Rk.educationalnotes

The effect of over capitalisation on different selections of the society can be discussed under the following heads. A. Effect on the corporation (i) Destroys the goodwill: over capitalisation market by low earning capacity destroys the reputation of the company which ultimately effects the prospects of the business. (ii) Difficulties in raising additional funds: Over capitalisation brings down the credit standing and the financial reputation of the company. Thus it funds difficulty in mobilising additional funds. (iii) Borrowings at higher rate of interest: An over capitalised company which is not able to raise capital from the shareholders may get loans at higher rate of interest. It will further deteriorate the position of the company. (iv) Resort to unfair practice:   It may force the management unhealthy practices of window dressing (fake report) of earnings that is may not provide sufficient depreciation and also neglect the maintenance and replacement of assets. B. Effects on sh

A company is said to be over capitalised when it's actual profits are not sufficient to pay interest dividends at proper rates. An over capitalised company is enable to pay a fair return on its investment.               A company is over capitalised only because it capital funds are not effectively or profitably employed. As a result there is a fall in earning capacity of company and in the rate of dividends to be paid to its shareholder as well as a fall in the market value of shares.             The chief sign of over capitalisation is therefore fall in the rate of dividend over longtime. In actual practice, over capitalisation have been found short of funds. Definition of Over capitalisation: Prof Bonneville and Dewey and Kelly's       " when a business is unable to earn a fair return on its outstanding securities it is over capitalised." Prof. Hougland," when aggregate of the par values of stocks and bonds outstanding exceeded the true value of the fixed asse