Untitled Quiz

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Questions and Answers

What is the primary basis for valuing tangible assets?

Historical costs

Current market prices (correct)

Depreciated values

Projected future profits

Which of the following statements about tangible asset valuation is true?

Market price is irrelevant in determining their value.

Their value is determined solely by depreciation.

They are always assessed at their book value.

Current replacement price is used for valuing tangible assets. (correct)

Which method is NOT typically used for the valuation of tangible assets?

Income-based valuation (correct)

Cost method

Current market prices

Liquidation value

What does the term 'current cost' refer to in the context of tangible assets?

The cost of replacing the asset at today's prices. Signup and view all the answers

How should inventory be valued according to the discussed methods?

At current market prices. Signup and view all the answers

In tangible asset valuation, which factor is crucial to determining current market prices?

Current supply and demand dynamics. Signup and view all the answers

When assessing tangible assets, what plays a significant role in their market valuations?

The cost of replacement. Signup and view all the answers

Which of the following would NOT be classified as a tangible asset?

Patents Signup and view all the answers

What is the valuation approach used for non-operating assets?

Realizable value Signup and view all the answers

Which of the following accurately describes operating assets in asset-based valuation?

Valued at their book values Signup and view all the answers

Why are stock exchange quotations not considered reliable for share valuation?

They can be influenced by external factors and speculation Signup and view all the answers

What is a primary consideration that influences the approach to share valuation?

The purpose of the valuation Signup and view all the answers

In the context of share valuation, which scenario might require more liberal valuation methods?

Government compensation schemes Signup and view all the answers

Which factors are identified as fundamentally important for share valuation?

Assets employed and earning capacity Signup and view all the answers

For what purpose is share valuation commonly conducted, involving block purchases?

Formulation of schemes for company mergers Signup and view all the answers

How are comparative companies primarily used in valuation?

For negotiation rather than actual valuation Signup and view all the answers

What should the tangible fixed assets be valued at when using the Net Assets Basis for share valuation?

Current market costs Signup and view all the answers

Which of the following should be excluded when calculating net assets according to the Net Assets Basis?

Fictitious assets Signup and view all the answers

When assessing the value of receivables in the Net Assets Basis, what factor should be considered?

Quality of receivables Signup and view all the answers

Which of the following liabilities should be deducted from total assets under the Net Assets Basis?

Short-term and long-term liabilities Signup and view all the answers

In the context of the Net Assets Basis, how should stock of finished goods be valued?

At market price Signup and view all the answers

What is the key focus of the Yield Basis for share valuation?

Earnings and rate of return Signup and view all the answers

How should goodwill be valued when considering it as an intangible asset?

As the difference between business value and net assets Signup and view all the answers

What is a distinctive characteristic of goodwill compared to tangible assets?

Subject to fluctuations in value Signup and view all the answers

Study Notes

Entrepreneurship

The word entrepreneurship originates from the French word entreprendre, meaning "to undertake."
Entrepreneurship is the key to innovation, productivity, and effective competition.
When a person recognizes their ability, puts it to practical use, and creates a new business unit, this action is called entrepreneurship.

Concept of Entrepreneurship

Entrepreneurship is an innovative function, focused on leadership rather than ownership.
Innovation can manifest as introducing new products, using new production methods, creating new markets, or securing new raw material sources.
Joseph A. Schumpeter is associated with defining entrepreneurship as an innovative function.

Traditional vs. Modern Concepts

Traditional: Ability and aptitude to bear various types of business risks and uncertainties.
Modern: Ability to establish new enterprises and implement improvements within them.

Risk Bearing Capacity

Risk refers to the variability of outcomes or returns.
Entrepreneurs are "risk-takers" who don't fear business uncertainties.
Entrepreneurship involves taking risks and making investments under uncertain conditions.

Organization Building Ability

Entrepreneurship involves connecting and coordinating productive resources to organize a venture and enterprise.
It entails bringing together the factors of production and organizing them.
Entrepreneurs make decisions about resource allocation.

Managerial and Leadership Skills

Entrepreneurship involves combining creative and innovative ideas with management and leadership skills.
Skills are used to mobilize people, money, and resources to build wealth.
Entrepreneurs translate ideas into action with management and leadership skills.

Innovative Function

Innovation is the core function of entrepreneurship.
Entrepreneurs create new wealth-producing resources or enhance the potential of existing resources.
Joseph Schumpeter highlighted the innovative function of entrepreneurship.

High Level Need for Achievement

Individuals driven by a high need for achievement exhibit high levels of entrepreneurial activity.
These individuals desire success in competitive situations.

Search for Profitable Opportunities

Entrepreneurship involves actively searching for opportunities to do new things or create new ways of doing existing things for profitable business.
Potential entrepreneurs always look for unique opportunities to meet needs and wants.

Wealth Creation

Entrepreneurs are economic agents who transform demand into supply and resources into goods and services.
This process leads to wealth creation and industrial growth.

Change Agent

Entrepreneurship is a modern concept.
Entrepreneurs act as change agents, transforming resources into useful goods and services, often leading to industrial growth and adapting their circumstances.

Process of Creating New Values

This is a modern concept of entrepreneurship.
Through entrepreneurship, new products, services, transactions, market approaches, and resources create value for communities and marketplaces.
Value creation happens when resources transform into outputs like products and services.

Subject/Discipline

Entrepreneurship education is a growing field in colleges and universities.
Universities conduct research on entrepreneurship, leading to training courses.
Many entrepreneurial schools have opened due to the growing subject.

Definition of Entrepreneurship

Definitions can be classified based on: Establishment of new enterprises Function based Combination based Decision-making based Innovation based

Establishment of New Enterprises Based

Entrepreneurship is the act of inventing and risking time, money, and effort to start a business.
Entrepreneurship is a general trend of setting up new enterprises in society.
These definitions don't specify the functions and activities needed to establish and run successful businesses.

Function Based

Entrepreneurship is an innovative function, focused on leadership rather than ownership.
It encompasses identifying economic opportunities and organizing production resources and techniques.

Combination Based

Many scholars view entrepreneurship as a combination of functions, activities, and organization.
Entrepreneurship involves a composite of inventions, innovation, and adaptations.

Decision Making Based

Entrepreneurship is a form of social decision-making that is performed by economic innovations.
This type of view focuses on business's social responsibilities.
It does not focus on innovation within society itself.

Innovation Based

Entrepreneurship can be described as a creative and innovative response to the environment.
Entrepreneurship connects businesses with society and the environment.

Components/Elements of Entrepreneurship

Entrepreneur
Pursuit of Opportunities
Innovation
Organization Creation
Creating Values
Profit or Non-profit
Growth
Uniqueness
Process

Characteristics of Entrepreneurship

Innovation
Risk-Bearing Capacity
Creative Decision Making
Creating and Managing Resources
Managerial Skills and Leadership
Gap-Filling Function
Business-Oriented Tendency
Economic Activity
Producing Results
Life Style

Concept of an Entrepreneur

Person
Creator
Organizer
Decision Maker
Initiator
Leader
Motivator
Risk-Taker

Wage Employment vs. Entrepreneurship

Wage Employment: Working for others, following instructions, fixed income, does not create wealth;
Entrepreneurship: Owning one's business, creating plans, creative activity, can be negative or generate surplus, contributes to GDP, industry, trade, or service enterprise.

Who is an Entrepreneur?

An entrepreneur is an individual who starts and manages a business venture and bears responsibility for its development.
An individual who faces risk and uncertainty when operating a business.
An individual who organizes, manages, and assumes the risks of a business or enterprise.

Characteristics of an Entrepreneur

Mental Ability (creative thinking, change analysis)
Business Secrecy
Clear Objectives
Human Relations (good customer/employee relations, emotional stability, tactfulness, and consideration)
Communication Ability (sender/receiver understanding of messages)
Technical Knowledge

Importance of Entrepreneurship

Reduces poverty
Increases employment
Fulfills the needs of people
Develops the economic condition of a country

Causes of Entrepreneurship Failure

Lack of Visible Concept
Lack of Market Knowledge
Lack of Technical Skill
Lack of Seed Capital
Lack of Business Knowledge
Lack of Motivation
Time Pressure and Distractions
Legal Constraints and Regulations
Monopoly and Protectionism

Entrepreneurs (examples)

Dhirubhai Ambani (Reliance Company, India's largest private sector company)
Rahul Bajaj (Bajaj Group, distinguished business leader)
Steve Jobs (Apple Computer, Pixar, Next)

Entrepreneur vs. Entrepreneurship (Table)

Entrepreneur: Person, Visualizer, Creator, Organizer, Innovator, Planner, Leader
Entrepreneurship: Process, Vision, Creation, Organization, Innovation, Planning, Leadership

Other Types of Entrepreneurship

Social Entrepreneurship
Women Entrepreneurs
Agripreneurship
Technopreneurship
Netpreneurship
Portfoliopreneurship
Intrapreneurship

Role & Importance of Entrepreneurship

Pivot of Economic Development
Basis of Business
Organizer of Society's Productive Resources
Contribution in Production of New Products
Development of New Production Techniques
Helpful in Capital Formation
Development of New Market
Establishment of New Industrial Enterprises
Contribution in Development & Expansion of Existing Enterprises

Role & Importance of Entrepreneurship (cont'd)

Bring changes in Social Framework
Contribution to the formation of Industrial Climate to Generate Employment Opportunities
Raise the Standard of Living
Help in removing Regional Disparities
Encouragement to Investigation and Research

Business Life Cycle

Introduction Stage

Product available in the market
Slow sales, low profits, losses possible
High promotional costs, generally high prices, minimal competition

Growth Stage

Rapidly rising sales
Expansion of production scale
Rising profits, lower unit cost
Increasing competition

Maturity Stage

Saturation point in demand, severe competition
Extensive distribution, average cost decrease, maximum profits
Low competition, brand diversification in benefits

Saturation Stage

No growth in sales
Tough competition, falling prices, declining profits
Supply may exceed demand
Product modification is necessary

Decline Stage

Rapid fall in sales
Significant decline in prices
Removal of promotional expense
Reduction in distribution networks
Product technology obsolescence

Business Outside Business Life Cycle:

Fads
Styles
Fashion

Business Finance

Objectives of Business Finance

Defining business finance
Understanding the role of business finance
Recognizing the risks in financial decision-making
Pinpointing the connection between business finance and other disciplines like accounting.

Business Finance (definition)

The study of financing and investment decisions in business.
Making decisions on which investments a business should make (using theory to practice).
Managing money and other valuable assets.

Role of Business Finance

Financing: Bringing money into the organization; Business finance will help in financing and investment decisions.

Methods of Financing

Debt (taking on debt, credit arrangements, investments in real and financial assets)
The success and failure of a business depend upon this field.

BUS. FIN. and Accounting

Accountants and financial managers maintain financial records, generate reports;
Financial managers make decisions relating to finance.
Within small businesses, the roles of accountant and financial manager can combine in one person.

Financial Management

It starts with a plan.
Having cash and resources alone is insufficient.
It’s critical in business.
Making decisions intended to maximize shareholder wealth involves planning, controlling and directing financial activities, including procurement and asset utilization.
Stocks are forms of ownership in a corporation.

Scope of Financial Management

Investment decisions (fixed and current assets, capital budgeting, working capital decisions).
Financing decisions (raising finance from different resources).
Dividend decisions (related to net profit distribution, dividends for shareholders, retained profits).

Objectives of Financial Management

Ensure regular and sufficient funds.
Ensure shareholders receive adequate returns.
Ensure optimum fund utilization.
Ensure investment safety to achieve adequate returns.
Plan a sound capital structure balancing debt to equity capital.

Function of Financial Management

Estimating capital requirements (expected costs, profits, future programs).
Determining capital composition (capital structure). Debt-to-Equity Analysis
Ratio measuring the debt level a company uses for funding its business (also called gearing, risk, or leverage).
High ratios suggest higher risk of defaulting on debt payments.

Choice of Fund Sources

Issuing shares and debentures (unsecured debt instruments, backed by creditworthiness).
Loans from banks and financial institutions (with various interest rate implications).
Public deposits from bonds (with regulatory oversight).

Disposal of Surplus / Net Profit Disposal

Dividend declaration.
Retained profits for expansion, innovation, and diversification planning.
Cash management (administrative & distributional costs).
Financial control.

Business Valuation

Introduction to Business Valuation

Liberalization of economy, emphasis on core competence, and relaxation of tax laws have led to a surge in mergers, takeovers, acquisitions and de-mergers.
Aligning business activities to maximizing shareholder wealth has driven large organizations toward strategic decisions, which all involve business valuations.
Value means 'economic value' expressed in monetary terms to be paid in exchange for an asset or right.

Valuation Dynamics

Total economic environment
Potential of asset use
Timing of estimate
Location of the asset
Relative scarcity
Availability of substitutes
Extent of ownership
Liquidity of the asset
Physical condition of asset

Key Drivers of Valuation

Purpose of valuation (Buyer vs. Seller, Acquisition vs. Investment, Legal vs. Commercial)
Macro factors (Economic scenario, Investment patterns in sector, Role of Government, Functioning of Financial Institutions, Banks)
Micro factors (Nature of product/service, Business life cycles, Seasonal nature, Growth vs. Maturity)
Industry and sector (Economy - Boom vs. Gloom, Emerging vs. Dying Sector, Manufacturing vs. Service, Structured vs. Traditional)

Concepts of Value

Fair Market-Value
Investment Value
Book Value
Intrinsic Value
Going Concern Value
Replacement Value
Goodwill / Brand Value
Liquidation Value
Benchmark Value
Salvage Value

Golden Rules of Valuation

Valuation is more art than science.
Valuation is subjective.
Valuation is time-dependent; perceptions vary.
Value is in the eyes of the payer (the deal/price), not in the eyes of the valuer.
Valuation is critical in strategic decision-making.
Valuation applies theory to practice.

Business Valuation Methods

Historical cost
Current cost
Economic valuation
Asset valuation
Market valuation

Historical Cost Valuation

Assets valued at historical costs.
Goodwill is added to asset costs.

Current Cost Valuation

Valuation based on current replacement costs.
Tangible assets (current replacement price)
Investments (current market prices, unquoted investments at their cost)
Inventory (based on current market prices)
Debtors (net collection/realizable amount)
Intangibles (current acquisition prices)

Economic Valuation (Income-Based)

Business value is determined by its profitability and cash generation.
Capitalization method (past profits capitalized at an industry-relevant rate of return, adjustments for extraordinary items, taxation, etc.)
Profit Earning Capacity Value (similar to capitalization but considers future, maintainable profits.)
Discounted Cash Flow (present value of future cash flows, using WACC–weighted average cost of capital – as discount factor).

Market Valuation

Applicable for publicly traded companies.
Average share price from market forces used for valuation purposes.

Asset-Based Valuation

Used in combination with profitability/market value methods.
Value calculated by dividing total assets into operating and non-operating assets.
Non-operating assets valued at realizable value.
Operating assets are valued at their book value.
Comparing parameters of similar companies for valuation.

Valuation of Shares

Share valuation techniques.
Share valuation is driven by valuation purposes (e.g., compensation, taxation, etc.)
Key considerations are the interests, advantages, and risks of involved parties.

Valuation of Shares–Purpose

Purchase of a block of shares (possibly for controlling interest).
Scheme formulation (amalgamation, absorption, merger, acquisition).
Acquiring dissenting shareholders’ interests.
Government compensation for nationalization.
Securing shares for loans.
Valuations under wealth tax acts.
Converting debts to equity shares.