[Machine Malfunction] Michael, the president of a health club operation called Head-to-Toe Health Club, convinced the board of directors to approve a large purchase of a certain fitness machine called "Perfect Body." Michael had carefully investigated the machine and did a presentation to the board on its purported benefits. Unfortunately, after the purchase, it was announced that "Perfect Body" was actually a very dangerous machine that should not be used. The manufacturer of "Perfect Body" went bankrupt, and Head-to-Toe lost $200,000 on the purchase of the machines. The shareholders are furious and want to sue Michael and the directors. In an attempt to appease the ring leader of the shareholders, Simone, the board of directors agrees to allow her to purchase stock of the company at below its fair market value. Simone purchases a considerable amount of stock on that basis, but says that the shareholders plan to continue with an action against Michael and the board members.
-Stock such as that issued to Simone is called which of the following?

Question

Quizplus · Accepted Answer

Watered stock refers to stock that is issued at a value much greater than the value of the issuing company's assets, typically involving some form of manipulation or unfair practice. In this case, issuing stock to Simone at below its fair market value to appease her and potentially influence her actions regarding the lawsuit can be considered as creating watered stock, as it dilutes the value of the existing shares.

[Machine Malfunction] Michael, the President of a Health Club Operation