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What are the effects of under capitalization?
1-On Shareholders
A-Company’s profitability increases. As a result, rate of earnings go up.
B-Market value of share rises.
C-Financial reputation also increases.
D-Shareholders can expect a high dividend.
2-On company
A-With greater earnings, reputation becomes strong.
B-Higher rate of earnings attract competition in market.
C-Demand of workers may rise because of high profits.
D-The high profitability situation affects consumer interest as they think that the company is overcharging on products.
3-On Society
A-With high earnings, high profitability, high market price of shares, there can be unhealthy speculation in stock market.
B-‘Restlessness in general public is developed as they link high profits with high prices of product.
C-Secret reserves are maintained by the company which can result in paying lower taxes to government.
D-The general public inculcates high expectations of these companies as these companies can import innovations, high technology and thereby best quality of product.