Over capitalization and Under Capitalization
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A detailed presentation on causes, impact and remedies of over and under capitalization.
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Over capitalization and Under Capitalization
- 1. OVER-CAPITALISATION AND UNDER-CAPITALISATION A Presentation by. Akshita Jain B.Com(Hons) Faculty of Commerce Banaras Hindu University
- 3. OVER-CAPITALISATION When a company fails to earn adequately over the capital invested. A company is said to be over capitalised when its earnings are not large enough to yield a fair return on the amount of stocks and bonds that have been issued. – C.W. Gerstenberg DEBT and EQUITY > Net worth of Assets
- 4. EXAMPLE Company A Company B Investment 50,00,000 60,00,000 Return 5,00,000 5,00,000 Rate of Return 10% 8.334%
- 5. Excess Capital Floatation High Promotional Cost Excessive Purchase of Fixed Assets High Rate of Interest
- 8. 1. PLOUGHING BACK OF PROFITS 2. REDEMPTION OF PREFERENCE SHARES 3. REDUCTION IN THE RATE OF INTEREST OF DEBENTURES 4. FINANCIAL EFFICIENCY 5. REDUCTION IN NUMBER OF SHARES 6. REDUCING PAR VALUE OF SHARES
- 9. UNDER- CAPITALISATION It is the reverse of over-capitalisation. When any concern earns extra ordinarily high over its capital, then it is called under-capitalisation. The company distributes dividend at a high rate. Real value of shares is greater than its book value.
- 10. EXAMPLE LIABILITIE S Amt. ASSETS Amt. Share Capital 12 lacs Fixed Assets 14 lacs Debentures 5 lacs Current Assets 13 lacs Current Liab 10 lacs 27 lacs 27 lacs LIABILITIE S Amt. ASSETS Amt. Share Capital 12 lacs Fixed Assets 19 lacs Debentures 5 lacs Current Assets 8 lacs Current Liab 10 lacs 27 lacs 27 lacs OVER CAPITALISATION UNDER CAPITALISATION
- 12. CAUSES PROMOTION DURING DEFLATION INTENTION OF CONTROL FEAR OF NON SUBSCRIPTION OF CAPITAL LOW PROMOTION EXPENSE
- 14. REMEDIES 1. SPLITTING UP OF SHARES 2. ISSUE OF BONUS SHARES 3. INCREASE IN PAR VALUE OF SHARES 4. ISSUE OF NEW SHARES
- 15. Conclusion Over capitalisation and under capitalisation are the symptoms of long term disease and not the result of working of one or two years. Both are harmful for the concern, but between the two under capitalisation is the lesser evil. Still both should be discouraged and the ideal should be fair capitalisation.
- 16. THANK YOU A presentation by. AKSHITA JAIN