upr000204 305

1 i Mr. Bdward C. Benwiek -5- Hovender 23, 1951 * f t , 4 0 0 .0 0 0 i s v ie w e d a s th e c a p i t a l s t r u c t u r e t h a t m ig h t be s u it a b le f o r th e I s s u e o f s e c u r i t i e s . S e c u r it ie s to be is s u e d p r o b a b ly s h o u ld be li m i t e d en ­t i r e l y t o b o n d s and common s t o c k . tEhere w o u ld be no j u s t i ­f i c a t i o n f o r a p r e f e r r e d s t o c k is s u e on a company a s s m a ll a s t h i s o n e . The bon ds s h o u ld n o t e x ce e d 50% and i n t h i s c a s e p ro b ­a b ly a 4-0 o r 4 5 $ is s u e w o u ld fee b e t t e r , 4 , |||% W S f e ' c o n d it io n s o b t a in in g i t w o u ld a p p e a r t o rae t h a t th e oonds s h o u ld c a r r y a 1$ cou p o n r a t e and is s u e d a t p a r, E a r n in g s on th e common s t o c k e q u it y w i l l n e c e s s a r ily d e - pendon w hat i s l e f t a f t e r p a y in g bona i n t e r e s t (and a l l o t h e r o p e r a t in g e x p e n s e s ) . A minimum d iv id e n d r a t e o f 8% would, p ro b ­a b ly be r e q u ir e d t o be a t t r a c t i v e t o o u t s id e p u r c h a s e rs * In — i t i a l l y s o m e th in g l e s s w o u ld p r o b a b ly toe p a id to t h e U n io n P a c i f i c . !£he f o llo w in g s im p le f i n a n c i a l s t r u c t u r e c a l l i n g f o r e a r n in g re q u ire m e n ts a r e a s f o llo w s ; Bonds S to c k 6 3 0 , 0 0 0 7 7 0 just #1 , 400,000 i 4$ 6 8% 6.2 # 25,200 63 ,bufO f 8 6 ,3 0 0 I f 7% i s p a id in s t e a d o f 8%, th e n 5 *6$ w o u ld be e a rn e d and i f o n ly 6$ i s p a id , b u t 5 .1 $ w o u ld be e a rn e d o v e r a l l . Xn o u r ’E x h ib it **S* u n d e r in t e g r a t e d o p e r a t io n s , a re v e n u e o f |S 6 ,S 3 7 on an Investment | I f n e t a d d it io n s t o p la n t w ere e q u a l to o r e xce e d e d th e g ro w th i n th e d e p r e c ia t io n r e s e r v e , t h e r e w o u ld be no le s s e n ­in g i n th e n e t p la n t v a lu e u n d e r ly in g th e b o n d s . To th e e x­t e n t t h a t e a r n in g s e xce e d e d d iv id e n d s p a id , th e n e t w o rth w o u ld in c r e a s e and th e e a r n in g s i n d o l l a r s on th e common s t o c k e a u it y w o u ld in c r e a s e fro m y e a r t o y e a r . On any r e o r g a n iz a t io n i n th e c a p i t a l s t r u c t u r e and th e cringing in or tii© Production Companyj, tlio accounting practice w o u ld u n d o u b te d ly be chang ed t o nr e t lr e s e n t a c c o u n t in g ’*. T h is w o u ld m e a n t h a t u p o n re p la c e m e n t o f a 4 - in c h m ain t h a t s to o d o n tn e b o o ks a t , s a y , $ 1 .5 0 p e r f o o t , th e new 4 —iu c h m a in w o u ld b e c a p it a liz e d a t i t s p r e s e n t d a y c o s t o f , s a y , # 3.00 p e r f o o t . U n d e r p r e s e n t XCC r a i l r o a d re q u ir e m e n ts th e $ 1 .5 0 p e r f o o t i n ­c r e a s e i s an e x p e n s e c h a r g e . S i m i l a r l y u n d e r g ro u p 'd e p r e c ia ­t i o n p r a c t i c e s , th e w h o le o r i g i n a l e o s t i s c h a rg e d t o th e r e s —