Capital Stock Definition Formula Calculation With Examples

Capital Stock Definition

Capital Stock Types

It can be divided into the following types:

Authorized = Authorized Capital represents the maximum share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company’s initial public offerings, common shares or preference stocks to the public. It appears as the owner’s or shareholders’ equity on the corporate balance sheet’s liability side.read more a company can issue, as mentioned in its legal charter. It can be altered by changing its legal charter after following prescribed procedures.Issued = It means the total amount of share capital presently issued by the company out of its authorized capital stock. It is worthy to note that issued capital cannot exceed the authorized capital stock.Unissued = It reflects the part of authorized capital stock that the company has not issued yet.Outstanding = It means those issued sharesIssued SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner’s equity on the Company’s balance sheet.read more which are still held by the stockholders (i.e., those shares which are not bought back by the company)Treasury Shares =Treasury SharesTreasury SharesTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. read more means those issued shares bought back by the company.

Capital Stock Formula

The formula for calculating capital stock in the balance sheet is as follows:

It is calculated by multiplying the number of shares issued with the par value per sharePar Value Per SharePar value of shares is the minimum share value determined by the company issuing such shares to the public. Companies will not sell such shares to the public for less than the decided value.read more.

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Examples of Capital Stock in the Balance Sheet

Let us understand the method of calculation by way of examples.

Example #1

A company issued 5,000 shares at $6 per share, having a par value of $5 each.

Solution

Calculation of Capital Stock

= 5,000 * 5= $25,000

Example #2

A company has issued equity as well as preference sharesPreference SharesA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more as follows-

6,000 equity shares were issued at a par value of $10 each.7,000 preference shares were issued at a par value of $8 each;
= 6,00010 + 7,0008= $1,16,000

Advantages

The following are the advantages which are listed below:

The company’s dependence on external debt is reduced.The company is free to use the funds for as long as it needs, while if it opts to take outside loans, it will need to repay them after a certain fixed period.It shows the investors’ trust in the company and thus increases its credibility.Unlike in the case of debt financing, the investors need not be paid a fixed income every year. A company can pay dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more according to its financial condition.There is freedom for the company to use the funds as per its goals without any restrictions.

Disadvantages

The following are the disadvantages which are listed below:

The dividend that the company pays is not a tax-deductible expense.The control of the company is diluted when it is issued.The company is subjected to various laws and regulations when it issues it and thus is more complicated than taking a loan, for instance.The approval of stockholders is required to make major decisions in the company. It may be serious trouble in case of disagreement with the stockholders.