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

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

7. IMPACT
ON
Company
Stockholders
Society
Workers

8. 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
LIABILITIE
S
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
LIABILITIE
S
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
1. SPLITTING UP OF SHARES
2. ISSUE OF BONUS SHARES
3. INCREASE IN PAR VALUE OF SHARES
4. 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