Q7 (a) Describe the important role small business play in our nation s economy. Ans.

Small businesses contribute greatly to the economy all around the world. Almost all business s are small businesses, or even started out as small businesses. They contribute to the society by selling their products to customers, products that people need. They also provide employment opportunities to people, which can become reasonable career paths and choices. There are many type of small business, these include: y Sole Trader y Partnership y Company y Manufacturing y Retail y Service (b) Describe the 10 deadly mistakes of business entrepreneurship. Ans. The Ten Deadly Mistakes of Entrepreneurship 1. Management mistakes 2. Lack of experience 3. Poor financial control 4. Weak marketing efforts 5. Failure to develop a strategic plan 6. Uncontrolled growth 7. Poor location 8. Improper inventory control 9. Incorrect pricing 10. Inability to make the entrepreneurial transition (c) Discuss the element of a solid business plan. Ans. Business Description Mission Statement As you begin your business venture, the first step is to clarify what is most important to you. To write a mission statement, first consider the things you care about or want to do. A mission statement communicates the purpose and principles of what you re doing and why you re doing it. A good mission statement should accurately explain why your venture exists and what it hopes to achieve in the world. Write a brief paragraph that is free of jargon. At the very least, your mission statement should answer three key questions:

1. What are the opportunities or needs that you exist to address? (the purpose of the venture) 2. What are you doing to address these needs? (the business of the venture) 3. What principles or beliefs guide your work? (the values of the venture) Business Overview Also included in the Business Description portion of a business plan is a summary of the current state of the venture. Products and Services Readers of your plan will need a description of what your product or service is to provide context for what you will later say about it and your market. Market Analysis This section is the place for you to discuss the market and your approach to it. In it you describe the market s characteristics, your target customer s profile, the competition, and how you plan to gain an advantage over them to create a successful venture. Market Characteristics Your business will be a part of an industry. Describe the industry so readers can understand the market place. Include information on its size, location, history, competitiveness, and profitability as well as its general health. Target Customer Profile In writing your market analysis, you will narrow the range of potential customers to those specific ones who are willing and able to buy your product. Competitor Assessment First, define who your competitors are, and then profile them. You should assess competitors with a critical eye on their strengths and weaknesses compared to your own. Marketing Plan Marketing plans usually address four areas: product offered, price charged, distribution system, and promotional efforts. Pricing Pricing strategies are based on the perceived value of your products and services, your cost of doing business, your marketing goals, and expected competitive actions. Distribution Distribution decisions concentrate on the methods and channels of delivery that will optimize your sales and profits.

Promotion Promotional activities are designed to communicate the value of your products and services to your customers. Operating Plan The operating portion of the plan deals specifically with the internal organizational structure, operations, and equipment you will need to operate your venture. Ownership and Management Managers of a venture are responsible for turning an idea into a successful business. Financial Plan The financial plan is a necessary part of evaluating a new investment opportunity. With it you develop an estimate of your profit potential. Q1 (a) How do entrepreneur describe the financial elements of their new venture. Ans. The venture should have a clear revenue model and a workable path to profitability. Furthermore, there should be a plan of how the wealth created will be harvested by the owners. A comprehensive financial plan will be designed to demonstrate the potential for growth and profitability that is based on accurate and reliable assumptions. With the financial plan in hand, sources of investment capital will be explored and tested. Then the terms and valuation of the deal with the investors will commence. The presentation of the total business plan will require a compelling story about the venture. Furthermore, skillful negotiations with all owners and partners will be required. When funded and launched, the venture team must continuously and ethically implement the business plan and adapt to changing conditions. Entrepreneurs build a financial plan to determine the economic potential for their venture. This plan provides an estimate of the potential of the venture. Of course, any estimate is based on a set of assumptions regarding sales revenue and costs. Using the best available information and their intuition, entrepreneurs calculate the potential profitability of the venture. Furthermore, they require over a two or three year period. Also, an income statement and a balance sheet are required to demonstrate profitability and liquidity. Using the estimates of sales, the venture team can determine the number of units it needs to sell to break even. Furthermore, it can calculate several measures of profitability that demonstrate the return provided by its venture for investors. The best venture grow sales consistently and provide positive cash flow and profit early in their life.

(b) The difference between a copyright and a Patent. Ans. Copyright is a form of protection provided to the authors of "original works of authorship" including literary, dramatic, musical, artistic, and certain other intellectual works, both published and unpublished. A patent for an invention is the grant of a property right to the inventor, issued by the Patent and Trademark Office (c) How can an entrepreneur identify and select a valuable opportunity? Q3 With reference to construction estimating techniques explain three of the following. 1. Purpose of Estimating: To give a reasonably accurate idea of the cost. An estimate is necessary to give the owner a reasonably accurate idea of the cost to help him decide whether the work can be undertaken as proposed or needs to be curtailed or abandoned, depending upon the availability of funds and prospective direct and indirect benefits. For government works proper sanction has to be obtained for allocating the required amount. Works are often let out on a lump sum basis, in which case the Estimator must be in a position to know exactly how much expenditure he is going to incur on them. 1. Estimating Materials From the estimate of a work it is possible to determine what materials and in what quantities will be required for the work so that the arrangements to procure them can be made. 2. Estimating Labor The number and kind of workers of different categories who will have to be employed to complete the work in the specified time can be found out from the estimate. 3. Estimating Plant An estimate will help in determining amount and kind of equipment needed to complete the work. 4. Estimating Time The estimate of a work and the past experience enable one to estimate quite closely the length of time required to complete an item of work or the work as a whole. Whereas the importance of knowing the probable cost needs no emphasis, estimating materials, labor, plant and time is immensely useful in planning and execution of any work. 2. Types of Construction Estimates: There are several kinds of estimating techniques; these can be grouped into two main categories 1. Approximate estimates 2. Detailed estimates

1. Approximate Estimates An approximate estimate is an approximate or rough estimate prepared to obtain an approximate cost in a short time. For certain purposes the use of such methods is justified. 2. Detailed Estimate A detailed estimate of the cost of a project is prepared by determining the quantities and costs of every thing that a contractor is required to provide and do for the satisfactory completion of the work. It is the best and most reliable form of estimate. A detailed estimate may be prepared in the following two ways (a). Unit quantity method (b). Total quantity method. (a) Unit Quantity Method In the unit quantity method, the work is divided into as many operations or items as are required. A unit of measurement is decided. The total quantity of work under each item is taken out in the proper unit of measurement. The total cost per unit quantity of each item is analyzed and worked out. Then the total cost for the item is found by multiplying the cost per unit quantity by the number of units. For example, while estimating the cost of a building work, the quantity of brickwork in the building would be measured in cubic meters. The total cost (which includes cost of materials. labor, plant, overheads and profit) per cubic meter of brickwork would be found and then this unit cost multiplied by the number of cubic meters of brickwork in the building would give the estimated cost of brickwork. This method has the advantage that the unit costs on various jobs can be readily compared and that the total estimate can easily be corrected for variations in quantities. (b) Total Quantity Method In the total quantity method, an item of work is divided into the following five subdivisions: (I) Materials (II) Labor (III) Plant (IV) Overheads (V) Profit. 3. Qualifications of an Estimator A good estimator should possess the following quantifications: 1. A thorough understanding of architectural drawings. 2. A sound knowledge of building materials, construction methods and customs prevailing in the trade. 3. A fund of information collected or gained through experience in construction work, relating to materials required, hourly output of workers and plant, overhead expenses and costs of all kinds. 4. An understanding of a good method of preparing an estimate.

5. A systematic and orderly mind. 6. Ability to do careful and accurate calculations. 7. Ability to collect, classify and evaluate data that would be useful in estimating. Good instruction or careful and thorough study of a standard book will help a beginner to become a good estimator. He must, however, try to develop all the above mentioned qualities while obtaining practical experience. Q2 (b) The five forces The threat of the entry of new competitors Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition).
y

y y y y y y y y

The existence of barriers to entry (patents, rights, etc.) The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily. Economies of product differences Brand equity Switching costs or sunk costs Capital requirements Access to distribution Customer loyalty to established brands Absolute cost Industry profitability; the more profitable the industry the more attractive it will be to new competitors.

The threat of substitute products or services The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives:
y y y y y y y y

Buyer propensity to substitute Relative price performance of substitute Buyer switching costs Perceived level of product differentiation Number of substitute products available in the market Ease of substitution. Information-based products are more prone to substitution, as online product can easily replace material product. Substandard product Quality depreciation

The bargaining power of customers (buyers) The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes.
y y y y y y y y y y y

Buyer concentration to firm concentration ratio Degree of dependency upon existing channels of distribution Bargaining leverage, particularly in industries with high fixed costs Buyer volume Buyer switching costs relative to firm switching costs Buyer information availability Ability to backward integrate Availability of existing substitute products Buyer price sensitivity Differential advantage (uniqueness) of industry products RFM Analysis

The bargaining power of suppliers The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm, when there are few substitutes. Suppliers may refuse to work with the firm, or, e.g., charge excessively high prices for unique resources.
y y y y y y y y

Supplier switching costs relative to firm switching costs Degree of differentiation of inputs Impact of inputs on cost or differentiation Presence of substitute inputs Strength of distribution channel Supplier concentration to firm concentration ratio Employee solidarity (e.g. labor unions) Supplier competition - ability to forward vertically integrate and cut out the BUYER

Ex. If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from him. The intensity of competitive rivalry For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.
y y

Sustainable competitive advantage through innovation Competition between online and offline companies

y y y

Level of advertising expense Powerful competitive strategy The visibility of proprietary items on the Web[2] used by a company which can intensify competitive pressures on their rivals.

How will competition react to a certain behavior by another firm? Competitive rivalry is likely to be based on dimensions such as price, quality, and innovation. Technological advances protect companies from competition. This applies to products and services. Companies that are successful with introducing new technology, are able to charge higher prices and achieve higher profits, until competitors imitate them. Examples of recent technology advantage in have been mp3 players and mobile telephones. Vertical integration is a strategy to reduce a business' own cost and thereby intensify pressure on its rival... Usage Strategy consultants occasionally use Porter's five forces framework when making a qualitative evaluation of a firm's strategic position. However, for most consultants, the framework is only a starting point or "checklist" they might use " Value Chain " afterward. Like all general frameworks, an analysis that uses it to the exclusion of specifics about a particular situation is considered na ve. According to Porter, the five forces model should be used at the line-of-business industry level; it is not designed to be used at the industry group or industry sector level. An industry is defined at a lower, more basic level: a market in which similar or closely related products and/or services are sold to buyers. A firm that competes in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the first fundamental issue in corporate strategy is the selection of industries (lines of business) in which the company should compete; and each line of business should develop its own, industry-specific, five forces analysis. The average Global 1,000 company competes in approximately 52 industries (lines of business). Criticisms Porter's framework has been challenged by other academics and strategists such as Stewart Neill. Similarly, the likes of Kevin P. Coyne and Somu Subramaniam have stated that three dubious assumptions underlie the five forces:
y y y

That buyers, competitors, and suppliers are unrelated and do not interact and collude. That the source of value is structural advantage (creating barriers to entry). That uncertainty is low, allowing participants in a market to plan for and respond to competitive behavior.

Q6. (a) State the formula for series discounting

Ans.

PV = PV1 + PV2 + PV3 + Where (b) = +


n

.. + PVn

= 8,739.70 (c) n=5 I= ? PV = 4000 FV = 5000  (1+i)5 = (1+i) = 1.25 1+i = 1.251/5 I = 1.046 1 I = 0.046 I = 46% (d) I = 0.2 FV = 2PV PV = PV =

(1.2)n = 2 nlog 1.2 = log2 n=

n = 3.8years.
Q5. With reference to basic ideas, scope and tools of finances (investment appraisal) Explain the following. (a) Financial markets and participants. Ans. (a) Broad term describing any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade. Some financial markets only allow participants that meet certain criteria, which can be based on factors like the amount of money held, the investor s geographical location, knowledge of the markets or the profession of the participant. Financial markets can be found in nearly every nation in the world. Some are very small, with only a few participants, while others like the New York Stock Exchange (NYSE) and the forex markets trade trillions of dollars daily. Most financial markets have periods of heavy trading and demand for securities; in these periods, prices may rise above historical norms. The converse is also true downturns may cause prices to fall past levels of intrinsic value, based on low levels of demand or other macroeconomic forces like tax rates, national production or employment levels. Information transparency is important to increase the confidence of participants and therefore foster an efficient financial marketplace.

(b)Market interest rates and prices. Ans. Once a bond is issued the issuing corporation must pay to the bondholders the bond s stated interest for the life of the bond. While the bond s stated interest rate will not change, the market interest rate will be constantly changing due to global events, perceptions about inflation, and many other factors which occur both inside and outside of the corporation. The following terms are often used to mean market interest rate:
y y y y

effective interest rate yield to maturity discount rate desired rate

When Market Interest Rates Increase Market interest rates are likely to increase when bond investors believe that inflation will occur. As a result, bond investors will demand to earn higher interest rates. The investors fear that when their bond investment matures, they will be repaid with dollars of significantly less purchasing power. Let s examine the effects of higher market interest rates on an existing bond by first assuming that a corporation issued a 9% $100,000 bond when the market interest rate was also 9%. Since the bond's stated interest rate of 9% was the same as the market interest rate of 9%, the bond should have sold for $100,000. Next, let s assume that after the bond had been sold to investors, the market interest rate increased to 10%. The issuing corporation is required to pay only $4,500 of interest every six months as promised in its bond agreement ($100,000 x 9% x 6/12) and the bondholder is required to accept $4,500 every six months. However, the market will demand that new bonds of $100,000 pay $5,000 every six months (market interest rate of 10% x $100,000 x 6/12 of a year). The existing bond s semiannual interest of $4,500 is $500 less than the interest required from a new bond. Obviously the existing bond paying 9% interest in a market that requires 10% will see its value decline. For example, An existing bond s market value will decrease when the market interest rates increase. The reason is that an existing bond s fixed interest payments are smaller than the interest payments now demanded by the market.

(c) Cost of Captial. The opportunity cost of an investment; that is, the rate of return that a company would otherwise be able to earn at the same risk level as the investment that has been selected. For example, when an investor purchases stock in a company, he/she expects to see a return on that investment. Since the individual expects to get back more than his/her initial investment, the cost of capital is equal to this return that the investor receives, or the money that the company misses out on by selling its stock. The required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost of equity. The cost of capital determines how a company can raise money (through a stock issue, borrowing, or a mix of the two). This is the rate of return that a firm would receive if it invested in a different vehicle with similar risk. When companies require money for investments, expansion or any activity they raise money through many options like shares, debentures, preferential shares, bank loans etc. Cost of employing any of these modes to raise capital is called Cost of capital. For eg: If Reliance wants to raise money for a new power plant. It will look for feasible options like IPO, Preferential shares debentures or bank loan. Each of these modes have some risk and cost involved. For shares you lose your share in the company, for preferential shares you have to pay some fixed dividend, and for debentures also we have to pay some amount of interest to the debenture holders.