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Corporate capital usually represents the amount of shareholder’s equity on a company’s financial statement. A simple way to calculate the company’s corporate capital without looking at the company’s balance sheet is to subtract a company’s total liabilities from its total assets. The remaining amount should equal shareholders equity and retained earnings; these two items represent the total capital generated by the corporation. The shareholders equity number is the monetary amount a corporation must repay shareholders who have purchased stock in the company. Retained earnings is the net income amount reinvested in the business that can be distributed to shareholders in the form of dividends.
Corporate capital typically includes two types of stock: preferred and common. Preferred stock in a company usually does not hold any voting rights; however, preferred stock usually takes preference when dividends are paid out by the corporation or during the business liquidation process. Companies entering bankruptcy are usually required to repay preferred stockholders investments prior to a common stockholder’s investment. Common stock is usually the most common form of stock sold by companies and holds voting rights with no dividend privileges. Corporations are usually required to separate the amount of outstanding preferred and common shares of stock on their balance sheet.
Outstanding stock amounts listed in the company’s corporate capital may be used to repay other investors if the company enters bankruptcy. Corporations are legally allowed to do this since preferred and common stockholders accept the risk inherent in equity investments when purchasing a company’s stock. Corporate capital amounts are usually designed as a financial buffer for corporations during business operations. Most stockholders are willing to make long-term investments into the corporation in anticipation for a future financial return. While investors may sell their stock at any time to recover their investment, leaving the money invested in the company may increase the risk of financial gain or loss.
Corporate capital does not represent an increase in wealth generated by the corporation from its business operations. The corporate wealth or net worth of a corporation is usually calculated as the amount total assets exceed total liabilities. Corporate capital does not usually represent wealth created by the business since it represents money owed to investors. Companies may use corporate capital to increase its wealth or net worth by purchasing assets for use in the business. This use of capital is commonly called equity financing; equity financing is usually an alternative to purchasing business assets or making capital improvements through the use of bank loans and other traditional lender debt.
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