Over capitalization and Under Capitalization

A detailed presentation on causes, impact and remedies of over and under capitalization.

1. Over-Capitalisation and Under-Capitalisation A Presentation by. Akshita Jain B.Com ( Hons ) Faculty of Commerce Banaras Hindu University

2. OVER-CAPITALISATION

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. CAUSES Excess Capital Floatation High Promotional Cost Excessive Purchase of Fixed Assets High Rate of Interest

6. CAUSES Liberal Dividend Policy Defective Depreciation Policy Inflation Wrong Income Estimation

7. Impact on Company Stockholders Society Workers

8. REMEDIES 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 LIABILITIES 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 LIABILITIES 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

11. Causes HIGH EFFICIENCY UNDER ESTIMATION OF EARNINGS CONSERVATIVE DIVIDEND POLICY SECRET RESERVE

12. Causes PROMOTION DURING DEFLATION INTENTION OF CONTROL FEAR OF NON SUBSCRIPTION OF CAPITAL LOW PROMOTION EXPENSE

13. Impact on Company Stockholders Society Workers

14. Remedies SPLITTING UP OF SHARES ISSUE OF BONUS SHARES INCREASE IN PAR VALUE OF SHARES 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