l8 FOREST VALUATION 



31. Returns on Capital. Out of the net profits after can- 

 celling the expenses for the year, provision must first be made for 

 the replacement of capital assets lost by depreciation or other- 

 wise. The remainder is available as returns on capital. 



Here a sharp distinction must be made between the total 

 amount of capital required to finance a venture and the persons 

 or sources from which this capital is derived. From the stand- 

 point of the business itself, the source or ownership of this 

 capital has no effect upon the total net profits but affects merely 

 the apportioning of these profits. 



A proprietor who furnishes his entire capital, both fixed and 

 working, takes all the profits and assumes the risk of loss. But 

 it is an almost universal custom to borrow part of the needed 

 capital on the security of the business or of the fixed assets. 

 In this case profits are earned on the total invested capital as 

 before, but the division is on a different basis. The borrowed 

 capital receives a fixed rate, agreed upon at the time of secur- 

 ing the loan, and guaranteed by the proprietor. He receives 

 in turn the entire surplus remaining after this obligation is 

 met. 



32. Interest versus Dividends. The sum guaranteed to 

 the lender of borrowed capital is interest. This is paid out of 

 net income and is as much a part of the net earnings of the busi- 

 ness as the remainder. The residue is either left in the business 

 as additional capital, or paid to the proprietors as dividends. 



Interest, at the rate demanded on borrowed funds, will require 

 a given sum on the entire capital. Should the business earn a 

 net income exceeding this sum, the proprietor receives the excess, 

 which raises the rate earned by his own capital, or his dividends, 

 above the rate of interest paid to creditors. The greater the 

 proportion of capital he borrows, the greater will be the rate of 

 dividends on the lessened capital of the proprietor. But on 

 failure of the business to earn the rate paid on borrowed funds, 

 the owner bears the entire loss, and the smaller the proportion 

 which his capital bears to the whole investment, the greater is 

 his relative loss. 



In an insolvent concern, the owner's capital, as well as divi- 



