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Thursday, July 9, 2009

Financial Management MBA Assignments for SMU MB0029

Question - What are the causes and remedies for over capitalization and under capitalization?

Answer – Overcapitalization

A company is said to be overcapitalized, when its total capital (both equity and debt) exceeds the true value of its assets. It is wrong to identify overcapitalization with exess of capital because most of the overcapitalized firms suffer from the problems of liquidity.

Causes of overcapitalization:

1. Decline in the earnings of the company.
2. Fall in dividend rates.
3. Market value of company’s share falls, and company loses investors confidence.
4. Company may collapse at any time because of anemic financial conditions – it will affect its employees, society, consumers and its shareholders.


Remedies for overcapitalization

Restructuring the firm is to be executed avoid the situation of company becoming sick.

It involves

1. Reduction of debt burden
2. Negotiation with term lending institutions for reduction in interest obligation.
3. Redemption of preference share through a scheme of capital reduction.
4. Reducing the face value and paid-up value of equity shares.
5. Initiating merger with well managed profit making companies interested in talking over ailing company.

Undercapitalization

Under-capitalization is just the reverse of over-capitalization. A company is considered to be under-capitalized when its actual capitalization is lower than its proper capitalization as warranted by its earning capacity.

Causes of under- capitalization

1. Under estimation of future earnings of the time of promotion of the company.
2. Abnormal increase in earnings from new economic and business environment.
3. Under estimation of total funds requirements.
4. Maintaining very high efficiency through improved means of production of goods or rendering of services.
5. Companies which are set up during recession start making higher earning capacity as soon as the recession is over.
6. Use of low capitalized rate.
7. Companies which follow conservative dividend policy will achieve a process of gradually rising profits.
8. Purchase of assets at exceptionally low prices during recession.

Remedies of undercapitalization

1. Splitting up at the shares – This will reduce the dividend per share
2. Issue of bonus share: this will reduce both the dividend per share and earning per share.
3. Both over-capitalization and under – capitalization are detrimental to the interests of the society.

3 comments:

Prakash said...

Hey...Great Blog...I was also part of Sikkim Manipal University. India is growing steadfastly in the future and all the credit goes to the increasing number of literacy rate. The large mass of educated people are heralding a new script in its growth and development of Indian story. Even Obama is pushing Americans to be like Indians and Chinese. The major factor which contributes to Indian Education is the presence of Distance Education eg. Sikkim Manipal University( http://www.smude.edu.in). It offers the flexibility of learning and earning at the same time and at your ease. The vast number of schools, colleges and universities produces a mass number of workforce. We are marching forward and the World is Listening our footsteps attentively than ever.

OMKAR said...

Dear Sir,
pls.... provide me MBA 3rd semester assignment for financial management for following questions

1)Management Research :
You are incharge of prmoting a new flavour of tooth paste yet to be produced in a tooth paste manufacturing unit which sampling techniques will you use to get the required data from a population?
2)Quality Systems Management :
What are the points you will keep in mind about the concept of quality control & inspection if you are the quality system manager of a rubber products manufacturing units?
3)Business Environment :
Imagine yourself as a new businessman what are the objectives of business that you will keep in mind if you have to launch a new business?
4)Quantitative technique for business analysis :
Suppose you are heading a business unit in india which are the points about statistics you will keep mind for doing business profitably. In other words what is the relevance of business statistics in you venture.
5)Managerial Economics:
Suppose you are the marketing manager of buyer & company ahmedabad , which are technique you will apply in forcasting demand of a products yet to be manufactured .
6)Service marketing :
Selective food marketing has answered the call and was created to represent the way a foodservice broker should. As our industry rapidly evolves, yet condenses, the demand for qualified & experienced represention is great. Selective food service marketing's philosophy is to execute our principals' agenda with thorough opearator penetration & effective service to our distributors. a consrvative prospectus of manufactures, but go to market aggressively to succed. what is the your vision to represent a food manufacturing company in a way that they are proud to say that they have selective food marketing services?

if you get pls forward me on my email ID omkaralim@gmail.com, omkaralim@yahoo.co.in

thanks & regards,
Omkar alim
9727300281

sushant said...

sushant said that ,
when a business is unable to earn a fair rate of return on its outstanding securites it is over capitalisation

and

when a corporation is earning an extraordinarily large return on its outstanding stocks , it is said tobe under capitalistion

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