CAPITALIZATION
Capitalization is one of the most important parts of financial decisions, which is related to the
total amount of capital employed in the business concern.
Understanding the concept of capitalization leads to solving many problems in the field of
financial management. Because there is confusion among the capital, capitalization, and
capital structure.
The term capital refers to 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 a large
amount of finance into the business, it is called capital. Capital is the initial and integral part of
the new and existing business concerns. The capital requirements of the business concern may
be classified into two categories: (a) Fixed capital (b) Working capital.
Meaning of Capitalization
Capitalization refers to the process of determining the quantum of funds that a firm needs to
run its business. Capitalization is only the par value of share capital and debenture and it does
not include reserve and surplus.
According to Guthman and Dougall, “capitalization is the sum of the par value of stocks and
bonds outstanding”.
“Capitalization is the balance sheet value of stocks and bonds outstands”. — Bonneville and
Dewey
According to Arthur. S. Dewing, “capitalization is the 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 about its
activity level and requirements. In simple means, overcapitalization is more capital than is
actually required and the funds are not properly used.
According to Bonneville, Dewey, and Kelly, overcapitalization means, “when a business is
unable to earn fair rate on its outstanding securities”.
Example A company is earning a sum of Rs. 50,000 and the rate of return expected is 10%.
This company will be said to be properly capitalized. Suppose the capital investment of the
company is Rs. 60,000, it will be overcapitalization to the extent of Rs. 1,00,000. The new
rate of earning
would be 50,000/60,000×100=8.33% When the company has over capitalization, the rate of
earnings will be reduced from 10% to 8.33%.
Capitalization is one of the most important parts of financial decisions, which is related to the
total amount of capital employed in the business concern.
Understanding the concept of capitalization leads to solving many problems in the field of
financial management. Because there is confusion among the capital, capitalization, and
capital structure.
The term capital refers to 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 a large
amount of finance into the business, it is called capital. Capital is the initial and integral part of
the new and existing business concerns. The capital requirements of the business concern may
be classified into two categories: (a) Fixed capital (b) Working capital.
Meaning of Capitalization
Capitalization refers to the process of determining the quantum of funds that a firm needs to
run its business. Capitalization is only the par value of share capital and debenture and it does
not include reserve and surplus.
According to Guthman and Dougall, “capitalization is the sum of the par value of stocks and
bonds outstanding”.
“Capitalization is the balance sheet value of stocks and bonds outstands”. — Bonneville and
Dewey
According to Arthur. S. Dewing, “capitalization is the 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 about its
activity level and requirements. In simple means, overcapitalization is more capital than is
actually required and the funds are not properly used.
According to Bonneville, Dewey, and Kelly, overcapitalization means, “when a business is
unable to earn fair rate on its outstanding securities”.
Example A company is earning a sum of Rs. 50,000 and the rate of return expected is 10%.
This company will be said to be properly capitalized. Suppose the capital investment of the
company is Rs. 60,000, it will be overcapitalization to the extent of Rs. 1,00,000. The new
rate of earning
would be 50,000/60,000×100=8.33% When the company has over capitalization, the rate of
earnings will be reduced from 10% to 8.33%.
