Capitalization Interview Questions with Answers
Question: 1. Do You Know The Theories To Determine The Amount Of Capitalization?
Answer:
The fundamental theories which are worried with the amount of capitalization are as follows:-
Cost Theory – In this concept the fee of the business enterprise is determined by means of adding certain factors which includes:-
Cost of fixed assets i.E. Machinery, mechanical items
Working capital i.E. The capital which is required for non-stop operation of the enterprise
Cost of established order of commercial enterprise promoting i.E.
Expenses in doing the advertisements:
These elements permit the merchandising team to recognise the quantity of capital which has to be raised to meet the promoting task. The proper income of the organization is been found out by its earning now not with the aid of its investment in other states. For instance if a few property becomes out of date and a few idle then the income will fall but that fall of capital might not affect the funding made by using the agency in other employer’s commercial enterprise.
Earnings Theory: In this theory actual cost of an organisation depends on its income ability. The value of the employer capitalization can be identical because the expected incomes of the corporation. To find out this a company has to prepare a earnings and loss account and then check frequently to look the impact of their sales over the years to find out how correct there estimations are. The income may be as compared to the actual earning and the adjustment can be made in keeping with that. The promoting group will then see the up and down of the earnings and then basic selection can be taken on control and a way to simulate the earning to boom the revenue of the business enterprise.
For example if there is a organization which has an envisioned average earnings of Rs. 25,000 in first few years and incomes a return of five% on their capital.
The capitalization could be: (25,000*a hundred)/5 = Rs. 5, 00,000.
Question: 2. Explain Earnings Theory?
Answer:
In this idea authentic value of an organization relies upon on its earnings capability. The value of the organisation capitalization can be identical because the envisioned incomes of the employer. To discover this a agency has to put together a income and loss account and then take a look at regularly to look the effect in their sales through the years to discover how correct there estimations are.
The income can be compared to the actual earning and the adjustment may be made in line with that. The promotion team will then see the up and down of the profits after which average selection might be taken on management and the way to simulate the incomes to boom the revenue of the organisation.
For instance if there’s a company which has an predicted common profit of Rs. 25,000 in first few years and incomes a go back of five% on their capital.
The capitalization could be: (25,000*100)/5 = Rs. 5, 00,000
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Question: 3. Explain Cost Theory?
Answer:
In this theory the value of the business enterprise is decided by way of including positive elements which include:-
Cost of constant property i.E. Machinery, mechanical objects
Working capital i.E. The capital that’s required for non-stop operation of the organization
Cost of established order of business promotion i.E.Expenses in doing the advertisements
These elements permit the promotion crew to recognize the amount of capital which has to be raised to fulfill the advertising task. The proper earnings of the organisation is been observed out by its incomes no longer through its investment in other states. For instance if some property becomes out of date and a few idle then the income will fall but that fall of capital may not have an effect on the funding made by way of the employer in other corporation’s business.
Question: 4. Tell Me What Is Over Capitalization? What Are Its Causes?
Answer:
Capitalization of a employer neither have to be low or excessive. It should be definitely available on the time of want. Over capitalization is a state wherein the earning which aren’t sufficient to provide an amazing go back on the amount of proportion capital which has been issued. This is wherein while general owned and borrowed capital exceeds the constant and contemporary property (it indicates losses on the property side).
The agency which comes beneath this country is like someone who cannot deliver his personal weight well. The agency which comes underneath this sort of have an effect on has many difficulties and not probably to be energetic until the state is been corrected.
The reasons of over capitalization are as follows:
Idle Funds: Company can also have finances which won’t had been used properly e.G. Money invested in such projects that are giving very low income.
Over-valued : Fixed assets may be having higher value than that of its real fee.
Value degradation : Fixed assets may have been taken when the expenses have been excessive and whilst the charges have fallen the value of it is able to have fallen but then also the price for the employer will be high simplest.
Inadequate Depreciation provision: Fixed property might not have good enough provision.
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Question: 5. Do You Know What Is Capitalization? What Is Its Importance?
Answer:
Capitalization is a time period which has unique meanings in each financial and accounting context. Capitalization in accounting means the cost to shop for an asset that’s included inside the rate of the asset while in financial phrases it is the cost that is required to shop for an asset which incorporates rate of a selected asset and it also include the retained income of a business enterprise with stock debt and long time debt. There are two kinds of capitalization which might be called as Over-capitalization and some other is called as Under-capitalization.
Capitalization is very import aspect in determining the price of the organization within the marketplace that’s primarily based on the economic structure of the employer. This element depends at the previous information and economics of the business enterprise. This also shows a specific behaviour of the companies’ shape and lets in them to create a plan to do the advertising and marketing.
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Question: 6. What Are The Causes Of Under Capitalization?
Answer:
The impact of undercapitalization may be summarized as:-
The fee of immoderate hobby on borrowed capital can cause beneath capitalization as we should pay extra interest on the capital which has been borrowed from a few other dealers around.
Under capitalization can also reason organizations to apply their vintage and out of date system due to lack of ability to buy new items or buy new objects.
Under capitalization lets in the agencies to run on low price due to that they are not able to have high value of production due to use of antique machinery. It is also a purpose of improper economic making plans. It is hard to elevate the capital if any employer comes below this sort of situation.
There are several extraordinary causes that exist which include:-
It makes a organisation developing financially with brief-term capital, in preference to having permanent capital to spend on goods and on shopping.
It would not permit a at ease transaction of financial institution mortgage at crucial time.
In at some stage in the predictable commercial enterprise threat it also fails to gain the coverage fee.
It also has to undergo many destructive macroeconomic situations.
Question: 7. What Is Undercapitalization?
Answer:
Under capitalization is any state of affairs which restricts the commercial enterprise agencies to accumulate the price range which they need. Under capitalization is likewise a country like over capitalization where the owned capital of the business is a good deal less than the borrowed capital. It additionally manner that the owned capital of the organization isn’t always up to the scale and its operation and commercial enterprise depends at the borrowed money.
This additionally comes as a result of over-trading. Under capitalization has many elements concerned with it and it’s far indicated by using:
Low proprietary Ratio
Current Ratio
High Return on Equity Capital
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Question: eight. What Is Inadequate Depreciation Provision?
Answer:
Fixed property might not have good enough provision.
Question: 9. What Is Value Degradation?
Answer:
Fixed belongings can also were taken whilst the fees had been excessive and when the expenses have fallen the value of it could have fallen however then also the fee for the corporation might be high only.
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Question: 10. What Is Over-valued?
Answer:
Fixed belongings can be having higher value than that of its real fee.
Question: 11. What Is Idle Funds?
Answer:
Company may have budget which might not were used nicely e.G. Money invested in such initiatives which might be giving very low profits.
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Question: 12. Explain What Sort Of Remedies Is Available For Companies To Overcome The Situation Of Over Capitalization?
Answer:
There are distinct kinds of remedies to be had for over capitalization which are as follows:-
The company can conquer Over-capitalization by using decreasing its capital to be able to achieve a exceptional courting between owners’ funds and internet income.
The agency can overcome this section by way of spending the cash accurately and in those areas wherein they are able to get some earnings.
The organisation also can conquer this with the aid of utilising the money which has been idle in the bank and put up in a few funding and has now not been used till now.
The organisation also can triumph over this through eliminating the over-valuation coverage by bringing down the values of property to their right values.
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Question: 13. Tell Me What Is The Effect Of Overcapitalization On Following Parties? A.) Company B.) Shareholders C.) Consumers D.) Society
Answer:
a.) Company
It has a massive effect on the company due to low earnings the businesses reputation is harmed.
The merchandising of the organization because tough to do and the stocks of the enterprise can’t be without difficulty advertised.
Borrowings from different events come to be tough because of decline of earnings by the organisation and due to this the reputation of the corporation goes down which in turn makes the enterprise looses its credibility.
Company bask in malpractices to keep its photograph for example manipulation of debts to show excessive earnings.
Company under the impact of low capital cuts down the expenditure on maintenance, alternative of assets and do the important value cutting for example elimination of the stuff etc.
B.) Shareholders
As the businesses earnings decreases the charge of earning of shareholders also decreases as they each are directly proportional to each different. Due to this problem simplest the market rate of the proportion additionally cross down. Due to over capitalization the shareholders positions become uncertain and their earnings or income also been cut down. Share fee also decreases and they cannot be advertised effectively.
C.) Consumers
Consumers are the folks who are shopping for the organization shares in an effort to cover up the agencies earning the control indulges in wrong doing to boom or decrease the capital in satisfactory at the paper. Return at the capital turns into low which offers the affect to the client that the aid which employer is using isn’t always utilized in a proper way. Consumer begins thinking the credibility of the enterprise due to their low profits because the organisation fail to pay its lenders on time. It additionally has an impact on working situations and fee of wages and salaries also reduce.
D.) Society
It has an effect on the society by speculating about the enterprise which might be beneath-appearing and those people who purchase the shares always continue to be in panic as what is going to manifest to their investments which they’ve executed. It has additionally an impact on working situations and fee of the organization of people running in the organisation that are going thru this phase. The salaries of other businesses in the businesses also lessen down due to this.
Question: 14. Explain What Are The Indications Of Existence Of Undercapitalization In A Company?
Answer:
Undercapitalization is whilst the actual capitalization is decrease than its proper capitalization as it’s miles given by means of its incomes ability. Undercapitalization is indicated by using the condition above and when the charge of earning may be very excessive in effect to the returns which other businesses get which might be within the identical industry as others.
This is also indicated while a corporation does not have enough capital to conduct ordinary enterprise operations and that they should pay the people from whom they have got taken. When a employer doesn’t generate sufficient cash drift to get entry to the forms then it is stated to be undercapitalized.
Question: 15. Explain What Are The Effects Of Undercapitalization On Following Parties? A.)organisation B.)shareholders C.)customers D.)society
Answer:
a.) Company
The under capitalization on this one impact the corporation to convey the greater reputation for them and with greater earning their market stocks also increases. Higher rate of incomes additionally permit better competition in the marketplace. The demand of people to do appropriate pleasant product also rises due to float of excessive income.
B.) Shareholders
The impact of under capitalization on the employer is a whole lot greater because the organisation’s profits increases because the incomes goes up however the marketplace fee goes down because of increase of proportion upward thrust business enterprise’s profitability will increase. As a result, price of profits pass up. The financial recognition additionally increases because of having capital inside the hands of the organization. In the organisation in this example the shareholders can also revel in high dividend due to increase in income and saving of cash.
C.) Consumers
This state of affairs impacts customer by means of having their hobby getting affected as they assume that business enterprise is over charging them on the goods as the organisation is having excessive probability of raising greater profits by using doing their bit. So, customers right here are at the receiving end as they should pay up more to shop for a product which has fee blanketed of advertising and classified ads and different promotional agendas.
D.) Society
Society is getting laid low with the high earning and high profitability and high marketplace charge of stocks and there can be unhealthy talks in inventory market about the employer that is having all these with them. Generally public anticipate high prices of product from excessive income of a particular enterprise. Company additionally continues stock to maintain the cash secretly which permit them to pay lower taxes to the authorities. Public also raises the high expectancies from the companies which were given excessive earnings to elevate the innovation bar and to provide properly facility and excessive stop technology of the product within the marketplace.
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Question: sixteen. Tell Me What Remedies Are Available For Companies To Overcome Undercapitalization?
Answer:
Remedies are the answers which might be to be had for the companies to triumph over the problem of undercapitalization this will be finished by the use of factors.
These factors are as follows:-
Splitting up the stocks will reduce the dividend in step with percentage and don’t deliver more to at least one best however equally to every person and the excessive incomes can be applied properly.
Issue bonus shares to the company members who’re presently related to the agency as well as the shareholders stake with the aid of doing this each the dividend consistent with percentage and income in step with percentage will lessen.
Question: 17. Explain Balanced Capitalization?
Answer:
Capitalization is a group of share capital, loans, reserves and debentures. It represents everlasting investment in companies and it also gets rid of the need of long-time period mortgage plans. It is used to reveal the fact of the enterprise by using promoting opposition, improvement, income and investment among individuals, corporations and companies.
Balance capitalization is a part of this Capitalization handiest in which it’s miles compared to the relative importance, fee and other things to make it proportionate in each sense. In stability capitalization debits and credit should be identical on each aspects and the percentage need to be shared amongst all in equal proportions.
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Question: 18. Can You Please Explain The Difference Between Overcapitalization & Undercapitalization?
Answer:
Overcapitalization is a country where income are not sufficient to justify the truthful return on the amount of percentage capital which has been issued through the business enterprise whereas undercapitalization is a nation where the capital that is owned by means of the enterprise is a great deal much less than the borrowed capital.
Overcapitalization takes place while the real profits of a enterprise aren’t enough or sufficient to pay interest to the lenders whereas undercapitalization occurs because of over-trading and whilst the enterprise earn excessive income compared to other industry.
Overcapitalization shows the charge of return as declining entity while undercapitalization suggests the fee of return as increasing entity.
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Question: 19. Explain What Are Watered Stock / Watered Capitals? What Are The Reasons Which Lead To This Situation?
Answer:
Watered stock/capital is that inventory which is issued with a price a whole lot better than the value of belongings which a corporation very own. It may be due to excising inventory dividends, hyped up property and large running losses. The belongings could have these capabilities including values which are directly associated with money owed or through immoderate difficulty of inventory. It is an asset with an inflated price which is not real however has the artificial significance.
The reasons which cause this situation are the excess price of paid for an asset. For instance if a corporation pays 25,000 because of goodwill, which if valued Rs. 20,000 then the capital which is watered to the extent of Rs. 2,000. During the time of promotional sports water enters the capital inside the initial time frame.
Question: 20. Can You Please Explain The Difference Between Watered Capital And Overcapitalization?
Answer:
Watered capital is referred to as so due to the fact the float of cash can be seen at the time of promotional events only and then cash flows like water with the capital within the preliminary length at the time of advertising while Over capitalization may be calculated after the organisation has worked for a few years and at the give up best.
Over capitalization can be resulting from watered capital while water capital isn’t always as a result of overcapitalization and it could be calculated on the time when the company is taking the promotional event in hand.
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