B.com Notes

Differentiate between over-capitalization and under-capitalization   "Both over-capitalization and under-capitalization are undesirable . However , of the two , the state of over-capitalization is more fatal and dangerous"  (#) Capitalization   * Capitalization means amount of capital invested in a business . * Capitalization is used in the case of companies only . * Capitalization includes all the sources of fund used in an organization .   ------> " The term capitalization or the valuation of the capital includes the capital stock and debts " * "Capitalization " has been derived from the term ' capital ' . Capitalization is used in relation to companies and not in partnership from of sole business .  *Capitalization  = Share capital + Preferential share capital   (#) Over-capitalization    * " A corporation is over-capitalized when its earning are not large enough to yield ( Provide ) a fair return on the am

Weighted Average Cost Of Capital  * The Weighted Average Cost Of Capital is the rate that a company is expected to pay on average to all its security holders to finance its assets . * Weighted average cost is dictated by the external market , not by management . * The Weighted Average Cost Of Capital represents the minimum return that a company  must earn on an existing assets base to satisfy its creditors , owners , and other provider of capital , or they will invest elsewhere . # FORMULA      WACA = E/V × Re + D/V × Rd × ( 1-Tc ) Where  :- * WACA = Weighted Average Cost Of Capital * Re = Cost of equity  * Rd = Cost of debts * E = Market value of firm equity * D = Market value of firm debts * V = E + D ( Total market value of the firms finance ) * E/V = Percentage of financing that is equity * D/V = Percentage of financing that is debts * Tc = Corporate tax rate  * Securities analysts frequently use Weighted Average Cost Of Capital  when asses

Difference Between Capitalization and Capital Structure (#) Capitalization  * Capitalization means amount of capital invested in a business . * Capitalization is used in the case of companies only . * Capitalization includes all the sources of fund used in an organization .   ------> " The term capitalization or the valuation of the capital includes the capital stock and debts " * "Capitalization " has been derived from the term ' capital ' . Capitalization is used in relation to companies and not in partnership from of sole business .  *Capitalization  = Share capital + Preferential share capital    (#) Capital Structure ------> " Capital Structure is qualitative term that gives the ratio in which the total capital is contributed by different sources" * Capital Structure may be high geared or low geared * Capital Structure influenced by external factors . * Capital Structure is a proportion of debts a

Maximization Of Profit * It may be short run or long run process . * Determine the best price and output level that returns the greatest profit . * It can be negative for consumer if the company starts to use cheaper products or decides to raise unreasonable price . ( # ) There are two methods for profit maximization . 1> Marginal cost = Marginal revenue method  2> Total cost = Total revenue method  * Profit = total revenue - total cost (#) Profit Maximization With The Help Of TR & TC      ( see above figure ) Gross Profit = Total Revenue - Total Cost                                                = TR - TC (1) At Q level of output     G.P = TR - TC             = QO - QO            = 0 This is B.E.P ( Break Even Point ) (2) At Q1 level of output         G.P = TR - TC                = Q1.A -  Q1.F                = AF ( i.e., Profit ) (3) At Q2 level of output             G.P = TR - TC                   = B.Q2 - E.Q2  

Trading on Equity policy and its Limitation Meaning * It refers to practice of using borrowed money at fixed interest rates. *It means taking advantages of ownership ( Here ownership means equity {capital} ) . * It is the financial process of using debt to produce gain for the residual owner . * Firm should earn return greater than the interest cost of the debt . * In finance , equity tading is the buying and selling of company stock . Limitation Of Trading On Equity 1 > FIxed Obligations * company have to pay dividend and interest on debentures or fixed dividend        on preference shares . Example -- If profit is 1000 in investment of 10000 which have interest 10% every year so , no amount is left for distribution among shareholder therefore whole profit is utilised for interest payment . 2 > Earning fluctuations * Company gaining from trading on equity should greater than fixed charges . * Firm should ready for future fluctuations . * If profit