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compare and contrast the pros and cons of over capitalization and under capitalization
Weegy: The main advantages/ merits of under-capitalization are -(i) Creation of secret reserves, (ii) Higher rate of dividend, [ (iii) Rapid increase in the prices of shares in the stock exchange; (iv) Symptom of economic prosperity of the company; (v) Increase in the rate of profits of the company; and (vi) Shares can be sold easily. The evils of under capitalization are- (i) Wide fluctuation in the prices of shares etc., (ii) Increase in competition, (iii) Increase in speculative activities, (iv) Increase in opportunities for manipulation by management, (v) Industrial relations tend to be strained, (vi) Dissatisfaction amongst consumers, they feel they are being exploited by the company, (vii) Increase in the tax burden of the company, (viii) Increased Government interference etc. The main advantages or merits of overcapitalization are: Increase in the competitive power of the company. Easy expansion of the company's activities. Morale of the management is raised. Risk-taking capacity is increased. No fear of shortage of capital. Power to face depression period is increased. The Disadvantages of over capitalization depends of the view of stakeholders and these are the following Form Company's Point View: (i) It reduces the earning capacity of the company; (ii) Reputation and goodwill of the company is adversely affected, i.e., reduced; (iii) Company takes resort to unfair practices; (iv) Manipulation of accounts etc. ] (More)
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