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Mr. Edward G. Renwiok -5- November 23, 1951 The # 1 ,4 0 0 ,0 0 0 i s v ie w e d as th e c a p i t a l s t r u c t u r e t h a t m igh t be s u it a b le f o r th e is s u e o f s e c u r i t i e s . S e c u r i t i e s to be is s u e d p r o b a b ly should be lim it e d en­t i r e l y t o bonds and common s t o c k . T h ere would be no j u s t i ­f i c a t i o n f o r a p r e fe r r e d s to c k Is s u e on a company as sm a ll as t h i s on e. The bonds should n ot exceed 50$ and in t h i s ca se prob ­a b ly a 40 o r 45$ is s u e would be b e t t e r . U nder a l l th e c o n d it io n s o b t a in in g i t would a p p ea r t o me t h a t th e bonds should c a r r y a 4$ coupon r a t e and is s u e d a t p a r . E a rn in gs on th e common s to c k e q u it y w i l l n e c e s s a r ily d e ­pend on what i s l e f t a f t e r p a y in g bond 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 rob ­a b ly be r e q u ir e d to be a t t r a c t i v e to o u ts id e p u rc h a s e rs . I n ­i t i a l l y som eth in g le s s w ould p r o b a b ly be p a id t o th e Union P a c i f i c . The f o l lo w i n g sim 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 irem e n ts a r e as f o l lo w s : Bonds 45$ # 630,000 a t 4$ #25,200 S to c k 55$ 770,000 a t 8$ 61,600 $ r , W , O T ? 6 .2 w t s g u I f 7$ i s p a id In s te a d o f 8 $ , then 5 .6 $ would be ea rn ed and i f o n ly 6$ i s p a id , but 5.1$ w ould be earned o v e r a l l . I n our E x h ib it ” S " under in t e g r a t e d o p e r a t io n s , a 6£$ r e t u r n c a lle d f o r n e t reven u e o f #86,837 on an in v e s tm e n t base o f #1,3& 9»400. 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 t o o r exceed ed th e g row th in th e d e p r e c ia t io n r e s e r v e , t h e r e would be no le s s e n ­in g in th e n e t p la n t v a lu e u n d e r ly in g th e bonds. To th e e x ­t e n t t h a t e a r n in g s exceed ed d iv id e n d s p a id , th e n e t w o rth would in c r e a s e and th e e a rn in g s in d o l l a r s on th e common s to c k e q u it y would in c r e a s e from y e a r t o y e a r . On any r e o r g a n iz a t io n in th e c a p i t a l s t r u c tu r e and th e b r in g in g in o f th e P r o d u c tio n Company, th e a c c o u n tin g p r a c t ic e would u n d o u b te d ly be changed to " r e t ir e m e n t a c c o u n tin g ” . T h is would mean t h a t upon re p la c em e n t o f a 4 -in o h main t h a t s to o d on th e books a t , s a y , #1.50 p e r f o o t , th e new 4 -in o h main would be c a p i t a l i z e d a t i t s p r e s e n t day c o s t o f , sa y , # 3 .0 0 p e r f o o t . U nder p r e s e n t ICC r a ilr o a d req u irem e n ts t h e # 1 .5 0 p e r f o o t i n ­c r e a s e i s an expen se c h a r g e . S im i l a r l y under group d e p r e c ia ­t io n p r a c t ic e s , th e w h ole o r i g i n a l c o s t i s ch arged t o th e r e s -