Overview · What & why
A decision, before a calculation.
Return of capital repays contributed principal; return on capital compensates for the investment period and risk. A preferred return gives a specified claim priority over other profit distributions, subject to the agreement and available cash. It is not a guarantee that enough cash will exist to pay it.
A concrete example
$1M invested for one year at an 8% simple preference creates an $80K claim. With $1.5M proceeds, returning $1M capital and paying $80K preference leaves $420K residual. With only $950K proceeds, not all capital is returned and the preference remains unpaid.
What to remember
Distinguish earned or accrued claims from actual cash received.
Before using this in a project: Contribution dates, returned capital, preference basis, compounding rules and distribution priority.