Differentiate between overcapitalization and undercapitalization
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Overcapitalization
A company is said to be overcapitalized, when its total capital (both equity and debt) exceeds the true value of its assets. It is wrong to identify overcapitalization with exess of capital because most of the overcapitalized firms suffer from the problems of liquidity.
Undercapitalization
Under-capitalization is just the reverse of over-capitalization. A company is considered to be under-capitalized when its actual capitalization is lower than its proper capitalization as warranted by its earning capacity.
A company is said to be overcapitalized, when its total capital (both equity and debt) exceeds the true value of its assets. It is wrong to identify overcapitalization with exess of capital because most of the overcapitalized firms suffer from the problems of liquidity.
Undercapitalization
Under-capitalization is just the reverse of over-capitalization. A company is considered to be under-capitalized when its actual capitalization is lower than its proper capitalization as warranted by its earning capacity.
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Overcapitalization indicates a situation of over-funding i.e.: the company has raised excessive funds as compared to its current requirements. Undercapitalization indicates a situation of under-funding i.e.: the company does not have enough funds/cash flow to meet the current needs of its business operations .
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