August 2011
Beginner
547 pages
16h 12m
English
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13.2 OVER-CAPITALISATION
Despite careful study of different variables in order to determine capitalisation, there is always a possibility of deviation from the optimum capitalisation point. This may result either in over-capitalisation or in under-capitalisation, both of which are harmful to a firm.
13.2.1 Meaning of Over-capitalisation
Over-capitalisation is a state of affairs when firm’s capital is too large to be justified by its earnings. In other words, the amount of capital in the firm is too large to earn, on an average, a rate of return that is common among similar firms. Suppose the average annual earning in a firm is Rs 20,000. When the rate of return in similar firms is 10%, the amount of capital that is justified by its earnings should ...
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