Capitalization Question:
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Tell me what is the effect of overcapitalization on following parties?

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

Answer:

a.) Company

(i) It has a big impact on the company because of low profits the companies reputation is harmed.

(ii) The promotion of the company because difficult to do and the shares of the company can't be easily marketed.

(iii) Borrowings from other parties become hard due to decline of earnings by the company and due to this the reputation of the company goes down which in turn makes the company looses its credibility.

(iv) Company indulge in malpractices to retain its image for example manipulation of accounts to show high earnings.

(v) Company under the influence of low capital cuts down the expenditure on maintenance, replacement of assets and do the necessary cost cutting for example removal of the stuff etc.

b.) Shareholders

As the companies profit decreases the rate of earning of shareholders also decreases as they both are directly proportional to each other. Due to this problem only the market price of the share also go down. Due to over capitalization the shareholders positions become uncertain and their profits or earnings also been cut down. Share value also decreases and they can't be marketed correctly.

c.) Consumers

Consumers are the people who are buying the company shares so to cover up the companies earning the management indulges in wrong doing to increase or decrease the capital in quality on the paper. Return on the capital becomes low which gives the impression to the customer that the resource which company is using is not utilized in a right manner. Consumer starts questioning the credibility of the company due to their low earnings as the company fail to pay its creditors on time. It also has an effect on working conditions and payment of wages and salaries also lessen.

d.) Society

It has an effect on the society by speculating about the company which are under-performing and those people who buy the shares always remain in panic as what will happen to their investments which they have done. It has also an effect on working conditions and payment of the group of people working in the company which are going through this phase. The salaries of other groups in the companies also lessen down due to this.

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