What is Additional Paid In Capital?
Definition: Additional Paid In Capital (APIC) is simply the amount of money that investors pay in excess of the par value price of the stock. Often called contributed surplus, additional paid-in capital is the share capital value above the stated par value.
Initial public offerings act as avenues for companies to generate additional capital. During an IPO, a firm can set any price that it believes values the business reasonably. Likewise, investors can opt to pay more for the stock, regardless of the prevailing IPO price. If that was to happen, additional paid-in capital is often the outcome.
The paid in capital is made up of stock’s par value as well as the additional paid-in capital. The par value is often set as low as possible and does not have any economic significance. State laws in the U.S require companies to report and record the paramount of issued shares from the greater amount.
Paid In Capital vs Additional Paid In Capital (APIC) – What’s the Difference?
Itemized under the shareholder’s equity section in the balance sheet, additional paid-in capital acts as a profit opportunity for companies given the excess amount of cash generated by stockholders in the public offering.
Additional Paid In Capital doesn’t have anything to do with the prevailing market price. Instead, it’s based on the issue price that a firm set for the proposed public offering. Likewise, if an investor sells his share of a company to at a higher price to a different investor, the same wouldn’t affect a company, as is the case with APIC.
Paid-up capital, on the other hand, is the amount that shareholders pay a company in exchange for shares of stock. It is created when a company sells its shares in the primary market to investors. However, when shares are bought’ and sold to investors in the secondary market, no paid-up capital is created as proceeds go to the selling shareholders.
Just like paid-in capital, Paid-up capital also consists of the par value and excess capital. Any amount paid by investors that exceed the par value is considered as additional paid-in capital as it is more than the par value.
How to Calculated Additional Paid In Capital Formula
As stated above, would-be investors can decide to pay more for a stock in a public offering. For instance, let’s assume company ABC wants to issue one million shares priced at $2 a share. The total amount that the company is likely to generate upon full subscription of the offering is $2 million.
However, let’s assume that stockholders opt to purchase the stock $10 a share; the total amount that the company will end up generating from the offering is $10 million. In this case, the additional paid-in capital will be $10 million minus $2 million, giving rise to $8 million in additional paid-in capital.
How is Additional Paid in Capital Created?
Additional Paid-in Capital comes about on companies setting stock par values way below what they should be trading. By setting the IPO price as low as possible, companies try to avoid legal liability should the stock price dip immediately after an IPO.
It is common for companies to be hit by class-action lawsuits on their stock price dipping significantly after an Initial Public Offering. By setting the price low, the companies can avoid the risk and consequently stand a chance of generating significant prices on stockholders paying much more for the stock.
Summary
Additional paid-in capital signifies the additional amount of money that investors put into a company. It also underscores investors’ confidence about a stock’s long-term prospects to the extent of paying much more compared to the issue price.