contributed capital

(noun)

Refers to capital contributed to a corporation by investors through purchase of stock from the corporation (primary market) (not through purchase of stock in the open market from other stockholders (secondary market)). It includes share capital (i.e. capital stock) as well as additional paid-in capital.

Related Terms

  • exercise price
  • yield

Examples of contributed capital in the following topics:

  • Impact of the SML on the Cost of Capital

    • The plotted location of an instrument on the SML has consequences on its price, return, and cost of capital it contributes to a firm.
    • Companies often turn to capital markets in order to generate funds -- using the issuance of either debt or equity.
    • The cost of obtaining funds in such a manner is known as a company's cost of capital.
    • This would not be an attractive market situation for a company looking to raise capital.
    • Describe the impact of the SML on determining the cost of capital
  • MVA and EVA

    • Market Value Added (MVA) is the difference between the current market value of a firm and the capital contributed by investors.
    • Quite simply, EVA is the profit earned by the firm, less the cost of financing the firm's capital.
    • The idea is that value is created when the return on the firm's economic capital employed is greater than the cost of that capital.
    • EVA is net operating profit after taxes (or NOPAT) less a capital charge, the latter being the product of the cost of capital and the economic capital.
    • where r is the return on investment capital (ROIC); c is the weighted average of cost of capital (WACC); K is the economic capital employed; NOPAT is the net operating profit after tax.
  • The Cost of Preferred Stock

    • Because preferred stock carries a differing amount of risk than other types of securities, we must calculate its asset specific cost of capital to work into our overall weighted average cost of capital.
    • If preferred dividend is known and fixed, we can use the following equation to calculate the cost of capital for preferred stock .
  • Disadvantages of the IRR Method

    • In cases where one project has a higher initial investment than a second mutually exclusive project, the first project may have a lower IRR (expected return), but a higher NPV (increase in shareholders' wealth) and should thus be accepted over the second project (assuming no capital constraints).
    • Moreover, since IRR does not consider cost of capital, it should not be used to compare projects of different duration.
    • Modified Internal Rate of Return (MIRR) does consider cost of capital and provides a better indication of a project's efficiency in contributing to the firm's discounted cash flow.
  • Defining Venture Capital

    • Venture capital is a method of financing a business start-up in exchange for an equity stake in the firm.
    • Investors combine their financial contributions into one fund, which is then used to invest in a number of companies.
    • The technology firms of Silicon Valley and Menlo Park were primarily funded by venture capital.
    • A VC firm's contributions often extend beyond financial funding.
    • Facebook is one example of a entrepreneurial idea that benefited from venture capital financing.
  • Role of Financial Markets in Capital Allocation

    • One of the main functions of financial markets is to allocate capital, matching those who have capital to those who need it.
    • One of the main functions of financial markets is to allocate capital.
    • Capital markets especially facilitate the raising of capital while money markets facilitate the transfer of liquidity, matching those who have capital to those who need it.
    • Long-term capital can come in the form of shared capital, mortgage loans, and venture capital, among other types.
    • Many individuals are not aware that they are lenders providing capital, but many do lend money at least indirectly, for example when they put money in a savings account or contribute to a pension.
  • Ownership Nature of Stock

    • The stock of a company represents the original capital paid into the business by its founders and can be purchased in the form of shares.
    • The capital stock (or stock) of a business entity represents the original capital paid into or invested in the business by its founders.
    • For example, labor, suppliers, customers and the community are typically considered stakeholders because they contribute value and/or are impacted by the corporation.
  • The Marginal Cost of Capital

    • The marginal cost of capital is the cost needed to raise the last dollar of capital, and usually this amount increases with total capital.
    • The marginal cost of capital is calculated as being the cost of the last dollar of capital raised.
    • Generally we see that as more capital is raised, the marginal cost of capital rises .
    • The Marginal Cost of Capital is the cost of the last dollar of capital raised.
    • Describe how the cost of capital influences a company's capital budget
  • Sales Forecast Input

    • Target volume, price, and contribution margin per unit are the key inputs to a sales forecast.
    • includes/excludes amounts capital goods & services, non-capital goods & services, input valued-added tax, with cost of non-capital goods sold
    • Target Volume = [Fixed costs + Target Profits] / Contribution per Unit
    • Target Revenue = 100 * [ { Fixed Costs + Target Profits } / Contribution Margin ]
  • Interpreting Overall Cash Flow

    • Thus, these cash flows are essential to helping analysts assess the company's ability to meet ongoing funding requirements, contribute to long-term projects and pay a dividend.
    • One such ratio is that for capital acquisitions:
    • Capital Acquisitions Ratio = cash flow from operating activities / cash paid for property, plant and equipment
    • A common definition is to take the earnings before interest and taxes, add any depreciation and amortization, then subtract any changes in working capital and capital expenditure.
    • The free cash flow takes into account the consumption of capital goods and the increases required in working capital.
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