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Owers Equity Paper

Essay by   •  November 20, 2011  •  Research Paper  •  739 Words (3 Pages)  •  908 Views

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In an organization, Owner's equity is defined as stockholders' equity, shareholders' equity, or corporate capital. The following three categories normally appear as part of stockholders' equity:

1. Capital stock.

2. Additional paid-in capital.

3. Retained earnings. (Wiley 2007).

Owners' equity, also called capital, is any debt owed to the business owners. Paid-in capital represents the investments made by the shareholders. However, it is important for the company to separate paid-in capital from earned capital because the investor will be able to see how well the company can generate capital that results from the operation of the company.

In addition, one more motive behind this is mainly for reporting reasons, so that the investing segment of capital is separated from the shareholders segment of capital. Paid in capital, also called contributed capital, and is the amount paid from the stockholders for use in business (Kieso, Weygandt, & Warfield, 2007)

As an investor, the most important thing the investor will concern is the ability to generate income and profit of the company, the dividend policy of the company, and the expansion plan of the company. As a result, earned capital is more important to the investor because earned capital is the amount that the company can actually generate from their operations. Earned capital is also important fund available the company will use to pay dividends in both the cash and stock dividends. Moreover, the earned capital will also reflect how well the company has reserved funds for the future expansion, which would result in an additional return of investments for the investors. On the other hand, paid-in capital is the excess amount from the par value, which is the fixed amount and will not contribute to the dividends paid to the investors.

Some companies issued convertible preferred share, convertible bonds, or warrants in which they can be converted to common shares. Holders of preferred share, convertible bonds, or warrants have the right to convert their preferred stock or bonds into shares of common stock at the fixed price at the option of the holders or the right to buy stock for a stated price. As an investor, diluted earnings per share are more important. An investor would be more interested in diluted earnings per share. This is because diluted earnings per share is when a business has converted securities, options, warrants, or other rights that can be converted into common stock and therefore decrease the earnings per share (Kieso, Weygandt, & Warfield, 2007).

This dilutes the earnings per share by converting them into more shares, ergo diluting the true number of shares, and therefore spreading the dollar out among more shares. So to an investor they would want to know if the earnings per

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