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Friday, May 12, 2017

IGNOU SOLVED QUESTION PAPERS - ECO 01 (JUNE' 2014)

Term-End Examination: June, 2014
Note: Attempt both section - A and section - B.
SECTION-A
1. Attempt any four of the following: 5+5+5+5
(a) Distinguish between private limited company and public limited company.
Ans: Refer above
(b) Write a short note on bank overdraft.
Ans: When a business' bank account has a negative balance it is said to be running a bank. It is a form of financing in which the bank honors presented cheques even when there is no balance in the business account which results in negative balance in the bank account.
There is a special type of bank overdraft called 'book bank overdraft' which represent situation in which the balance as per cash book is negative while the balance as per bank book is positive. It arises when the cheques written exceed the bank balance available thereby resulting in negative bank balance in books but since those cheques are not yet presented so the bank balance is not negative and there is no 'actual bank overdraft'.

(c) How is Industrial Finance Corporation of India helpful in the industrial development?
Ans: Role of IFCI in Industrial development: Role of IFCI in industrial development is classified into two parts:
(a) Financial assistance, and
(b) Promotional activities
(a) Financial Assistance: IFCI renders financial assistance to industries in one or more of the following forms:

1. Guaranteeing loans raised by industrial concerns which are repayable within a period of 25 years.
2. Underwriting the issue of stock, shares, bonds or debentures by industrial concerns but must dispose of such securities within 7 years.
3. Granting loans or advances to or subscribing to debentures of industrial concerns, repayable within 25 years.
4. Guaranteeing loans raised by industrial concerns from scheduled banks or state co-operative banks.
(b) Promotional Activities: The IFCI has been playing a very important role as a financial institution in providing financial assistance to eligible industrial concerns. It is playing a promotional role too. It has been creating industrial opportunities. It discovers the opportunities for promoting new enterprises.
(d) Explain the concept of speculation at stock exchanges.
Ans: Speculation : Speculation involves entering into futures contracts (contracts where is effected on a future date, at price decided not at the time of entering into the contract), whereby one party agrees to buy (sell) and the other party agrees to sell (buy), a specified quantity of a specified asset (share, commodity, etc) at the today agreed upon price.
The person who sells now expects the price of the underlying asset to come down by the time the futures contract is due for settlement. He is called the ‘bear’ speculator. If his calculations go right, the other party’s calculations go wrong. The other party is asked to give the difference in prices and wind-up the contract. There is no physical delivery, but only settlement of price difference.
(e) State with reasons of your choice of media of advertising for a low priced detergent in the rural areas.
Ans: Television is the best mode for advertising of a low priced dteregent in rural areas because it is the only mode of advertising which has highest reach in rural areas. It is also cost effective as compared to other media due to which the cost of goods are not adversely affected and will be available at a lower price in rural areas.
(f) Describe briefly the importance of transport in trade.
Ans: Importance of transport:
  1. It facilitates trade by assembling and distributing goods. Goods are produced at one place and consumed at another place.
  2. Transport brings the goods from the place of production to all the far and distant places of consumption.
  3. It helps the consumers in getting a wide variety of goods at reasonable prices.
  4. Transport widens the market and helps to equalize prices at different places. It results in the equitable distribution of goods among far flung areas.
  5. Transport helps to increase the size and scale of business.
  6. Well-developed facilities of transport help industrial units to locate at the most economical places and grow to their optimum size.
(g) Enumerate the major reasons for the government participation in business.
Ans: Refer above
(h) Distinguish between current bank account and savings bank accounts.
Ans: The difference between saving and current account is discussed as follows:
1. Meaning: Saving account is opened by individuals for the purpose of saving a part of their income.
Current account is maintained by businessman and others who have to do regular bank transactions.
2. Purpose: The main purpose of opening a saving account is to save a part of the income.
The main purpose of opening a current account is to facilitate regular transactions.

3. Operated by: Saving account is operated by salary earners, small traders and others.
Current account is operated by businessmen and other organisations.

4. Interest Rate: The saving account earns a nominal rate of interest. At present, it is about 5% p.a. (in India).
Normally, banks do not pay interest on current account.

5. Minimum Amount: The saving account can be operated with lesser amount.
To open current account more amount is required.

SECTION –B
Note: Attempt any three of the following:
2. What do you mean by partnership? Enumerate the main features of partnership form of business organisation. 2+8
Ans: Partnership Meaning: Partnership is a form of business organisation, where two or more persons join hand and start and run a business. They share the profits and losses according to the agreement amongst them. According to the Indian Partnership, Act 1932, “Partnership is relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all”.
Following are the characteristics of partnership:
  1. Agreement: A partnership is formed by an agreement. The agreement may be either oral or in writing. It defines the relationship between the persons, who agree to carry on business. It may contain the terms of sharing profit and the capital to be invested by each partner, etc. The written agreement is known as partnership deed.
  2. Number of persons: There must be at least two persons to form a partnership. The maximum number of partners in a partnership firm can be ten in case of banking business and twenty in case of non-banking business.
  3. Business: The Partnership is formed to carry on business with a purpose of earning profits. The business should be lawful, thus, if two or more persons agree to carry on unlawful activities, it will not be termed as partnership.
  4. Sharing Profits: The partners agree to share profits in the agreed ratio. In case of loss, all the partners have to bear it in the same agreed profit sharing ratio.
  5. Mutual Agency: Every partner is an agent of the other partners. Every partner can bind the firm and all other partners by his/her acts. Each partner will be responsible and liable for the acts of all other partners.
  6. Unlimited liability: The liability of each partner, except that of a minor, is unlimited. Their liability extends to their personal assets also. If the assets of the firm are insufficient to pay off its debts, the partners’ personal property can be used to satisfy the claim of the creditors of the partnership firm.
  7. Management: All the partners have a right to manage the business. However, they may authorize one or more partners to manage the affairs of the business on their behalf.
  8. Transferability of share: No partner can transfer his/her share to anyone including his/her family member without the consent of all other partners.
3. Define capital structure. Describe the factors that determine the capital structure of a company. 2+8
Ans: Refer Above
4. Discuss the primary and secondary functions of a stock exchange. 10
Ans: Functions of stock exchange in capital market
Presence and vibrant functioning of a stock exchange is necessary for a developing economy. It reflects healthy financial and investment conducive atmosphere in the economy. The Indian securities market is considered as one of the most promising emerging markets. It is one of the top eight markets of the world. The stock exchange plays a vital role in the process of raising resources for the development of corporate sector. In the absence of the stock exchange it would be impossible for private enterprises, industries and entrepreneurs to survive and grow. A stock exchange plays a significant role in a capital market which are mentioned below:
Primary Functions:
  1. Encourages capital formation: A common investor is attracted to capital market. Today investor prefers to divert his surplus and savings in the securities like shares, debentures, mutual funds etc. As a result new capital formation is speeded up.
  2. Resource Mobilsation: Due to continuous buying and selling of the securities the resources of the economy flow from one company to other company giving comparatively higher returns. This helps mobilisation of resources.
  3. Flexibility in investments: The stock exchanges provide liquidity to the investment made in the securities. As there are multiple options, investors can flexibly go on switching their investment where it is more beneficial?
  4. Value addition to the securities: Listing of shares on a stock exchange adds to the prestige and reputation to companies. With the advantage of listed shares it can raise loans from corporate sector.
  5. Protects investor’s interest: All the transactions in the stock exchanges are effected and controlled by the Securities Control (Regulation) Act 1956. The stock exchanges protect the interests of the investors through the strict enforcement of their rules and regulations. The malpractices of the brokers are punishable with heavy fine, suspension of their membership and even imprisonment.
Secondary Functions
  1. Motivation to Management: A stock exchange allows the trading of listed securities only. Listing procedure requires to comply with certain guidelines for protecting the interests of investors and obviously are under strict supervision of stock exchange. If companies do not comply with the rules and regulations of the exchange, the shares of a company can be delisted. To avoid such unfavorable and undesirable consequences every company manages its affairs more cautiously and effectively.
  2. Best utilization of capital: The stock exchange regulates and controls the flow of investment from unproductive to productive, uneconomic to economic, unprofitable to profitable enterprises. Thus, savings of the people are channelized into industry yielding good returns and underutilization of, capital is avoided. As the stock exchange provides an account of price variations of the securities listed on it (upward or downward fluctuations) it would be an opportunity for the investors to switch their investments. This would, keep companies performing in the best possible way. 
  3. Help in repaid economic development: The stock exchanges help in the process of rapid economic development by speeding up the process of capital formation and resource mobilization. It helps in raising the medium and long term capital for the development and expansion of the companies. New industries and commercial enterprises easily get capital funds through a stock exchange.    
5. How does advertisement help the business? Also state its adverse effects. 5+5
Advertising: It is the most commonly used tool of promotion. It is an impersonal form of communication, which is paid by the marketers (sponsors) to promote goods or services. Common mediums are newspaper, magazine, television & radio.
Advertisements play a very important role in offering innumerable benefits to the manufacturers, customers and to the society in general. Following are the benefits of Advertisements:
  1. Advertisements attracts new buyers and maintains existing customers and to the society in general.
  2. Advertisements inform the consumers about the quality and uses of the product.
  3. Advertising also acts as an information service and educates the consumer. It enables him to know exactly what he wants and where to get it. 
  4. Advertising stimulates production and reduces the cost per unit. This reduction in the cost is generally passed on to the consumer.
  5. Advertising also makes it possible to sell direct to the consumer by Mail Order Business. 
  6. Advertising helps in creating goodwill, brand image and brand loyalty.
  7. Advertisements help the retailers in selling the advertised products.
  8. It is also helpful in getting better employees and executives.

Several objections have been raised against advertising and some people criticize advertising as a social waste. The main point of criticism is as follows:
  1. Creates Monopoly in the Market: Advertisement leads to promotion and cover mass level of customers at a time. Sometimes it will create a monopoly in the market with the help of advertisement. Large firms can bear the advertisement expenditure but not the small firms, due to that it can eliminate the small firms from the market and creates its monopoly authority in the market. But the monopoly is only for a temporary basis as there is availability of competition in the market.
  2. Higher the Prices of Product: Investment of money in advertisement leads to increase in the price of goods and services for which consumer has to face high prices and pay for it.
  3. Misleading the consumers: Now days, advertisement misleads the consumers on false representation regarding their goods. Consumer attracts to those goods which are not necessary for them. Producers misguide the consumers by giving bogus testimonials and false representation regarding particular commodity.
  4. Wasteful Consumption by the Consumers: Advertisement attracts the consumers for wasteful products which are not necessary for consumers. Due to advertisement businessmen takes undue advantage from them.
  5. Wastage of National Resources: There will be wastage of national resources, valuable stationary, time and energy used by the people or is ignored by them.
6. Outline the relationship between a banker and its customer. What are the obligations of a bank towards them? 5+5
Ans: The relationship between banker and Customer are categorized into three:
  1. Relationship as debtor and creditor.
  2. Banker as a trustee.
  3. Banker as an agent.
Relationship as Debtor and Creditor: On the opening of an account the banker assumes the position of a debtor. A depositor remains a creditor of his banker so long as his account carries a credit balance. Relationship with the customer is reserved as soon as the customer account is overdrawn. Banker becomes creditor of the customer who has taken a loan from the banker and continues in that capacity fills the loan is repaid.
Banker as a Trustee: Ordinally a banker is a debtor of his customer in report of the deposit made by the letter but in certain circumstances he act as trustee also. A trustee hold holds money or asset and performs certain functions for the benefit of some other person called the beneficiary. For exam; if the customer deposits securities or other valuable with the banker for the safe custody, the letter acts as a trustee of his customer.
Banker as an Agent: A banker acts as an agent of his customer and performs a number of agency functions for the conveniences of his customer. For example: he buys or sells securities on behalf of his customer, collects cheques on his behalf and makes payment of various dues of his customer.

General obligations of banker towards customer:
  1. Obligation to honour cheques- banker accepts the deposits from the customer with an obligation to repay it to him on demand or otherwise. The banker is therefore under a statutory obligation to honour his customer’s cheques.
  2. Obligation to maintain secrecy and disclosure of information required by law- the banker is under an obligation to take utmost care in keeping secrecy about the accounts of the customers since it may affect his reputation, credit-worthiness and business. The duty to maintain secrecy will be continuing even after the account is closed or the death of the customer. This obligation is subject to certain exceptions.
  3. Obligation to keep a proper record of transactions- the banker must keep a proper record of transactions of the customer. If he wrongly credits the account of the customer and intimates him with the same and the customer acts upon the intimation bonafide and withdraws cash the banker cannot contend that the entries were wrongly made. He shall not succeed in recovery of money from the customer.
  4. Obligation to abide by the instructions of the customer- the banker must abide by any express instructions of the customer provided it is within the scope of their banker-customer relationship. In the absence of any express instructions, the banker must according to prevailing usages at the place where the banker conducts his business.

7. Describe the distinctive features of public utilities. 10
Ans: 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. Public utility concerns supply electricity, gas, water, communication and transport services or products which are absolutely indispensable for the community.
Characteristics of Public Utilities
A public utility concern possesses certain essential features which make it quite distinct from other types of business concerns. Some of the basic characteristics of public utilities are given below:
1. Supply of essential services: Public utilities are engaged in the supply of products or services which are indispensable to the community. In the absence of these services, the normal life of the community is dislocated.
2. Inelastic demand: 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.
3. Non-transferable demand: The demand for the services of public utilities is non-transferable. If a consumer is not satisfied with the services or rates charged by the concern, he cannot change over to another concern unless he shifts to another city. Due to regular demand, the earnings of a public utility concern do not fluctuate vary widely.
4. Heavy fixed investment: A large amount of capital expenditure is required for the establishment and operation of a public utility concern. For instance, an electricity undertaking has to install a generating plant, build up a network of cables and other apparatus for the distribution of electricity to the public.
5. Local area of operation: A public utility concern is usually allowed to operate within a defined and limited market area. For instance, a water supply concern provides services to a particular city or town and its operations are confined to that particular area. Therefore, there is little scope for the expansion of market.
6. Monopoly position: A public utility concern enjoys a natural monopoly due to the essential nature of its services. As competition is not desirable in the supply of essential public services, only one concern is allowed to operate in a particular area.
7. Public regulation and control: Public utility concerns are subject to strict regulation and control by the State. As these concerns enjoy a monopoly power and their services are of an essential nature, the Government regulates their policies and working in public interest.
8. Special Franchise: Since the public utilities are recognised as natural monopolies, a franchise is generally granted to protect them from competition. Under the franchise, a public utility concern is permitted to make use of public property like roads, streets, etc. The franchise may be perpetual or for a period of say 50 to 99 years.

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