PREVIOUS YEAR SOLVED PAPERS - July 2018
| List-I | List-II |
| (a) Tariff | (i) A regulation specifying the proportion of a finished product’s components and labour that must be provided by importing country. |
| (b) Import Quota | (ii) Tax imposed on product entering a country and used to protect domestic producers and/or raise revenue. |
| (c) Local-content Law | (iii) A requirement that a product contain or exclude certain ingredients or that it be tested and certified as meeting certain restrictive standards. |
| (d) Local-operating Law | (iv) Limiting amount of a particular product that can be brought into a country, to protect domestic industry or broadening access to its markets. |
| (e) Standards and Certification | (v) A refusal to buy products from a particular company or country. |
| (f) Boycott | (vi) A constraint on how, when or where retailing can be conducted. |
CODES
| (a) | (b) | (c) | (d) | (e) | (f) | |
| 1 | (iii) | (iv) | (ii) | (i) | (vi) | (v) |
| 2 | (vi) | (ii) | (i) | (iv) | (iii) | (v) |
| 3 | (ii) | (iv) | (i) | (vi) | (iii) | (v) |
| 4 | (iv) | (vi) | (i) | (ii) | (iii) | (v) |
- Option : C
- Explanation : Trade Barriers: The most common legal forces affecting international marketers are barriers created by governments to restrict trade and protect domestic industries. Examples include the following:
∎ Tariff: A tax imposed on a product entering a country. Tariffs are used to protect domestic producers and/or raise revenue. To illustrate, for over 40 years the US has imposed a 25% tariff on imported pickup trucks, keeping brands such as Volkswagen and Hyundai out of the market and causing other foreign manufacturers such as Toyota and Nissan to build factories in the US.
∎ Import quota: A limit on the amount of a particular product that can be brought into a country. Like tariffs, quotas can protect a country’s domestic industry or can broaden access to its markets. For example, US textile manufacturers want stiff quotas placed on imports from China, while large retailers such as JC Penney, seeking low cost goods, are strongly opposed to such quotas.
∎ Local-content Law: A regulation specifying the proportion of a finished product’s components and labour that must be provided by the importing country. For example, to be sold in Taiwan, Japanese cars must be at least partially assembled there. To comply with a local-content law, a firm may import most of a product’s parts, buy some locally, and have the final product assembled locally. These laws are used to provide jobs and protect domestic businesses.
∎ Local Operating Laws: A constraint on how, when, or where retailing can be conducted. These regulations, many intended to protect small businesses, are having an impact on Internet shopping. For example, in some countries the retail price of a product has to be the same for everyone. As a result, a system like Priceline.com, where consumers propose a price for an airline seat, rental car, or hotel room and the seller decides if it is acceptable, is illegal.
∎ Standards and Certification: A requirement that a product contain or exclude certain ingredients or that it be tested and certified as meeting certain restrictive standards. European countries, for example, have restricted genetically altered corn and also beef that has been fed growth hormones.
∎ Boycott: A refusal to buy products from a particular company or country. Boycotts, also called embargoes, are used by a government to punish another country for what are perceived to be unfair importation rules.
| List-I | List-II |
| (a) Prospecting | (i) Attention, Interest, Desire, Action |
| (b) Preapproach | (ii) Identifying Profiles, leads, Records and Qualifying capability and willingness |
| (c) Presentation | (iii) Reduce Dissonance, Build goodwill |
| (d) Post sales services | (iv) Information, habits, preferences |
CODES
| (a) | (b) | (c) | (d) | |
| 1 | (i) | (iii) | (iv) | (ii) |
| 2 | (iii) | (iv) | (ii) | (i) |
| 3 | (ii) | (iv) | (i) | (iii) |
| 4 | (iv) | (iii) | (ii) | (i) |
- Option : C
- Explanation : Prospecting: Prospecting refers to locating prospective buyers. Good salesmen do not entirely rely on existing customers, but seek out new ones. They constantly search for ‘prospects’ or potential customers and rope in as many of them as possible. Prospecting is the first step in the selling process, whenever new customers are sought.
Identifying Prospects and Gathering Leads: Although the company may supply some leads, the salesmen must have the skill to develop their own leads. They can develop leads from many sources, such as current customers, dealers, suppliers, non-competing salesmen, banks, credit agencies, clubs/similar organisations and published data sources like directories, telephone yellow pages, etc. The ‘prospecting’ will be more effective if the salesmen systematically gather market intelligence and make use of it.
Qualifying the Prospects and Analysing their Purchases: The salesmen have to screen the leads, reject the poor ones and pick the better looking ones for further probing/making sales call. He might phone up or write to prospects 30 before deciding whether to make a sales call. Prospects should be qualified by evaluating their financial ability, likely volume of purchase, specifications adopted, likelihood of continuous business, etc. The leads can also be categorised into hot leads, warm leads and cool leads, depending on their potential to become customers.
Websites can be Used for Acquiring and Qualifying Leads: Salesmen can use websites of companies/social network sites/blogs for acquiring leads and qualifying the prospects. A lot of details about the prospects can be collected by perusing the sites, and this can help in fine tuning the leads. In some cases, the site can take care of even the actual processing of the business.
Pre-Approach: Pre-approach consists of planning and preparation. The salesmen have to meticulously plan the sales presentation. They must size up the customer characteristics and the sales context. Need exploration is an especially important part of Pre-approach. The sales presentation has to be dovetailed with the exact needs of the customer. Securing appointments from the customer is also a part of the preparation.
Approach: Approach refers to the preliminaries and the initial part of the interaction before the substantive sales presentation commences. In particular, it includes the opening remarks in the presentation and the opening style adopted by the salesman. In general, a consultative style of selling is superior to a totally controlled one. The approach should facilitate this requirement.
Sales Presentation: Now, the salesman gets to the actual delivery of the sales story/ message/demonstration. Listening, probing, use of questions, persuasive interceptions are integral elements in the process. Handling and overcoming objections is also a part of it. The salesman must involve the customer in the presentation.
Post Sales Service: The final step in the personal selling process is referred to as the ‘follow up’. The follow up involves the salesperson contacting the customer after the sale to ensure that the customer is satisfied. If the customer has any existing issues with the product, the salesperson will address them. A successful follow up stage of personal selling can be very effective in ensuring repeat sales, evaluating the effectiveness of the salesperson, and obtaining additional referrals from the satisfied customer.
43. Which of the following is not an approach to the Capital Structure?
- Option : A
- Explanation : Theories of Capital Structure: As per as the concept of capital structure is concerned a number of eminent scholars have made their valuable contribution with regard to relationship between capital structure, cost of capital and value of the firm. The main contributors of the theories are David Durand, Ezra Solomon, Modigliani and Miller etc., some important theories is discussed below:
∎ Net Income Approach: The net income approach has been suggested by Durand. Under this approach capital structure decision is relevant to the valuation of the firm. A firm can minimize the weighted average cost of capital and increase the market price of the equity shares by using the debt content in its capital structure. This theory presumes the following assumptions:
(i) The cost of debt is less than the cost of equity
(ii) There are no corporate taxes
(iii) The use of debt content does not change the risk perception of the investors as a result the equity capitalization rate of the company and the debt capitalization rate of the company remains constant with changes in leverage.
∎ Net Operating Income Approach: This approach is also suggested by Durand. It is dramatically opposite to the net income approach. According to this approach any changes in the capital structure of a company does not affect the market value of the firm and the overall cost of capital remain constant irrespective of the mode of financing. The implication of the above statement is that the overall cost of capital remains the same whether the debt equity mix is 50:50 or 20:80 or 40:60 under this theory all the structures are optimum capital structures. This theory presumes the following assumptions:
(i) The debt capitalization rate is a constant.
(ii) The market capitalizes the value of the firm as a whole and therefore the split between debt and equity is not important.
(iii) Corporate taxes do not exist.
(iv) The use of the debt fund having low cost increases the risk of equity shareholders, but it could result in increase the equity capitalization rate.
∎ Traditional Approach: The traditional approach to capital structure advocates that there is a right combination of equity and debt in the capital structure, at which the market value of a firm is maximum. As per this approach, debt should exist in the capital structure only up to a specific point, beyond which, any increase in leverage would result in the reduction in value of the firm.
It means that there exists an optimum value of debt to equity ratio at which the WACC is the lowest and the market value of the firm is the highest. Once the firm crosses that optimum value of debt to equity ratio, the cost of equity rises to give a detrimental effect to the WACC. Above the threshold, the WACC increases and market value of the firm starts a downward movement. This theory presumes the following assumptions:
(i) The rate of interest on debt remains constant for a certain period and thereafter with an increase in leverage, it increases.
(ii) The expected rate by equity shareholders remains constant or increase gradually. After that, the equity shareholders start perceiving a financial risk and then from the optimal point and the expected rate increases speedily.
(iii) As a result of the activity of rate of interest and expected rate of return, the WACC first decreases and then increases. The lowest point on the curve is optimal capital structure.
∎ Modigliani-Miller Approach: The basic premise of the Modigliani and Miller thesis was that there is no optimal capital structure, and moreover, that capital structure would not be able to affect the firm’s value. The reason is summarized by the compensatory effect of the market value of the firm’s stock that would decrease any time the firm incurs more debt and gets into a higher level of risk. It is because the firm’s market value is actually the sum of the market value of debt and market value of stock.
Modigliani and Miller separate between the firm’s value and its cost of capital, on one hand, and the form of capital structure on the other. They attribute the firm value to its ability to obtain the highest expected return on investment, utilizing the best capitalization rate, given that:
(i) The capitalization is for the firm’s pure equity stream for a certain class with a proper consideration of the potential financial risk.
(ii) The capitalization rate would not be related to the type of securities that would be utilized for investment.
(iii) Finally, their argument gave a lot of weight to the personal arbitrage and its ability to change the dynamics of the financial leverage.
- Option : C
- Explanation : Assumptions Underlying Discounted-Cash- Flow Analysis: As is true of any decision model, discounted-cash-flow methods are based on assumptions. Four assumptions underlie the NPV and IRR methods of investment analysis.
∎ In the present-value calculations used in the NPV and IRR methods, all cash flows are treated as though they occur at yearend. If the city of Mountainview were to acquire the new street cleaner, the $14,000 in annual operating-cost savings actually would occur uniformly throughout each year. The additional computational complexity that would be required to reflect the exact timing of all cash flows would complicate an investment analysis considerably. The error introduced by the year-end cash-flow assumption generally is not large enough to cause any concern.
∎ Discounted-cash-flow analyses treat the cash flows associated with an investment project as though they were known with certainty. Although methods of capital budgeting under uncertainty have been developed, they are not used widely in practice. Most decision makers do not feel that the additional benefits in improved decisions are worth the additional complexity involved. As mentioned above, however, risk adjustments can be made in an NPV analysis to partially account for uncertainty about the cash flows.
∎ Both the NPV and IRR methods assume that each cash inflow is immediately reinvested in another project that earns a return for the organization. In the NPV method, each cash inflow is assumed to be reinvested at the same rate used to compute the project’s NPV, the organization’s hurdle rate. In the IRR method, each cash inflow is assumed to be reinvested at the same rate as the project’s internal rate of return.
What does this reinvestment assumption mean in practice? In the case of Mountainview’s proposed new street cleaner, the city must instantly reinvest the money saved each year either in some interest-bearing investment or in some other capital project.
∎ A discounted-cash-flow analysis assumes a perfect capital market. This implies that money can be borrowed or lent at an interest rate equal to the hurdle rate used in the analysis.
In practice, these four assumptions rarely are satisfied. Neverthless, discounted-cash-flow models provide an effective and widely used method of investment analysis. The improved decision making that would result from using more complicated models seldom is worth the additional cost of information and analysis.
