What is Capitalization?

This email exchange between myself and a business partner explains Capitalization or Cap Structure:

To: John
From: KT
Subject: What is Capitalization?

You and Dave mentioned Capitalization today…..is this the right definition for what you were talking about?

Capitalization
Total amount of the various securities issued by a corporation. Capitalization may include bonds, debentures, preferred and common stock, and surplus. Bonds and debentures are usually carried on the books of the issuing company in terms of their par or face value. Preferred and common shares may be carried in terms of par or stated value. Stated value may be an arbitrary figure decided upon by the director or may represent the amount received by the company from the sale of the securities at the time of issuance.

KT

And the response:

To: KT
From: John
Subject: RE: What is Capitalization?

Yes, but a simple definition would be the finical makeup/ownership of the company in terms funding and value.  For example ACME’s current ownership structure is 50% ABC Holdings and 50% XYZ Corp (me).  In bringing Steve aboard we will ask him for additional capital in order to join the company in exchange for his acquired percentage of ownership.  We will determine a value of the company (lets say $1 million) and then exchange 10% of equity in ACME for $100,000.00.  A simple example but on point.  We could also go to a bank and get a loan and provide capital to the company.  This would alter our capitalization or cap structure adding debt in place of equity funding.  Let me know if you have other questions.

John

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