UC-NRLF 
 
 37 273 
 
PROBLEMS 
 IN PRIVATE FINANCE 
 
 BY 
 
 CHARLES W. GERSTENBERG, Pn.B., J.D. 
 *\ 
 
 PROFESSOR OF FINANCE AND HEAD OF THE DEPARTMENT OF FINANCE OF NEW YORK 
 UNIVERSITY SCHOOL OF COMMERCE, ACCOUNTS AND FINANCE 
 
 1922 EDITION 
 
 PRENTICE-HALL, INC. 
 NEW YORK CITY, N. Y. 
 
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 Copyright, 1916 and 1922, by Charles W. Gerstenbcrg 
 
FOREWORD 
 
 These problems were originally planned for classes in Private 
 Finance in the School of Commerce, Accounts and Finance of New 
 York University. 
 
 Some of them have been used over a long period of time, having 
 been submitted to the students in mimeograph form. As the value 
 of solving problems of this kind became more apparent, new prob- 
 lems were added and it was decided, for economy's sake, to print 
 them in book form. The problems are to be used with MATERIALS 
 OF CORPORATION FINANCE and SYLLABUS OF CORPORATION FINANCE, 
 by the same author. 
 
 The chapters in this problem book correspond with the chapters 
 in the syllabus. 
 
 4834 
 
PROBLEMS IN PRIVATE FINANCE 
 
 CHAPTER I 
 
 Before beginning the study of these problems the students should 
 study very carefully the chart on pp. 22 and 23. 
 
 1. If you alone were about to engage in one of the following 
 businesses, would you form a corporation or conduct the business 
 as an individual proprietorship: the manufacture of automobiles; 
 professional accountancy ; local grocery store ; mail order business ? 
 
 2. A partnership does a very successful business and grows 
 rapidly, constantly adding new partners. They desire to organize 
 in the most efficient manner and to delegate certain duties and au- 
 thorities to certain partners, restricting each partner to the duty 
 and authority delegated. How may they accomplish their purpose? 
 
 3. A sells his interest in the partnership A-B to C. What rights 
 hasC? 
 
 4. Suppose that A and B had an agreement to conduct a partner- 
 ship for five years, and that at the end of one year A withdrew. 
 First, what would happen? Second, what could B do? 
 
 5. A, B and C are partners, investing as follows: A, cash, 
 $30,000; B, property valued at $20,000; C, cash, $10,000. During 
 the first year A withdrew $6,000; B, $4,000; and C, $2,000. At the 
 end of the year, after deducting withdrawals, the partnership has 
 $6,000 to divide as profits among the partners. Nothing was said 
 in the partnership agreement as to the method of dividing the 
 profits' or as to withdrawals. How should the profits be divided? 
 
 If the partne-^hip agreement provided that "profits and losses 
 shall be divided in proportion to the contribution of capital," what 
 division would be made? 
 
 6. A, B and C are partners, investing respectively $60,000, $40,- 
 000 and $20,000. B lends the partnership $40,000. The firm owes 
 outside creditors $100,000. The firm dissolves and realizes $200,000 
 on its assets. How should that amount be divided ? 
 
 7. X, Y and Z are in partnership and have invested $75,000 in 
 the partnership business in equal shares. Aside from the investment 
 in the business, X has $25,000, Y has $35,000 and Z has $50,000 inj 
 cash, marketable stock and bonds not invested in any other busi- 
 ness. The partnership owes $99,000 and is about to dissolve. X owes 
 to individual creditors $18,000, Y owes $30,000 and Z owes $25,000 
 All the creditors demand immediate payment of their debts and a 
 receiver is appointed to take over the assets of the partnership anc 
 of all the partners. How should their assets be divided? 
 
6 PROBLEMS IN PRIVATE FINANCE 
 
 8. If, in the above problem, the X, Y, Z firm had been incor- 
 porated, would you change your answer ? 
 
 9. If you were to co-operate with other persons in the conduct 
 of the following enterprises, would you organize as a partnership : 
 a street railway; oil production; retail clothing; investment bank- 
 ing; aeroplane manufacture? 
 
 10. A entrusted B with $10,000 for use in the business of heating, 
 ventilating, etc., and for no other use whatever. For this A was to 
 receive 6 per cent and one-half of the net profits of the business. He 
 was also to have a right to require quarterly statements of its trans- 
 actions and the right to withdraw his money at any time. The busi- 
 ness fails. Can the creditors hold A liable as a partner? (See 115 
 N. Y., 625.) 
 
 11. Can you suggest a method by which A's liability (in the 
 above problem) could have been definitely limited to the $10,000 
 contributed, A still obtaining one-half of the profits, B remaining 
 personally liable to creditors, and the business suffering none of the 
 disadvantages of incorporation? 
 
 12. A is a special partner in a limited partnership of A, B and C, 
 which does business and has its certificate filed in New York State. 
 A, B and C open a branch in New Jersey. A lives in New Jersey 
 and owns property in New Jersey. Partnership A, B and C fails. 
 What right has X, a creditor, living in New Jersey? 
 
 13. If A, a member of the Pierce-Fordyce Oil Association 
 (p. 6), sells his interest to C, will C have any rights other than 
 those he had in problem 3 ? 
 
 14. Could the members of the partnership, referred to in prob- 
 lem 2, accomplish their purpose by organizing a joint-stock 
 company ? 
 
 15. (a) Refer to articles of the Pierce-Fordyce Oil Association 
 in MATERIALS. The member's certificate of interest on p. 7 pro- 
 vides that "no member of this association shall be liable for any 
 debts, covenants, damages or torts of this association beyond the 
 limit of his shares." Is this provision in itself binding on third 
 parties who become creditors of the association? 
 
 (b) If not, what further steps are necessary? 
 
 (c) What additional provision do we find in the articles of asso- 
 ciation to protect the shareholders and make the above provision 
 binding on third party creditors? 
 
 (d) Suppose the board of governors do not refer to the agree- 
 
8 PROBLEMS IN PRIVATE FINANCE 
 
 ment in a contract, and the person with whom they were dealing 
 knew nothing about these articles of association. Could the creditors 
 look to the individual members of the Pierce-Fordyce Oil Asso- 
 ciation ? 
 
 (e) What right would the members have if the board of gov- 
 ernors neglected to refer to the articles of association in any 
 contract ? 
 
 16. Suppose that the members of this class were to form a 
 partnership. There are 50 students in the class. How many per- 
 sons would there be? 
 
 17. Suppose that we have formed a corporation and that each 
 one of us is a stockholder in this corporation. How many persons 
 will there now be in the room? 
 
 18. A, B and C are members of the X corporation, which owns 
 a block of land under contract of sale to Z. A, B and C sign the 
 deed and deliver it to Z. Does Z get title? 
 
 19. X, Y and Z, three persons, sell out their entire partnership 
 to A, with an ancillary promise not to engage in business under 
 the firm name. They incorporate the X-Y-Z Company, in the same 
 line of business. May A restrain the company from doing business 
 on the basis of the contract itself ? On any other principle? 
 
 20. If in the 3rd problem the business were a corporation and 
 not a partnership, would your answer be different? 
 
 21. Draw up a simple form of by-laws for the Hamilton Auto- 
 mobile Co. (p. 82). You may use the United States Steel Corpora- 
 tion's By-Laws, p. 66, as a guide, but they should be simplified. 
 
 22. How much would you pay the State of New York for the 
 right to begin business as a corporation with a capitalization of 
 $5,000,000? (See chart, p. 51.) 
 
 23. How much would you have to pay the State for the right 
 to begin business as a partnership, investing $5,000,000 in the busi- 
 ness? As a joint-stock company? As a Massachusetts Trust? 
 
 24. A, B and C are general partners doing a retail dry goods 
 business in New Jersey. They decide to do business in New York. 
 Must they pay any special taxes before they "can begin business? 
 
 25. Suppose A, B and C were incorporated for $100,000. Would 
 they be required to pay any special tax before they could begin busi- 
 ness in New York, assuming that the company owned property 
 worth $1,000 located in New York, and $9,000 of property located 
 elsewhere ? 
 
10 PROBLEMS IN PRIVATE FINANCE 
 
 26. Suppose that A, B and C were incorporated. Would they 
 be required to pay any special tax before they could begin business 
 in New York? 
 
 27. Would your answer be different if the business were con- 
 ducted as a joint-stock company? As a trust? 
 
 28. All the stockholders of the A company die. The directors 
 are not stockholders, not being required to be stockholders by the 
 by-laws of the corporation. What should the directors do? 
 
 29. If the shareholders of the Pierce-Fordyce Oil Association 
 (p. 6) died, would its Board of Governors take action different from 
 that taken by the directors of A company (above) ? 
 
 30. If the shareholders of the Massachusetts Electric Companies 
 (p. 11) died, what would the Trustees do? 
 
 31. All the directors of the X Company die. The by-laws pro- 
 vide that vacancies in the board of directors shall be filled by a 
 special election held by the board of directors. The next annual 
 meeting of the X Company is not scheduled to be held for ten 
 months. What should be done? 
 
 32. Who has the title to the property of the Massachusetts Electric 
 Companies ? 
 
 33. Are the members of this enterprise liable as partners ? What 
 changes are necessary to remove this liability? 
 
 CHAPTER II 
 
 1. Under what kinds of laws were the General Electric Com- 
 pany (pp. 26-33) and the United States Steel Corporation (pp. 
 59-65), respectively, created? 
 
 2. If you were to form a business, like which of these two 
 corporations would you form it? 
 
 3. Point out the difference in purpose and scope between the 
 ^certificate of incorporation of the United States Steel Corporation 
 (pp. 59-65) and the by-laws (pp. 66-79) of that corporation. 
 
 4. A, B and C offer the Secretary of State a certificate of in- 
 corporation providing for two classes of stock, one of which, like 
 Bethlehem Steel B stock (p. 763), will have no voting power. The 
 Secretary of State refuses to file it, on the ground that stockholders 
 have the right to vote for directors and that this right cannot be 
 taken away from them. Will the courts compel him to accept it? 
 
 5. Company X has two classes of stock, common and preferred. 
 A holds one share of preferred. At a meeting of the stockholders 
 
12 PROBLEMS IN PRIVATE FINANCE 
 
 it is moved and seconded that the certificate be amended to increase 
 the preferred dividend from 7 to 8 per cent and to offset this by 
 depriving the preferred stock of its voting power. A objects. What 
 right has A? 
 
 6. A, an I. W. W. leader, buys one share of common stock 
 in the U. S. Steel Corporation, and six months later demands at the 
 office of the company a list of the stockholders, with their addresses, 
 that he may write to the stockholders remonstrating against the 
 labor policy of the company. Will the company be justified in re- 
 fusing him the list? (See S. C. L. 1 of N. Y., Sec. 32; N. J., 
 Sec. 33.) 
 
 7. A, in problem 6, also demands that he be permitted to 
 inspect the cash-books, ledgers and other financial books. The 
 company refuses him permission. What are his rights? (See 
 S. C. L. of N. Y., Sec. 69.) 
 
 8. If A were a director, would he have any right to inspect these 
 books ? 
 
 9. A partnership has incorporated its business and it asks you 
 to provide the necessary books. What books will you procure? 
 
 10. Read pages 99 and 100. Suppose that the by-laws of the 
 X Company, a New York Corporation, provided that a majority 
 of the stockholders in interest might ratify a mortgage. Directors 
 ask the stockholders to ratify a mortgage. Of $12,000,000 capital 
 stock, nine million is represented at the meeting, six million vote in 
 favor of the mortgage, three million against. Will the bonds be 
 valid legal obligations of the company? 
 
 11. If the meeting referred to on page 89 had been called by a 
 notice similar to that on page 88 (with the necessary changes of 
 dates), would the action of the stockholders in authorizing the 
 foond issue have been legal? 
 
 12. The by-laws of the X Corporation provide that "at any 
 meeting of the stockholders, 51 per cent of the capital stock of the 
 company, present in person or represented by proxy, shall con- 
 stitute a quorum for all purposes, unless the representation of a 
 larger number shall be required by law, and, in that case, the rep- 
 resentation of the number so required shall constitute a quorum." 
 Of 100 shares of capital stock, A owns 50 and B owns 50. A con- 
 trols two directors and B one. The annual meeting, at which direc- 
 tors are to be elected, is to be held. A and B have a disagreement. 
 
 1 S. C L. refers to Stock Corporation Law ; the Business Corporation Law 
 will be referred to as B. C. L., and the General Corporation Law as G. C. L. 
 
14 .PROBLEMS IN PRIVATE FINANCE 
 
 What should A do to insure a continuation of his control? (See 
 S. C. L. of N. Y., Sec. 25; also 15 A. D. 530; N. J., Sec. 34.) 
 
 13. A sells his stock to B, who neglects to transfer the stock on 
 the books of the company. A and B both appear at the meeting. 
 Which should be given admittance? (See G. C. L. of N. Y., Sec. 
 23; N. J., Sec. 40.) 
 
 14. The Statute of the State of Maine does not refer to the 
 question of the method of voting by stockholders. Suppose that 
 you bought a majority of the stock of a Maine corporation and 
 wanted to elect its board of directors, what would you do? How 
 could you make the rules of the State of New York on the ques- 
 tion of voting apply to a Maine company? (See G. C. L. of N. Y., 
 Sec. 23 ; N. J., Sec. 36.) 
 
 15. If you were the presiding officer at a stockholders' meeting 
 of a New York corporation and the stockholders claimed the right 
 of cumulative voting, what would you do? (See G. C. L. of N. Y., 
 Sec.24;NJ.,Sec.38j4.) 
 
 16. Assume that nine directors are to be elected by the California 
 Petroleum Corp. (pp. 101-104) and that the company has issued its 
 maximum stock provided by its certificate. How many shares would 
 you have to own to elect six of the directors under the cumulative 
 plan of voting? 
 
 17. If you own 501 shares out of 3,000 voting shares, how many 
 of the five directors can you safely seek to elect? 
 
 18. Under the cumulative plan of voting, how many shares of 
 the United States Steel Corporation (assuming that the total capital 
 stock has been issued) would you require to elect a majority of the 
 directors whose terms expire each year? (See pp. 59-65.) 
 
 19. Imagine the names of the directors whom you are to put in 
 control of the United States Steel Corporation under the plan 
 mentioned in the last problem. Draw up a ballot as per form given 
 on page 90. 
 
 20. Suppose you sent in the proxy given on page 88 and then 
 wanted to attend the meeting yourself. What could you do about 
 the matter? 
 
 21. As far as you can determine from the voting-trust agreement 
 given on pages 91-97, is it valid? 
 
 22. Would the said agreement be valid if it applied to a New 
 York corporation? If not, how could it be made valid? (G. C. L. 
 of N. Y., Sec. 25.) 
 
 23. The creditors of an insolvent New Jersey company agree not 
 
16 PROBLEMS IN PRIVATE FINANCE 
 
 to foreclose if they can get control of the company till it pays for 
 its bonds. Can you suggest a method of accomplishing this end? 
 
 24. Can you suggest any purposes, other than those already sug- 
 gested, for which a voting trust could be formed? 
 
 25. How may the objects obtained through the voting trust be 
 secured permanently? 
 
 26. Very briefly describe what are likely to be the duties of the 
 officers, committees, agents and departments of the Westinghouse 
 Electric Company. (Refer to pp. 627-629.) 
 
 27. Draw a chart of the organization of the Westinghouse Elec- 
 tric Company. 
 
 CHAPTER III 
 
 1. Refer to page 762. What was the capital stock, the capitaliza- 
 tion, and the capital of the Bethlehem Steel Corporation in 1911? 
 
 2. Is the certificate given on page 150, as it now stands, negoti- 
 able? (Study pp. 111-116. Notice that the law was not enacted 
 in New York until September 1, 1913. Certificates of stock dated 
 before the enactment of the law are not negotiable. The same 
 law was passed in New Jersey in 1916. It has also been enacted in 
 Louisiana, Maryland, Massachusetts, Michigan, Ohio, Pennsylvania, 
 Rhode Island, Tennessee, Wisconsin and Alaska.) 
 
 3. A owns certificate No. 5 for 100 shares of the X Company, 
 dated September 1, 1905. He endorses it in blank and loses it. B 
 finds it and sells it to C, who knew of the loss. C gives it to D. D 
 sells it to E, who knew nothing of its past history. E sells it to F, 
 who knew of the past history of the certificate. Does F get the title? 
 
 4. Suppose that the same certificate had been transferred by D 
 to his own name before the stock was sold to E. Would D get the 
 title? Would E get the title? Would E get any right? 
 
 5. What remedies in the above two cases, if any, would A have? 
 
 6. Suppose that the certificate mentioned in problem 4 had been 
 dated September 1, 1917. Would your answer be different? 
 
 7. Suppose that Faith Jones wanted to send the certificate on 
 page 150 to her broker ready for delivery. How could she do this 
 without danger of loss and without incurring a double stock-transfer 
 tax? (Study pp. 117-121 and see foot of p. 160 and top of p. 161.) 
 
 8. Mary Smith, unmarried, is a customer of your brokerage and 
 bond house. She marries John Anderson and writes for advice on the 
 following. questions : ( 1 ) How should I have certificates made out in 
 the future? (2) How can I get the old certificates I hold in various 
 companies transferred to my new name? (Refer to rules pp. 171-175.) 
 
18 PROBLEMS IN PRIVATE FINANCE 
 
 9. Faith Jones transfers her stock to you by assignment endorsed 
 on the certificate. The company refuses to make the transfer unless 
 the signature of the transferor is accompanied by a stock exchange 
 member's guarantee or a notarial certificate. Is the demand justi- 
 fied? (See pp. 174-175, paragraph vi.) 
 
 10. (1) Company M is formed for $500,000. 
 
 (2) $50,000 of its stock, par value, is sold and issued to 
 
 each of the following persons : A, B, C, D and 
 E, 10 per cent paid. 
 
 (3) Company calls 10 per cent. All calls are responded to. 
 
 (4) Company sells $25,000 of its stock to F for patent. 
 
 (5) Company issues another call for 10 per cent. A does 
 
 not respond and his stock is forfeited. 
 
 (6) F donates $10,000 of his stock to the company. 
 
 (7) Company sells $25,000 to G at 105. 
 
 (8) Company sells all its remaining stock (both unissued 
 
 and treasury stock) to H without subjecting H to 
 any future liability on it, at the lowest price possible. 
 Fill in the following table step by step : 
 
 12345678 
 Authorized 
 Unissued 
 Issued 
 Outstanding 
 Treasury 
 Part paid 
 Full paid 
 Forfeited 
 
 (See pp. 174-175, paragraph vi.) 
 
 11. How much stock did the company sell at the end and what 
 price did it receive for the stock? (S. C. L. of N. Y., Sec. 56; 
 N. J., Sec. 21.) 
 
 12. Draw up a form of stock ledger and enter in it all the 
 transactions described in problem No. 10. 
 
 13. (a) If H had bought the stock at 20, would he be liable to 
 
 the company for any sum thereon? 
 
 (b) Would he be liable in any way? (S. C. L. of N. Y., 
 Sec. 56 and 57; N. J., Sec. 21.) 
 
 14. H transferred the stock to Y for $100 a share and Y had no 
 notice or information of what H paid for it. The stock is marked 
 "full paid and non-assessable." Would Y have any liability on the 
 
20 PROBLEMS IN PRIVATE FINANCE 
 
 stock? (S. C. L. of N. Y., Sec. 56; N. J., Sec. 21; see also Ersfeld 
 v. Exner, 128 A. D., 135.) 
 
 15. In each of the above problems, would the directors have 
 any personal liability? (See White, Frost or Harrison on New 
 York Corporations.) 
 
 16. The Wisconsin Edison Company (pp. 43-46) sells 100 
 shares of common stock to A for $3,600. Has A any liability on the 
 stock? (pp. 47-50.) 
 
 17. Assume that the Wisconsin Edison Company, after paying 
 all operating expenses and other charges and dividends on the pre- 
 ferred stock, has a surplus of $1,000,000. The directors decide to 
 pay out the entire surplus in dividends. Assume that all the stock is 
 issued and outstanding. Draw up the resolution of the directors 
 declaring the necessary dividend. 
 
 CHAPTER IV 
 
 1. Refer to the charters of the General Electric Company (p. 
 26), Wisconsin Edison Company (p. 43), the Atchison, Topeka and 
 Santa Fe (p. 54), the U. S. Steel Corporation (p. 59) and parts 
 of the certificate of incorporation of the California Petroleum Com- 
 pany (p. 101), the Chicago, Milwaukee and St. Paul Ry. Company 
 (p. 105), the May Department Stores (p. 107), Western Maryland 
 Rd. Company (p. 1011), and American International Corporation 
 (p. 1013), and tell which of the following characteristics the stock 
 of each has : 
 
 Voting 
 
 Non-voting 
 
 Vetoing 
 
 Preferred as to assets 
 
 Not preferred as to assets 
 
 Cumulative preferred 
 
 Non-cumulative 
 
 Non-participating 
 
 Participating 
 
 Participating immediately 
 
 Manager's participating 
 
 Convertible preferred (See S. C. L. of N. Y., Sec. 61.) 
 
 Redeemable preferred 
 
 Protected preferred 
 
 2. The certificate of incorporation of A Company says that the 
 stock shall be divided into two classes, one of which shall be com- 
 
22 PROBLEMS IN PRIVATE FINANCE 
 
 mon and the other 7 per cent preferred. Is the preferred, voting or 
 non-voting (G. C. L. of N. Y., Sec. 23); preferred as to assets; 
 cumulative or non-cumulative (See 84 N. Y. 157) ; participating, non- 
 participating or participating immediately; convertible (S. C. L. of 
 N. Y., Sec. 61) ; redeemable; protected? 
 
 3. State as to each form mentioned in problem 1, whether the 
 variation from the normal common stock is a variation which effects 
 the control, income, or risk of the stockholders. 
 
 4. Explain how J. P. Morgan undertook to use the redeemable 
 feature in the preferred stock of the Northern Pacific in 1901 to 
 retain control of that company from J. J. Hill. ( Lyon's Capi- 
 talisation. ) 
 
 5. Explain the difference in prices between Bethlehem Steel 7 
 per cent preferred and common stocks in 1916. (See pp. 761-763.) 
 
 6. What are the quotations for American Brake Shoe & Foundry 
 Company preferred and common stocks? Explain the difference in 
 prices. 
 
 7. In 1913 National Lead Common, paying 3% without much 
 prospect of increase, was selling around 60. Preferred never went 
 above 108, although it is a 7% cumulative preferred, paying divi- 
 dends at that rate. Explain. 
 
 8. In 1916 Gulf States first 7 per cent cumulative preferred, 
 preferred as to assets and dividends, sold at 115; the second 6 per 
 cent non-cumulative preferred sold as high as 190. Explain the dif- 
 ference in prices. 
 
 9. Assume a company has $5,000,000 of common stock and $7,- 
 500,000 of 8 per cent preferred stock. How much would each class 
 get if the company distributed its entire surplus of $6,000,000 under 
 the following circumstances? 
 
 (1) The preferred is participating; 
 
 (2) The preferred is non-participating; 
 
 (3) The preferred is participating immediately; 
 
 (4) The preferred is cumulative non-participating, and has 
 not received dividends for four years past; 
 
 (5) The preferred is same as (4), except that preferred 
 stock is participating immediately ; 
 
 (6) The preferred is same as (4) except that preferred stock 
 is participating. 
 
 10. Has the May Department Stores (pp. 767-8) lived up to its 
 obligations to its preferred stockholders? (pp. 107-110.) 
 
24 PROBLEMS IN PRIVATE FINANCE 
 
 CHAPTER V 
 
 1. In 1916 the Bethlehem Steel Corporation needed over 
 $30,000,000 for the purchase of new property. . This money is bor- 
 rowed at 5% interest. Would it have been more profitable for the 
 shareholders to sell additional stock? (See pp. 761-763.) 
 
 2. Plot the gross and net earnings and fixed charges of the fol- 
 lowing companies: Bethlehem Steel Corporation (pp. 761-763); 
 May Department Stores (pp. 767-768) ; Chicago, Milwaukee & St. 
 Paul (pp. 753-759) ; British Westinghouse Company (p. 640) ; 
 French Westinghouse Company (p. 644) ; The Connecticut Com- 
 pany (p. 695) ; New York & Stamford Railway Company (p. 698). 
 
 3. (a) Prepare a table showing the following averages for each 
 of the above companies, including as many years as are included in 
 the Materials book for each company. 
 
 (1) The total average amount of stock. 
 
 (2) The total average amount of interest bearing indebt- 
 edness. 
 
 (3) The financial risk. 
 
 (b) Do these companies seem to have followed the rule that 
 companies with stable gross income can borrow relatively more than 
 those with variable gross earnings ? 
 
 4. . Suppose that in 1902 a stockholder of the United States Steel 
 Company had asked you how he ought to vote on the questions 
 raised by the Notice of Meeting on p. 89, what advice would you 
 give and what reasons would you assign? (See Ripley's Trusts, 
 Pools and Corporations, pp. 149-181.) 
 
 5. Can you think of any reasons, other than those on pp. 354-5, 
 why public utility commissions insist on being shown that bonds will 
 earn interest, while they do not demand proof that stock can earn 
 dividends ? 
 
 6. The law of a certain State provides that no corporation's 
 bonded indebtedness may exceed the amount of its capital stock. 
 Company X has issued bonds equal to the amount of its common 
 stock, which is all outstanding, and which is selling at 45. The 
 Company needs more money. What should it do? 
 
 7. Company A's average gross earnings for ten years have been 
 $1,000,000 and its operating ratio 60%. Interest on its first mortgage 
 bonds is $200,000 and on its second mortgage bonds $100,000 and on 
 its third mortgage bonds $50,000. Its gross earnings decreased 10% 
 and 40% of its operating expenses decreased proportionately, the 
 remaining 60% being fixed. 
 
26 PROBLEMS IN PRIVATE FINANCE 
 
 (a) What was the operating ratio in the poor year? 
 
 (b) What was the factor of safety protecting the first, second 
 and third mortgage bonds in the average or normal year, 
 and what was the factor of safety for the same issues 
 in the poor year ? 
 
 (c) What was the decrease in the factor of safety protecting 
 the several issues? 
 
 8. Refer to pp. 749-50. (a) How many times did the company 
 earn its interest in 1914? 
 
 (b) What per cent did the company earn on its issued stock? 
 
 (c) What is the net working assets of the company and for 
 how many years would this provide interest payments? 
 
 9. In dollars and cents : (a) What was the security back of the 
 bonds of the American Smelting and Refining Company in 1914? 
 (b) What was the equity? (c) What was the security back of the 
 stock? (pp. 759-60.) 
 
 CHAPTER VI 
 
 1. Briefly summarize the contents of the real estate mortgage 
 (pp. 176-182) and point out the corresponding clauses in the cor- 
 porate mortgage (pp. 183-9). 
 
 2. During the life of a mortgage (pp. 176-182, 211-215), who 
 has possession of the property? 
 
 3. Explain very briefly the promises of the mortgagor contained 
 in Article II of the Jones-Laughlin mortgage and the possible con- 
 tingencies against which these promises protect the mortgagee. 
 
 4. Who has the right to foreclose the Jones-Laughlin mortgage ? 
 (pp. 228 and 233-4.) 
 
 5. Name the mortgagor and mortgagee in each of the mort- 
 gages beginning on the following pages respectively: 176, 183, 
 255, 291. 
 
 6. Are the mortgages, beginning respectively on pp. 183, 255 and 
 291, closed end, open end, or limited open-end mortgages? (pp. 
 196-7,266-7,291-9.) 
 
 7. Just what does the trustee do when it authenticates an issue 
 of bonds? (p. 192.) 
 
 8. Draw up a resolution to be used by the Board of Directors 
 of the Jones-Laughlin Steel Company in order to procure an authen- 
 tication of $3,000,000 worth of bonds, the proceeds to be used for 
 alterations in the company's plant. Assume that only $5,000,000 
 par value of bonds are outstanding under the mortgage (pp. 196-7.) 
 
28 PROBLEMS IN PRIVATE FINANCE 
 
 9. Assume that the company has outstanding $18,000,000 of 
 bonds secured by the Jones-Laughlin mortgage. State generally 
 how the company can procure the authentication of bonds for the 
 purpose of building a new plant. If any papers have to be executed, 
 state briefly the contents of such papers (pp. 197-200). Why are 
 the requirements governing the issue of these bonds different from 
 those governing the issue of the bonds referred to in the preceding 
 problem ? 
 
 10. Which of the restrictions mentioned in the SYLLABUS protect 
 the income of the bondholders and which protect the principal? 
 
 11. Of the six restrictions named in the SYLLABUS, which are 
 contained in the Jones-Laughlin mortgage? 
 
 12. Company X is formed to acquire C, and to take over Cor- 
 porations A and B. It authorizes a $5,500,000 issue of bonds, with 
 the proceeds of $2,000,000 par value of which it acquires property C. 
 The remaining $3,500,000 of bonds are reserved to refund bonds 
 which have been issued by corporations A and B, amounting, re- 
 spectively, to $1,000,000 and $2,500,000. The mortgages securing 
 the several issues of bonds contain "after-acquired'* clauses. The 
 X Company succeeds in refunding $500,000 par value of the A bonds 
 and $1,500,000 of the B bonds. Company X then fails and the three 
 properties are sold separately, bringing in $600,000, $1,000,000 and 
 $1,900,000 for properties A, B and C respectively. What percentage 
 of the face value of their investments would the holders of the 
 various issues of bonds each receive? Pay no attention to expenses of 
 foreclosure, taxes, etc. 
 
 13. In the above problem, what liens had the bondholders on 
 each of the properties: (a) before any refunding; (b) at the time 
 ,of the company's insolvency? 
 
 14. What additional provisions or covenants could you insert in 
 the agreement securing the notes or bonds on pp. 291-298 to give 
 ihe security holders greater protection, without creating a mortgage? 
 
 CHAPTER VII 
 
 1. Where is the "after-acquired" clause in the Jones-Laughlin 
 mortgage? What is the purpose and effect of this clause? 
 
 2. Public Utility Co. X has outstanding a $5,000,000 closed-end 
 mortgage. It wants to extend its property into new territory, and 
 expects to spend $1,000,000 a year for 12 years. Its average annual 
 surplus, after payment of 5 per cent dividends on its stock, amounts 
 
30 PROBLEMS IN PRIVATE FINANCE 
 
 to about $200,000. Show by diagram and explanation how the 
 company can best finance the extension: (a) Assuming that the 
 $5,000,000 mortgage has no "after-acquired" clause, (b) Assuming 
 that it has an "after-acquired" clause? 
 
 3. Explain and give the reasons for the statement contained in 
 the last sentence on p. 929, beginning "This policy," etc. 
 
 4. Briefly explain the content and purposes of the agreements 
 on pages 299-312 and pages 313-19. 
 
 5. What is the security behind the "Equipment Notes" (pp. 301- 
 303), and to what sources may the noteholders look for payment 
 each year ? 
 
 6. Show by diagram the amount >cf bonds outstanding from year 
 to year, and the value of the cars year by year, assuming they de- 
 preciate to a junk value of $80,000 over a period of 20 years. Does 
 the equity increase or decrease each year? 
 
 7. Can you suggest other kinds of businesses that could finance 
 acquisitions through the issuance of similar notes?* 
 
 8. The N. Y., N. H. and H. R. R. Company guarantees the in- 
 terest on the bonds of the N. Y. W. and B. Ry. Company (pp. 751- 
 752). Is the amount to be paid by the N. Y., N. H. and H. R. R. 
 Company a fixed charge of that company? If not, under what cir- 
 cumstances would it be? 
 
 9. What is the security behind the bonds of the Mortgage Bond 
 Company? (pp. 255-290.) 
 
 10. Suggest other kinds of companies by which this method of 
 financing may be used to advantage. 
 
 11. Which is the better form of collateral to secure collateral 
 trust bonds stock or bonds ? Give reasons. 
 
 12. What provision is contained in the Jones-Laughlin mort- 
 gage protecting the bondholders against a dissipation of the sur- 
 plus of subsidiary companies whose stock is held by the Jones- 
 Laughlin Company as security for the bondholders? (p. 214.) 
 
 13. Company A obtained control of Company B by exchanging 
 for the latter 's stock an equal amount ($5,000,000) of collateral 
 trust bonds. At the time the transfer took place, the B Company 
 had a surplus of $1,000,000. What provisions do you think ought 
 to be included in the collateral-trust agreement to protect the bond- 
 holders against a dissipation of this surplus ? 
 
 14. What provisions are contained in the Jones-Laughlin mort- 
 gage protecting the bondholders against manipulation of the sub- 
 sidiarv companies? (pp. 206-209; 219; 225.) 
 
32 PROBLEMS IN PRIVATE FINANCE 
 
 15. Corporations A, B and C have, respectively, 6, 12 and 24 
 directors. Each corporation has provision for cumulative voting. 
 They are capitalized as follows: A, $12,000,000 com.; B, 
 $12,000,000 com., $12,000,000 p'f'd; C, $18,000,000 com., $12,- 
 000,000 p'f'd non-voting. Stock of Co. A is selling at 80; of Co. 
 B at 60 for com. and 100 for p'f'd; of C, 70 and 50, respectively. 
 With what minimum investment could you get control of the entire 
 system ? Explain how you could finance the acquisition. 
 
 16. What advantage does the parent company (for example, the 
 Bethlehem Steel Corporation) obtain by guaranteeing a subsidiary 
 company's (i. e., Fore River Shipbuilding Corporation) bonds? 
 
 17. Would it not be more advantageous for the parent company 
 to sell its own bonds ? 
 
 18. Suppose that a subsidiary of the Jones-Laughlin Steel Co. 
 wanted to acquire property worth $500,000 and did not have suf- 
 ficient accumulated earnings for this purpose ; how could the acquisi- 
 tion be financed? (pp. 199 and 207.) 
 
 CHAPTER VIII 
 
 1. Is bond (1) (p. 325) a "purchase-money mortgage" bond? 
 
 2. Is the Jones-Laughlin bond a "first mortgage" bond? (See 
 pp. 196 and 205.) 
 
 3. Is bond (3) (p. 325) secured by a first mortgage on all the 
 property ? 
 
 4. Are "consolidated first-mortgage bonds" usually secured 
 wholly by a first mortgage? If not, why is a corporation justified 
 in calling the bonds "first-mortgage bonds" ? 
 
 5. Co. A is unable to pay interest on its third-mortgage bonds. 
 A receiver is appointed who sees the necessity of improving the 
 property. The court orders him to sell certificates. What lien will 
 the holders of these certificates have on the property ? 
 
 6. Suppose it could be shown that the sale of the receiver's cer- 
 tificates mentioned in problem 5 would materially strengthen the 
 position of the second mortgage bondholders, would you change 
 your answer? 
 
 7. Read Rule 4 on page 353. Assuming that the bond in ques- 
 tion ran for ten years, and that an equal amount was laid aside 
 annually during the life of the bond to make up the discount, at 
 what rate of interest could the company sell its bonds at par without 
 imoosinp "a greater annual payment upon consumers"? 
 
34 PROBLEMS IN PRIVATE FINANCE 
 
 8. Are the adjustment income bonds of the Hudson and Man- 
 hattan Railroad Company (pp. 933-65) cumulative, non-cumulative, 
 profit-sharing, debenture, or mortgage, bonds? (pp. 939-40.) 
 
 9. How is the interest to which the bondholders are entitled de- 
 termined? (pp. 939-940.) Of what advantage is this to the company? 
 
 10. Have the holders of the adjustment income bonds of the 
 Hudson and Manhattan Co. at the present time any control over 
 the company? (p. 940.) This will necessitate looking up the finan- 
 cial record of the company during the last few years. 
 
 11. Does the holder of a Jones-Laughlin bond have to pay the 
 federal normal income tax on the interest received? What effect 
 has this on the price of the bond ? 
 
 12. What changes would be made in the Jones-Laughlin bond 
 (pp. 190-1) to make it a bond registered as to principal? A fully 
 registered bond ? 
 
 13. Is there any difference between a coupon bond and a fully 
 registered bond endorsed in blank? 
 
 14. What kind of a bond is most like a share of stock? (The 
 elements of similarity to be considered are income, risk, control, 
 form, and term.) 
 
 15. What kind of a share of stock is most like a bond? 
 
 16. As commodity prices rise, which would you prefer to have, 
 a share of stock, or a bond? 
 
 17. Why do coupon bonds frequently sell a trifle higher than 
 the registered bonds of the same issue? (See, e.g., some of the 
 U. S. Government bond issues in the Annalist.) 
 
 CHAPTER IX 
 
 1. May stock be issued convertible into bonds at the option of 
 the stockholder? At the option of the company? (S. C. L. of N. Y., 
 Sec. 61.) 
 
 2. May a company sell its bonds at 80 and make them convertible 
 into stock, par for par? (S. C. L. of N. Y., Sec. 56-61.) 
 
 3. Southern Pacific convertible 5's are convertible into the stock 
 of that company, par for par. At what price is each selling? 
 
 4. Which usually sell the higher, convertible bonds or the stock 
 into which they are convertible? Give reasons, (pp. 324-325.) 
 
 5. Southern Pacific convertible 4's are convertible into common 
 stock at 130. At what price is each selling? Explain the difference 
 in price. What would happen if the stock approached nearer to 130? 
 
36 PROBLEMS IN PRIVATE FINANCE 
 
 6. If Southern Pacific convertible 5's were selling at the same 
 price as the stock, which would you buy the stock, or the bonds? 
 Why? 
 
 7. Explain the mathematics of protecting short sales (pp. 428- 
 429) by the purchase of convertible bonds. 
 
 8. Conversion is a privilege of the bondholder or noteholder. 
 What reasons prompt a corporation to make its bonds convertible? 
 
 9. Read Rule 5, p. 354, before solving this problem. A com- 
 pany has an issue of $1,000,000 of bonds which are sold at 80 and 
 bear interest at the rate of 6 per cent. A proposition is now made to 
 refund the bonds at 110, out of the proceeds of the new issue of 4 per 
 cent bonds to be sold at 80 and to run for the same time as the un- 
 expired term of the old bonds, viz., 75 years. Assume that the com- 
 pany puts through the proposition, and arranges to retire during the 
 life of the bonds and in equal annual amounts, the bonds required 
 to be issued in excess of $1,000,000 in order to carry out the proposi- 
 tion. How much will the company save, making no allowance for 
 interest on annual savings of interest? 
 
 10. If you held a note of the Chicago Elevated Railways (see p. 
 1009), what questions would you have determined before deciding 
 whether or not to agree to the extension of the notes? Would you 
 change your answer if you had been a stockholder as well? 
 
 11. Would your answer be different in the case of the Toledo 
 Traction Company bonds? (p. 320.) 
 
 12. Suppose that the holder of bond No. 26 of the Pensacola 
 and Atlantic R. R. Co. (p. 336) does not surrender his bond for re- 
 demption ; what will happen ? 
 
 13. W r hat are all the other disadvantages to the investor of re- 
 deemable bonds? 
 
 14. What offsetting advantage does the company usually offer? 
 (pp. 220-221 ; 325-336 and 1022.) 
 
 15. Why are the redemption prices of the Bethlehem Steel Cor- 
 poration notes (p. 1022) fixed at varying rates? 
 
 16. Is the redemption feature of the Jones-Laughlin bonds 
 "mandatory" ior "solicited"? (pp. 220-223.) 
 
 17. Where redemption is solicited, will the price demanded by 
 bondholders be more, or less, than the market price? 
 
 18. What effect has the redemption feature on the price of the 
 notes ? 
 
38 PROBLEMS IN PRIVATE FINANCE 
 
 19. A company is about to raise $10,000,000 for which it will 
 pay 8 per cent. Should it issue long-term redeemable bonds, re- 
 deemable at 108, or should it issue short-term (2-year) notes and 
 pay a 2 per cent commission to the issuing bankers, assuming that 
 high money rates are expected to last for about six years? 
 
 20. Suppose interest rates were very high (i. e., 7 per cent or 
 more) and the Jones-Laughlin Steel Co. wanted to raise $5,000,000 
 for additions and improvements. Assume that $20,000,000 of its 
 5 per cent mortgage bonds (pp. 190-191) had previously been issued. 
 What would you advise the company to do ? 
 
 21. Why are the maturities of the Mississippi County, Arkansas 
 Drainage District Bonds (p. 1026) and the table of drawings for 
 the amortization of the bonds >of the Mortgage Bond Company (pp. 
 261-262) arranged as they are? 
 
 22. What are the differences between the methods employed in 
 the 21st problem and the method employed to retire the Erie Equip- 
 ment Trust Notes? (pp. 299-312.) 
 
 23. What method of making payments into the sinking fund is 
 required on the Jones-Laughlin mortgage? (pp. 219-220.) Can 
 you suggest any reasons for employing a sinking fund here? 
 
 24. For what kinds of companies, respectively, is each of the 
 methods of making payments into a sinking fund, as described in 
 the SYLLABUS, better? 
 
 25. What method of investing the sinking fund is employed in 
 the Jones-Laughlin mortgage? (pp. 219-223.) 
 
 26. Of the three methods of investing sinking-fund payments 
 described in the SYLLABUS, which do you consider the most advan- 
 tageous (a) for the corporation; (b) for the investor? 
 
 27. What difference does it make whether the bonds are can- 
 celed or kept alive: (a) to the corporation; (b) to the investor? 
 
 28. Prepare tables showing in tabular form the annual amount 
 of sinking fund, annual amount of interest accrued on bonds held in 
 sinking fund, total amount to invest each year (from October 1, 
 1915, to April 1, 1929), amount of bonds purchased annually for 
 sinking fund, annual cash balance, and total amount of bonds held in 
 sinking fund each year, where the issue is $1,000,000 5 per cent 
 15-year bends, due April 1, 1929; interest payable April 1 and Octo- 
 ber 1. Issue to be purchased or drawn each year at par and kept 
 alive by the trustee, (pp. 1023-1025.) 
 
 29. A steel company has outstanding $2,000,000 5 per cent bonds 
 
40 
 
 PROBLEMS IN PRIVATE FINANCE 
 
 due in three years, and redeemable at 105. The mortgage requires 
 the company to pay $50,000 annually into the sinking fund. The 
 treasurer of the company reports to its directors that it has over 
 $2,000,000 on hand which it cannot profitably use in the business. 
 He advocates the redemption of the bonds at 105, claiming that this 
 will save the company $100,000 a year in interest and $50,000 a 
 year in sinking fund payments. As a director of the company, would 
 you vote in favor of the treasurer's recommendation? 
 
 CHAPTER X 
 
 1. What advantages were to be derived through the consolida- 
 tion of the New York Central Lines? (pp. 548-554.) 
 
 2. What other reasons prompt business enterprises to Combine? 
 
 3. What are some of the disadvantages of combination as shown 
 by the Starch Consolidations. (See Dewing, Corporate Promotions 
 and Reorganizations.) Can you suggest any other disadvantages? 
 
 4. Corporation A has powers X, Y and Z. Corporation B has 
 powers X and Y. May they consolidate? (B. C. L. of N. Y., Sec. 
 7; N. J., Sec. 104-109; see also 75 N. J. Eq., p. 229, and Dewing, 
 Corporate Promotions and Reorganizations, p. 44.) 
 
 5. Briefly discuss the three methods of distributing securities in 
 the formation of consolidations. (See Political Science Quarterly, 
 Vol. 30, pp. 277-300.) 
 
 6. Three corporations, A, B and C, call upon you to draw up 
 a financial plan for their consolidation. The balance sheets, together 
 with the net earnings, of the three companies are as follows : 
 
 Assets 
 Plants 
 
 Co. A 
 $300000 
 
 Co. B 
 $180,000 
 
 Co.C 
 $80,000 
 
 Materials and supplies .... 
 
 100,000 
 
 20,000 
 
 20,000 
 
 Accounts receivable 
 
 ....'. 80,000 
 
 60,000 
 
 40,000 
 
 Cash 
 
 20,000 
 
 10,000 
 
 10,000 
 
 
 
 
 
 $500,000 $270,000 $150,000 
 Liabilities 
 
 Accounts payable $70,000 $30,000 $20,000 
 
 Capital 350,000 200,000 100,000 
 
 Surplus 80,000 40,000 30,000 
 
 $500,000 $270,000 $150,000 
 Average annual net income $32,000 $36,000 $48,000 
 
42 PROBLEMS IN PRIVATE FINANCE 
 
 Assume that a fair rate of return in this business is 8 per cent; 
 that each company will take care of its own indebtedness with its 
 own current assets, and that the necessary working capital will be 
 raised by the sale of 5 per cent bonds. Draw up a memorandum of 
 consolidation showing the kinds of securities that are to be issued by 
 the consolidated company, the distribution of them, and the increase 
 or decrease in income to the stockholders of each company. 
 
 (a) Allow nothing for economies of consolidation, except that 
 the company will pay interest on the bonds out of expected earnings. 
 Divide the stock partly on the basis of gicod will and partly on the 
 basis of assets. 
 
 (b) Allow nothing for economies of consolidation. Base the 
 distribution of securities exclusively on earning power. 
 
 (c) Assume that the consolidated company will be able to earn 
 interest on the bonds and $20,000 more than total earnings of the 
 three separate companies and that these increased earnings will be 
 due to the good management of the better concerns extending over 
 the poorer concerns. 
 
 (d) Assume that the consolidated company will be able to earn 
 interest on the bonds and $20,000 more than total earnings of the 
 three separate companies and that these increased earnings will be 
 due to the increase of assets. (See pp. 276-280 of first edition, pp. 
 346-351 of second edition, Cole's Accounts, Their Construction and 
 Interpretation. 
 
 7. Explain the purposes of the various clauses in the agreement 
 on pp. 538 to 541. 
 
 8. Company A has outstanding $1,000,000 stock, $500,000 bonds 
 and $200,000 unsecured debts ; Company B has outstanding $2,000,- 
 000 stock, $750,000 bonds and $100,000 unsecured debts. They con- 
 solidate into Company 5C, which exchanges its stock for the stock 
 of Companies A and B, share for share. Company X then issues 
 Consolidated First Mortgage Bonds amounting to $1,000,000, and 
 incurs trade debts amounting to $300,000. Suppose none of the 
 debts of Company A and Company B or Company X have been paid. 
 By diagram and explanation, show what are the respective rights of 
 the various creditors, bondholders and stockholders of the various 
 properties. (B. C. L. of N. Y., Sec. 11 ; N. J., Sec. 107.) 
 
44 PROBLEMS IN PRIVATE FINANCE 
 
 CHAPTER XI 
 
 1. Is it easier to consolidate two companies, or to accomplish the 
 same purpose by the sale of all the assets of one company to the 
 other? What difference is there between the two methods of form- 
 ing intercorporate relations, as far as the rights and liabilities of 
 stockholders and creditors are concerned? (B. C. L. of N. Y.. 
 Sec. 7-11; S. C. L. of N. Y., Sec. 16-17; N. J., 104-105 and 31.) 
 
 2. A and B, partners, sell out their business to A-B Company, 
 taking in payment all the stock of the company. 
 
 (a) What rights have the creditors of the partnership? 
 
 (b) If the partners, after acquiring the stock, gratuitously 
 transferred it to their wives, would your answer be 
 different? 
 
 (c) Would they have any additional rights if the stock were 
 turned over directly to the wives of the partners? 
 
 3. What does the Boston Elevated Railroad Company pay the 
 West End Street Railway Company as rent? (pp. 555-569.) 
 
 4. What basis of rent would you suggest as equitable in case 
 the landlord were the owner of a copper mine to be operated by 
 the tenant ? 
 
 5. In the absence of a specific contract, is the lessee bound to 
 pay interest on the lessor's bonds? 
 
 6. Should the lessee contract or agree to pay the interest on the 
 bonds of the lessor company as part of the rent? Why? 
 
 7. Is the rent paid by the Boston Elevated Railway Company a 
 fixed financial charge? How is it treated in the reports of rail- 
 roads? (See pp. 625, 666, 1010.) 
 
 8. If the Boston Elevated Railroad Company were to improve 
 the property, who would own the improvements at the termina- 
 tion of the lease, in the absence of any special agreement? 
 
 9. Explain in detail how "permanent additions, alterations and 
 improvements" to the lessor's property are financed under the West 
 End Street Railway lease, (pp. 560-1.) 
 
 10. What covenants are contained in the Boston Elevated and 
 West End Street Railway lease providing against manipulation of 
 the landlord's property by the tenant? (p. 562.) 
 
 11. In computing the per-mile capitalization of the New York. 
 New Haven and Hartford for the purpose of comparing it with a 
 similar railroad, would you add the capitalization of the leased lines 
 
46 PROBLEMS IN PRIVATE FINANCE 
 
 to the capitalization of the N. Y., N. H. and H., or would you add 
 the capitalized rentals? (p. 725.) 
 
 12. A small gas company is serving a suburban community. 
 Part of its territory is annexed to a city in which low rates prevail. 
 What should the company do to protect itself ? 
 
 13. Fifty-one per cent of the stockholders in interest of corpora- 
 tions A and B are desirous of consolidating the business; but the 
 other forty-nine per cent object. May the majority effect the desired 
 result in any other way? (See Beverage v. N. Y. Elevated R. R. Co., 
 112 N. Y. 1; N. J. Corp. Law, Sec. 133.) 
 
 14. Company A leased Company B's property for forty years 
 at an annual rental of eight per cent on the $1,000,000 capital stock 
 of B. The present appraised value of B's property is $2,500,000. 
 Company A is now in need of permanent capital of $500,000, but 
 finds that it has mortgaged all the property it owns outright, and 
 that its credit is not strong enough to borrow on debenture bonds. 
 What would you suggest? 
 
 CHAPTER XII 
 
 1. Under what circumstances may a corporation in New York 
 State hold stock in another corporation? (S. C. L. of N. Y., Sec. 
 52; N. J., Sec. 196-198.) 
 
 2. Chart the intercorporate relations of the N. Y., N. H. and H. 
 R. R. Co. (pp. 663-780). Indicate exactly the kind and degree of 
 control exercised. 
 
 3. Show by diagram the genealogy of Company X, the following 
 facts being known : 
 
 In 1870 Corporation A was incorporated with $100,000 capital 
 stock. This stock was increased in 1875 to $1,000,000, in which year 
 Corporation B was organized with a capital stock of $500,000. In 
 1880 A's capital stock was increased to $2,000,000. Corporation B 
 was leased to Corporation A, and in 1885 Corporation A failed and 
 was reorganized into Company C., in the same year stockholders of 
 B assuming control of their own company. B and C consolidated 
 into Company D in 1890 with a capitalization of $5,000,000. In 
 1895 D consolidated with Company E, which was organized in 1880 
 with a capitalization of $1,000,000, and with Company F, which was 
 organized in 1870 with a capitalization of $500,000 and which was 
 increased to $2,000,000 in 1880. The new consolidation was Company 
 G with a capital stock of $10,000,000, which was increased to $20,- 
 
48 PROBLEMS IN PRIVATE FINANCE 
 
 000,000 in 1900. In 1905 it organized a subsidiary, AA, with a 
 capitalization of $500,000; in 1910 another subsidiary, BB, with a 
 capitalization of $1,000,000. In 1915 Company G consolidated with 
 Company J to form Corporation K with a capitalization of $50,- 
 000,000. J was the result of a consolidation of Corporations H and 
 I, organized respectively in 1875 and 1885 with capitalizations 
 respectively of $6,000,000 and $9,000,000, having exchanged with 
 Company J's stock share and share alike. In 1920 Company K 
 reorganized into Company X with a capitalization of $40,000,000. 
 
 4. How does the affixing of the proxy to the notice of meeting 
 (p. 88) affect the control of the United States Steel Corporation? 
 
 5. Make an outline of the brief, setting forth the advantages of 
 holding companies in the public utility field, (pp. 570-582.) 
 
 6. A book publishing concern proposes to publish a magazine. 
 Suggest a method of financing the venture, pointing out the superior- 
 ity of your plan over other possible plans, and also pointing out any 
 weaknesses that may be advanced against your plan. 
 
 7. Several large department stores, some of which are corpora- 
 tions and others partnerships, desire to combine their delivery sys- 
 tems. Suggest a method of doing this, and point out the advantages 
 and disadvantages of your plan. 
 
 8. A law is passed in Texas which prohibits an oil company from 
 operating a pipe-line. The X Oil Company owns certain pipe-lines 
 from which it makes a large profit. What can the X Company do? 
 
 9. Explain very briefly the nature of the plan for the consolida- 
 tion of the Electric Railway Companies (pp. 526-535) and how it 
 is to be consummated. Do not use figures, but merely state the prin- 
 ciple in broad outline. 
 
 10. Explain in the same way the nature of the plan for con- 
 solidation on pp. 522-525. 
 
 11. Explain in the same way the general nature of the agree- 
 ment on pp. 516-521. 
 
 12. Does this agreement differ in principle from the one on pp. 
 511-515? If so, how? 
 
 13. How do these agreements differ in principle from those on 
 pp. 499-510? 
 
 14. What kind of a pool (see SYLLABUS) is the one created by 
 the agreement on pp. 496-498? 
 
50 PROBLEMS IN PRIVATE FINANCE 
 
 CHAPTER XIII 
 
 1. What will be the amount required for fixed capital and for 
 working funds for the projected interurban railroad described in the 
 Engineer's Report (pp. 457-88) ? 
 
 2. From statistics of other interurban railways, does it appear 
 that the amounts thus estimated are understated? 
 
 3. What facts are given in the report to show that the second 
 principle underlying the "discovery" of the enterprise will be com- 
 plied with? 
 
 4. From statistics of other interurban railways do you believe 
 the operating revenues are overstated and the operating costs under- 
 stated ? 
 
 5. What, according to the report, (p. 488) will be the form of 
 capitalization of the projected company? 
 
 6. Assuming all the estimates are conservative, do you think the 
 company could be "floated" on the basis outlined in problem No. 5? 
 
 7. Show how each of the steps in promotion is illustrated in 
 the complaint of Haskins v. Ryan. (pp. 489-95.) 
 
 8. Of the various items of cost mentioned on page 455 which 
 may be charged to (a) financing during construction, (b) financing 
 construction, and (c) financing business ? 
 
 9. Do you agree with Mr. Bemis's conclusions as to "going 
 concern" value, pp. 822-4? 
 
 10. Are the owners of the properties which are to be consolidated 
 (pp. 526-35) to be paid in stock or in cash? 
 
 11. What was the basis of capitalization for the consolidations 
 formed in Chapter X, problems 6 and 7. 
 
 12. Why is it wise for private businesses to incorporate on the 
 basis of average earning power rather than on the basis of actual in- 
 vestment ? 
 
 13. Why should public-service corporations capitalize on the basis 
 of actual investment or appraisal value? 
 
 14. A owns a piece of land (Plot No. 1), inherited from his 
 father, reasonably worth $20,000. Five years thereafter he pur- 
 chases, from X, Plot No. 2 for $15,000. Each plot appreciates in 
 value, $1,000 a year. At the end of five years A conceives the idea 
 of getting his money out of the land by selling to a company which 
 he purposes organizing. The company is formed in the following 
 year, but in the meantime A purchases another plot (No. 3) for 
 $10,000. For how much may he sell all the property to the company? 
 
52 PROBLEMS IN PRIVATE FINANCE 
 
 15. Under what circumstances could A make a bargain "at arm's 
 length" with the company? 
 
 16. Company A is being promoted by X and Y. X sells stock 
 to M on the representation that the company has an oil well in 
 operation. The statement is not true ; the company fails and M loses 
 his money. What rights has he? 
 
 17. A offers to sell his plant to a corporation of which he is a 
 promoter. He writes to the dummy directors: "I paid compara- 
 tively little for my plant twenty years ago, but have added much 
 to the investment. Moreover, I want to be very frank with you 
 and say that while I believe my plant is worth more than I um 
 offering it to you for, I don't think I could get as much from a 
 cash buyer. Of course, you are to pay in stock which may turn 
 out, under the company's management, not to be worth a dollar." 
 Is this statement sufficient to entitle A to deal with the company 
 "at arm's length" ? 
 
 18. When you find that a promoter has made a secret profit, 
 under what various circumstances would you use each of the three 
 remedies mentioned in the SYLLABUS ? 
 
 19. Write a biography (about 1,000 words) of one of the fol- 
 lowing: J. P. Morgan (the late), E. H. Harriman, J. J. Hill (the 
 late), Daniel Drew, Commodore Vanderbilt, Jay Gould, Henry 
 Ford, J. D. Rockefeller (Sr.), Andrew Carnegie (the late), Stephen 
 Girard, Charles M. Schwab, John N. Willys, Lord Leverhulme, 
 George W. Perkins, Samuel Insull, Otto H. Kahn. Pay especial 
 attention to their early careers. 
 
 20. -Write a short account of the promotion and first two years of 
 existence of the United States Steel Corporation. 
 
 21. Write up the Alton case. (pp. 920-8.) 
 
 CHAPTER XIV 
 
 1. Assume that A owns $5,000 shares of stock and $500,000 worth 
 of bonds of the Hartford and N. Y. Transp. Co. (pp. 749-750). The 
 company increases its capital stock by $2,500,000. A syndicate 
 offers to buy all of the new stock at $125. All of the stockholders 
 except A agree to accept the offer of the syndicate. A objects. 
 Later the company sells to the syndicate all of the new stock at $125. 
 Immediately thereafter the stock is quoted at $150 per share. What 
 right has A? (Stokes v. Continental Trust Co., 186 N. Y. 285.) 
 
 2. If the treasury stock had been sold to the syndicate, would 
 your answer be different? 
 
54 PROBLEMS IN PRIVATE FINANCE 
 
 3. If the company had merged with another corporation and had 
 given the new $2,500,000 worth of stock in exchange for the stock 
 of the other corporation, would A have had any right to subscribe 
 to the new stock ? 
 
 4. In June, 1911, American Telephone and Telegraph stock was 
 selling at 150. What was the value of the right referred to on p. 
 1014? (See p. XV of MATERIALS. ) 
 
 5. What disposition could you make of the rights in problem 
 4, or how could you "cash your privilege"? 
 
 6. Is the common or preferred stock of the following companies 
 an investment as investment is defined in the SYLLABUS? May De- 
 partment Stores (p. 767) ; Bethlehem Steel Corp. (p. 761) ; Ameri- 
 can Smelting & Refining Co. (p. 759) ; Chicago, Milwaukee & St. 
 Paul R. R. Co. (p. 753) ; Midwest Refining Co. (p. 766) ; United 
 Light and Power Co. (p. 764). 
 
 7. Are the Chicago, Milwaukee & St. Paul general 4's legal in- 
 vestments under the laws of the State of New York? (pp. 753-758, 
 and pp. 447-54.) 
 
 8. Why did the B. and O. pay dividends in 1908 (pp. 625-6), 
 although they were not earned in that year ? 
 
 9. You have patented a new toy that will cost about 5 cents to 
 manufacture and will sell at about $1. Describe fully how you would 
 go about financing the proposition. 
 
 10. Why is the practice of selling securities to customers more 
 appropriate for public utilities than for industrials? 
 
 11. What are the earmarks of a fraudulent prospectus? 
 
 (This requires a comparative study of fraudulent and honest 
 prospectuses given on pp. 367-404.) 
 
 12. Point out the fallacies in the argument on p. 398. 
 
 13. What has happened to the business described on pp. 399- 
 403, and why ? 
 
 14. Draw up a bond circular for the bonds of the Mortgage 
 Bond Co. (pp. 255-298) similar to the circular for the Jones- 
 Laughlin Steel Company bonds (pp. 374-6). Omit the letter. 
 
 15. Submit in writing a three-inch one-column advertisement for 
 one of the above mentioned bonds. Indicate the layout by lines and 
 give the wording separately. Make the advertisement dignified, but 
 play up stfongly in the headline the most important reason for buying 
 the bond. 
 
56 PROBLEMS IN PRIVATE FINANCE 
 
 16. What, in brief, are the requirements for listing securities on 
 the New York Stock Exchange? (See pp. 151-61.) 
 
 17. What is the advantage of listing securities on the stock ex- 
 change, (a) to the underwriters of a new issue, (b) to the cor- 
 poration ? 
 
 CHAPTER XV 
 
 1. Which of the methods of underwriting does the agreement of 
 the underwriting syndicate of the Republic of Cuba 5 per cent 
 Gold Bonds of 1904 illustrate? (pp. 405-411.) 
 
 2. If the bonds of the Republic of Cuba,, during their sale by 
 the syndicate, were to be offered by outside purchasers at a price 
 below that being asked by the syndicate managers, what could they 
 do? (pp. 405, et seq., and p. 435.) 
 
 3. If you were a subscriber to the extent of $1,000,000 in the 
 agreement referred to in the first problem, what would be your 
 possible maximum loss? 
 
 4. Suppose the Chicago Telephone Company, in 1911, increased, 
 its capital stock by $5,000,000 (p. 865) ; a syndicate was formed 
 to underwrite the sale of the new stock and you participated to the 
 extent iof $500,000. What would be your maximum loss? 
 
 5. If the bonds in problem 1 were not sold quickly enough to 
 raise the money as the Republic of Cuba required it, what could the, 
 managers of the syndicate do? (pp. 405-411; see also p. 769-782.), 
 
 6. Suppose instead of the bonds mentioned in the letter on p. 
 769, it had been proposed to buy $1,500,000 worth of the Jones- 
 Laughlin mortgage bonds (pp. 183 et seq.). Draw up the complete 
 agreement between the parties (pp. 771 et seq.). Note: Where a 
 clause is to be copied verbatim from the book you can indicate it as 
 follows: "Here follows the 3rd paragraph on p. 781"; where blanks 
 have to be filled in or changes made, give the text of your agreement 
 in full. 
 
 7. Outline very briefly the salient features of an agreement (a) 
 between the manager of a syndicate and a company about to build, 
 within 10 months 20 miles of interurban railway track at $50,000 
 a mile, and (b) between the manager and the participants. 
 
 8. Would you have advised the American Telephone and Tele- 
 graph Co. (p. 1014) to have the sale of its new stock underwritten 
 by bankers, assuming that the market price of the old stock at that 
 time was 150? 
 
58 PROBLEMS IN PRIVATE FINANCE 
 
 CHAPTER XVI 
 
 1. A corporation proposes to market a new adding machine; the 
 following estimates are made after careful investigation: 
 
 Cost of manufacture $15 
 
 Administrative expenses 
 
 Selling expenses 35 
 
 Collection expenses and loss : $1 a month for 10 months. ... 10 
 
 Total expense $75 
 
 Retail selling price 100 
 
 Net profit $25 
 
 Terms of payment: $10 down, $10 a month. 
 
 Volume of business : 50 machines per month during 1st 2 mos. 
 
 150 2d2mos. 
 
 300 " " " 3d 2 mos. 
 
 500 " thereafter. 
 
 What will be the working capital required? 
 
 2. What factors are likely to raise or lower your estimated 
 working capital in the above problem, and why ? 
 
 3. Calculate the aggregate profits that will be realized up to the 
 time the working capital is exhausted and the company is carrying 
 its business on income alone. 
 
 4. What factors affect the amount of working capital of the 
 May Department Stores? (pp. 767-768.) 
 
 5. From the balance sheet (pp. 761-763), can you tell how the 
 Bethlehem Steel Company financed its inventory increases in 1917? 
 
 6. What was the turnover of (a) merchandise, and (b) working 
 capital, of that company? 
 
 7. Is it profitable for that company to borrow working capital 
 from its bank in order to discount its accounts payable? Give 
 illustration. 
 
 8. If you reckon that there is one chance in ten of the failure 
 of each of two obligors on a promissory note, what are the chances 
 that the note will not be paid ? 
 
 9. Why has single-name paper predominated over double-name 
 paper in the investments of American banks? 
 
 10. What kinds of commercial paper can a member bank redis- 
 count at its Federal Reserve Bank ? 
 
60 PROBLEMS IN PRIVATE FINANCE 
 
 11. What is the advantage to a merchant of selling his notes 
 through note-brokers, and why do banks prefer to buy much of their 
 paper through a recognized reputable note-broker? 
 
 12. What is the advantage of registering commercial paper? 
 (pp. 907-8.) 
 
 13. Are the accounts in the agreement (pp. 408-9) assigned out- 
 right or by way of collateral? 
 
 14. What is a "bankable proposition"? 
 
 15. A has a contract with the X Company to purchase its refuse 
 at a very low figure $50,000 a year. He can utilize the refuse 
 and sell the resulting product for $200,000 a year, making a profit of 
 $50,000 a year, after deducting all operating expenses and 6 per cent 
 on the capital required. In order to do this, he must build and equip 
 a factory at a cost of $500,000. (a) How much money, in -all, will 
 he require? (b) How can he raise the money necessary? 
 
 16. Debate the following question: Resolved, that the trade 
 acceptance provides a better method of financing sales in America 
 than the system of "open accounts." 
 
 CHAPTER XVII 
 
 1. Can you tell from the income statement and balance sheets of 
 the May Department Stores (pp. 767-768) what disposition was 
 made of the profits of 1918? 
 
 2. Are the reports of this and other companies usually written 
 up on an "accrual," or "cash," basis? Why? 
 
 3. The Midwest Refining Company furnishes no income account. 
 By comparing its balance sheets (p. 766), show its annual net income, 
 amount reserved for depreciation and for war taxes, and the balance 
 available for dividends in 1915, 1916 and 1917. The dividends 
 paid during these years were as follows: 1915, $720,000; 1916, 
 $1,353,520; 1917, $1,711,167. 
 
 4. Show by a series of balance sheets how depreciation of an 
 asset worth $10,000 is provided for in five equal installments and' 
 how, at the end of the life of the asset, the reserve is used to re- 
 place it. 
 
 5. Explain very briefly what the Chicago Telephone Companies 
 did to maintain their property (pp. 799-811.) 
 
 6. Does Mr. Bemis conclude that the provisions made for main- 
 
62 PROBLEMS IN PRIVATE FINANCE 
 
 tenance present and deferred were sufficient to maintain the value 
 of the company's investment? (pp. 799-858.) 
 
 7. Can you see any fallacies in Mr. Byllesby's argument? (pp. 
 899-901.) 
 
 8. Suggest kinds of companies for which, respectively, each 
 method of calculating depreciation referred to in the SYLLABUS 
 would he preferable. Give reasons for each example. 
 
 CHAPTER XVIII 
 
 1. From the standpoint of financial expediency, from which 
 sources of surplus (SYLLABUS, p. 52) may dividends be declared? 
 
 2. If the Midwest Refining Company (p. 766) were to write up 
 its "property, leases and contracts" by $10,000,000, would the amount 
 thus added to the assets be income subject to taxation under the 
 Federal Income Tax ? 
 
 3. What, probably, is the purpose of each of the " funds" men- 
 tioned on page 624? Are these so-called "funds" reserves, or funds, 
 as those words are used in American practice? 
 
 4. What are all the advantages of a large surplus (a) to the 
 corporation; (b) to the stockholder? 
 
 5. Why are regular dividends desirable from the standpoint of 
 (a) the stockholder and (b) the corporation? 
 
 6. Prove that the interest on a 6 per cent bond for fifteen years 
 is worth more than the rest of the bond principal and interest 
 no matter how long the bond has to run. 
 
 7. A corporation presents to its directors at the end of its first 
 fiscal year the following condensed statement : 
 
 BALANCE SHEET 
 
 Assets Liabilities 
 
 Cash $33,600 Accounts Payable $67,200 
 
 Accounts Receivable. . . 57,000 Notes Payable 12.000 
 
 Inventories 50,400 Accrued Wages 4,800 
 
 Plants and Machinery. . 93,000 Capital Stock 120,000 
 
 Patent Rights 30,000 Surplus 60,000 
 
 $264,000 $264,000 
 
64 PROBLEMS IN PRIVATE FINANCE 
 
 Income and Expenditures Statements 
 
 Gross Sales $560,000 
 
 Deductions from Sales 22,800 
 
 $537,200 
 Operating Expenses 335,100 
 
 Manufacturing Profit $202,100 
 
 Selling Expenses 105,000 
 
 Gross Profit $97,100 
 
 Administrative Expenses 36,000 
 
 Gross Income $61,100 
 
 Taxes and other deductions 1,100 
 
 Net Surplus for Year $60,000 
 
 The three directors of the company are not agreed as to the 
 correct dividend policy for the year : one votes to pay out a 20 
 per cent cash dividend, another is in favor of a 40 per cent stock 
 dividend, and the third believes the company should pay no 
 dividend at all. What would you favor? 
 
 8. Would your answer in the above problem be changed if the 
 company intended to expand its business through the sale of $50,000 
 capital stock to outsiders at par ? 
 
 9. Under what circumstances would you advise the payment of 
 a dividend? 
 
 10. The balance sheet of the X Company may be simplified as 
 follows : 
 
 Land $120,000 Capital Stock $500,000 
 
 Building and Machinery 130,000 Debts 140,000 
 
 Inventories 220,000 
 
 Receivables 110,000 $640,000 
 
 Cash 10,000 
 
 Profit and Loss . 50,000 
 
 $640,000 
 
66 PROBLEMS IN PRIVATE FINANCE 
 
 The company is three years old, has never declared a dividend, 
 but has made, through war orders, a profit for the year of $40,000. 
 It is anxious to pay a dividend. How may it do so? 
 
 11. On March 1, Company A declares a dividend as of March 
 15, payable April 15. X was the owner of a certificate for 100 shares 
 of stock on February 28. On March 5 he sold the certificate to Y, 
 who sold the certificate to Z on April 1. Who is entitled to the 
 dividend? Would your answer be changed if these transactions had 
 been made through the New York Stock Exchange? (pp. 126-49.) 
 
 12. What is meant by the item "Dividends unclaimed and pay- 
 able" on p. 760? How could the company give this indebtedness 
 priority over the item listed above it : "Int. on deb. bds." ? 
 
 13. A died in 1910, leaving $2,000,000 stock in corporation M 
 to X, in trust for L for life, remainder to Z. Company M pays 
 regular dividends of 6 per cent, but in 1916 distributes a 50 per cent 
 dividend. What should X do with the money received? The impor- 
 tant facts from the balance sheets for the two years are as follows : 
 
 1910 1916 
 
 Assets $25,000,000 $32,000,000 
 
 Stock 12,000,000 12,000,000 
 
 Debts 10,000,000 13,000,000 
 
 Surplus 3,000,000 7,000,000 
 
 14. This is a summarizing and review problem: 
 
 (1) Enumerate very briefly and concisely all the purposes for 
 which a corporation may need funds. 
 
 (2) Enumerate very briefly all the sources from which funds can 
 be derived. 
 
 (3) Enumerate very briefly the agencies through which each of 
 the sources mentioned in the previous problem can be reached. 
 
 CHAPTER XIX 
 
 1. Is the Millbrook Company (p. 760) insolvent under the defi- 
 nition of insolvency contained in the Bankruptcy Law? 
 
 2. Why did the Pacific Gas and Electric Company (pp. 929- 
 932) readjust its capital account? 
 
 3. Did the readjustment of the capital account of the Hudson 
 and Manhattan Railroad Company increase or decrease the capital- 
 ization? (pp. 932-937.) 
 
68 PROBLEMS IN PRIVATE FINANCE 
 
 4. What objects were sought to be effected by the readjust- 
 ment of the Hudson and Manhattan Railroad Company? (pp. 
 933-965.) How were the objects attained under the readjustment? 
 
 5. Prepare a table of the claims against the B. and O. in the 
 order of their priority (pp. 966-1000), and show how these priorities 
 were respected in the reorganization agreement. 
 
 6. In 1897, the highest prices that could be obtained for Balti- 
 more and Ohio common, first preferred and second preferred were 
 respectively 21, 45 and 25. In 1900, the Baltimore and Ohio 
 common sold from 58^4 to 89%, and preferred from 72^ to 90. 
 Assume money is worth 4 l / 2 per cent. 
 
 Refer to the Baltimore and Ohio reorganization agreement (pp. 
 966-1000), and then answer the following questions, showing all 
 computations used in arriving at your conclusion: 
 
 (a) Would it have paid you to have sold your common stock in 
 1897 or to have held it, gone through the reorganization and 
 sold in 1900? 
 
 (b) Would it have paid you to have sold your first preferred 
 stock in 1897, or to have held it, gone through the reorganization 
 and sold in 1900? 
 
 (c) Would it have paid you to have sold your second preferred 
 stock in 1897, or to have held it, gone through the reorganization and 
 sold in 1900? 
 
BOOK ISDUEON 
 
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 UNIVERSITY OF CALIFORNIA UBRARY