Capitalization Question:
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Explain what are the effects of undercapitalization on following parties?

a.)Company
b.)Shareholders
c.)Consumers
d.)Society

Answer:

a.) Company

The under capitalization in this one effect the company to bring the greater reputation for them and with greater earning their market shares also increases. Higher rate of earning also allow higher competition in the market. The demand of workers to do good quality product also rises due to flow of high profits.

b.) Shareholders

The effect of under capitalization on the company is much more as the company's profits increases as the earning goes up but the market value goes down due to increase of share rise company’s profitability increases. As a result, rate of earnings go up. The financial reputation also increases due to having capital in the hands of the company. In the company in this situation the shareholders can also enjoy high dividend due to raise in profits and saving of money.

c.) Consumers

This situation affects consumer by having their interest getting affected as they think that company is over charging them on the products as the company is having high probability of raising more profits by doing their bit. So, consumers here are on the receiving end as they have to pay up more to buy a product which has cost included of marketing and advertisements and other promotional agendas.

d.) Society

Society is getting affected by the high earning and high profitability and high market price of shares and there can be unhealthy talks in stock market about the company which is having all these with them. Generally public expect high prices of product from high profits of a particular company. Company also maintains stock to keep the money secretly which allow them to pay lower taxes to the government. Public also raises the high expectations from the companies which got high profits to raise the innovation bar and to provide good facility and high end technology of the product in the market.

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