Question

Identify and briefly describe the two primary sources of shareholders' equity.

Answer 1

Contributed capital:

Capital contributions are one of most important primary source of shareholders equity. They are raised from investors. Shares can be issued at par, premium or discount. Corporate form of organizations raise huge amount of capital thourgh IPOs. But the cost of capital is high.

Retained earnings:

Retained earnings are the earnings of the corporations that are not distributed to its shareholders. Corporations retain these profits to use it for growth. They also have cost of capital equal to its contributed capital.