What is the over capitalisation and causes of overcapitalization?
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It is the capitalization under which the actual profits of the company are not sufficient to pay interest on debentures and borrowings and a fair rate of dividend to shareholders over a period of time. In other words, a company is said to be over-capitalised when it is not able to pay interest on debentures and loans and ensure a fair return to the shareholders.
Causes of overcapitalization
Acquisition of Assets at Higher Prices
Higher Promotional Expenses
Underutilisation
Liberal Dividend Policy
Causes of overcapitalization
Acquisition of Assets at Higher Prices
Higher Promotional Expenses
Underutilisation
Liberal Dividend Policy
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0
Answer:
Overcapitalization occurs when a company has more debt than its assets are worth. A company that is overcapitalized may have to pay high interest and dividend payments that will eat up its profits. This may not be sustainable in the long term. Ultimately, a company that is overcapitalized may face bankruptcy.
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