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# Paid-In Capital: Examples, Calculation, and Excess of Par Value

July 18, 2024
Bill Kimball

That is why most of the time, it has almost no relevance in the stock market. Stock that is exchanged in the equity markets is known as common stock. The owner of common stock is entitled to vote and if awarded, dividends. If a stock drops below its par value, then potential legal liability may occur. This often leads to companies trying to avoid this by setting their stock par values far lower than their actual worth. Common stock is a component of paid-in capital, which is the total amount received from investors for stock.

## APIC in the Real World

The buyback is frequently carried out when a corporation has significant financial reserves or surplus funds. Preferred stockholders have priority in receiving payment during bankruptcy proceedings. An alternate interpretation is that additional capital paid equals already paid, excluding par value from the definition. So, when discussing paid-in capital with others who might have a different understanding of the phrase, you need to be clear on the definition. In this case, it signifies the face value that a business gives to a particular stock during its IPO.

## What Is Market Value?

Common stock or share capital represents the resources put up by shareholders. A stock’s overall value or market capitalization evolves through share price fluctuations. The overall equity for the shareholders is unaltered even when the number of outstanding shares changes with a split stock because the corporation also keeps the cash or retained earnings. Priority payment in the event of bankruptcy is given to preferred stockholders, who also receive dividends before common stockholders do. Due to the absence of voting rights, preferred stock often has a lower potential for capital appreciation than common stock. The sum of cash that is generated by the IPO is recorded as a debit on the balance sheet.The common stock and the APIC would be recorded as credits.

## Paid-In Capital: Examples, Calculation, and Excess of Par Value

In conclusion, the total paid-in capital from our hypothetical transaction is \$100k, composed of \$100 in common stock (par value) and \$99.9k in additional paid-in capital (APIC). The investors that participated in the capital raise paid \$10.00 per common share. Although shares are rarely sold at par value, we will suppose that market participants have evaluated the stock to have a price of one dollar. It means that the par value of this stock is the same as its market value in the primary market. The price for which the stocks are initially sold is usually way above the par value. The par value of shares can be set at levels as low as one cent per share.

## How to Find Paid-In Capital on the Balance Sheet

We get a total APIC of \$490,000 multiplied by the total number of shares of 10,000. Download CFI’s Excel template to advance your finance knowledge and perform better financial analysis.

By raising capital through APIC, companies can improve their financial flexibility and reduce financial risk. The par value marks the minimum amount of capital for each share being issued. Learn how additional paid-in capital is used to track equity fundraising contributions in a company. Let’s continue with our example regarding the effects of dividend stock change. Let’s say Blue Star distributes a 5% bonus stock to its 2.0 million shareholders as a dividend.

If the initial repurchase price of the treasury stock was higher than the amount of paid-in capital related to the number of shares retired, then the loss reduces the company’s retained earnings. Investors value preferred stock shares for their steady returns, not for their price growth, which can be minimal. They appeal to fewer investors, which is why most companies have relatively few shares of preferred stock than common stock in circulation. It reflects the excess cash generated by stockholders during a public offering.

To frame our understanding of APIC, we will use a relatively recent real-world example. In early 2019, Beyond Meat Inc., a Los Angeles-based producer of plant-based meat alternatives, held its initial public offering. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

You can set the default content filter to expand search across territories. These materials were downloaded from PwC’s Viewpoint (viewpoint.pwc.com) under license. The sum raised equals the Par value plus any Additional Paid-In Capital over the Par Value. It is a great way to generate cash for businesses without first laying down any collateral. When you’re valuing a stock, you want to always make sure that you can be as accurate as possible.

1. A share repurchase program could result in gains, losses, or net proceeds for the corporation.
2. Legal agreements and accounting standards typically determine the treatment of APIC in an acquisition.
3. Treasury stock cancellation losses are passed on to the retained earnings account going ahead.
4. It is the equity portion of a company’s balance sheet that includes funds received from issuing stock at a premium.

The term “additional paid-in” originated from the early days of corporate finance when companies issued stock to raise capital. Over time, the term “paid-in capital over par” was shortened to “additional paid-in capital.” On the other hand, the issue price is reflective of investor expectations of the company’s valuation. The difference between the par value and what the market thinks a share is worth determines the additional paid-in capital in the above equation. APIC is recorded at the initial public offering (IPO) only; the transactions that occur after the IPO do not increase the APIC account.

There will be two portions to the liabilities section of the shareholders’ Equity section. Share capital and premium are the units of measure for shareholders’ equity. When a company is made, several states mandate that common stock be issued for the first time at par value; however, some states do not. All subsequent stock issuances are then included in the three paid-in capital accounts. Additional paid-in capital is the difference between a share’s printed value and the amount the share is sold on the market.

Additional paid-in capital appears directly below the line item for the relevant common stock or preferred stock. The par value of the issued stock goes to the common or preferred stock line, while the amount paid by investors above and beyond the par value goes to the additional paid-in capital line. Shareholder’s equity is a section that includes capital contributed to the company plus its retained earnings from all prior years in business.

Thus, investors make money on the changing value of a stock over time, based on company performance and investor sentiment. APIC is combined with capital stock to represent total stockholders’ equity. Additional paid-in capital can only occur when an investor purchases stock directly from a company in the primary market via initial public offering (IPO). When an investor purchases from a company in the primary market, the proceeds from the sale go directly to the company issuing the stocks. Dividends that are given in the form of stock rather than cash could result in yet another significant adjustment to the shareholders’ share premium and overall equity.

Anything that’s above that value is known as additional paid-in-capital (APIC). The credibility of a company and its reputation on the market can be improved by successfully making an APIC offer. Multiplying \$45 by the total number of shares (20,000) gives us a total APIC of \$900,000.

Since APIC represents the payment investors make in exchange for new shares, existing shareholders do not give up a portion of their ownership in the company. In short, APIC represents the amount investors pay above a stock’s par value. It provides a source of funding for companies without incurring additional debt, allowing them to finance growth and expansion. From an accounting perspective, it allows companies to raise capital without increasing their debt. This element is an important component of a firm’s equity and can be exploited to assess its economic health, growth potential, or capital-raising capacity.