
(b) Functional middlemen and merchant middlemen. (10+10)
Those who undertake various marketing functions in the process of distribution of goods without having ownership rights are called functional middlemen. These functional middlemen operate on behalf of owners. They perform a specific function or undertake general functions relating to purchase and sale. These middlemen are also called ‘mercantile agents’. Depending on the functions performed, the functional middlemen may be classified into five categories. Let us discuss about them briefly.
- Factors: A middleman who keeps the goods of others and sells them with the approval of the owner is known as a ‘factor’. The goods are normally in his possession or under his control. With the approval of the owner the factor can sell the goods as agent, or sell in his own name, or pledge goods in his possession, or can do all such acts as can be done by the owner of the goods. After the sale of goods, he receives the payment from the buyer. He receives commission at a fixed percentage on sales from his principal.
- Brokers: Middlemen who bring together the buyers and sellers and negotiate the terms and conditions of sale on behalf of either the buyer or seller are known as brokers. When a broker acts on behalf of the buyer, he is known as buying agent. If the owner of goods employs a broker for sale of the goods, the broker is known as a selling agent. For his services, the broker receives a fixed percentage of the value of transaction as brokerage from the employer i.e., either buyer or seller.
- Commission Agent: The commission agent is a middleman who sells goods as an agent of the owner. He takes the possession of the goods, negotiates the terms of sale with the – intending buyers, and arranges transfer of title of the goods to the buyer. If necessary, the commission agent also performs various other functions like storage, grading, packaging, etc. For his services, the commission agent receives remuneration from his principal as a percentage of the value of goods sold.
Middlemen who act on their own right buying and selling goods at a profit, are called merchant middlemen or merchants. They acquire title to the goods and bear the risks of trade besides performing various functions like storing, grading, packing and packaging, etc. Merchant middlemen may be divided into two categories.
- i) Wholesale traders
- ii) Retail traders
Merchants who buy goods from producers or manufacturers or their agents and sell the same to industrial consumers or retail traders are known as wholesale traders. The middlemen who buy goods from producers or wholesalers and sell the same to ultimate consumers are known as retail traders. Thus, retailers act as the final link in the channel of distribution.
- Write notes very brief comment on the following statements: (
- a) Direct demand for public utility services is elastic.
Public utilities are a special type of business undertakings which are engaged in the supply of essential public services in limited market area on a monopolistic basis.
As the public utilities supply essential public services, the demand for their products or services is inelastic. In other words, the demand for their services, e.g. water or electricity, does not change substantially with a change in price.
This is fully true about the direct demand, i.e. for immediate consumption. But the derived demand for industrial and commercial purposes may be elastic.
(b) All the public enterprises in India are wholly owned by the Government of India.
A state-owned enterprise in India is called a Public Sector Undertaking (PSU) or a Public Sector Enterprise. These companies are owned by the union government of India, or one of the many state or territorial governments, or both. The company stock needs to be majority-owned by the government to be a PSU. PSUs may be classified as Central Public Sector Enterprises (CPSEs), public sector banks (PSBs) or State Level Public Enterprises (SLPEs).
CPSEs are companies in which the direct holding of the Central Government or other CPSEs is 51% or more. They are administered by the Ministry of Heavy Industries and Public Enterprises.
(c) Insurance is nothing but risk transfer.
(d) Employment is an economic activity carried out with the objective of earning profit.