[Latest News][6]

Affiliate Marketing Guides
Agriculture Business Ideas
Amazon Online Store Tips
Banking & Finance Tips
Blogging & Webmaster Guides
Bulk SMS Short Code Guides
Computer & IT Business Ideas
Education Business Ideas
Entrepreneurship Tips & Freebies
Facebook Autopilot & Tips
Fashion & Decoration Ideas
Financial Calculators
Fiverr Income Guides
Free SMS Text Messages
Google Adsense Tips
Health Business Opportunities
Inspirational Poems & Literature
Insurance & Risk Management
Job Search Tips
Mobile Phone Tips & Business
Motivational Quotes & Tips
Oil & Gas Business Ideas
Online Business Guides
Online Importation Business Guides
Small Scale Business Ideas
Social Media Income Guides
Start-Up Business Ideas
Transportation & Haulage Ideas
Web & Graphic Designing Ideas
Work-At-Home Business Ideas

Over Capitalization Definition And Meaning

Over Capitalization:

Over capitalization refers to the company which possesses an excess of capital in relation to its activity level and requirements. In simple means, over capitalization is more capital than actually required and the funds are not properly used.

According to Bonneville, Dewey and Kelly, over capitalization means, “when a business is unable to earn fair rate on its outstanding securities”.

finance
[Post Image Courtesy of Stuart Miles at FreeDigitalPhotos.net]

Example:

A company is earning a sum of Rs. 50,000 and the rate of return expected is 10%. This company will be said to be properly capitalized. Suppose the capital investment of the company is Rs. 60,000, it will be over capitalization to the extent of Rs. 1,00,000. The new rate of earning would be:

50,000/60,000×100=8.33%

When the company has over capitalization, the rate of earnings will be reduced from 10% to 8.33%.

Causes of Over Capitalization:

Over capitalization arise due to the following important causes:

• Over issue of capital by the company.

• Borrowing large amount of capital at a higher rate of interest.

• Excessive payment for acquisition of goodwill.

• High rate of taxation.

• Under estimation of capitalization rate.

Effects of Over Capitalization:

Over capitalization leads to the following important effects:

• Reduce the rate of earning capacity of the shares.

• Difficulties in obtaining necessary capital to the business concern.

• It leads to fall in the market price of the shares.

• It creates problems on re-organization.

• It leads under or misutilisation of available resources.

Remedies for Over Capitalization:

Over capitalization can be reduced with the help of effective management and systematic design of the capital structure. The following are the major steps to reduce over capitalization.

• Efficient management can reduce over capitalization.

• Redemption of preference share capital which consists of high rate of dividend.

• Reorganization of equity share capital.

• Reduction of debt capital.

About Author Mohamed Abu 'l-Gharaniq

when an unknown printer took a galley of type and scrambled it to make a type specimen book. It has survived not only five centuries.

No comments:

Post a Comment

Do you have any reasonable comments for this post ? Please feel free to drop them below using the comment box. We will moderate and publish them as soon as possible. Cheers !

Start typing and press Enter to search