Science, asked by refanrahim4138, 1 year ago

Comparision between overcapitalisation and undercapitalisation

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Answered by sushma91
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Over Capitalization:

A company is said to be overcapitalized when the aggregate of the par value of its shares and debentures exceeds the true value of its fixed assets.In other words, over capitalisation takes place when the stock is watered or diluted.

It is wrong to identify over capitalisation with excess of capital, for there is every possibility that an over capitalised concern may be confronted with problems of liquidity. The current indicator of over capitalisation is the earnings of the company.

Under capitalization:

Under capitalisation is just the reverse of over capitalisation, a company is said to be under capitalised when its actual capitalisation is lower than its proper capitalisation as warranted by its earning capacity. This happens in case of well established companies, which have insufficient capital but, large secret reserves in the form of considerable appreciation in the values of fixed assets not brought into books.

In case of such companies, the dividend rate will be high and the market value of their shares will be higher than the value of shares of other similar companies. The state of under capitalisation of a company can easily be ascertained by comparing of a book value of equity shares of the company with their real value. In case real value is more than the book value, the company is said to be under capitalised

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