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    Paid in capital and earned capital

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    Write a paper regarding owners equity and include in the paper:

    1. Why is it important to keep paid-in capital separate from earned capital?
    2. As an investor, is paid-in capital or earned capital more important? Why?
    3. As an investor, are basic or diluted earnings per share more important? Why?

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    Solution Preview

    1. Why is it important to keep paid-in capital separate from earned capital?

    First let's discuss the basics. Both paid in capital and earned capital are part of share capital. Share capital decision is an issue of capital structure. The term capital structure is used to represent the proportionate relationship between debt and shares. The various means of financing represent the financial structure of an enterprise. Share capital represents ownership in the organization. Equity doesn't involve any fixed cash outflow unlike debt. This helps in reducing the financial risk and improving the solvency of the organization. Equity acts as a base to raise debt for the organization. Owners typically are entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock. For the most part, however, common stock has more potential for appreciation. (Npscbdc, 2010)

    One of the limitations of this source is that it is the costliest form of capital. It adds to the cost of the capital. Additional issuance of equity leads to dilution of earnings and the ownership. There can be takeover threat.

    Paid in capital

    This is the capital received from investors in exchange for stock, as distinguished from capital generated from earnings or donated. The paid-in capital account includes CAPITAL STOCK and contributions of stockholders credited to accounts other than ...

    Solution Summary

    Response discusses paid in capital and earned capital

    $2.19

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