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Additional Paid in Capital
Additional Paid in Capital
Additional Paid in Capital
KEY TAKEAWAYS
Additional paid-in capital (APIC) is the difference between the par value
of a stock and the price that investors actually pay for it.
To be the "additional" part of paid-in capital, an investor must buy the
stock directly from the company during its IPO.
The APIC is usually booked as shareholders' equity on the balance
sheet.
APIC is a great way for companies to generate cash without having to
give any collateral in return.
How Additional Paid-in Capital (APIC) Works
During its IPO, a firm is entitled to set any price for its stock that it sees fit.
Meanwhile, investors may elect to pay any amount above this declared par
value of a share price, which generates the APIC.
Let us assume that during its IPO phase the XYZ Widget Company issues
one million shares of stock, with a par value of $1 per share, and that
investors bid on shares for $2, $4, and $10 above the par value. Let us
further assume that those shares ultimately sell for $11, consequently making
the company $11 million. In this instance, the APIC is $10 million ($11 million
minus the par value of $1 million). Therefore, the company’s balance
sheet itemizes $1 million as "paid-in capital," and $10 million as "additional
paid-in capital."
APIC is recorded at the initial public offering (IPO) only; the transactions that
occur after the IPO do not increase the APIC account.
Special Considerations
APIC is generally booked in the SE section of the balance sheet. When a
company issues stock, there are two entries that take place in the equity
section: common stock and APIC. The total cash generated by the IPO is
recorded as a debit in the equity section, and the common stock and APIC
are recorded as credits.
The APIC formula is:
Market Value
Market value is the actual price a financial instrument is worth at any given
time. The stock market determines the real value of a stock, which shifts
continuously as shares are bought and sold throughout the trading day. Thus,
investors make money on the changing value of a stock over time, based on
company performance and investor sentiment.
Additional paid-in capital, as the name implies, includes only the amount paid
in excess of the par value of stock issued during a company's IPO.
Both of these items are included next to one another in the SE section of the
balance sheet.
Another huge advantage for a company issuing shares is that it does not
raise the fixed cost of the company. The company doesn't have to make any
payment to the investor; even dividends are not required. Furthermore,
investors do not have any claim on the company's existing assets.
After issuing stock to shareholders, the company is free to use the funds
generated any way it chooses, whether that means paying off loans,
purchasing an asset, or any other action that may benefit the company.