Capitalization Change

  

Categories: Stocks, Bonds, Banking

This has nothing to do with Caps Lock or changing your Twitter handle.

This has everything to do with how a company’s ownership and capital structure changes as it grows over time.

Think about Facebook for a minute. It started with Mark Zuckerberg and his friends operating out of a dorm. You watched the movie The Social Network. They had a little bit of cash, and they divided the ownership among a few people.

But then they grew and it started to show financial promise. Venture capital funds got interested. They bought in, trading their cash stash for partial equity ownership in ticker: FB. In doing so, they needed the founders to accept a capitalization change...a process that changes equity ownership distribution in the firm and its ownership structure.

Keeping it simple: New sources and forms of capital lead to a capitalization change.

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finance a la shmoop- what is compounding value or compounding interest? ah the

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power of compounding. it makes trees stronger pollution more feral and the

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rich well richer. how so well let's start with compounds kissing

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cousin with six toes, arithmetic compounding. right so the first was [feet with six toes pictured]

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really geometric compounding now we're talking about arithmetic compounding. if

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you invest a thousand bucks in a ten-year bond that pays 6% of a year in

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interest, the dough comes back to you in a pattern that looks like this - like

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every six months they pay thirty bucks and it's $60 a year, got it? nice. you get

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the total of sixteen hundred bucks back from your investment and the cash that

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came back to you you know came in small parts all along the way, until you got [list of yearly returns]

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about two thirds of it or sixty percent at the end right? if you just spent that

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money and collected your thousand bucks at the end that's it. okay so that's

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arithmetic compounding/ the money comes to you if you don't reinvest it.

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ding-ding-ding that's the key here and you just go buy burgers. okay so now

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let's look at what six percent compounded looks like over the same

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10-year period .well at the end of year one it's a thousand sixty bucks and note

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we're only gonna compound it annually we probably should do the semi-annually but [list of yearly compounds]

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we'd confuse you even more so don't do that. but then you essentially reinvest

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that money and you get another six percent compounded on that thousand

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sixty , instead of six percent compounded against the original thousand. so by the

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end of year two you'll have a thousand one hundred twenty three sixty. and by

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the end of year ten you'll have one thousand seven hundred and ninety

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dollars and eighty-five cents. so why do you make so much more money when you

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compound interest versus getting 30 bucks twice a year like you would in

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this bond example? go and find burgers with it? yeah .you don't want to do that

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