Multiple choice

Overcapitalisation may result in

  1. increase in goodwill

  2. decline in dividends

  3. borrowing money at lower rate of interest

  4. demand for increase in salaries by employees
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

As overcapitalsiation arises when actual profits are not sufficient to provide a fair return on share capital over a period fo time. So when profits are low in comparison to capital invested by investors, the company pays lower dividends on shares than previous years to its investors due to less profits.

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