Financial Decisions (Theory)
Financial Decisions (Theory)
Financial Decisions (Theory)
FINANCING DECISIONS
FINANCIAL DECISONS
What Is Overcapitalization?
Refers to the state of affairs where earnings of
company do not justify the amount
Overcapitalization occurs when a company has issued
more in debt and equity than its assets are worth.
An overcapitalized company might be paying more in
interest and dividend payments than it can sustain in the
long term.
Causes of Over
Capitalisation
1. Over Issue of Capital
2. Promotion, formation or development during Inflation
3. Buying assets of lower value at higher prices
4. High promotion expenses
5. Inadequate Depreciation
6. Liberal Dividend Policy
7. Taxation Policy
8. Inadequate demand
9. Payment of high Rate of Interest
10. Underestimation of the capitalisation rate.
Undercapitalization