Question

Which of the following leads to under-capitalization?

(A) Raising of more money by issue of shares.

(B) Acquiring fixed assets on excessive amounts.

(C) Over-estimation of earnings for enterprise.

(D) Under-estimation of initial rate of earnings.​

Answer 1

Answer:

Acquiring of more money by issue of shares

Answer 2

Answer:

(D) Under-estimation of initial rate of earnings leads to under-capitalization.

Explanation:

Undercapitalization happens when an organization doesn't have adequate capital to direct typical business tasks and pay leasers.

Undercapitalization is the contrary idea of overcapitalization and it will happen when the organization's genuine capitalization is lower than the capitalization justified by its acquiring limit.

Reasons for UnderCapitalization

Undercapitalization emerges because of the accompanying significant causes:

• Underestimation of capital prerequisites.

• Underestimation of initial and future earnings.

• Keeping up with elevated expectations of effectiveness.

• Moderate dividend policy.

• Longing for control and exchanging on equity.