paid-in capital

Examples of paid-in capital in the following topics:

• Defining Capital

  • In economics, capital references non-financial assets used in the production of goods and services.
  • In economics, capital (also referred to as capital goods, real capital, or capital assets) references non-financial assets used in the production of goods and services.
  • In a broad sense, capital can be divided into two categories:
  • Interest is a fee that is paid by a borrower of assets.
  • Commonly, it is the price that is paid for the use of borrowed money.

• Capital Expenditures

  • Capital expenditures ("CAPEX") are one-time expenses incurred for the purchase of land, buildings, construction of buildings and other assets, and equipment used in the production of goods or in the rendering of services.
  • In short, capital expenditures are the total costs needed to bring a project to a commercially operable status.
  • A CAPEX cannot be deducted as an expense in the year in which it is paid or incurred and must be capitalized.
  • The CAPEX costs are then amortized or depreciated over the life of the asset in question.
  • The following capital expenditures are capitalized:

• Owners' Equity

  • In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid.
  • This creates a liability on the business in the shape of capital as the business is a separate entity from its owners.
  • At first, all the secured creditors are paid against proceeds from assets.
  • Ownership equity is also known as risk capital or liable capital.
  • In financial accounting, equity capital is the owners' interest on the assets of the enterprise after deducting all its liabilities.

• Accounting Perspectives on Long-Lived Assets

  • All money that is spent to get the asset up and running is capitalized as part as the cost of the asset.
  • Items that can be capitalized when the firm purchases a machine include the machine itself, transportation, getting the machine in place, fees paid for having the machine installed and tested, the cost of a trial run, and alike.
  • So, for example, the cost of land would include any attorney fees, real estate fees, title fees, back taxes that need to be paid, and the cost of preparation for the lands intended use.
  • Basically any costs that are necessary to get an item or land ready to use for business is included in the cost of the item.
  • Items spent to get the asset up and running is capitalized as part as the cost of the asset.

• Calculating Expected Value

  • It is a derivation of working capital that is commonly used in valuation techniques, such as DCFs (Discounted Cash Flows).
  • Therefore, in this context, we calculate available working capital using the following formula:
  • We can find working capital by:
  • An increase in working capital indicates that the business has either increased current assets (that it has increased its receivables, or other current assets) or has decreased current liabilities, for example, has paid off some short-term creditors.
  • The common commercial definition of working capital for the purpose of a working capital adjustment in a mergers and acquisitions transaction (i.e., for a working capital adjustment mechanism in a sale and purchase agreement) is equal to:

• Cost of Interest During Construction

  • The capitalization of interest costs involves adding the amount of interest expense incurred and/or paid during the asset's construction phase to the asset's cost recorded on the balance sheet.
  • Interest cost capitalization does not apply to retail inventory constructed or held for sale purposes.
  • If any delays occur during the construction phase, the interest costs incurred during the delay are not capitalized.
  • Most of the interest paid during construction is part of an asset's cost.
  • Interest paid during delays in construction is excluded from the asset's cost.

• Cost of capital

  • The cost of capital refers to the cost of the money used to pay for the capital.
  • In order for an investment to be worthwhile, the expected return on capital has to be higher than the cost of capital.
  • In order to determine a company's cost of capital, the cost of debt and the cost of equity must be calculated.
  • The cost of debt is composed of the interest rate paid on the bonds or loans.
  • where D is the value of debt in the company, E is the value of equity, rd is the cost of debt, t is the tax rate, and re is the cost of equity.

• Relationship Between Dividend Payments and the Growth Rate

  • The portion of the earnings not paid to investors is, ideally, left for investment in order to provide for future earnings growth.
  • Capital is distributed to investors via dividend payments and, indirectly, through capital gains.
  • In other words, the portion of profits not paid out to investors via dividends is, ideally, left for investment in order to provide for future earnings growth.
  • However, investors seeking higher capital growth may prefer a lower payout ratio because capital gains are taxed at a lower rate.
  • High growth firms in early life generally have low or zero payout ratios in order to reinvest as much of their earnings as possible.

• Capital Market

  • In primary markets, new stock or bond issues are sold to investors.
  • The money markets are used for the raising of short term finance, sometimes for loans that are expected to be paid back as early as overnight.
  • Capital markets are used for the raising of long term finance, such as the purchase of shares, or for loans that are not expected to be fully paid back for at least a year.
  • When a company borrows from the primary capital markets, often the purpose is to invest in additional physical capital goods, which will be used to help increase its income.
  • The NYSE is one of the largest capital markets in the world.

• Differences Between Required Return and the Cost of Capital

  • Now, cost of capital for a given investor will always equate to the required return.
  • In the above equation, you have D as total debt, E as total equity, Kd as the required return on debt, and Ke as the required return on equity.
  • While this image goes into a bit more detail on the derivation of the cost of equity and the cost of debt, the final three boxes on the right ultimately demonstrate the way in which required rates balance out into a WACC (one for debt, one for equity).
  • Debt tends to be a lower rate because it is paid out first if a company goes bankrupt (i.e. lower risk).
  • Equity is a bit higher risk (only paid out if there is capital remaining after debts are paid), and thus equity has a higher rate (and higher risk).