Question 48.1 What is a Memorandum of Association? What are its main clauses? AnswerA memorandum of association is a document that gives the essential facts about a new company intended to be formed. It is submitted to the Registrar of Companies. It has the following clauses: (1) Name, (2) Place of the Registered Office, (3) Objects, (4) Liability, (5) Authorized share capital, and (6) Name, address of subscribers, and number of equity shares held by each. Question 48.2 What do you mean by essential commodities? State five products that are listed as essential commodities in India. AnswerThe essential commodities are those for which the government has the power to produce, supply and distribute. Five essential commodities include: (1) Cattle fodder, (2) Coal, (3) Cotton, (4) Drugs, and (5) Cotton. Question 48.3 Name five products that are listed in the Reserved List of Products for small-scale sectors. AnswerThe five products are: (1) Bread, (2) Mustard oil, (3) Wax candles, (4) Safety matches, and (5) Steel almirah. Question 49.1 State three components of equity funding and three components of debt funding. AnswerThree components of equity financing are the following: (1)Common stock, (2) Preferred stock, and (3) Retained Earnings Three components of debt financing are the following: (1)Debenture, (2) Term loan, and (3) Deferred credit Question 49.2
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State three main advantages of debt finance over equity finance. AnswerDebt financing does not dilute the control over the company, whereas in equity financing the control is diluted for the existing owners. Interests on debt are tax-deductible, whereas dividends to equity holders are not. Issue cost is significantly lower for debt financing compared to that of equity financing. Question 49.3 Differentiate between promissory notes, bonds, and debentures. AnswerPromissory notes, given to banks, can generate funds needed for short-term (2 – 5 years) needs. Bonds and debentures help in generating funds for long-term needs. Bonds are long-term unsecured notes issued by government, government undertakings, and financial institutions, whereas debentures are secured debts that are issued by private. Question 49.4 How can an entrepreneur get working capital advance and what are the types of such advances? AnswerWorking Capital Advances are given by commercial banks against hypothecation (against movable property or inventory) or pledge (goods deposited with the banks). They can be (1) cash credits/overdrafts where a borrowing company can borrows as often as it needs, but not exceeding a pre-specified limit, (2) loans - a fixed amount, (3) purchase/discount of bills where the bank pays the company’s purchase bill, and (4) letter of credit given by a bank undertaking the responsibility of meeting a company’s purchase obligation and thus enabling the company to buy an asset/service.
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