Capitalization Question:
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Explain what are watered stock / watered capitals? What are the reasons which lead to this situation?


Watered stock/capital is that stock which is issued with a value much higher than the value of assets which a company own. It can be caused by excessing stock dividends, overvalued assets and large operating losses. The assets can have these features including values which are directly related to accounts or through excessive issue of stock. It is an asset with an inflated value which is not real but has the artificial significance. The reasons which lead to this situation are the excess price of paid for an asset. For example if a company pays 25,000 on account of goodwill, which if valued Rs. 20,000 then the capital which is watered to the extent of Rs. 2,000. During the time of promotional activities water enters the capital in the initial period of time.

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Can you please explain the difference between watered capital and overcapitalization?Can you please explain the difference between Overcapitalization & undercapitalization?