What is capitalization What are the issues and remedies of overcapitalization?

Over-capitalisation is that state of financial affairs of a company, in which the real value of company’s assets is much less than their book value; leading to a permanent decline in the earning capacity of the company. ADVERTISEMENTS: As a result, the company is unable to pay a fair rate of return on the equity.

What is Overcapitalization and its causes?

Over-capitalisation may be the result of the following factors: (i) Acquisition of Assets at Higher Prices: Assets might have been acquired at inflated prices or at a time when the prices were at their peak. In both the cases, the real value of the company would be below its book value and the earnings very low.

What is under-Capitalisation What are the causes what are the remedies?

(i) Under-capitalisation may be remedied by increasing the par value and/or number of equity shares by revising upward the value of assets. This will lead to decrease in the rate of earnings per share. This will also reduce the rate of earnings per share without reducing the total earnings of the company.

What is undercapitalization and Overcapitalization?

A company is said to be overcapitalized when the aggregate of the par value of its shares and debentures exceeds the true value of its fixed assets.In other words, over capitalisation takes place when the stock is watered or diluted. Overcapitalisation does not mean surplus of funds. …

Why is over-Capitalisation bad?

Another social evil of over-capitalisation is promotion of gambling habits by providing scope for gambling in shares of such a company. (v) Recession: Over-capitalisation leads to increased losses, poor quality of products, retrenchment or unemployment of workers, decline in wage rates and purchasing power of labour.

What are the reasons for under capitalization?

Following are the important causes of under-capitalisation in a company:

• Under-Estimation of Capital Requirements:
• Under-Estimation of Future Earnings:
• Promotion during Depression:
• Conservative Dividend Policy:
• Very Efficient Management:
• Desire of Control and Trading on Equity:
• Fresh Issue of Shares:

What remedies are available for companies to overcome Undercapitalization?

Remedies of Under-Capitalisation:

• Splitting up of shares: The easiest remedy is for the directors to split up the shares in order to reduce earnings per share.
• Increase in par value of shares:
• Issue of bonus shares:
• Issue of shares and debentures:

How can Undercapitalization be prevented?

Here are some tips on avoiding undercapitalization of your business.

1. Choose an industry you know. Do not rush into a business in which you have little or no experience.
2. Have a thorough business plan.
3. Get an accountability partner.
4. Differentiate your business.
5. Provide stellar customer service.

What are the effects of over-Capitalisation?

A. Over- capitalisation marked by low earning capacity destroys the reputation and goodwill of the company with deterrent effect on its prospects of business. (ii) Difficulty in raising additional funds: It causes decline in share values which brings down the credit- standing and financial reputation of the company.

Are the true owner of company?

Equity shareholders are the real owners of the company. Equity shares represent the ownership of a company and capital raised by the issue of such shares is known as ownership capital or owner’s funds.

Which is the best way to cure over capitalization?

The only effective remedy to cure over-capitalisation lies in implementing a scheme of a capital reduction. (i) A reduction in the rate of interest payable on debentures (or other types of loans) (ii) A reduction in rate of preference dividend. (iii) A reduction in the paid-up value of shares-equity or preference or both.

What are the remedies for over trading in stocks?

Remedies for Over-Trading: i. The company should cut down its business and over-spending or it should arrange for more funds. ii. Preventing a situation of over-trading by taking precautionary steps. 1. Content Guidelines 2. Prohibited Content 3. Image Guidelines 4. Plagiarism Prevention 5. Content Filtration 6.

What does it mean when a company is overcapitalized?

Overcapitalization is a financial situation in which the value of equity and debt issued by a company exceeds the value or worth of its assets, specifically its fixed assets. It is essentially a state in which a company is over-funded.

When is over capitalization a chronic financial disease?

(i) Over-capitalisation is a chronic financial disease. It is discovered only when a company has worked for several years. (ii) Fair rate of return means the prevailing rate of return; which other companies in the industry- doing similar business are paying.