The paid in capital definition is the total amount paid on equity or stock over the par value of the stock. In addition, it is a balance sheet account in the stockholder’s equity section. This account simply represents the market value over the book value of the equity. It is also called the premium stock, premium on stock, or additional paid in capital (APIC).
For example, Yazoo inc. is looking to make a public offering in the market for $2 par value common stock in the amount of 100,000 shares. Thus, the book value of the common stock is $200,000. The investment bank believes that the company will be able to receive a price based on its current market value of stock at $20 per share. Yazoo is unsure that they can receive this price. So, they opt to sell the stock at $19 per share first to the investment bank allowing them to make the offering. They can now debit cash in the amount of $1.9 million. Yazoo will also credit common stock for $200,000 or the book value, and it will also credit the additional paid in capital (APIC) account for the remainder of $1.7 million.
[box]Note: If successful in supplying the market with the stock, then the investment bank will make a profit of $1 million dollars that Yazoo would not see. However, many companies perform this same maneuver to take the volatility of the market out of the equation allowing Yazoo to lock in a price for the financing that they will receive. This is where the term underwriting comes from when referring to investment banking. [/box]
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