13.1 SIGNIFICANCE AND BASES OF CAPITALISATION

13.1.1 Meaning of Capitalisation

The term, capitalisation refers to the magnitude of capital employed in a firm. This includes both longterm and short-term capital. Any financing decision in respect of capitalisation is of much significance to the firm. This is because any deviation from optimum capitalisation may lead to unhealthy environment, and come in the way of maximisation of the value of the firm. If the size of the capital is more than optimal, a part of it will remain idle, this will entail on the profitability of operations. If it is less than optimal, this will affect liquidity. This is why an estimate of the firm’s capital requirements must be made very carefully, after a thorough study ...

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