Capital & Capitalisation
Capital & Capitalisation
Capital & Capitalisation
and
Capitalisation
BY
Ms. Asha Agrawal
ASST. PROFESSOR
KES’ Shroff College
UNIT: 3
C A P IT A L
AND
C A P I T A L IZ A T IO N
CAPITAL
MEANING OF CAPITAL
According to Gerstenberg-
“ Capitalization as the total accounting value of
all the capital employed regularly in the business”.
Share capital
Debentures
Bonds
Reserves and surplus
Long term loans
Short term loans
TYPES O F CAPITALIZATION
Watered Capitalization
Under Capitalization
Over Capitalization
According to Gestenberg-
“A corporation may be under-capitalized when the
rate of profit, it is making on the total capital is
exceptionally high in relation to the return enjoyed by
similarly situated companies in the same industries or
when it has too little capital with which to conduct its
business”.
CAUSES OF UNDER-CAPITALIZATION
3. Deflationary condition.
To society
- Increase employment.
- Encourages new entrepreneurs to set up new ventures.
- D evelopment of workers and employees with large
amount of profit.
According to Gerstenberg-
“ a corporation is overcapitalized when its earnings are
not large enough to yield a fair return on the amount of stock &
bonds that have been issued”.
KEY FACTORS
Over capitalization refers to that state of affairs where earnings of the
corporation do not justify the amount of capital invested in the business.
(Earning doesn’t justify)
Over capitalizes company earns less than what it what it should have
earned at fair rate of return on its total capital. (Earns less than the
capacity)
If the company’s rate of return is less than the average rate of return, it is
indicative of the fact that company is not able to earn fair rate of return on
its capital. i.e. over capitalization. (Indication of not earning fair rate of
return)
When par value of shares of the company is higher than the market
value then company would be in state of over capitalization.
When book value of shares is higher than the real share value then
its is overcapitalized.
To company
Fair Capitalisation
= Actual Capitalisation = Fair Capitalisation i.e. B. V. = R. V.
Over Capitalisation
= Actual Capitalisation > Fair Capitalisation i.e. B. V. > R. V.