the basis of value for the price they are paying. As a rule the nearer a company can come to limiting the issue of its bonds to an amount equaling the estimated value of its property at a forced sale, the better for the company, so far as concerns the price it can get for the bond issue. The rate of interest on the bonds should be high enough-about the current market rateso that it will not put the issue at a disadvantage with reference to other bond issues of equal safety which are on the market, for then the bonds will command par both because of their safety and their interest returns. Since the face value of bonds must be paid at maturity, a sale of bonds at less than par is discounting the future by the difference between the sale price and the par of the bonds. The principal advantage of bonds to the stockholder is similar to that of preferred stock,-that the interest paid on them is lower than the customary dividends on stocks, so that the stockholders receive a larger share of the profits than if an amount of the stock equal to the bond issue had been sold. The prevailing interest on bonds is from 4 to 6 per cent., while the dividend on preferred stock is usually 6 or 7 per cent. Common stock may receive any dividend the profits permit and the directors may see fit to declare. In industrial concerns, where there are bonds or preferred shares, profits should be such that the common stock will receive from 8 to 12 per cent., owing to the disadvantages under which it is placed, especially if it is sold at par. Sometimes a company does not expect to realize much from the sale of common stock, and gives free with a certain number of preferred shares, or with a bond, several shares of common stock as an inducement to buy. As the preferred stock in this case usually represents in amount the value of the property and other assets of the corporation, the common stock represents only a part of the expected surplus earnings above the dividend or interest requirements. If it is marketed it may bring 30 or 40 cents, or some other low price, according to its prospects for dividends, and it is not expected that it will receive a large dividend until the profits are large enough to bring its market value near or to par. When the profits grow large enough to pay high dividends, they are the

cause, and the higher value of the common stock is the effect, while in a case where par value was paid for common stock it should be the cause, in a proper capitalization, of a comparatively high dividend, if there are the preferred shares or bonds mentioned. The principal compensation in holding common stock is the larger dividend it will likely receive over the preferred shares and over the interest on bonds. Another advantage that may be mentioned here is that it has a proportional interest in the assets of the company to the extent of their full value, while the preferred stock is usually debarred from any interest in the assets beyond its par or face value and arrearages of cumulative dividends. If all the stock of an industrial corporation is common stock, and there are no bonds, or only a small issue of bonds, 6 or 8 per cent. of dividends is a fair return if the value of the assets of the company is equal in amount to the price paid for the common stock issue, or greater than that price.

As has been said, the stockholders are owners of a corporation, and the bondholders are creditors. The latter can demand at the time of maturity of the bonds a certain amount named in the bond as its face value, and no more, and they have a definite claim to the interest named in the bond, and no more. If stock were sold instead of bonds, the additional stockholders would share in all the profits. But as a company can usually make more on the money borrowed through a bond issue than it has to pay in interest, the lesser number of stockholders get all the advantage of the earnings above the interest. However, as the first consideration should be the preservation of the solvency of the company, the degree of variation in the business of the company must be reckoned with in making a bond issue. If the business is uniform in amount and profit from year to year, the issue of bonds is a comparatively safe thing for the company; but if the business or profits are subject to wide variation, the issue of preferred stock is the safer plan. If it is intended to pay bonds at their maturity, instead of refunding the debt the bonds represent by the issue of more bonds, the provision of a sinking fund must enter into the calculation. For this

purpose a definite part of the yearly profits must be laid aside to meet the payment of the bond principal. Of course, this will take just so much from the profits used for interest, dividends and prudential expenses, such as a reserve. Instead of paying the principal, large corporations usually issue new bonds and exchange them for the old, or sell the new to new purchasers and use the money to pay off the old bonds, thus making the bondholders permanent creditors of the company. On account of certain economic objections to sinking funds, this is preferable in all cases of staple business, except in those where the productive assets are gradually depleted through years of operation or otherwise. For instance, the products of a mine will give out after a time, and if bonds have been issued a sinking fund must have been created to retire them. In continuous businesses the money that would be used for a sinking fund had better be employed in increasing their earning capacity.

A further consideration with reference to the issue of bonds is this: A bond issue, as was said, is an indebtedness. In taxing corporations many states permit corporations to deduct outstanding indebtedness from their taxable property in determining the amount on which the corporations shall be taxed. Therefore some companies save taxes and state fees by capitalizing for a smaller amount than must be used in their business and issuing bonds to make up the rest.

§ 29. Capitalizing at Less Than Real Value.

There frequently arise circumstances where the corporate form of organization is desirable in a business for only a few of the advantages which it offers. It may be desired to make a division and distribution of interests among only the few persons interested and secure for them freedom from partnership liabilities. If their company were capitalized at its true value, the attention of the public might be called to the profitableness of the business, and competition might be aroused. By capitalizing at less than real value the state fees and taxes are lower, while the practical objects of incorporation are accomplished,

and little attention is drawn to the fact of incorporation. The shares in cases of this kind are, of course, worth several times their par value.

§ 30. PLACING STOCKS AND BONDS.

In companies organized by a promoter the disposal of stock is usually attended to by him. But frequently when a corporation is organized, and the promoter's work is considered to be done, all the stock has not been subscribed and the corporators expect to sell the balance to provide funds for more extensive operation, etc. It is always better to have enough stock subscribed before incorporating to run the business, for stock cannot always be sold easily or advantageously. In small concerns, new ones or old ones reorganized, where there is a balance of unsubscribed stock, the sale of it depends usually upon the corporators or such unprofessional salesmen as they may be able to employ. Conservative professional stock salesmen, such as financial bankers and stock-brokers, do not usually take issues of stock for sale where the concern is small and new and its earning capacity uncertain or wholly speculative. In the case of large or old companies, which have increased their capitalization on a proper basis, or in reorganized companies where the stock has acquired an estimable value, or in large companies where the profits are calculable with reasonable certainty, stock and bond dealers, financial bankers-sometimes private, sometimes national,—and trust companies will frequently act as fiscal agents and take stock for sale on commission, or will underwrite it. When stock is sold for a commission the commission is a matter of arrangement between the corporation and the selling agent, and usually depends on the degree of ease with which the stock may be marketed, which depends largely on the financial reputation of the corporators or the corporation and on the prospective value of the stock. When a well paying common or preferred stock is backed by assets which are salable at a figure which will protect the stock at par after prior claims against the assets are deducted, the commission may run any

where from 4 to 10 per cent. When stocks are underwritten, the profit required by the underwriter depends usually on the actual and certain value of the stock, though it sometimes depends mostly on the underwriter's certainty that he will be able to dispose of the stock within the time specified in the agreement. The underwriting of stocks (and this applies also to bonds) consists in subscribing for an entire issue or balance of an issue at a certain price, to be paid within a certain time, say six or nine months. The object of the underwriter is to sell the securities within that time at a price in excess of what is to be paid. If all the securities are not sold the underwriter must pay for what is left on his hands when the time is up. The underwriter does not expect to use much of his money in the transaction, as he will, in paying his own debt, use the money paid by the subscribers to him. Sometimes a portion of the amount subscribed, usually from 10 to 30 per cent. of it, may be made in the agreement subject to call, and, if called, it is paid. For assuming the risk, and furnishing the small amount called, if any, he will have as his profit the difference between the underwriting price and the sale price to the public. Underwriting on a large scale is done by such banking concerns as J. P. Morgan & Co., the National City Bank, the Bank of Commerce and the First National Bank, of New York. They are really wholesale bond dealers. In unusually large underwriting transactions a syndicate of bankers is usually formed to share the risks and the profits, and a syndicate manager is chosen from among the banks interested to conduct the transaction. The syndicate manager receives an extra share of the profit for the extra services performed. The syndicate agreement simply recites that the several banks agree to purchase at the given price and within the given time the amount of stocks or bonds set opposite their respective names, and to furnish on call a certain. amount of money to pay for the stock subscribed. When the transaction is finished the syndicate manager sends each member of the syndicate a check for the amount which was called, and the share of profits which belongs to that member. If all the securities are not sold, and the members must redeem their