A corporation is said to be under capitalised when a company is one whose earning has been hired in relation to the size of invested capital.
In other words, "the real value of a fixed assets is more than their value shown in the books"
causes of Under capitalisation
- under estimation of income
- under estimation of capital requirement
- promotion during deflation
- conservative Dividend policy
- desire to control over capital and management
- high standard of efficiency
- secret reserve
effect of Under capitalisation
- effect on company:- excessive fluctuation in market price of the share increase in the competition due to dividend declared on high rate.
- effect on shareholder :-increase in rate of return and capital.
- effect on labourers:- bonus, labour welfare.
- effect on society:- better quality of product formation of new industry
Undercapitalization is expressed as follows
undercapitalization = loan capital> equity capital
remedies of Under capitalisation
- capitalisation of profit and issue of Bonus shares.
- splitting up shares
- issue of new shares
