Concept of Under Capitalization The phrase under capitalization should never be misconstrued with inadequacy of capital Gerstenberge says “A corporation may be under capitalized when the rate of profit is exceptionally high in relation to the return enjoyed by similarly situated companies in the same industry or it has too little capital to conduction business”. It’s against over capitalization, under capitalization implies an effective utilization of finance, a high rate of dividend & the enhanced price of share. Here the capital of the company is less in proportion to its total requirements. In this state of affairs the real worth of the assets exceeds their book value and the rate of earning is higher than a corporation is able to offer. When a company succeeds in earning abnormally large income continuously for a pretty long time symptoms of under capitalization gradually develop in the companies. Under capitalization is an index Continue reading
Business Finance Terms
Concept of Capitalization in Financial Management
Meaning of Capitalization Capitalization is an important constituent of financial plan. ln common parlance, the phrase ‘Capitalization’ refers to total amount of capital employed in a business. However, scholars are not unanimous in so far as capitalization is concerned. The term capitalization connotes the process of determining the quantum of funds that a firm would require to run its business. Capitalization is distinct from share capital which refer only to the paid-up value of shares issued and definitely excludes bonds and other forms of borrowings. Similarly, it should be distinguished form ‘capital’. The term capital refers to the total investment of a company in money, tangible assets like goodwill. It is in a way the total wealth of a company. When used in the sense of net capital, it indicates the excess of total assets over liabilities. Here, then, it includes “the gains or profits from the use and Continue reading
Working Capital Management
Management of Working Capital There are two types of assets in each concern i.e., fixed assets and current assets. Both types of assets are to be manged efficiently so as to earn maximum profit with minimum possible investments because maximization of profits is the prime object of every business. Decisions regarding investment in fixed assets are taken through the capital budgeting process but decision making regarding management of working capital is a continuous process which involves control of everyday and flow of financial resources circulating in the enterprise in one form or the other. The accomplishment of the prime objective – maximization of profits in most businesses depends largely how their working capital is managed. Working capital management is considered to involve the management of current assets, i.e., cash, accounts receivables and inventory. Unlike the management of fixed assets which may be arranged in special cases on long-lease basis, the Continue reading
What is Over Capitalization?
Concept of Over Capitalization The phrase ‘Over Capitalization’ should not be confused with excess of capital. Truly speaking, over capitalization is a relative term used to denote that the firm in question is not earning reasonable income on its funds. According to Bonneville, Dewey and Kelly, when a business is unable to earn a fair rate of return on its outstanding securities, it is over capitalized. Thus over capitalization refers to that state of affairs where earning of the corporation do not justify the amount of capital invested in the business. The main symptom of over capitalization in a company is the amount of earning which it is making on its total capital. Thus, a company is said to be over capitalized when it earns less than what it should have earned as fair rate of return on its total capital. To ascertain whether the company is earning reasonable rate Continue reading
Fixed Capital of Capital Requirements
The fixed capital of an industrial concern is invested in fixed assets like plant and machinery, land, buildings furniture, etc. These assets are not fixed in value; in fact, their value may record an increase of decrease in course of time. They are fixed in the sense that without them, the business of the concern cannot be carried on. This means that the fixed capital is used for meeting the permanent or long-term needs of the concern. While making an assessment of the fixed capital requirements, a list of the fixed assets needed by the concern will have to be prepared, say, by promoter. Having compiled a list of the fixed assets which will be required, it is not difficult to estimate the amount of funds required for the purpose. The prices of land are generally known, or can be easily ascertained. A contractor can be relied upon to give Continue reading
Introduction to Investments – Meaning, Objectives and Elements
Concept of Investment Investment is the employment of funds with the aim of getting return on it. In general terms, investment means the use of money in the hope of making more money. In finance, investment means the purchase of a financial product or other item of value with an expectation of favorable future returns. Investment of hard earned money is a crucial activity of every human being. Investment is the commitment of funds which have been saved from current consumption with the hope that some benefits will be received in future. Thus, it is a reward for waiting for money. Savings of the people are invested in assets depending on their risk and return demands. Investment refers to the concept of deferred consumption, which involves purchasing an asset, giving a loan or keeping funds in a bank account with the aim of generating future returns. Various investment options are Continue reading