Scribd
Upload
37 views2 pages

Capitalisation

The document explains the concepts of under-capitalization and overcapitalization in companies. Under-capitalization occurs when a company's true asset value exceeds the total value of its outstanding stocks and bonds, indicating insufficient capital to support its operations. Conversely, overcapitalization happens when a company has more debt and equity than its assets are worth, leading to inefficient capital management and potential financial distress.

Uploaded by

ARVIND KUMAR
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
37 views2 pages

Capitalisation

The document explains the concepts of under-capitalization and overcapitalization in companies. Under-capitalization occurs when a company's true asset value exceeds the total value of its outstanding stocks and bonds, indicating insufficient capital to support its operations. Conversely, overcapitalization happens when a company has more debt and equity than its assets are worth, leading to inefficient capital management and potential financial distress.

Uploaded by

ARVIND KUMAR
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

An excess of true asset value over the aggregate of stocks and bonds outstanding

indicates under-capitalization, where the company's assets are worth more than the
total value of its outstanding securities.
Here's a more detailed explanation:
 Under-capitalization:
This refers to a situation where a company has a lower amount of capital (funds)
than what is actually needed to support its operations and assets.
 True Asset Value:
This represents the actual worth of a company's assets, such as property,
equipment, and other holdings, as opposed to their book value.
 Aggregate of Stocks and Bonds Outstanding:
This refers to the total value of a company's outstanding shares of stock (equity)
and bonds (debt).
 Under-capitalization as a Result:
When a company's assets are worth more than the combined value of its stocks
and bonds, it suggests that the company's capital structure is not sufficient to fully
represent its assets.
 Causes of Under-capitalization:
 Underestimation of capital requirements
 Underestimation of initial and future earnings
 Maintaining high standards of efficiency
 Conservative dividend policy
 Desire of control and trading on equity
 Effects of Under-capitalization:
 It can lead to manipulate the market value of shares
 It increases the marketability of the shares
 It may lead to more government control and higher taxation
 Consumers feel that they are exploited by the company
 It leads to high competition

When a company's total capital (debt and equity) exceeds the true value of its
assets, the company is considered overcapitalized.
Here's a more detailed explanation:
 Overcapitalization
refers to a situation where a company has issued more debt and equity than its
assets are worth.
 Market value vs. capitalized value:
The market value of the company is less than its total capitalized value.
 Financial implications:
An overcapitalized company might be paying more in interest and dividend
payments than it can sustain in the long term.
 Inefficient capital management:
Overcapitalization suggests that a company's capital management strategies are
not running efficiently, potentially leading to a poor financial position.
 Causes:
Overcapitalization can occur due to various reasons, including poor management,
higher startup costs, or excessive debt financing.
 Remedies:
Alleviating overcapitalization can involve debt repayment or restructuring, or in
extreme cases, bankruptcy.
 Opposite of Undercapitalization:
Overcapitalization is the opposite of undercapitalization, where a company
doesn't have enough capital to continue its operations.

You might also like