September 19, 2019

What are the economic roles of a government?

Regulatory role Covers a broad spectrum – entry to the business to the final result of business The reservation of industries to small scale, public and cooperative sectors.  Licensing system Regulation of entry Regulation of product mix, promotional activities etc.  Regulate relationship between organizations.  Promotional role Building infrastructure – power, transport etc.  Financial support Institutions […]

What are the effects of Over Capitalisation?

Effects of Over Capitalisation Effects on the company Loss of goodwill – reduced earning capacity>fall of market price Poor creditworthiness – difficult to get loans or credit at cheaper rates of interest. Difficulties in obtaining capital – loss of confidence in the company. Decline in efficiency of the company Loss of market – Inflated profits […]

What are the causes of Over Capitalisation?

Causes of over capitalisation Over issue of capital Promotion, formation or development during inflation. Buying assets of lower value at higher prices. High promotion expenses – preliminary expenses. Inadequate depreciation – leaves insufficient provision for replacement of assets. Liberal dividend policy – Taxation policy – high tax rates Inadequate demand for products – bring down […]

Difference between Cost theory and Earnings theory

Cost Theory Earnings Theory Meaning Capital value is determined by adding all costs. Capital value is determined based on its earning capacity. Base of theory Based on costs incurred Based on earning capacity Applicability to companies New companies Existing companies Calculation Easy and simple Difficult Superiority Not so Superior to cost theory

What are the factors determining the Capital Structure?

Factors determining the capital structure Financial leverage or trading on equity The use of long term debt increases, magnifies the EPS if the firm yields a return higher than the cost of debt. The EPS also increases with the use of preference share capital but due to the fact that interest is allowed to be […]