Along the same lines the committee decides to let the old common stockholders for each share of the old common stock they own buy an amount of $50 par value of the new 4's and $75 par value of the new common stock on the paythent in cash of $50. Again, on the estimate of the new bonds being worth 85, this is making the new common stock cost the old common stockholders $7.50 for each $75 of par value, or at the rate of $10 a share. Assuming that the new stock should be worth approximately this amount, this means that the old preferred stockholders are being per mitted to realize a computed value of $2.50 a share on their old stock. Since their claim is superior to that of the common stock holders, it is natural that they should be shown some preference in the reorganiza tion.
Let us see how the committee is coming out with its common stock issue, To meet the distribution of one share of the new stock to each deposited liond will take $2,375,000 of the new stock. If all the old preferred and common stockholders should want to partici pate, they would take more common stock than the committee has in mind to provide. Such unanimous participation, too, would call for $15,000,000 of the new 4's instead of the $3,000,000 the committee has planned to dispose of to meet the cash requirements, and would provide $15,000,000 in cash. Of course, no such result will follow the offer. Even for the preferred stockholders the com puted value of the new securities offered them is so small that a small change in market con ditions would wipe it out. The managers know that the syndicate to be formed to underwrite the reorganization plan will be remarkably fortunate if enough of the old stockholders come forward to supply all the cash needed.
We now have the new financial scheme of our hypothetical reorganization committee pretty well formulated. It results then in this manner: — Summarizing the disposition of the new securities, we have: — It will be noted that besides the cash com mission stated in the list of cash requirements, we have provided the additional compensa tion of $1,500,000 of the new common stock as shown in the list just given for the distribu tion of the stock. The old bondholders at whose instance the property is being reorgan ized would probably regard this provision as more advantageous for them than a larger cash commission. The cash would have to be provided through the sale of a large amount of the underlying security, the new 4's, and would by so much lessen the proportion of assets to debt of that security. They would also consider it desirable that at least part of the bankers' compensation should be in such form that the bankers would be more likely to have a continued interest in the business.
We have assumed a substantial specula tive value for this new stock. Earnings are already sufficient almost to cover the require ments of the new preferred stock. Let us assume that the default took place during a time of financial panic followed by a period of business depression. As a result of the bad business period the receiver has not been able to show a material increase in earnings. With a period of reviving business a substantial increase in earnings may reasonably be expected. Practically all of any increase in net will become available for dividends on the common stock. Though presumably a policy of dividend payment would not be undertaken immediately on any increase in net, a stockholder may reasonably expect that within a few years dividends will be forthcoming on the common stock. Under the plan outlined there is only a relatively small amount of stock to absorb increased earnings, the total of $5,875,000 in the hands of the old bondholders, the old preferred and common stockholders, and in the hands of the syndicate. The large block of $14,125,000 of stock held for corporate requirements is practically, and may be made actually, treas ury stock. If any of it is disposed of, it will increase the assets, and consequently, it is to be presumed, also the earning power, of the corporation.
A word should be said about the preferred stock provided in the plan proposed, though the reorganization committee may be able to get the old security-holders to convert part of their old interest charge into a mere divi dend, expecting that the old security-holders would probably insist that they shall not run the risk of their expectancy of preferred divi dends being made more remote through the creation of a prior claim against the earnings. In order to get its proposal accepted, the committee will have to make it one of the pro visions of the preferred stock that no such prior claim shall be created. It may be able to modify this provision to one permitting such a claim to be created on the approval of two thirds or three quarters of the pre ferred stockholders. Such a provision might seriously hamper the financing of Lhe corpora tion in future years and the preferred stock might very well be made redeemable. It might, perhaps, also be made convertible, so that if the corporation should greatly prosper it would disappear through the conversion process.