It is plain, from what has been said above that many corporations, either at the outset or at some later stage in their career, are faced with wide discrepancy between the actual value of all their assets and the nominal net worth of the business which is represented by capital stock. In 1897, for example, the Glucose Sugar Refining Company was organized as a combination of six glucose refineries. Although $7,500,000, it is reliably estimated, would have fully covered the actual value of the plants and current assets acquired, the company started with a capital stock issue of $37,000,000. In 1906 this same combination, with some additions, was reorganized under the name of the Corn Products Refining Company, which is estimated to have had assets worth approximately $15,000,000. Against these assets the company issued a bonded debt of $9,500,000, preferred stock of $30,000,000, and common stock of $50,000,000.

Once in a while, if a corporation has been continually unsuccessful over a period of years, an effort is made to improve the financial status by reducing its capital stock and its contingent charges. This was attempted, for example, with the Corn Products Refining Company in 1910, when the presi-. dent brought out a plan which called for the absolute surrender and cancellation of four-fifths of the outstanding $50,-000,000 of common stock; the remaining one-fifth of common and all the preferred stock was to be exchanged for new stock of one class, upon which it was proposed to pay dividends at the rate of 5% per year. The result would have been to cut down the charges against the company and to make up a much better-looking balance sheet. However, the preferred stockholders saw no advantage to themselves in giving up part of their claims and the plan eventually failed.

* Hartley Withers on "Stocks and Shares," p. 287.

A similar process is much more frequent in English practice. In November, 1914, a circular letter was sent out to the preference shareholders of R. White and Sons, in which the directors stated that they had had fresh valuations made of the assets which had disclosed a total value less than the book value of these assets, amounting to 87,760. The directors were also anxious to eliminate from the balance sheet the large "good-will" item which amounted to 94,367, and thought it wise to write off a further sum of 7,500 against other assets. These three sums together amounted to 189,-62J. The directors' proposal was to charge 25,627 against Reserves and Profit and Loss accounts, leaving 164,000 still to be dealt with. This was offset by reducing the nominal value of all the outstanding ordinary shares from 3 to 1 each. The ordinary shareholders made it a condition of their agreement to this arrangement, that they should be entitled to the same aggregate amount of dividends on their shares as they were previously entitled to before contributions were made to the special reserve. That is to say, where they were previously entitled to 5%, they were, after the change, entitled to 15% on the reduced capitalization.

To the average American mind all the complexities and niceties of a transaction such as the one just described, seem like so much useless juggling with figures. The purpose of any well-managed company is to make profits and distribute them according to the various claims against these profits that are outstanding. Whether the ordinary stock is listed at a nominal value of $82,000 or $246,000; whether "good-will" stands at $94,000 or at nothing, and similar questions of academic accounting, have very little apparent connection with changing the business from a profit-loser into a profit-maker. The typical English financial manager attaches vastly more importance than does the typical American financial manager, to presenting a balance sheet that makes an impression of stability and conservatism. Doubtless there is much to be said on both sides. It is enough here merely to call attention to the variation in practice.

It is sometimes thought to be desirable by the directors of a corporation to have the corporation purchase some of its own outstanding stock, which is, in effect, a method of reducing its capitalization. The general rule of the law, which applies with modifications in almost all jurisdictions, is to the effect that a corporation may purchase its own shares only out of surplus. It cannot, in other words, carry the purchase of its own shares so far as to produce a deficit which might be injurious to creditors.