Over-capitalisation occurs when:
ACapital is too small
BCapital employed exceeds what the firm can profitably employ
CEquity > Debt
DDividends are very high
Answer & Solution
Correct answer: B. Capital employed exceeds what the firm can profitably employ
1. Over-capitalisation: company has more capital than it can profitably employ.
2. Earnings as a percentage of capital fall below acceptable level.
3. Causes: over-issue of shares, over-valuation of assets, etc.
_Source: ICAI BoS CA Inter Paper 6A, Ch 5 "Financing Decisions — Capital Structure", §4 — Over/Under capitalisation_
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