Under-capitalisation refers to:
AA firm with too much equity
BA firm with no debt
CA firm earning more than what its capital can normally generate
DA firm with low EPS
Answer & Solution
Correct answer: C. A firm earning more than what its capital can normally generate
1. Under-capitalisation: firm uses less capital than it could profitably employ.
2. Earnings are abnormally high relative to capital invested.
3. Often seen as a sign of efficient management or temporary boom.
_Source: ICAI BoS CA Inter Paper 6A, Ch 5 "Financing Decisions — Capital Structure", §4_
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