Business Finance

What is Capitalisation? | Definition, Causes, Remedies, Consequences of Over & Under Capitalisation

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capitalisation
Contents :

  1. Meaning and Definition of Capitalisation.
  2. Meaning and Definition of Over Capitalisation.
  3. Causes of Over Capitalisation.
  4. Consequences / Disadvantages of Over Capitalisation
  5. Remedies of Over Capitalisation.
  6. Meaning and Definition of Under Capitalisation.
  7. Causes of Under Capitalisation.
  8. Consequences / Disadvantages of Under Capitalisation.
  9. Remedies of Under Capitalisation.

What is Capitalisation ?


Capitalisation is an important part of financial planning. In common practice, capitalization refers to the total amount of capital employed in a business. This meaning is used in a narrow sense. Broadly speaking, capitalisation refers to the act of deciding in advance the quantum of fund requirements of a firm, its patterns and administration of capital in the interest of the firm.

Meaning of Capitalisation 


The term Capitalisation means total amount of long term funds available to the company. In the words of Dewing, “Capitalisation includes capital stock and debt. Therefore, capitalisation includes shares and debentures issued by the company and also the long term loans taken from the financial institutions. Capital surplus will always be a part of total capitalisation though it is available for cash, dividend under certain circumstances. Revenue surplus will be a part of capitalisation if the management wants to retain it in the business. The amount of capitalisation should be only that much which can be justified by its profits and by the normal rate of return for the industry concern. If the company earns less than the other companies in the same industry, value of shares of a company will reduce and the company will suffer.


Definitions of Capitalisation 


According to Guthman and Dougall :
“Capitalisation is the sum of the par value of the stocks and bonds outstanding.” According to them, capitalisation of a company comprises only share capital and funded debts and it does not include reserves and surplus.

According to Gerestenberg :
“Capitalisation is the total accounting value of all the capital regularly required in the business.”

According to Walker and Baughn :
“The use of capitalisation refers to only long-term debt and capital stock only and short term creditors, do not constitute supplies of capital. In reality, total capital is funded by short-term creditors, long – term creditors and others”.

From the above definitions, capitalisation can be summarized as under :
  • Capitalisation is the net worth of the business which includes actual assets involves tangible as well as intangible assets.
  • Capitalisation also comprises the ownership capital and borrowed capital as represented by long-term indebtedness.
  • Capitalisation is total accounting value of capital stock, surplus and long-term debt.

Primary Market | Meaning, Functions, Features, Types, Advantages & Disadvantages

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What is Primary Market ? This denotes the New Issue Market i.e. where the shares are issued for the very first time. In other words, the same were never issued before in the market. Under this, the existing companies and the new entrants can bring the new issues. The basic objective is to procure funds … Read more

Zero-Based Budgeting | Definition, Methods, Example, Process, Advantages & Disadvantages

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What is Zero-Based Budgeting ? Zero-based budgeting (ZBB) is a financial management approach where all expenses must be justified for each new period, regardless of whether they are carried over from previous budgets. Unlike traditional budgeting methods, which typically start with the previous budget as a baseline and adjust from there, ZBB requires a thorough … Read more

Secondary Market | Meaning, Definition, Features, Functions, Types & Trading and Settlement Procedure

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What is Secondary Market ? It is a market set-up which is very much organised and caters the buying and selling of the securities. It refers to a market where the activities of buying and e selling of the securities is carried-out in a systematic and simplified way as per the directions of the SEBI. … Read more

Compare Shifting Business Strategies from Budget to Luxury and Luxury to Budget

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The business landscape is dynamic and constantly evolving, prompting companies to reassess their strategies to adapt to changing market conditions and consumer preferences. One significant strategic shift that companies may undertake involves transitioning between budget and luxury market segments. This shift demands a comprehensive understanding of the distinct characteristics and demands of each segment. In … Read more

Preference Shares | Definition, Types, Feature, Advantage & Disadvantage

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Preference Shares


Contents : 
  • Meaning & Definition of Preference Shares.
  • Features of Preference Shares.
  • Classification / Types of Preference Shares.
  • Advantages and Disadvantages of Preference Shares.
  • Differences Between Equity Shares and Preference Shares.

What do you mean by Preference Shares ? 


The parts of corporate securities are called as preference shares. It is the shares, which have preferential right to get dividend and get back the initial investment at the time of winding up of the company. Preference shareholders are eligible to get fixed rate of dividend and they do not have voting rights.

Meaning of Preference Shares 


Preference shares are those shares which carry certain priority rights in regards to the payment of dividend and return of capital and at the same time are subject to certain limitations with regard to voting rights. According to Indian Companies Act, 1956 Preference share is that part of the share capital of the company which is endowed with the following preferential rights :

i) Preference as to fixed rate of dividend.
ii) Preference as to repayment of capital in the event of the company being winding up.

Preference shareholder is entitled to receive the fixed rate of dividend out of the net profits of company prior to declaration or distribution of dividend on equity shares. The available net profits of the company are applied for paying specified rate of dividend to preference shareholders.

What is Finance? | Definition, Types, Sources & Features

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Contents :  Meaning and Definitions of Finance. Various Features of Finance. Types of Finance. Internal and External Sources of Finance. What is Finance ? Finance is the soul of economic activities. To perform any economic activity, certain resources are needed which are to be pooled in terms of money (i.e. in the form of currency … Read more

What is Equity Shares? | Meaning, Characteristics, Advantages & Disadvantages

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Contents : Meaning of Equity Shares. Characteristics of Equity Shares. Advantages of Equity Shares. Disadvantages of Equity Shares. What is Equity Shares ?  The equity shares may be regarded as the foundation of the financial structure of a company. They occupy a primary position. They represent the ownership capital of a company. The equity shareholders collectively own the company … Read more

What is Dividend? | Meaning, Types, Measures & Dividend Policy

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Contents : Meaning of Dividend. Background of Dividend Policy. The Dividend Payment Time Line. Forms / Types of Dividend. Measures of Dividend. Meaning of Dividend Policy. Factors Influencing Dividend Decision. What is Dividend ? From the viewpoint of the shareholders, dividends represent compensation for postponing consumption. The dividend policy of the firm relates to various … Read more