Question

Undercapitalization refers to the problem of: Group of answer choices insufficient funds to operate a business normally. inadequate control of expenses. inappropriate cash flows. undervalued capital stock.

Answer 1

Insufficient funds to operate a business normally.

Undercapitalization refers to the problem of insufficient funds to operate a business normally.

What is undercapitalization?

When a business lacks the money necessary to carry out routine operations and make creditor payments, undercapitalization occurs. This may happen if a company's cash flow is insufficient or if it is unable to obtain financing through debt or equity.

Additionally, undercapitalized businesses are more likely to favor high-cost capital sources like short-term loans over low-cost alternatives like equity or long-term debt. Investors should exercise caution if a company is undercapitalized since the likelihood of bankruptcy rises when a company is unable to pay its debts in full.

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