The main causes of under capitalisation are: Acquisition of assets during recession Under estimation of capital requirements Conservative dividend policy – higher rate of ploughing back of profits Efficient management Creation of secret reserves
The effects of under capitalisation are: On shareholders Rate of EPS will go up. The value of equity share in the market will go up. Financial reputation of the company will increase. Can expect higher dividends regularly. On company Market value of company shares will go up – increase in reputation of the company. The […]
The remedies for under capitalisation are: Increasing the par value or number of equity shares – leads to decrease in rate of EPS. Capitalise the earnings by issuing bonus shares to the equity shareholders. Where under capitalisation is due to insufficiency of capital, more shares and debentures may be issued to the public.
Over Capitalisation Refers to that state of affairs when earning of a company do not justify the amount of capital invested in its business. A company is over capitalised when its earnings are not large enough to yield a fair return on the amount of stock and bonds that have been issued. Over capitalisation means […]