a)
i) Overcapitalization refers to a situation where a company has more or excess capital at its disposal than what is required for its normal and optimal operation or utilization. This may occur due to excessive equity or debt financing.

ii) Overtrading is when a company has insufficient cash or near-cash resources due to rapid growth. Indicators include high utilization of trade credit, large turnovers without a corresponding increase in cash, and liquidity challenges.

b)
i) Extra Profit:
Contribution Sales Ratio = (30-27)/30 = 10%
Increase in sales revenue: 25% x 6,000,000 = 1,500,000
Increase in contribution = 10% x 1,500,000 = 150,000

Return on investment = 150,000/ 450,000 = 33.33% (3 marks)
The policy is worthwhile if the existing customers stick to the 1 month and new
customers or accounts take the 2 months. The return on the latter is 33.33% which has
crossed the required rate of return of 28%.

Decision or advice

c)
i) A stock split divides existing shares into multiple shares. A scrip issue gives additional fully paid shares free of charge, similar to a bonus. The main difference is that stock splits simply increase the number of shares, whereas scrip issues involve giving additional shares. (3 marks)

ii) A company may embark on a scrip issue to improve float, liquidity, and traded volumes of the stock. It also signals the company’s confidence in its ability to service a larger equity base. (2 marks)