capital gains

Examples of capital gains in the following topics:

• Reporting

  • Most commonly, reporting of investments will fall under the reporting of capital gains.
  • Both organizations and individuals must report any and all capital gains within a given time period.
  • A few examples of potential reductions or deferrals in capital gains reporting include:
  • While there are countless other small legislative items which may indicate tax implications on capital gains, this gives a reasonable overview of the types of considerations accountants make when considering capital gains.
  • Recognize the broader points of capital gains reporting, alongside the potential reductions available

• Investor Preferences

  • Investor preferences are first split between choosing dividend payments now, or future capital gains in lieu of dividends.
  • Cash dividends provide liquidity, but the bonus share will bring capital gains to the shareholders.
  • The investor's preference between the current cash dividend and the future capital gain has been viewed in kind.
  • Gordon's dividend discount model states that shareholders discount the future capital gains at a higher rate than the firm's earnings, thereby evaluating a higher value of the share.
  • In contrast, others (see Dividend Irrelevance Theory) argue that the investors are indifferent between dividend payments and the future capital gains.

• Dividend Irrelevance Theory

  • Under perfect market conditions, stockholders would ultimately be indifferent between returns from dividends or returns from capital gains.
  • Dividend irrelevance follows from this capital structure irrelevance.
  • However, the total return from both dividends and capital gains to stockholders should be the same.
  • Therefore, if there are no tax advantages or disadvantages involved with these two options, stockholders would ultimately be indifferent between returns from dividends or returns from capital gains.
  • Merton Miller, one of the co-authors of the capital irrelevance theory which implied dividend irrelevance.

• Relationship Between Dividend Payments and the Growth Rate

  • One such fundamental that that investors take into account is how much capital is distributed to investors, and conversely how much capital is kept from investors.
  • Capital is distributed to investors via dividend payments and, indirectly, through capital gains.
  • Capital that is kept from investors is known as retained earnings.
  • Some companies require large amounts of new capital just to continue operations.
  • However, investors seeking higher capital growth may prefer a lower payout ratio because capital gains are taxed at a lower rate.

• The Marginal Cost of Capital

  • The marginal cost of capital is the cost needed to raise the last dollar of capital, and usually this amount increases with total capital.
  • Generally we see that as more capital is raised, the marginal cost of capital rises .
  • For this we must look into marginal returns of capital, which can be described as the gains or returns to be had by raising that last dollar of capital.
  • The Marginal Cost of Capital is the cost of the last dollar of capital raised.
  • Describe how the cost of capital influences a company's capital budget

• Defining Venture Capital

  • Early-stage business ventures gain funding and guidance from venture capitalists in exchange for an equity stake in the firm.
  • Venture capital is a method of financing a business start-up in exchange for an equity stake in the firm.
  • Due to their risky nature, most venture capital investments are done with pooled investment vehicles.
  • The technology firms of Silicon Valley and Menlo Park were primarily funded by venture capital.
  • Facebook is one example of a entrepreneurial idea that benefited from venture capital financing.

• Role of Financial Markets in Capital Allocation

  • One of the main functions of financial markets is to allocate capital, matching those who have capital to those who need it.
  • One of the main functions of financial markets is to allocate capital.
  • Capital markets especially facilitate the raising of capital while money markets facilitate the transfer of liquidity, matching those who have capital to those who need it.
  • Money markets allow firms to borrow funds on a short-term basis, while capital markets allow corporations to gain long-term funding to support expansion.
  • Long-term capital can come in the form of shared capital, mortgage loans, and venture capital, among other types.

• Inputs and Outputs of the Function

  • Capital refers to the material objects necessary for production.
  • Machinery, factory space, and tools are all types of capital.
  • Although in reality a firm may own the capital that it uses, economists typically refer to the ongoing cost of employing capital as the rental rate because the opportunity cost of employing capital is the income that a firm could receive by renting it out.
  • Thus, the price of capital is the rental rate.
  • The marginal product of an input is the amount of output that is gained by using one additional unit of that input.

• Free Enterprise

  • This is a form of capitalism but one in which the state acts as the dominant economic player and uses markets primarily for political gain. "
  • This is an example of capitalism in which government policies generally target the regulation and not the money.
  • There are multiple variants of capitalism, including laissez faire, mixed economy, and state capitalism.
  • Capitalism gradually spread throughout the Western world in the 19th and 20th centuries.
  • Explain how free enterprise leads to the economic system of capitalism

• Relationship Between Financial Policy and the Cost of Capital

  • As opposed to strictly using cost of capital, decisions must be made using opportunity cost of capital.
  • Other facets include portfolio theory, hedging, and capital structure.
  • Along the same lines, companies use hedging techniques to offset potential gains and losses.
  • Simply put, a hedge is used to reduce any substantial gains or losses suffered by an individual or an organization.
  • Capital structure may be highly complex and include dozens of sources.