paid-in capital

Examples of paid-in capital in the following topics:

• Ownership Nature of Stock

  • The stock of a company represents the original capital paid into the business by its founders and can be purchased in the form of shares.
  • The capital stock (or stock) of a business entity represents the original capital paid into or invested in the business by its founders.
  • Stock is different from the property and assets of a business, both of which may fluctuate in quantity and value.
  • Ownership of stock represents a stake of ownership in the business entity.
  • The stock is a security that represents equity in the company.

• 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:

• 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.

• 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).

• Dividend Payments and Earnings Retention

  • Retained earnings are shown in the shareholder equity section in the company's balance sheet–the same as its issued share capital.
  • Dividends are usually paid in the form of cash, store credits (common among retail consumers' cooperatives), or shares in the company (either newly created shares or existing shares bought in the market).
  • Cash dividends (most common) are those paid out in currency, usually via electronic funds transfer or a printed paper check.
  • Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid.
  • If the payment involves the issue of new shares, it is similar to a stock split in that it increases the total number of shares while lowering the price of each share without changing the market capitalization, or total value, of the shares held.

• Working Capital

  • Along with fixed assets, such as plant and equipment, working capital is considered a part of operating capital.
  • It is a derivation of working capital, that is commonly used in valuation techniques such as discounted cash flows (DCFs).
  • 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.
  • Decisions relating to working capital and short-term financing are referred to as working capital management.
  • Inventory management is to identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence, increases cash flow.

• The Goals of Capital Budgeting

  • Budgeting helps to aid the planning of actual operations by forcing managers to consider how the conditions might change, and what steps should be taken in such an event.
  • Capital Budgeting, as a part of budgeting, more specifically focuses on long-term investment, major capital and capital expenditures.
  • The main goals of capital budgeting involve:
  • Preferred stock have no financial risk but dividends, including all in arrears, must be paid to the preferred stockholders before any cash disbursements can be made to common stockholders; they generally have interest rates higher than those of corporate bonds.
  • Private equity firms, such as NBGI, provide funds for companies unable or uninterested in obtaining funds publicly.

• Calculating Working Capital

  • Working capital (WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entity.
  • Along with fixed assets, such as plant and equipment, working capital is considered a part of operating capital.
  • Current liabilities (CL) is an accounting term similar to CA: CL is the amount of liabilities that are expected to be settled in cash within a year (or the operating cycle of the company).
  • Since most expenses and debt must be paid in cash , having positive WC shows that the company has the ability to pay off expenses and debt that will arise or come due in the short-term.
  • The company cannot pay a short-term expense, even though a positive WC says that the company should be able to pay off most expenses and loans in the short-term.

• Methods of Paying Dividends

  • Cash dividends are those paid out in currency, usually via electronic funds transfer or a printed paper check.
  • Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid.
  • Stock or scrip dividends are those paid out in the form of additional stock shares of the issuing corporation or another corporation, such as its subsidiary corporation.
  • If the payment involves the issue of new shares, it is similar to a stock split: it increases the total number of shares while lowering the price of each share without changing the market capitalization, or total value, of the shares held.
  • Property dividends or dividends in specie (Latin for "in kind") are those paid out in the form of assets from the issuing corporation or another corporation, such as a subsidiary corporation.

• Loans and Loan Amortization

  • Because capital can be invested, and those investments can yield returns.
  • This gets even more drastic as the scale of capital increases, as the returns on capital over time are expressed in a percentage of the capital invested.
  • Say instead of only a $100, you put in $10,000.
  • Unfortunately, a bit of irresponsible borrowing in your past means you must pay 8% interest over a 30 year loan, which will be paid via a monthly amortization schedule (12 months x 30 years = 360 payments total).
  • This shows the first few installments in the example discussed above (i.e. borrowing $100,000 at 8% interest paid monthly over 30 years).