Theories of Capitalization

ANKIT
MOHIT
 Capitalization

• Capitalization refers to the valuation of the total business.

• It is the sum total of owned capital and bor­rowed capital.

• In a broader sense it means the total fund invested in the business

and includes owner’s funds, bor­rowed funds, long term loans.
Cost Theory of Capitalization

 According to this theory a projected Balance Sheet is prepared. The

sum of amounts of all items to be shown on the assets side of the
projected Balance Sheet is taken as the amount of capitalisation.
Capitalised Value of Earning Theory of
Capitalization
• The earnings theory of capitalization recognizes the fact
that the true value of an enterprise depends upon its
earnings and earning capacity.

• it correlates the value of a firm or the amount of

capitalisation directly with its earning capacity.