There are other corporations, however, the business of which is not profitable to so remarkable an extent, and which have actually caused unnecessary sacrifices to their stockholders by reason of a blind adherence to the policy of putting out only common stock. If a public utility company, for example, were to attempt to finance itself solely by the sale of common stock, the chances are that there would be very little money for anyone interested. The profits on such enterprises are comparatively limited, and the financing must be watched with the closest attention in order to preserve reasonably good earnings for the benefit of the common shares. This can be made clearer by a hypothetical case than by any example which is at hand, for practically all public utility companies do raise the greater portion of their capital through issuing obligations rather than through issuing shares. Let us suppose that a public utility corporation requires $10,000,000 capital, and that its net earnings amount to $600,000, or 6% on the invested capital. Clearly this would not in itself be an attractive return to prospective purchasers of the common stock. Let us further assume, however, that $6,000,000 of the required capital is secured by bond issues at an average cost to the corporation of 5%; that $2,000,000 is obtained through preferred stock or junior bond issues at an average cost to the corporation of 6%; and that $2,000,000 consists of common stock. In that case, the annual profits would be distributed as follows:

Bonds,

$6,000,000 @ 5% ......................

.$300,000

Junior bonds,

2,000,000 @ 6% .......................

. 120,000

Common stock,

2,000,000 with earnings of 9%.

. 180,000

Total earnings ........................

.$600,000

As a matter of fact, it is customary to provide all the cost of the tangible property of public service enterprises by issuing bonds up to about 75% of the cost, and preferred stock up to about 25%. The common stock in this case represents intangible assets and is secured by the promoters of the enterprise as their profits. If this rule were followed in the case just cited, the results would be as follows:

$7,500,000 bonds @ 5%..............

$375,000

$2,500,000 bonds @ 6%...............

150,000

Available as earnings on common stock.....................

75,000

Total..............

$600,000

Some interesting comparisons may be made among the railroad corporations of the United States in respect to the percentage of capital represented by means of bonded obligations as compared with the capital raised through stock issues. Following is a list of some of the important railroads showing their capitalization in stock and in bonds per mile, and the percentage of each form of security.*

Per Mile

Per Cent per Mile

Stock

Bonds

Stock

Bonds

Wheeling & Lake Erie..........

$80,567

$77,677

51

49

Erie..........

78,100

110,847

41

59

Norfolk & Western.........

64,224

54,835

54

46

New York Central........

60,075

104,222

37

63

Baltimore & Ohio........

47,413

89,892

35

65

Toledo, St. Louis & Western.......

44,346

65,177

41

59

Union Pacific......

42,364

43,971

49

51

Lehigh Valley.........

42,089

66,556

39

61

Northern Pacific.......

39,209

30,789

56

44

Chicago & Alton........

38,679

83,136

32

68

Wabash........

36,739

49,381

43

57

Denver & Rio Grande.......

33,984

51,801

40

60

Great Northern.......

29,687

18,440

62

38

Atchison......

28,418

28,712

50

50

Chesapeake & Ohio......

26,768

74,o63

26

74

Southern Pacific.....

26,162

60,669

30

70

C, C, C. & St. Louis.......

26,094

43,904

37

63

Southern Railway......

25,574

40,396

39

61

Illinois Central.....

25,013

41,363

38

62

* Copied from the New York Annalist, June 21, 1915.

Per Mile

Per Cent per Mile

Stock

Bonds

Stock

Bonds

St. Paul...........

24,042

34,418

41

59

St. Louis South........

22,647

30,834

42

58

Seaboard Air Line........

20,271

36,244

36

64

Chicago & Eastern Illinois.......

20,135

58,072

26

74

Missouri, Kansas & Texas.........

19,955

36,808

35

65

Boston & Maine.........

18,941

30,000

39

61

Northwestern..........

18,896

27,141

41

59

Atlantic Coast Line........

14,800

33,345

31

69

Louisville & Nashville........

14,586

38,376

28

72

Minneapolis & St. Louis........

12,933

27,070

32

68

Pere Marquette........................

12,263

24,406

26

74

Burlington............

12,127

23,504

34

66

Missouri Pacific.........

11,428

41,875

21

79

C. R. I. & Pacific.............

10,126

36,604

20

80

Frisco................

9,505

55,734

15

85

Cincinnati, Hamilton & Dayton.......

8,127

70,819

10

90

The above table contains some striking illustrations of the second and more serious of the two faults above named. Note especially the high percentages of bonds in the case of roads which are at this writing in the hands of receivers, including the Cincinnati, Hamilton and Dayton; the Chicago and Eastern Illinois; the Pere Marquette; Frisco; Chicago, Rock Island and Pacific; and Missouri Pacific. On the other hand, the sound roads, such as the Pennsylvania and the Great Northern, are, if anything, overconservative in their issue of bonds. Union Pacific, Atchison, Norfolk and Western, Reading, etc., show a proportion of approximately 50% bonds and 50% stock, which may fairly be regarded as conservative and about correct. Of course, the above percentages are suggestive only and might lead, if taken wholly at their face value, to strikingly wrong conclusions. For example, the Wheeling and Lake Erie, which is notoriously unsound financially, shows a proportion of less than 50% bonds out of its total capitalization; but this is to be accounted for, not by conservatism in issuing bonds, but by reckless overissues of stock.