How to Calculate Equity Share Capital?
When learning how to calculate equity share capital, you must look at shareholders equity along with the company's liabilities and assets.3 min read
What Is Share Capital?
Share capital involves money and property that a company receives through equity financing. It's important because it reflects how much the business earned through equity shares during the initial public offering (IPO).
For instance, a company had an IPO six years ago and began to sell equity shares to the general public. The company sourced $1 million in capital. Since then, its market value increased to $5 million. However, since it raised only $1 million in equity financing six years ago, the balance sheet reflects the same amount and not $5 million. If the company issued new shares of stock for $0.5 million, then the balance sheet would reflect $1.5 million.
Share capital does not deal with the company's market value. No matter what the market value is, the balance sheet specifies what the company earned at the time of the IPO. It only considers the issued price. If a company issues 10,000 shares at $10, the capital is $100,000. After five years, the market price becomes $100; the capital is still $100,000 until the company issues new shares.
Share Capital Formula
To determine the share capital formula, there are several formulas you can consider. Keep in mind that the par value is the minimum amount of price a shareholder pays to gain one share of the company. Also, paid-in capital is the amount that is the excess of par value. Deducting par value from the issue price gives you extra paid-in capital.
- Formula 1: Share capital equals the issue price per share times the number of outstanding shares.
- Formula 2: Share capital equals the number of shares times the par value of stock plus the paid in capital in excess of par value.
In another example, a company issues 100,000 shares at $10 per share. The par value is $1 per share. The total capital is $1 million because you multiply 100,000 shares times $10. The total par value is $100,000 because you multiply $1 times 100,000 shares. The additional paid-in capital per share is $9, the difference of $10 minus $1. The total additional paid-in capital is $900,000, $9 times 100,000 shares.
Share Capital and Balance Sheet
If a company needs additional money, it can raise capital in several ways:
- Issue bonds.
- Take a debt from a bank or financial institution.
- Use equity shares.
- Raise capital.
When a company issues equity or preferred shares, the company receives cash, which is an asset. Since the company is liable to the shareholders, the share capital is a liability. If the company records the cash as an asset or debits it, and records it as a liability or credits the share capital, the company can balance both the assets and liabilities.
What Is Stockholders' Equity?
Also known as shareholders' equity, stockholders' equity consists of share capital plus retained earnings. You place this information on the company's balance sheet. Basically, stockholders' equity equals assets minus liabilities.
Stockholders' equity is helpful when analyzing financial statements. If you experience liquidation, equity holders receive payments after debt holders and bondholders. Shareholders care about liabilities and equity accounts because they can only receive equity after bondholders receive payment.
Components of Stockholders' Equity
There are several aspects of stockholders' equity to consider.
- Retained earnings are amounts earned through income. Retained earnings are important when dealing with International Financial Reporting Standards (IFRS).
- Net income increases retained earnings.
- Dividend payments reduce retained earnings.
Common shares represent residual ownership in a company. If liquidation occurs, common shares only receive payment after shareholders.
Companies might also sell shares on a subscription basis. In this instance, the buyer makes a down payment to purchase a specific number of shares. The buyer agrees to pay the rest by a certain date. For instance, if a company sells 10,000 common shares for $10 each on a subscription basis, it might require the buyer to pay $3 per share when the company signs the contract. The company might also ask that the buyer pay the balance two months later.
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