Both of these are definitely bad for a firm.
Undercapitalization is when the capital owned by the firm is too much less than the capital borrowed by the firm. In such a situation, the firm will likely be
- Paying excessively high interest charges
- Losing productivity by producing on obsolete machinery
Overcapitalization is the opposite problem. In this case,
- Dividend and interest payments will likely be too high relative to earnings.
This is because the capital is not being used efficiently.
Remedies could include splitting shares to correct undercapitalization and buying back shares to correct overcapitalization.
No comments:
Post a Comment