August 21, 2019

What are the effects of Over Capitalisation?

Effects of Over Capitalisation

  1. Effects on the company
    1. Loss of goodwill – reduced earning capacity>fall of market price
    2. Poor creditworthiness – difficult to get loans or credit at cheaper rates of interest.
    3. Difficulties in obtaining capital – loss of confidence in the company.
    4. Decline in efficiency of the company
    5. Loss of market –
    6. Inflated profits
    7. Liquidation of the company
  2. Effects on shareholders
    1. Reduced dividends
    2. Fall in the value of shares
    3. Unacceptable as collateral security – shares have small value
    4. Loss on speculation
    5. Loss on re-organization
  3. Effects on society
    1. Loss to consumers – over priced and poor quality goods
    2. Loss to workers – reduction in wages, welfare activities – layoffs
    3. Under utilization of resources
    4. Gambling in shares
    5. Recession in economy

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