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Factors of Working Capital

The following are the factors which determine a concerns requirements of working capital

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Working Capital of capital requirements

The working capital is required for the purchase of raw materials, and for meeting the day-to-day expenditure on salaries, wages, rents, advertising etc.

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Fixed capital of capital requirements

The fixed capital of an industrial concern is invested in fixed assets like plant and machinery, land, buildings furniture, etc. These assets are not fixed in value; in fact, their value may record an increase of decrease in course of time.

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Estimation of capital requirements

It has been indicated above that a company should be properly capitalized can that the actual capital should be neither more nor less than the amount which is needed and which can be gainfully employee.

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Remedies of under-capitalisation

If it is desired to remedy under-capitalization, it can be done relatively more easily than in the case of over-capitalization.

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Disadvantages of under-capitalisation

Under-capitalisation, too, has its own disadvantages

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Under-capitalisation is just the reverse of over-capitalisation. Sometimes a company, on the face of it, may have an insufficient capital but it may have large secret reserves.

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Evils of Over-capitalisation

Over-capitalisation has evil consequences from the point of view of the company, the society and the shareholders.

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Watered Capital

'Water' is said to be present in the capital when a part of the capital is not represented by assets. It is considered to be as worthless as water. Sometimes the services of the promoters are valued at an unduly high price.

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If a company raises more capital (by the issue of shares and debentures and through long-term loans) than is warranted by the figure of capitalisation of its earning power, the company will be said to be over-capitalized.

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Theories of Capitalization

There are two recognized bases for capitalizing new companies

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Capital and Capitalization

The term Capitalization is used only in relation to companies and not in respect of firms or sole-proprietorships.

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Narrow Interpretation

In its narrow sens, the term capitalisation is used only in its quantitative aspect and refers to the amount at which a company's business can be valued.

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Broad Interpretation

There is a growing number of authors who regard capitalisation as synonymous with financial planning.

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