Question

What is the over capitalisation and causes of overcapitalization?

Answer 1

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

Answer 2

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.