Question 11.C-R-Q.4: It has been argued that many businesses are overcapitalised....
It has been argued that many businesses are overcapitalised. If this is true, what may be the reasons for businesses having too much capital and how can EVA® help avoid this problem?
If businesses are overcapitalised it is probably because insufficient attention is given to the amount of capital that is required. Management incentive schemes that are geared towards generating a particular level of profits, or achieving a particular market share without specifying the level of capital invested, can help create such a problem. EVA® can help avoid the problem by focusing on the need to obtain a profitable return on capital invested.
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