SAMPLE QUESTION PAPER (2021-22)
ENTREPRENEURSHIP
TERM II
CLASS 12
Time: 2 Hrs Max. Marks: 35
GENERAL INSTRUCTIONS
1. The paper is divided into 3 Sections
2. Section-wise overall choice is given to the students.
3. Section A (2 markers) has 6 questions. Attempt any 4 out of 6
4. Section B (3 markers) has 5 questions. Attempt any 4 out of 5
5. Section C (5 markers) has 4 questions. Attempt any 3 out of 4
SECTION – A
1. Pink & Blue Store sells 1000 insulated water bottles annually. Demand for the product is uniform. Purchase cost per bottle is ₹50. Holding cost per annum is 10% of purchase cost. Ordering cost is ₹100 per order. Calculate the Economic Ordering Quantity for bottles.
Ans. 200 units
Economic Ordering Quantity = √(2PD/C)
Thus as: Annual demand (D) = 1,000 bottles
Order cost (P) = ₹100
Annual carrying cost of 1 unit (C/i) = 10% x ₹50 = ₹5
EOQ = √ (2 x 1000 x 100)/5
= 200 units
2. Identify and explain the method of raising additional finance from existing shareholders by offering securities to them on pro-rata basis.
Ans. rights issue is a method of raising additional finance from existing shareholders by offering securities to them on pro-rate basis i.e., giving them a right to a certain number of shares in proportion to the shared they are holding. Normally, through a circular, rights issues are proposed to the existing shareholders and in case they are not willing to subscribe, they can renounce the same in favour of another person. This method of issuing securities is considered to be inexpensive as it does not require any broker, agents, underwriters, prospectus or enlistment, etc.
3. ‘Wimber Motors Ltd.’ was a car dealer. It took over a car manufacturing plant ‘Speed Cart & Co.. and started a new business in the name of ‘Unique Cart Ltd.’ to synergize and capture a major share of the market and to maximize their profits. Like their competitors, they decided to sell their cars through company appointed dealers (retailers) in various parts of the country. This type of distribution network will enable the company to retain control over the distribution process. Identify and give the meaning of this type of enterprise growth opportunity.
Ans. Acquisition: Acquisition is a corporate action in which a company buys most, if not all, of the target company’s ownership stakes in order to assume control of the target firm. Acquisition are often made as part of a company’s growth strategy whereby it is more beneficial to take over an existing firm’s operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company’s stock or a combination of both. An acquisition, also known as a takeover, is buying of one company (the target) by another.
4. Evaluate the pricing strategy which permits different rates to be extended to different customers for the same goods or services.
Ans. Variable price method: Variable pricing is a marketing approach that permits different rates to be extended to different customers for the same goods or services. The approach is often employed in cultures where dickering over the price of goods is considered the norm, or potential buyers are allowed to participate in a bidding situation, such as in an auction. Even in countries where fixed pricing is the standard, variable pricing may come into play when the customer is committing to the purchase of large volumes of goods or services. When this is the case, the customer must usually comply with specific criteria in order to enjoy pricing that varies from the standard cost.
5. What is product franchise business opportunity? How is it different from manufacturing franchise opportunity?
Ans. In product franchise business opportunity manufacturers use the product franchise to govern how a retailer distributes his products. The manufacturer grants a store owner the authority to distribute goods by the manufacturer and allows the owner to use the name and trade mark owned by the manufacturer. The store owner must pay a fee or purchase a minimum inventory of stock in return for these rights. Some tire stores are good examples of this type of franchise. Whereas manufacturing franchise opportunity provides an organization with the right to manufacture a product and sell it to the public, using the franchisor’s name and trademark. This type of franchise is found most often in the food and beverage industry. Most bottles of soft drinks receive a franchise from a company and must use its ingredients to produce, bottle and distribute the soft drinks.
6. Enlist any four objectives of advertising.
Ans. The objectives of advertising is to increase profit by increasing sales. Advertising aims to:
(i) Make business and product name familiar to the public.
(ii) Create goodwill and build a favourable image.
(iii) Educate and inform the public
(iv) Offer specific products or services.
(v) Attract customers to find out more about your product or service.
SECTION – B
7.
(i) Identify the type of business whose operating cycle is represented above?
Ans. The type of business whose operating cycle is represented is manufacturing business.
(ii) Analyse the working capital requirement for the type of business identified in (i)
Ans. Different products will have different operating cycles. If the conversion takes longer then the cycle will be longer. For trading, where there is no manufacturing (or conversion), the operating cycle will be shorter. Longer the operating cycle, working capital quantum is morel shorter the cycle, less working capital is needed. Therefore, the working capital required in manufacturing business is more.
8. From the following information, calculate ‘Return on Equity’.
Capital ₹6,00,000
10% Loan ₹2,00,000
Net profit before interest ₹1,40,000, Also, state what is this return on rupees per lakh of equity.
Ans. Return on Equity = Net income/Equity x 100
Given Capital = ₹6,00,000
Loan @10% = ₹2,00,000
Net profit before interest = ₹1,40,000
Interest = ₹20,000
So, ROE = (1,20,000/4,00,000) x 100
= 30%
i.e., for every rupee of own money invested the owner earned 30 paisa or ₹0.30
Rupees per lakh of equity = ₹0.30 x 1,00,000
= ₹30,000
9. What is the purpose of logo?
Ans. The purpose of Logo can be understood from the following points:
(i) Logos are critical aspect of business marketing. As the company’s major graphical representation, a logo anchors company’s brand.
(ii) Corporate Logo are intended to be the “Identity” of an enterprise because of displaying graphically enterprise’s uniqueness.
(iii) Through a set of colour combination, fonts, images, impression and/or pattern, logos provide essential information about a company that allows customers to relate with the enterprise’s core brand.
(iv) Enterprises normally resort to logos’ as a short path for advertising and other marketing materials.
(v) Logos act as the key visual component of an enterprise’s overall brand identify.
10. What do you think are the reasons for mergers and acquisitions? Explain any three.
Ans. Reasons for mergers and acquisitions are discussed below:
(i) Synergy: Synergy is the most essential component of mergers. In mergers, synergy between the participating firms determines the increase in value of the combined entity. In other words, it refers to the different between the value of the combined firm and the value of the sum of the participants. Synergy accrues in the form of revenue enhancement and cost savings.
(ii) Acquiring new technology: To remain competitive, companies need to constantly upgrade their technology and business applications. To upgrade technology, a company need not always acquire technology. By buying another company with unique technology, the buying company can maintain or develop a competitive edge. A good example is a merger of a logistics company such as a land transport entity with an airline cargo company. Another example is a merger between Blackberry and Treo which can incorporate cellphone capability and e-mail connectivity in one device; palm pilots and tablet laptops can provide benefits to both the entities.
(iii) Improved profitability: Companies explore the possibilities of a merger when they anticipate that it will improve their profitability. The results of the International Business Owners Survey, 2004, carried out by Grant Thompson, conducted across 26 countries in Europe, Africa, Asia-Pacific, and the US, showed that 34% of business use M&A to maintain or improve profitability. For example, European Media Group Bertelsmann, Pearson, and others have driven their growth by expanding into the US though M&As.
(iv) Acquiring a competency: Companies also opt for M&A to acquire a competency or capability that they do not have and which the other firm does. For example, the ICICI, ITC alliance made the retailer network and depositor base available to the merging entity. Similarly, IBM merged with Daksh for acquiring competencies that the latter possessed.
(v) Entry into new markets: Mergers are often looked upon as a tool for hassle-free entry into new markets. Under normal conditions, a company can enter a new market, but may have to face stiff competition from the existing companies and may have to battle out for a share in the existing market. However, if the merger route is adopted, one can enter the market with greater case and avoid too much competition. For example, the mergers of Orange, Hutch and Vodafone took place to achieve this objective.
(vi) Access to funds: Often a company finds it difficult to access funds from the capital market. This weakness deprives the company of funds to pursue its growth objectives effectively. In such cases, a company may decide to merge with another company that is viewed as fund-rich. For example, RDPL (Tamil Nadu Dhadha Pharmaceuticals) merged with Sun Pharma since TDPL did not have funds to launch new products.
(vii) Tax benefits: Mergers are also adopted to reduce tax liabilities. By merging with a loss-making entity, a company with a high tax liability can set off the accumulated losses of the target against its profits gaining tax benefits. For example, Ashok Leyland Information Technology (ALIT) was acquired by Hinduja Finance, a group company, so that it could set off the accumulated losses in ALITs books against its profits.
11. Identify and explain the type of marketing strategies used in the given situations:
(i) “Pizza” are the manufacturer of vegetarian frozen dessert food products made with coconut milk, agave syrup and other certified ingredients. The founders of the company originally developed this treat to meet their own needs but found that their friends and families around were also keen to use the products. The company started using all marketing activities to grow and expand. The company began sponsoring booths at festivals, drawing attention to its newly created vegetarian products. It also disseminated relevant information to media about its products and the people who helped in building the company’s reputation.
Ans. Public relations is the marketing strategy used in the given situation. Public relations are the deliberate, planned and sustained effort to establish and maintain mutual understanding between an organisation (or individual) and its (or their) public. Public relations are about building good relations with the stakeholders (public) of the business by obtaining favourable publicity, building a good corporate image and handling or heading off unfavourable rumours, stories and events. By building good relationships with the stakeholders, particularly customers, we can generate positive word or mouth and referrals from satisfied customers.
(ii) Bhoomi Hotel in Rajasthan was facing a problem of low demand for its rooms due to off season. The Managing Director (MD) of the hotel was very worried. The MD called upon the marketing Manager for his advice. He suggested that the hotel should announce an offer of ‘4 days and 3 nights’ hotel stay package’ with free breakfast and one-day tour to the attractions of famous places in Rajasthan. The MD liked the suggestion very much.
Ans. Advertising is the marketing strategy used in the given situation. Advertising is a paid form of communication designed to persuade potential customers to choose the product or service over that of a competitor. Successful advertising involves making the products or services positively known by that section of the public most likely to purchase them. It should be a planned, consistent activity that keeps the name of the business and the benefits of products or services uppermost in the mind of the consumer.
(iii) Rohan was a pen manufacturer. He used to make ball point pens in a small factory in the basement of his house. Daily he would go to the market place and distribute pens to the retailers. Some of the pens were sold by him of his own by meeting persons on road. He had not kept any name for his pens. They were just like blue, black and red pens. One of his friends suggested him to keep a good name of his pens. He started selling pens with the name of Rolto Pens. Gradually his business started to pick up even more and he earned good revenue.
Ans. Personal selling is the marketing strategy used in the given situation. It means selling products personally. It involves oral presentation of message in the form of conversation with one or more prospective customers for the purpose of making sales. Companies appoint salesperson to contact prospective buyers and create awareness about the company’s product.
SECTION – C
12. “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.
An entrepreneur can raise the required capital in the primary market by the following methods:
(i) Public issue/going public: Public issue is the most popular method of raising capital these days by the entrepreneurs. This involves raising of funds directly from the public through the issue of prospectus. An enterprise organizing itself as a public limited company can raise the required funds commonly by preparing a prospectus. When an entrepreneur offers shares to the public for subscription he/she is required to comply with all the restrictions and formalities pertaining to the initial issues, prospectus drafting and launch.
(ii) Rights issue: Rights 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. Normally, through a circular, rights issues are proposed to the existing shareholders and in case they are not willing to subscribe, they can renounce the same in favour of another person. This method of issuing securities is considered to be inexpensive as it does not require any brokers, agents, underwriters, prospectus or enlistment, etc.
(iii) Private placement: Private placement means the direct sale by a company of its securities to a limited number of sophisticated investors. Entrepreneurs, herein, raise funds by selling the issues mainly to the institutional investors like Unit Trust of India, Life Insurance Corporation of India, General Insurance Corporation of India, Army Group Insurance, State Level Financial Corporations, etc. Entrepreneurs both from public limited and private limited and private limited sector, bank heavily upon raising funds through the issue of varied financial instruments under this segment as at times they do not wish to disclose information to the open market.
(iv) Offer to employees: Stock options or offering shares to the employees has gained much popularity in many countries of the world. This method enables employees to become shareholders and share the profits of the company leading to higher efficiency, low labour turnover, better industrial locations, low floatation cost, wider/higher generation of funds.
13. Bhushan and Vinay were pursuing Electrical Engineering from a prestigious engineering college. During their third year they developed a solar LED bulb which can be used indoors. The bulb had a small panel which had to be charged at a stretch for 10 hours in the sun and it would last for 200 hours of usage. The idea was risky as there was a possibility that the market night not accept such a product, but if they do so, then there would be revolution in the power industry as it would lead to saving of power in every household. The prototype was made but to manufacture and distribute the same, they required around ₹5 crores. Both Bhushan and Vinay approached some affluent individuals who were ready to invest in their business in exchange for a convertible debt. Identify and explain the type of investors and state the features of the same.
Ans. Angel investors: 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. The job of an angel investor is invaluable. They fill the gap in start-up or early stage financing between “friends and family”, by providing seed funding and formal venture capital.
Features:
(i) They are current or retired executives, business owners or high net worth individuals who have the knowledge, experience and funds.
(ii) They bear extremely high risk and expect a very high return.
(iii) They provide proactive advice, guide about industry connections and mentor start-ups in its early days.
(iv) Their objective is to create great companies by providing value creation.
(v) They have a sharp inclination to keep themselves abreast with current developments in a particular business arena.
14. Read the following article from a Business Newspaper and answer the questions:
“The largest Hamburger Hamber” in India merged with well-known Cold drink manufacturer “Soda Pop and renamed the brand “Ham-Pop” to impart a different identity. This will allow the companies to group together their products and get access to a bigger set of consumers.”
(i) Quoting the lines from the passage identify and explain the types of merger.
Ans. Product extension mergers: A product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.
Lines: “This will allow the companies to group together their products and get access to a bigger set of consumers.”
(ii) Also explain why the growth of business is important through mergers and acquisitions.
Ans. Mergers and Acquisitions (M&A) is a potential strategy for ensuring the accelerated growth of a business. There are various reasons that firms may choose to grow through M&A instead of expanding internally. The growth process is accelerated by acquiring a target in a line of business in which the bidding company wants to enlarge when compared with internal expansion, because the company already exists in place, with its own production capacity, distribution network and clientele. This saves a lot of time and investment for the growing company. Above all, growing through M&A may usually turn out to be less expensive compared with internal expansion, particularly when the replacement cost of assets is higher than the market value of target assets.
15. What is cost plus pricing method and enlist its advantages and disadvantages?
Ans. Cost-plus pricing: The most common technique is cost-plus pricing, where the manufacturer charges a price to cover the cost of producing a product plus a reasonable profit. The cost-plus method is simple, but it does not encourage the efficient use of resources. Cost-plus pricing is typically based on a manufacturing estimate. Estimates of the costs associated with manufacturing tasks are made for many reasons. For example, to justify planned capital expenditure, to determine likely production costs for new or modified products and to focus attention on areas of high cost.
Advantages of cost-plus pricing:
(i) Biggest advantage of this is that company knows exactly the amount of expenditure that has incurred on making a product and therefore they can add profit margin accordingly which helps in achieving the desired revenue for a firm. So, for example if a company has incurred expenses of ₹1,000 and they want to earn profit margin of 10% than the company will sell the product at ₹1,100
(ii) It is the simplest method to decide the price for a product because one has just to add up all the cost and then add profit which you want to earn which will give the price for a product.
(iii) Since the company is using its own data for deciding cost which makes it easier for a company to evaluate the reasons for escalations in expenses, can take corrective action immediately.
Disadvantages of cost-plus pricing:
(i) This method does not take into account the future demand for a product which should be the base before deciding on the price of a product and therefore a serious limitation of this method.
(ii) It also does not take into account the competitors’ actions and their effect on pricing of the product, because in today’s competitive world if one solely depends on cost plus pricing it can lead to failure of company’s product in the market.
(iii) It can result in the company overestimating the price of a product because this method includes sunk cost and ignores opportunity cost also while calculating cost there is an element of personal bias while deciding the profit margin which is to be added to a product.