October 20, 2019

What are the effects of Under Capitalisation?

The effects of under capitalisation are:

  1. On shareholders
    1. Rate of EPS will go up.
    2. The value of equity share in the market will go up.
    3. Financial reputation of the company will increase.
    4. Can expect higher dividends regularly.
  2. On company
    1. Market value of company shares will go up – increase in reputation of the company.
    2. The management may be tempted to build up secret reserves.
    3. Higher rate of earnings will attract competition in the market.
    4. The workers may be tempted to demand higher wages, bonus and other benefits.
    5. Customers may feel that they are over charged.
    6. The government may increase tax rates on companies earning exceptional profit.
  3. On society
    1. Unhealthy speculation in shares – due to increase value of shares.
    2. Consumers may feel exploited.
    3. Management may build up secret reserves and pay lower taxes to the government.

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