Evening star., 1953-05-24

picture looked like this:
Company Tofo Toxes
Acme Sloo 700
eui.ss;". eU,ssys -------------- ,s5 s. soo 200
To find out why Acme was stuck
for over $4,000 more taxes than
Criterion, we must take look at the
past-specif1cally that part of the
past that fell between January /,
1916 and December 81, 1949. This
is the controversial "base period" of
the excess profits tax.
. Acme. In the immediate post
war years, Acme was rocking along
under momentum from the past.
But Acme was suffering from cor
porate hardening Of the arteries.
It's management was old, COM
placent and rather inefficient.
Profits suffered. This went on until
early in 1850, when the stock
holders rebelled, shook up the
operation and hired an on-the-ball
manager. The company took on
new life.
During the base period, Acme'S
profits had averaged 100000
year. By 1852. solely through in
creased efficiency, Acme 1UGs MAX
ing 100000
Q BullSeye. Bullseye. Inc, always
was q reasonably efficient opera
ton. It's management kept things
going on an even keel not only
throughout the base period, but on
into the sos. There was no crisis
for Bullseye anywhere along the
line.
During the base period, Bulls
eyes profits had averaged 100000
a year. At the end of 1852, the
balance sheet for that year ShOt1ed
the usual 100000 net.
. Criterion. The Criterion Corps
story is just the reverse of Acme's.
In the '40s, Criterion'S management
was sharp and the company was
the envy of the foithboinder indus
try. Criterion even got written up
in Fortune" Then, early in the
SOS, Criterion had touch OF
rheumatism. Things Slackened up
and profits suffered. The stock
holders never got around to clean
ing up the management-perh
for reasons that will become clear
later.
During the base period, Criter-
ions annual profits averaged $751;
446. At the end of 1852, hoWeUer,
Criterion'S yearly net UGS only
$500, 900.
Here is how the three companies
figured their taxes C"E. p" in the
table stands for excess prof1ts'D:
Acme BuIIssys Criterion
ovsross 800 900 $500. 900 1851 .446
1852 - 100000 100000 100000
tsa0S Of bo..) $4,000 $4,000 100000
E.P. net
ineom. ~ $4,000 $1,000 ------
TS"ID soss SoFmaI to- to. 10000 $1,000 10000
22oo SUrtoK Ion
all profits over
s2s, ,oooj ---- $500 $500 $500
So9o E.P. tax--- ~o.2oo $500 ------
TOTAL TAX -si9o7oo $l6s.soo $50, 500
PROFITS
Return
investment;
After tosss - 5.5qS 67qS 7.sqS
Thus Acme, the most efficiently
managed firm, got the least net
return on its capitalization. while
Criterion, q slackly-run operation.
got the greatest. (This may have
been the reason Criterion's stock
holders did not shake UP the man
agement when gross profits started
falling OF in 1951.)
To carry things . step farther.
what would happen If the holders
Of 10000 shares Of stock in the
three corporations started trading
among themselves with the idea in
mind Of getting 6 per cent re-
turn on their investment? Remem-
ber that shares have q par value
of $100-they are worth that much
at face value and cost that much
originally. Here is what would
happen to those companies 500
shares:
Stock Price
Acme ----- 9l34
BuIlseye loo
Criterion lZ5
Thus arises an Alice-in-W Wonder
land situation in which the stock
of a prosperous, well-operated COM
pany sells far below that of a firm
in a less favorable financial posi-
tion-all because of the working
~ fha AvNaca vnroAta fov