Question

A situation when a firm gets a profit lower than the average profit of the industry is called:

• A. Undercapitalization
• B. Break-even point
• C. Operating leverage
• D. Overcapitalisation

Answer 1

Answer:

D. Overcapitalisation

Overcapitalisation occurs when a firm's actual earnings are lower than the expected or average earnings of the industry, given the amount of capital invested. In this case, the company’s capital is more than what is required for its earning capacity, leading to lower returns (profits) on investment compared to similar firms.