Capitalization (finance)

“ True enough, no direct relation between rates and capitalization exists; but that a positive incentive to higher charges in general may be found in the need of supporting a large capitalization seems reasonably clear in the light of experience. ”

“ The custom is to adjust the value of the assets to harmonize with the capitalization rather than vice versa. Such a policy is to be deprecated.
The cost of reproducing the property as a basis of capitalization is as yet only seriously considered in theory. It is very doubtful if the method will ever be used in actual practice.
Earnings, past or potential, perhaps form the basis for capitalization most frequently used. Investment value closely corresponds to the rate earned and the degree of permanency of the earning power. To secure an income is the motive of all investment. ”

“ Sometimes the bolt comes out of the clear sky with prices at a maximum, sometimes it is only the last stage of a period of liquidation with progressively lower prices. But however unpredictable and seemingly inscrutable the actual course of events, the fundamental explanation is always the necessary readjustment of capitalization to actual earning capacity. ”

“ It would be theoretically possible, of course, to arrive at the total value of the business not by adding going-concern value obtained by capitalization of excess income to a valuation of the physical property obtained in some other way, but by capitalization of all income. ”

“ The laws that have been most strict on the subject attempt to limit the capitalization to the "actual cash value" of the business, by that being understood at times simply the cost of the plant itself with the running cash capital needed. On the other hand, most business men think that it is a wiser plan, and on the whole equally just, to capitalize a business on the basis of its earning capacity, regardless of what the plant may have cost. ”

“ When, as has been frequently the case of late years, in addition to this cash value of the plant and the cash itself which may have been paid in, large sums of stock are issued also for properties which may be in themselves highly over-valued, and for the services of the promoter, the financier and others, we can see that the capitalization must be far above what may ordinarily be considered a paying basis. ”

“ The effective capitalization of any modern company, that is to say, the capitalization which is effective for current business purposes as distinct from the formal requirements of the charter, is given by the quotations of the company's securities, or by some similar but less overt market valuation in case the company's capital is not quotable on the market. ”

“ These new or rejuvenated concerns are not committed to a scale of fixed charges carried over from a higher interest level; and these are therefore carrying only such interest charges as the current effective capitalization of their property will warrant, whether effective capitalization be taken to mean cost of production of the equipment, earning-capacity of the concern, or market quotation of its securities. ”

“ All capital which is put on the market is in this way subjected to an interminable process of valuation and revaluation - i.e. a capitalization and recapitalization - on the basis of its presumptive earning-capacity, whereby it all assumes more or less of a character of intangibility. ”

“ But the increase is chargeable mostly to changes in the assignment of capital stock to one account instead of another; and one such change alone operates to increase the average capitalization $700 per mile for the entire United States. ”

“ Any desired capitalization above a minimum of one thousand dollars may be fixed. Capital stock may be paid for in cash or by property. If it is paid for in cash, it may be paid for in full or by instalments, and a machinery has been created for protecting the corporation against the failure of the subscribers to stock to pay the balance of their subscriptions. If stock is paid for by property, the incorporators and not the State are to pass upon its value. ”

“ The consequences of inaccuracy are reduced by confining the capitalization to excess income, but of course it is a question of fact whether future excess income can be predicted with certainty sufficient to persuade a purchaser of the business o pay for its capitalized value. ”

“ Prices first rise in the particular enterprise, production augments, the movement spreads to other lines of business, and the new enterprises are financed by loans from the banks or trust companies, or by the sale of securities on a capitalization proportionate to the anticipated earnings. In times of buoyancy we are continually capitalizing anticipated earnings and future hopes, and we do this through the utilization of credit on a large scale. ”

“ In this way it may be seen that an earning power not known to bidders in the market does not enter into capitalization; a fictitious earning power, however, is capitalized so long as the investors continue to be deceived. ”

“ On the quantity theory, other prices, the prices of producers' goods and services, lands, and securities, would have to come down enough to compensate, in order that the price-level might remain unchanged. For the capitalization theory, however, the prices of lands, securities, and long time capital goods in general would have to rise, since the incomes on which they are based have risen. Wages of labor engaged in making consumers' goods would also have to rise, on the general imputation theory. ”

“ The borrower expects either to make these particular goods earn rents larger than those on the basis of which they have been capitalized, or to transfer them to an economy where goods are capitalized at a higher rate than he is paying. The income yielded by these goods, if the borrower's expectation is fulfilled, is but the difference between present and future rents that has been wrapped up in their capitalization. ”

“ The peculiarity, however, of an up-grade movement which rests on modern credit facilities is that we wear magnifying glasses or look at the future in too roseate a light. It is a natural tendency of human nature to capitalize one's hopes and expectations too liberally. If this is done on a continually larger scale, the capitalization becomes so great that actual earnings do not come up to our anticipations or the fear of a discrepancy between actual and estimated earnings begins to obsess us. ”

“ Thus, a corporation capitalized at one hundred thousand dollars ($100,000.00) , may elect directors and start business with only one thousand dollars ($1,000.00) actually paid in. The term, capital stock of a corporation, is used in many different ways. It is commonly used to designate the capitalization. Sometimes it is used to designate the amount actually subscribed. Strictly, it probably means the money actually paid in on subscriptions. A corporation's assets may be far in excess of its capitalization, or far below its capitalization. ”

“ In the first place, the whole mass of profits which are obtained by the adroit capitalization of a new business, or the reconstruction of one which already exists, have hardly any connection with production at all. When, for instance, a Lancashire cotton mill capitalized at £100,000 is bought by a London syndicate which re-floats it with a capital of £500,000—not at all an extravagant case—what exactly has happened? ”

“ As soon as a slight depression in business comes, so that it is perfectly evident not merely that dividends cannot be paid on the common stock, but that in all probability both the deferred stock and the bonds, if any have been issued, will also have to go without interest, it may be necessary to reorganize many of these combinations and to start them anew on a much lower capitalization. ”

“ Fisher's Rate of Interest, it assumes a degree of precision in business calculation which few experts in bond departments apply, and which the highly fluid and alert dealers in Wall Street certainly have not time for, even if they had that degree of mathematical knowledge! In practice, it need not be said, particularly in the case of the prices of lands, the capitalization theory finds its predictions very imperfectly realized! But the two theories, resting in such divergent psychological assumptions, may be expected, a priori, to conflict. That they do conflict is not remarkable. ”

“ High capitalization, it is sometimes said, tends to increase price. It does offer temptation to increase of price, [Pg 474] but nothing can put it within the power of combinations to increase price save the forces of monopoly. This power you do not increase or decrease by adding to the numbers of the counters, the considerations governing which are purely those of the stock-gambling fraternity. ”

“ It has long been recognized, as a general matter, that costs incurred in the acquisition or disposition of a capital asset are to be treated as capital expenditures. The most familiar example of such treatment is the capitalization of brokerage fees for the sale or purchase of securities, as explicitly provided by a longstanding Treasury regulation, Treas.Reg. ”

“ As indicated above, the market value of any stock is dependent in the long run more on the factor of its earning capacity than anything else. If investment in a stock nets the prevailing income rate on money, that stock will approximate its par value. So when determining the capitalization of a company which expects to be taken over as a going concern, the main consideration is not so much its true valuation as it is its earning capacity and its ability to pay dividends. ”

“ If a railroad corporation has bonded its property for an amount that exceeds its fair value, or if its capitalization is largely fictitious, it may not impose upon the public the burden of such increased rates as may be required for the purpose of realizing profits upon such excessive valuation or fictitious capitalization ”

“ From the inherent character of the machine industry itself, therefore, it follows that the earning-capacity of any industrial enterprise enters on a decline from the outset, and that its capitalization, based on its initial putative earning-capacity, grows progressively antiquated from the start. The efficiency of the machine process in the "instrumental industries" sets up a discrepancy between cost and capitalization. ”

“ On the other hand, if the element of monopoly enters into the business to any noteworthy extent, the prices of the product may be kept so high that fair dividends may be paid even on this high capitalization. That the tendency towards increasing the capital has been very strong there can be no question, and a penalty is apt to be paid for this somewhat reckless financiering. ”

“ It is too powerful a weapon in the hands of those alive to its possibilities, enabling a small group of men with a relatively insignificant investment of capital to control a country-wide industry. Take the simplest possible illustration: The industry of manufacturing a particular commodity is carried on by a number of corporations scattered throughout the country with an aggregate capitalization of, say, $10,000,000. A, B, and C form a holding company to acquire a bare majority of the stock of each corporation, say $5,100,000 in the aggregate. ”

“ It is true, as has been shown above, that the mere putting of an estimate on a durable good such as land involves the process of capitalization, which in turn implies a comparison of the values of the rents expected at different periods. Diminishing returns in the use of agents involves a loss of time to secure the usufructs emerging. ”

“ When a case has been brought before the courts in which the contention was advanced that the charges of the railway or public-service corporation were too high, the courts appear to have taken the ground that stocks and bonds should be classed together in order to determine the aggregate capitalization of the company, and that the justice or injustice of the contention that the charges are too high should be determined by ascertaining whether if the charges were made lower the net earnings would still be sufficient to pay a fair return on the total capital invested. ”

“ If an increased capitalization has been obtained without an increase in charges, owing to the lowering of the rates of bond interest and to the liberal use of stocks or income bonds, what has been the effect on the market value of the securities concerned? Is the aggregate value of the new securities less or greater than the aggregate value of the securities which they have replaced? ”

“ The conflict between the capitalization theory and the quantity theory may be more simply stated. Assume that the prices of consumers' goods and services rise, quantity of money and volume of exchanges remaining unchanged. ”

“ Commonly this takes the form of giving up a right which has a higher yield for one which has a lower yield. Or, viewed more fundamentally, from the angle of the capitalization theory, income-bearers of low saleability are capitalized at a higher discount rate than income-bearers of higher saleability, with the same yield. ”

“ This retardation (aided as it is by the reluctance of business men to lower their capitalization) is of sufficient effect to hinder recapitalization, on the whole, from overtaking the progressive need of it, with the result that a fair or "ordinary" rate of profits on industrial investments is not permanently attainable in the field of open competition. ”

“ A discrepancy between accepted capitalization and current earning-capacity, similar to the discrepancy discussed above but of a progressive character, arises under modern conditions apart from a fall in the rate of interest. ”

“ These large amounts of stock that are paid to the promoter and the financier for the purpose of bringing about the organization of a large trust, lead, of course, to what is called over-capitalization. What the proper basis of capitalization for a manufacturing industry should be, is a matter that cannot perhaps easily be determined by a definite The Basis of Capitalization.principle which shall be applicable in every case. ”