## Over-Capitalization vis-à-vis Under-Capitalization

Both conditions are undesirable, but they differ in severity and in how they are managed.

Basis	Over-Capitalization	Under-Capitalization
Nature	An economic problem (earnings can't support the capital)	Mainly a problem of adjusting the capital structure
Ease of handling	Harder to manage	Easier to manage
Danger level	More dangerous to company, shareholders, and society	Less dangerous

### Conclusion

Both over-capitalization and under-capitalization are problematic, but over-capitalization is more dangerous to the company, its shareholders, and society.
Under-capitalization is easier to manage — it is more about adjusting the capital structure than solving an economic problem.
Although under-capitalization is less dangerous, both situations are undesirable. Every company should aim for proper (fair) capitalization.

⚠️ Common exam mistakes

Stating that under-capitalization is the more dangerous condition — it is the less dangerous of the two.
Concluding that under-capitalization is desirable because it is 'less dangerous' — the goal is always proper capitalization, not either extreme.

Reference:

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Over-Capitalization vs Under-Capitalization

⚠️ Common exam mistakes