Whatever the cause, the financial market from time to time offers better relative prices for one class of security than for another. We have gone into this question simply to explain the third consideration, that of the market, in deciding whether to finance on stock or on bonds. This would determine the decision of corporation managers only when the other in fluences were relatively neutral. Aside from the general market, what this particular cor poration might be able to get in the way of relative prices for its preferred stock and its bonds would be only the reverse of one of the other two considerations. If increasing the amount of bonds outstanding would raise in terest charges to a height endangering the continuance of the shareholders in control during a period of depression, the bonds of the corporation would probably ,sell at a disad vantage as compared with its preferred stock. Bond-buyers want a practical assurance of in come. A strong probability of income satis fies a preferred-stock buyer. If these several influences result in a determination to finance on preferred stock, the same questions of au thority arise as in the case of common stock. Does the capitalization stipulated in the com pany's charter authorize preferred stock at all, or any more preferred stock than the cor poration already has outstanding? If not, the corporation must get its charter amended.
On the other hand, if those in control decide to finance on bonds, they have a different set of considerations to face. Are there bonds outstanding already ? Is the mortgage under which they are issued open or closed ? Is it a blanket mortgage ? Are the outstanding bonds subject to call or not ? If the corporation has no bonds outstanding the matter is simple. Though a lawyer, in the absence of express statutory permission to issue bonds, likes well enough to find an au thority expressly stated in the charter, he can, in the absence of either, fall back upon the sufficient principle that creating indebtedness and issuing bonds to secure it is one of the ordinary ways of conducting business that does not need express statutory or charter authorization : a vote of the shareholders and a resolution of the directors will cover the matter.
How many bonds shall they sell ? Shall they authorize more than the immediate need requires ? What interest shall they bear ? How long shall they run ? Those in control of the affairs of the corporation must decide these and many other matters of detail. A later chapter on "Form" will discuss consid erations affecting the decision.
If the corporation already has bonds out standing, the situation may be much more complex. Is the authority under which they are issued exhausted or not? That is, has the corporation issued all the bonds authorized? If the bonds are mortgage bonds, this ques tion becomes: Is the mortgage open or closed? In case the amount of "bonds authorized but not issued" covers the sum needed for the ex pansion, the corporation needs simply to issue a sufficient quantity for its requirements.
When a corporation has no "bonds author ized but not issued," the first question, in the absence of such special restrictions as we dis cussed in the chapter on "The Instruments of Corporation Finance," would be whether or not the outstanding bonds were issued under a blanket mortgage. For the few who may not be familiar with the phrase " blanket mort gage," we may explain that such a mortgage covers both "present and future acquired property." In the case of bonds so secured, no matter what new property the corporation may get, it comes under the existing mort gage, and the corporation cannot issue bonds on the property of equal rank as a lien on it with those already outstanding.
Perhaps the bonds outstanding under such a blanket mortgage are "subject to call," and when the desire for expansion comes, the cor poration managers may find it expedient to call in the outstanding bonds in order that they may put out a new and larger first mort gage issue with as many bonds authorized as needed to cover the expansion, and more if thought desirable. This possibility of con tingencies not immediately foreseen makes highly desirable the reservation to the corpor ation of the call privilege. We shall discuss elsewhere other considerations affecting the right of call. Bankers for the corporation may have insisted on the blanket mortgage. Their doing so shows that they looked for security not merely to the present value of particular assets, but to the value of the enterprise as a whole. In case the necessity of foreclosure arises, they want to be able to take over everything required to run the business. Con ceivably the corporation, through changing conditions, or as a result of experience, might find it expedient to move the location of its plant and install newer machinery. Advan tages gained might amply compensate for the loss in abandoning the old plant. Under such circumstances the holders of bonds secured by a mortgage covering only the assets owned at the time of its execution might find that, how ever ample such assets were when the bonds were issued, they are now worth very little. Though an extreme case, this is quite within the bounds of possibility, and shows why cor porations, under the insistence of bankers, so commonly place blanket mortgages on their properties.