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.

• Stock Dividends vs. Cash Dividends

  • Stock dividends, unlike cash dividends, do not provide liquidity to the investors; however, they do ensure capital gains to the stockholders.
  • Cash dividends are immediately taxable under most countries' tax codes as income, while stock dividends are not taxable until sold for capital gains (if stock was the only choice for receiving dividends).
  • Shareholders have the choice of either keeping their shares in hopes of high capital gains, or selling some of the new shares for cash, which is somewhat like receiving a cash dividend.
  • For the firm, dividend policy directly relates to the capital structure of the firm, so choosing between stock dividends and cash dividends is an important consideration.
  • When choosing between cash or stock dividends, the trade-off is between liquidity in the short-term or income from capital gains in the long-term.

• 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.

• Advantages of Leasing

  • Leasing is less capital-intensive than purchasing, so if a business has constraints on its capital, it can grow more rapidly by leasing property than by purchasing property.
  • Capital assets may fluctuate in value.
  • Leasing shifts risks to the lessor, but if the property market has shown steady growth over time, a business that depends on leased property is sacrificing capital gains.
  • Depreciation of capital assets has different tax and financial reporting treatment from ordinary business expenses.

• 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.

• 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.