Definition
Capital paid in excess of par value, also known as Additional Paid-In Capital (APIC), is the amount shareholders pay for the shares that is above the nominal or par value of the stock. This value is recorded in the equity section of a company’s balance sheet and represents funds that are available beyond the basic value of common stock. It is an indication of investor confidence and can be used by the company for various purposes such as expansion, debt reduction, or other capital-intensive activities.
Examples
Initial Public Offering (IPO): A company issues shares with a par value of $1 each, but they are sold to investors for $15 each. The additional $14 per share is considered capital paid in excess of par value.
Secondary Offering: A company with outstanding shares having a par value of $5 each issues additional shares at $25 per share. Here, the $20 over the par value per share would be recorded as capital paid in excess of par value.
Frequently Asked Questions (FAQs)
What is the par value of a stock? Par value is the nominal or face value of a stock as stated in the corporate charter. It is often set at a minimal amount, such as $0.01 or $1 per share, and does not necessarily reflect the stock’s market value.
Why is capital paid in excess of par value important? This figure is important because it indicates the premium investors are willing to pay over the par value, reflecting their confidence in the company’s future prospects. It also provides added financial flexibility for the company.
Can capital paid in excess of par value be used for any purpose by the company? Yes, funds recorded as capital paid in excess of par value can generally be used for any corporate purpose, including expansion, research and development, debt repayments, or other operational needs.
Is capital paid in excess of par value taxable? While capital contributions themselves are not typically taxable to the corporation, any use of these funds generating income would be subject to standard corporate taxes.
Related Terms
Par Value: Nominal value of a bond, share of stock, or a coupon as stated by the issuer. For most stocks, par value is a statutory minimum placed on shares.
Additional Paid-In Capital (APIC): Similar to capital paid in excess of par value, it is the amount paid by investors over and above the par value of the shares.
Common Stock: Equity ownership in a corporation, typically providing voting rights and a share of dividends.
Initial Public Offering (IPO): The first sale of stock by a company to the public, often to raise new equity capital.
Online References
Suggested Books for Further Studies
- “Corporate Finance: The Core” by Jonathan Berk and Peter DeMarzo
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren, and C. William Thomas
Fundamentals of Capital Paid in Excess of Par Value: Corporate Finance Basics Quiz
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