BUSINESS ADMINISTRATION
ENTREPRENEURIAL DEVELOPMENT
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
excess of assets over the liabilities.
|
|
|
excess of liabilities over the assets.
|
|
|
actual earnings are lower than the expected earnings..
|
|
|
actual earnings are higher than the expected earnings.
|
Detailed explanation-1: -A company may become overcapitalized if it buys assets that are priced too high or acquire assets that fit into its operations. Other reasons include poor corporate management, higher-than-expected startup costs (which often appear as assets on the balance sheet), and a change in the business environment.
Detailed explanation-2: -Over-capitalisation results in reduced earnings for the company. This means the shareholders will get lesser dividend. There may be no certainty of income to the shareholders in the future. In case of reorganisation, the face value of the equity share might be brought down.
Detailed explanation-3: -Over-capitalisation takes place when a company raises more money by the issue of shares and debentures than can be profitably used.
Detailed explanation-4: -Overcapitalization Examples Now if we assume that instead of $400, 000, XYZ company is using $500, 000 as its capital, then their rate of earnings will be $80, 000 / $500, 000 = 16%. Thus, their rate of return reduces from 20% to 16% due to overcapitalization.