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CAPITALIZATION

Capitalization refers to the total amount of capital employed in a business. It is the sum of the par value of stocks and bonds outstanding, representing the balance sheet value of equity and debt. There are different types of capitalization based on how the capital relates to a company's needs and activities, including over capitalization, under capitalization, and watered capitalization. Over capitalization means a company has more capital than required, while under capitalization means a company has less capital than warranted by its earnings capacity. Watered capitalization occurs when a stock's realizable value is less than its book value.

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53 views

CAPITALIZATION

Capitalization refers to the total amount of capital employed in a business. It is the sum of the par value of stocks and bonds outstanding, representing the balance sheet value of equity and debt. There are different types of capitalization based on how the capital relates to a company's needs and activities, including over capitalization, under capitalization, and watered capitalization. Over capitalization means a company has more capital than required, while under capitalization means a company has less capital than warranted by its earnings capacity. Watered capitalization occurs when a stock's realizable value is less than its book value.

Uploaded by

Shrikaran
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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CAPITALIZATION

Financial planning and decision play a major role in the field of financial management

which consists of areas of financial management such as, capitalization, financial

structure, capital structure, leverage and financial forecasting. Capital is the major part of all
kinds of business activities, which are decided by the size, and nature of the business concern.
Capital may be raised with the help of various sources. If the company maintains proper and
adequate level of capital, it will earn high profit and they can provide more dividends to its
shareholders. It also refers to as the total investment of the company in terms of money, and

assets. It is also called as total wealth of the company. When the company is going to invest

large amount of finance into the business, it is called as capital. Capital is the initial and

integral part of new and existing business concern.

The capital requirements of the company concern is classified into two categories:

(a) Fixed capital

(b) Working capital.

CAPITALIZATION

Capitalization is one of the most important parts of financial decision. It is related to the total
amount of capital employed in the business concern. Capitalization can be defined as the sum
of the par value of stocks and bonds outstanding. It is the balance sheet value of stocks and
bonds outstands. Capitalization is the sum total of the par value of all shares”.

TYPES OF CAPITALIZATION

Capitalization may be classified into the following three important types based on its nature:

• Over Capitalization

• Under Capitalization

• Water Capitalization

Over Capitalization

Over capitalization refers to the company which possesses an excess of capital in relation
to its activity level and requirements. In simple means, over capitalization is more capital

than actually required and the funds are not properly used. Capitalization means, when a

business is unable to earn fair rate on its outstanding securities.

Under Capitalization

Under capitalization is the opposite concept of over capitalization and it will occur when

the company’s actual capitalization is lower than the capitalization as warranted by its

earning capacity. Under capitalization is not the so-called inadequate capital.

Under capitalization Is when the rate of profit is exceptionally high in the same industry.

It is an excess of true assets value over the aggregate of stocks and bonds outstanding.

Watered Capitalization

If the stock or capital of the company is not mentioned by assets of equivalent value, it is

called as watered stock. A stock is said to be watered when its true value is less than its book
value. In simple words, watered capital means that the realizable value of

assets of the company are less than its book value.

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