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Over-Capitalisation & Under-Capitalisation - meaning, causes, consequences, remedies (in Hindi)
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Heena Malhotra
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Unacademy user
Excellent initiative... please continue
superb explanation thanks alot mam fully understand this whole capital structure
Heena Malhotra
7 months ago
welcome :)
mam lesson no 23 nhi play ho rha to mcq
Heena Malhotra
9 months ago
khushboo refresh kr ke chlao, sabhi lessons play honge :)
superb mam,I liked
Heena Malhotra
9 months ago
Thank you :)
  1. Capital Structure Decision By Heena Malhotra


  2. Causes of Over-Capitalisation: Over-capitalisation arises due to following reasons: () Raising more money through issue of shares or debentures than company can employ profitably () Borrowing huge amount at higher rate than rate at which company can earn (i) Excessive payment for the acquisition of fictitious assets such as goodwill etc. (iv) Improper provision for depreciation, replacement of assets and distribution of dividends at a higher rate. Wrong estimation of earnings and capitalisation. By Heena Malhotra


  3. Consequences of Over-Capitalisation: Over-capitalisation results in the following consequences (0) Considerable reduction in the rate of dividend and interest payments. (ii) Reduction in the market price of shares (iii) Resorting to "Window dressing" (iv) Some companies may opt for reorganization. However, sometimes the matter gets worse and the company may go into liquidation. Remedies for Over-Capitalisation: Following steps may be adopted to avoid the negative consequences of over-capitalisation: () Company should go for thorough reorganization. () Buyback of shares. (ii) Reduction in claims of debenture-holders and creditors. (iv) Value of shares may also be reduced. This will result in sufficient funds for the company to carry out replacement of assets. By Heena Malhotra


  4. Over- Capitalisation O It is a situation where a firm has more capital than it needs or in other words assets are worth less than its issued share capital, and earnings are insufficient to pay dividend and interest. O This situation mainly arises when the existing capital is not effectively utilized on account of fall in earning capacity of the company while company has raised funds more than its requirements. o The chief sign of over-capitalisation is the fall in payment of dividend and interest leading to fall in value of the shares of the company. By Heena Malhotra


  5. Consequences of Under-Capitalisation: Under-capitalisation results in the following consequences: (i) The dividend rate will be higher in comparison to similarly situated companies. () Market value ofshares will be higher than value of shares of other similar companies because their earning rate being considerably more than the prevailing rate on such securities (iii) Real value of shares will be higher than their book value. Effects of Under-Capitalisation: Under-capitalisation has the following effects: (i) It encourages acute competition. High profitability encourages new entrepreneurs (ii) (iii) (iv) (v) to come into same type of business High rate of dividend encourages the workers' union to demand high wages Normally common people (consumers) start feeling that they are being exploited Management may resort to manipulation of share values. Invite more government control and regulation on the company and higher taxation also. By Heena Malhotra


  6. Remedies: Following steps may be adopted to avoid the negative consequences of under capitalization: ()The shares of the company should be split up. This will reduce dividend per share, though EPS shall remain unchanged. Issue of Bonus Shares is the most appropriate measure as this will reduce both dividend per share and the average rate of earning. ( (i) By revising upward the par value of shares in exchange of the existing shares held by them By Heena Malhotra


  7. Over-Capitalisation vis- -vis Under- Capitalisation O From the above discussion it can be said that both over capitalisation and under capitalisation are not good. However, over capitalisation is more dangerous to the company, shareholders and the society than under capitalisation o The situation of under capitalisation can be handled more easily than the O Moreover, under capitalisation is not an economic problem but a problem of O Thus, under capitalisation should be considered less dangerous but both situation of over-capitalisation. adjusting capital structure. situations are bad and every company should strive to have a proper capitalisation. By Heena Malhotra