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The amount that investors pay for a company's stock beyond its par value is known in accounting as additional paid-in capital (APIC).
Par value is the nominal price given to a share of stock, which is typically very low, like $0.01 per share. Apart from the line item for common stock (par value), APIC is disclosed in the shareholders' equity section of the balance sheet. APIC only applies to stock that is offered directly by the company, such as during an Initial Public Offering (IPO).
Calculation of Additional Paid-In Capital
The method for calculating additional paid-in capital is pretty simple. It is calculated by multiplying the number of shares issued by the discrepancy between the stock's issuance price and par value. For instance, if a business issues 1 million shares of common stock with a par value of $0.01 each at a price of $10 per share, the additional paid-in capital is:APIC = ($10 - $0.01) x 1,000,000
APIC = $9.99 x 1,000,000
APIC = $9,990,000
The common stock (par value) is then recorded as a debit in the shareholders' equity part of the balance sheet, together with the additional paid-in capital as a credit. The balance sheet shows the total cash raised by the issuing of stock as an asset.
Importance of Additional Paid-In Capital
Additional paid-in capital is important for both investors and companies for several reasons:- Additional paid-in capital, for investors, represents the premium over par that they are prepared to pay for a company's stock. This premium reflects the company's market value and growth prospects. A high APIC indicates that investors have great hopes and trust in the company's future performance. A low APIC may indicate that there is little demand or interest in the company because investors aren't ready to pay much more than the stock's par value.
- Additional paid-in capital is a source of funds that businesses can use to finance operations, expansion, or debt repayment without incurring any fees or obligations. APIC is an example of an equity financing method that does not affect the ownership or control of current shareholders. Moreover, APIC raises book value of equity, which benefits the company's financial ratios and credit standing.
