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:

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:

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.*

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

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.