This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
The successful financial plan is not usually one that is highly involved and full of unusual and supposedly ingenious little expedients. It is more likely to be simple and to look beyond the needs of the moment. The chief financial virtue is foresight. Hit-or-miss financing is almost certain to involve either waste or danger.
We will see this exemplified over and over again in discussing the tangled affairs of insolvent corporations which are in process of reorganization. One of the noteworthy advantages of most reorganizations is the greater simplicity which is secured through refunding small and isolated issues into a few large issues with well-defined claims.
It is usually best, also, to work along conventional lines. Originality is only too apt to arouse distrust. There is almost an established routine in organizing public utility corporations, which is about as follows: First mortgage 5% bonds are issued up to 75 to 80% of the cost of construction or, if the company is a consolidation, of the value of the combined fixed assets. These bonds sell to bankers at 95 to 100. 7% preferred shares are then issued for the balance of the tangible assets plus a reasonable amount of good-will. It is expected that the preferred shares will be able to keep up their dividends. They are usually taken by bankers at about 95. Common stock is then issued to such an amount that the remaining earnings, after the period of development is over, will be sufficient to pay at least 4 or 5%. This would be considered a conservative method of capitalization, and in fact it would be difficult to suggest any striking improvement.