Rk.educationalnotes

Effect of under Capitalisation:-       Under Capitalisation has both good and adverse effects on various interested groups in the company. They are analysed below:- A. Advantages to the shareholders:- (1) Higher dividend: Due to higher earning of the company the shareholders regularly receive higher dividends on their investments. (2) Capital gain: The shareholders of under capitalised company also avail capital gains because the market value of share increase very rapidly. (3) Easy loan: Since the shares of an under capitalised company have great value as collateral security, the shareholders can easily obtain loans against the security of such shares. B. Advantages to society:-  (1) General welfare: The entire society is benefited with higher earnings of an under capitalised company. (2) Employee advantages: The employees get higher wages, boners and better amenities due to increased earnings. (3) More production:  Under Capitalisation encourages the establishment of new companies re

Under Capitalisation is just reverse of over capitalisation. A company is under capitalised of the real value is higher than the book value of its assets. In other words under Capitalisation occurs when a company's actual capitalisation is lower than its proper capitalisation. Thus, the phase under Capitalisation should never be misconstructed with inadequate of capital. Under Capitalisation is an index of effective and proper utilisation of funds employed in the enterprise.                 According to S.W. Gerstenberg, " A company may be under capitalised when the rate of profits it is making on the total capital is exceptionally high in relation to the return enjoyed by similarly situated companies in the same industry."                 According to Bonneville and Dewey," When a corporation earns exceedingly high income on its capital, it is said to be under capitalised."      Thus, under Capitalisation is associated with an effective utilisation of investmen