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Commercial value of railway property devoted to transportation in the several
States and Territories as of June 30, 1904—Continued.
Commercial Per cent
of miles of Average for of
single erty as of June United State
value per track.
mile. 30, 1904. States.
$59, 800 31,000 40,200 60, 100 45, 200 44, 300 62,500 146,400 108, 300 27,800 38, 700 75,000 43, 600 128, 900 121, 400 23, 800 16 300 37,700 20,100 50, 800 35, 100 53,700 54,500 71,000 40, 400 80, 400
3,600 39,000 174, 300 31, 400 34,500 30, 100
a Exclusive of Jersey City ferries of the Pennsylvania Railroad system. this ferry property is $5,698,000.
The value of
The following extracts from the text of the bulletin suggest the meaning of the figures submitted in the above table, as also the method of their computation:
INTERPRETATION OF FIGURES.
The valuation submitted in this report may be properly defined as the commercial value of property used by railways in connection with the business of transportation. By commercial value” is meant the estimate placed upon the worth of property regarded as a business proposition. This must, of course, be the market estimate and not the arbitrary estimate of a public official. The two fundamental considerations by which the market is influenced in placing a value upon property when bought and sold are the expectation of income arising from the use of the property and the strategic significance of the property. These two considerations are made the basis of the valuation of railway property submitted in this report. The material made use of in this valuation is, first, the operating and financial accounts of the railways; second, interrailway contracts and agreements, and, third, the published records of the stock market.
This is no place to enter upon a discussion of the nature and classification of different kinds of value, but a word of caution may be allowed in order to guard against an unwarranted use of the figures here submitted. The commercial valuation of railway property, in so far as it depends on income arising from the sale of transportation, is the result, among other things, of an established schedule of freight and passenger rates, from which it follows that
such a valuation can not be used for determining the reasonableness or unreasonableness of the rates in question. The solution of the rate problem demands a separate valuation of the physical property.
Again, in so far as the Government is precluded by its political character from following commercial rules in the sale of any service which it renders, a commercial valuation which assumes that property is administered under the rules of private rather than public financiering, might differ from the valuation of the same property regarded as a public property. The purpose of this remark is to preclude a discussion of the problem of the Government purchase of railways on the basis of the values submitted in this report. It would of course be necessary to modify these values by considerations of public utility in order to determine a public-purchase price.
Whether or not the commercial valuation here submitted can be used as the basis of assessing railway properties for the purpose of taxation depends entirely upon the taxing laws of the State for which the question is asked. If these laws confine the appraisal of railway property to its physical elements, the values here submitted would, in the case of prosperous roads, exceed an appraisal for the purpose of taxation. If, on the other hand, it is the purpose of the taxing law to appraise railway property at its true cash value, unusual or abnormal conditions being excluded, it may be that the commercial valuation of operating property submitted in this report fairly measures its appraisal for the purpose of taxation.
The meaning of the figures submitted becomes clear when it is remembered that this valuation was made for the Bureau of the Census, as one step in the determination of the wealth of the nation. It stands for that portion of the wealth employed in the business of transportation by rail. This being the case, those to whom the task of making this valuation was assigned were obliged to adopt a method that would disclose as nearly as possible the true cash or market value of the property. No other conception of value would be warranted, when the object of the valuation is to determine the current wealth of the nation.
METHOD OF VALUATION.
The value of railway property submitted in this report was arrived at by capitalizing the net earnings of individual railways and railway systems. This involved two fundamental processes, namely, the determination of the income to be capitalized and the determination of the rate of capitalization. The method for arriving at the income to be capitalized involves six points, and is as follows:
First. From the reported operating expenses there were subtracted such sums as were spent for permanent improvements charged to operating expenses. The remainder was accepted as the true operating expense.
Second. The true operating expense was then subtracted from the reported gross earnings from operation, and the remainder was accepted as the true net earnings from operation.
Third. From net earnings from operation there was then subtracted the amount of taxes paid. This final remainder was accepted as the true profit from operation for the year.
Fourth. If the operating mileage had been constant throughout the period examined, which period was five years wherever information was available for that length of time, the average was taken of the profits from operation for these five years and the quotient or average thus obtained was considered to represent fairly the average profit-earning capacity of the property, or what might be taken to be the profit-earning capacity, on June 30, 1904, provided the changes in profits from operation from year to year were irregular in direction and not extreme in amount. Where, however, the profits showed a steady falling off throughout the entire period of five years, the average for the last three years was taken instead of for five years. Occasionally, if the profits showed a steady increase from year to year for five years the average was taken for the last three years also, but more rarely than in the case where it fell off steadily, the purpose being to obtain always a conservative estimate of the profit-earning capacity as of June 30, 1904.
Fifth. Where the operating mileage changed during the period examined, the adjustment for varying length of line was made as follows: The sum of the profits earned for the various years considered was divided by the sum of the operated mileages for those years and the quotient multiplied by the operated mileage on June 30, 1904. The result thus obtained, provided it did not materially exceed the profits earned during the last year, was taken to be a fair measure of the profit-earning capacity. If, however, it appreciably exceeded the amount of profit earned during the last year, a lower figure was taken, the aim being to secure a figure which should be a conservative estimate of the profit-earning capacity.
Sixth. In case the operating property on June 30, 1904, included certain mileage which had reported independently at some time during the period examined, separate statements were made up from these independent reports, and such statements consolidated with regard to operating mileage and to profits from operation, so that the consolidated statement should contain all the physical mileage that was actually in existence at any time during the five years. From these consolidated statements the profit-earning capacity was determined in the same manner as stated in the above paragraph.
The method for determining the rate of capitalization involves seven steps, and is as follows:
First. The study of the market quotations covered in all cases twenty-seven weeks prior to July 1, 1904. In case the quotations disclosed abnormal fluctuations in price, this period was extended. For each particular issue of debt there was learned the amount outstanding, the rate of interest paid, the dates of the payment of interest, and the date of maturity.
Second. The funded debt was classified according to the number, frequency, and character of transfers, and market quotations. This gave rise to three classes of funded debt.
(a) Issues for which sales were sufficiently recent and of sufficient amount to warrant a market valuation of the security in question.
(6) Issues for which sales were not sufficiently recent or not of sufficient amount to warrant a valuation, but for which recent “bid ” and “ask ” prices were available.
(c) Issues for which neither sales nor bids were of such a character as to warrant valuation; such issues were valued by analogy with other issues in the system to which they pertain.
Current liabilities were excluded from consideration. Doubtless there would be no disagreement as to the propriety of this rule. It is on the side of conservative valuation.
Stocks were classified as guaranteed stocks, preferred stocks, and common stocks.
Third. Quotations were “stripped” of accrued interest and expected dividends in order to obtain the price paid for the obligation, as distinct from the income which it carried at the time of sale.
Fourth. The value of each issue of bonds was determined, and there was then computed (Deghuee's tables being used) the rate of annual return, and upon this rate there was computed the amount of annual return upon the total issue.
Fifth. The value of stock issues was determined in the same manner as the value of bond issues, but the treatment of stocks differed in this respect, that in this case annual dividend payments and annual divided returns to the stockholder are identical. The value of stocks added to the value of the bonds gives the aggregate value of outstanding securities.
Sixth. The total corporate net income of the system or corporation whose securities have been valued, as described above, is distributed as follows:
(a) Annual return (not accrued interest) to the investor in the funded debt. (6) Dividends on stocks.
(c) Physical betterments paid out of current earnings, whether charged to operating expenses or directly to income.
(d) Financial betterments of all kinds.
Seventh. The rate of capitalization was computed by dividing the corporate net income by the aggregate value of corporate securities.
All of which is respectfully submitted.
MARTIN A. KNAPP.