Professor Adams finds the net earning in Mr. Hansel's example to be $1,000 per mile. From this, in the method actually used, he deducts an annuity for the support of invested capital, which he assumes to be the present value found by Professor Cooley. In the example given by Mr. Hansel he would deduct 4% on $15,000, or $600 per mile, leaving $400 per mile as surplus, or the earnings due to non-physical elements of value. This, capitalized at 5%, would give $8,000 per mile, which, added to Professor Cooley's figure of Present Value, would make $23,000 per mile, instead of $35,000, as stated by Mr. Hansel.
The most recent criticism of the Michigan valuation work was in an address[[15]] before the New York Traffic Club in January, 1909, by Mr. W. H. Williams, Third Vice-President of the Delaware and Hudson Company. This address is devoted to an attack, not only on the work of the Michigan appraisal, but on Professor Adams' work and on the propriety of valuation work being undertaken for any reason. The arguments advanced in this address are such that a discussion of them becomes almost necessary in any complete review of the Michigan work, and it contains so many statements which are erroneous that it would hardly be permissible to pass them without comment. The manifest impatience with all forms of governmental interference with corporations, which so often characterizes the utterances of prominent railway officials, appears in this paper to a marked degree. After stating that the present agitation for a physical valuation appears to be the result of a misconception, on the part of the Interstate Commerce Commission, of Section 20 of the Act to Regulate Commerce, and quoting Professor Adams' suggestion of an inquiry, he says:
"Subsequently, the desire of Governor Pingree to find a means of increasing railway taxation in Michigan gave Professor Adams an opportunity to experiment with his project within the limits of that State."
This is a direct imputation of an improper motive, not only to Governor Pingree, but to Professor Adams. As stated elsewhere, the investigation was to determine whether the railroads were paying taxes on the same basis of valuation as other property in the State—an absolutely proper proceeding. Professor Adams was associated with the Michigan appraisal, but had no connection whatever with the "physical valuation," to which such objection is taken, and his appointment was made after the work of physical valuation had been fully outlined and was well under way.
The opening statement is followed by a brief résumé of the recommendations of the Interstate Commerce Commission and President Roosevelt, and of bills introduced in Congress, also by quotations from Bulletin 21, describing the methods of valuation used in Michigan and a showing that practically a similar basis was used in other States. Mr. Williams then summarizes his objections to the Michigan work:
"(1) No allowance is made for discount on securities sold.
"Discount is a partial capitalization of the commercial risk had in making the investment, and it increases or decreases in proportion to the probability of the earning power of money under existing conditions. Not only is this practice justified by long-established commercial usage, but also by judicial determination."
The correctness of this position cannot be conceded on any grounds of economics or accountancy. It is answered conclusively in an article,[[16]] elsewhere referred to, as follows:
"There is considerable diversity of opinion as regards the proper treatment of discount on securities sold. There is a distinction between bonds, representing corporate indebtedness and having a definite limitation as to the time of their redemption, and share capital, representing ownership and which as a rule is irredeemable. In relation to the former there can be but one tenable view. If a company can market its 50-year 4 per cent. bonds at 90 per cent. of par, it means that the company's credit is on a 4½ per cent. basis; that it could market a like security paying 4½ per cent. at par. If it elects to issue at the lower rate it is merely sacrificing principal for the sake of a reduction in the annual interest charge; in other words, it is pre-paying interest which would accrue during the life of the issue. If $10,000,000 par value were issued at 90 per cent., the discount would amount to $1,000,000, and the saving in interest to $50,000 per year, or $2,500,000 in 50 years. Obviously the company cannot claim the privilege of capitalizing the discount, while thereby availing itself of the reduction in interest. If such a course were legitimate in the case of a 5 or 10 per cent. discount, it would be equally so if the discount were 50 or 75 per cent., when the absurdity of the proposition would be perfectly apparent. The somewhat general practice of prorating the discount, as a charge against revenues, over the term of the obligation's existence is sound; but this should be done, not in equal installments, but on the basis of the appreciated value of the bond as it approaches par at maturity. There is no apparent objection to charging discount of this nature in a lump sum against an accumulated surplus. The capitalization of discount on stocks, involving as it does the introduction of fictitious values in capital assets, is wholly indefensible."
The writer has failed to note any particular "judicial determination" which approves of the charge of any such item to capital account.