Daily Kennebec journal. [microfilm reel] (Augusta, Me.) 1870-1975, 1917-12-07
Valuation Of a Public Utility
For Purchase and Sale

becomes established: that is, it will
sell on lower dividend rate. because
the hazard III that particular enter
prise has been eliminated by success
full management during the promotion
period. The result is, that the stock
and that is the property ownership
commands higher price in the
market the risk has been
gard to any increases in the actual
value Of the physical structure due to
rncarncd increment in real estate
Preater unit cots of construction of
similar property or any other ele-
lnert that enters into tangible values
When a business shows that it has
i.-l,u earning capacity, defined as
shove. good business men will invest
IN il on a muth lower rate of return
Oh their investment than they would
be satisfied with before this earning
capacity had bt en- established. Ii is
! rot necessary TO indulge in protrac ted
reasoning to explain this. The mere
statement of the proposition is suf-
| ficient.
This principle should be followed
/ " III efiutioh, ptl II IL dpSliIu W llOIu
that the owner cannot have its ben
eft III a sale of his whole plant. While
he would get it without question if he
sold a share of stock a time
/ 1t might SEEM a first glance. that
this distinction would lead to trouble
some complications in rate fixing
cases; but II need not In such cases
we are bound to consider the business
risk existing at the inception off the
undertaking. and we establish rates
which shall afford a fair return on
the present value of the property de-
voted t. public uses, fair taking that
risk into consideration. The rate Of
return on the value so established
bears no relation 10 the rate per cent
Of dividend on the outstanding capital
which it will provide. That is fixed
by the relation which the aggregate
TAR return on the property So EN-
ployed. taking the original business
risk into consideration. bears to the
face value Of the stock outstanding
To illustrate, il the present fair value
of the plant, including working capital,
measured by the cost of reproducing
it in its present condition. is $500, 900 90
and If eight per cent is Il fair annual
rate of return on money. that is, prop
erty. invested in such an enterprise.
taking the original business hazard
into consideration. the owners ought
TO receive s24000.o0 per year If, after
the lapse of a reasonable development
period, they have so managed the
property that the hazard peculiar to
such undertakings in general has been
elimina I'd. investors are glad to pur-
chase an interest in its ownership on
a six per cent basis of return. The
property with the element Of hazard
eliminated becomes as we'll worth
$500, 100000 to the investor who takes
il as ii is. as it was worth $500. 900. 90
to the investor who created it.
If we keep IN mind this distinction
between a far return on the actual
value of the physical plant original
risk included. and the dividend rate
which such a return may permit on
the shares of capital stock which hap
pen to be outstanding, justice may be
done without serious confusion and
without discrimination against either
class Of investors. those pioneers who
conceive. promote and develop in
dustry. and those more cautious but
equally necessary persons who furnish
1 the capital to carry it