Multiple choice

Which of the following is not a remedy for correcting undercapitalisation?

  1. Issuing of new shares and debentures

  2. Increase in Par Value of shares

  3. Iss of bonus shares to the equity shareholders

  4. Debentures carrying a higher rate of interest may be redeemed
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Right answer because it is a remedy for correcting overcapitalisation.In overcapitalisation the actual profits are not sufficient to provide a fair rate of return on share capital, the capital has to be decreased in this case, redemption of debentures decreases the capital invested and also increases earnings as interest is not to be paid.

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