Chicago & West Michigan (inc. No. 13, Chicago & North Michigan and No. 14,

VALUE OF RAILROADS-STOCK AND BOND BASIS.

(NOTE. The following is the report submitted by Willard E. Warner, one of the clerks of the Commission and a lawyer by profession, to Commissioner Campbell, and mentioned by him on page 70 of his report. The other Commissioners have no knowledge of its authorization by the board and do not vouch for its accuracy.)

Detroit, Mich., December 15, 1900.

Hon. Milo D. Campbell, President Board of State Tax Commissioners: Dear Sir-In accordance with your request, I have computed the values of stock and bonds of the various railroads in the state of Michigan, and have the honor to submit the following:

The market value of the respective stocks and bonds is given wherever they have been quoted, the average monthly quotations for 1899 having been taken. Where no quotation is given for any particular issue of stock or bonds, then the par value of such stock or bonds is taken; but such par value is not considered in any instance as representing the actual value of the properties upon which they are issued.

While the actual value of a stock or bond may, in theory, on an assumed statement of facts, be determined, yet, as a matter of fact, as applied to railway stock and bonds, where the premises are varying from day to day and the basis of computation constantly changing, there is no method by which their actual value may be computed. Nor do the actual and the market values necessarily coincide, the latter being subject to the manipulations of the stock brokers regardless of the actual value.

In some instances, either the stock or the bonds is and the other is not quoted, in which case the quoted value of the one and the par value of the other is taken. In other instances, where there are several issues of bonds, some of which are and others are not quoted, the quoted values of those quoted and the par values of those not quoted are taken-it appearing in the compilation whether they are or are not quoted.

In the compilation of valuations, wholly based upon the par values of the stocks and bonds, an effort has been made to give the credit balance from income after the payment of actual operating expenses, or the debit balance of operating expenses over the income, as tending to show the relative actual value of such stock or bonds. Such items are given as "Credit Balance From Income," "Debit Balance for Interest,” "Deficit Balance Reported," "Debit Balance for Expenses," etc., and show, in the case of the "Credit Balance," a surplus from the income, after the payment of all operating expenses, interest, etc., and is either

applicable to dividends or carried forward on the books of the company as a surplus. In such case, the bonds are worth at least their par value, and since the holder of a bond can receive no more than the yearly interest, and its face value upon its maturity, it is worth only such an amount for an investment, to receive a desired income, as an individual would be willing to pay for it. For instance, if the bond be for $100, bear five per cent interest, payable semi-annually, and has twenty-five years yet to run (assuming the security absolutely good), according to recognized and authenticated tables, a person desiring an income of three and one-half per cent on his investment could pay $124.86 for such bond; while if he desire four per cent income he could pay but $115.71 for it, and so on. If, however, the net income be not sufficent to pay the interest on the bonds, such bonds may or may not be worth their face value, for it is assumed that all bonds are secured by a mortgage upon the whole road, or such a part of the road as is amply sufficient to secure the payment of the bonds; and if a default in the payment of interest occur foreclosure proceedings under the security may be taken, a decree be entered for the sale of the road, or that part of it covered by the security, and providing for the payment of any deficiency that may exist after the sale. If the road, or part of road, sell for an amount sufficient to pay the bonded debt, the holder of such bonds will realize the full face value, and the bonds are worth their par value; but if an insufficient amount be realized upon such sale to satisfy the debt in full, then the financial responsibility of the company must be looked to, to realize such deficiency, and the value of the bond is controlled by that fact.

The computations of the bond values are rendered intricate and uncertain by reason of the fact that there may be many different issues of bonds issued by a company upon different portions of its line, or upon the same portion of its line; or, the different issues may overlap upon a portion of line; or an issue may cover a line partly in this state and partly in an adjoining state; or an issue may have been made at a certain time covering the whole line as it was at the time of the issuance of the bonds, since which time the line may have been extended without it appearing how the issue is affected or in what manner.

The particular part of the line, or the actual number of miles covered, is not given in the reports in every instance, in which event the computation is based upon the facts as nearly as they may be ascertained from such sources as are at hand. The par value of the stock and bonds do not represent the actual value of the road upon which they are issued for various reasons, chief among which is the well known fact that in many instances none of the avails of the stock whatever go into the construction or equipment of the road. It was, possibly, the early practice to pay in a portion, or even the whole amount, of the subscribed capital stock, and to use such amount in the construction of the road so far as available; and when this amount was found insufficient to complete the road that part constructed was then bonded for an amount sufficient to complete the construction and equipment. But the present practice, generally, is to organize the company, issue the stock to the subscribers thereof, construct a portion of the road, procuring the material and labor upon the credit of the company, and then bond the road for an amount sufficient to meet the cost of construction

and equipment of the whole road; in which event none of the capital stock is paid in and used in construction but is issued as a bonus to the incorporators, and the avails of the bonded indebtedness only go into the physical properties.

In other instances the road and its equipment may have appreciated, or depreciated, very materially, subsequent to the issue of the stocks and bonds, but without any change being made in the amount issued, and furthermore the avails which went into such construction and equipment may not have been equivalent to the par value, they having been sold at a discount, and a sum much less than their par value having been invested in the property.

In theory, at least, where both the stock and bonds are quoted, and have a known market value, the aggregate of such values ought to represent the total value of the company's property, but such market value, being subject to the manipulations before referred to, do not, in fact, stand for the actual value of the property any more than the price paid for any property purchased at a forced sale represents its true cash value.

In another known instance, a road already constructed and equipped, and upon which there was a bonded indebtedness, has been purchased by another company, and bonded for enough to refund its previous bonds and provide for the purchase price, in which case it can hardly be said that the value of its bonds represents the value of that portion of the purchasing company's property.

Stocks are a much more uncertain factor, though the dividends may be at a much greater rate per cent on the amount invested than the interest on the bonds; but the payment of any dividends whatever is postponed to that of the interest on the bonds, and only in the event of a surplus, after the payment of all operating expenses, interest on the bonds, the unfunded debts, and all other liabilities, may a dividend legally be declared, and then at a greater or less per cent as the case may be. The stocks may be rendered wholly valueless by default in the payment of interest and a sale under foreclosure proceedings, or the management of the company may be such that even though a large surplus may accrue yet no dividends may be declared.

In numerous instances, in the reports of the companies from which this compilation is made, a large surplus is reported though no dividends are reported, and it cannot be determined from such reports whether this surplus has been divided among the shareholders or is being carried along by the company. The assumption is that the dividends have been declared and paid, but that the amount is carried along on the books of the company as a surplus to show the total net earnings of the company.

The computations have been made with as good care as possible, due regard having been given to the varying methods of bookkeeping em