Assume that by changes in the alinement the business obtained has been increased or diminished 10%. Assume that the operating expenses are 67% of the gross receipts. Assume that the amount required for taxes, for the interest on the bonds, and for such demands for permanent improvements, working capital, etc., as are considered essential before dividends can be paid amount to 28%. We will have a balance left of 5% available for dividends. Assume a change of policy by which a 10% increase of business is obtained. As an approximate figure we may say that this additional business may be carried at a cost of 40% of the average cost of the traffic. We will also assume that the reduction of 10% in traffic reduces the expenses by a similar amount. The comparative effect may therefore be stated as follows:

 Business increased 10%. Business decreased 10%. Operating exp. = 67 67[1 + (10%X40%)] =69.68 67[1-(10%X40%)1 =64.32 Fixed charges, etc................ = 28 ..................=28.00 ..................=28.00 95 97.68 92.32 Total income.... 100 Income.............110.00 Income..............90.00 Available for dividents ................. 5 Available for dividends............. 12.32 Deficit ..................................................2.32

## 19. Practical Limitations Of Capitalization

Theoretically there is a definite limit to the proper capitalization of every railroad project. Even if it is possible to obtain from a credulous public more capital (in the form of bonds) than the project requires, the effect is to burden the road with unnecessary "fixed charges" for bond interest. If more stock is subscribed for and paid in than can profitably be used, the usual result is wasteful expenditure, and the inevitable result is a decrease in the rate of dividends. In either case the credit of the road is impaired by the reduction in net earnings. The result of the over-capitalization may be actually financial embarrassment.

The other extreme is far more common. The project may fail to attract the capital necessary to build the road properly and to operate it until its normal traffic income is being regularly obtained. If the obtainable capital is exhausted before the road is put in operation the loss to the projectors is very great and is sometimes nearly or quite total. In anticipation of such a predicament a road is sometimes opened for traffic, using rails or ties which are too light, using little or no ballast, uncom-pleted earthwork having narrow cuts and no ditches and very narrow embankments, and many other devices for reducing the cost of the road before traffic-trains are run. To some extent such measures are justifiable, but it should always be remembered that it is frequently very expensive "economy" and that the operating expenses are thereby increased - often to such an extent as to wipe out an easily obtainable profit. Although it is unfortunately true that the engineer of the road must make the best of the capital which is furnished him for the work, be it great or small, yet the recommendations of the engineer should largely control the efforts to secure capital. The engineer should be competent to recommend how much capital may profitably be spent to secure the greatest rate of net return on the capital invested.

## 20. Principles Which Should Govern The Amount Of Capital To Be Raised

(1) The project should secure sufficient capital to insure the proper completion of the road and its operation until the normal traffic income is obtained. An estimate of this amount can readily be made and the projectors should not be satisfied with anything less. It might even be stated more strongly to say that the projectors are foolish to embark on the enterprise unless they have a reasonable certainty of raising this amount.

(2) The surveys may develop the fact that some additional expenditure may permit an improvement on the line as originally laid out. An illustration of this (elaborated in Chapter XV (Ruling Grades. 194. Definition)) is the reduction of the rate of the ruling grade, which is shown to have a definite financial value. The criterion in such a case is this: If the improvement is unquestionably justifiable, on the basis of a reasonable capitalization of the annual saving in operating expenses, then the improvement should be made, unless there is danger that the total available capital is limited and that the whole enterprise may become imperiled by an expenditure which is not absolutely essential even though desirable.

(3) In considering such a case as the above, the possibility of merely deferring the extra expenditure without ultimately abandoning work already done must be considered. In some cases the plan as actually constructed becomes practically a finality, which cannot be changed except at prohibitive loss. Under such conditions the best plan (from the operating standpoint) must be insisted off.

(4) On the other hand, no change or "improvement" should be adopted, unless it can be demonstrated that the change itself will be financially justifiable. It is not sufficient that its cost will not wreck the enterprise.

(5) The engineer can usually count on the fact that unless the money market is abnormally disturbed by panic conditions any enterprise which is really meritorious can command sufficient capital to float it, if it is properly exploited. Even an improvement to the original plan can command capital if it has sufficient merit, although this may be more difficult than to raise the original sum asked for.