46 FOREST VALUATION 



which is satisfactory to both the purchaser and owner. Should 

 a business be sold which represents an investment of $50,000, 

 and earns a net income of $25,000 per year, or 50 per cent on 

 cost, the purchaser would probably be satisfied with 20 per cent 

 per year. The price will then be -**- , or $125,000, and the 



former owner has exchanged his income of $25,000 for capital 

 on which he in turn must earn 20 per cent in order to be as well 

 off as before. 



In the large operations of modern finance, especially in the 

 formation of trusts and transportation monopolies, it was con- 

 sidered that unlimited opportunities for future income would 

 be created by the control of prices and railroad rates. This 

 belief was then capitalized on a generous scale. The final step 

 was to sell these securities to the public, thus realizing, for the 

 original owners, the capitalized income which had not been 

 earned. This inflated income must now materialize or the 

 value of these investments will correspondingly diminish, as 

 has been the case with many such ventures in the recent past. 



72. The Regulation of Capitalization. It is possible to 

 prevent the fraud and burdens of over-capitalization by giving 

 to states or the national government the power of supervision 

 over such semi-public operations. Since income is the key to 

 capitalization, the exaction of extortionate rates or prices should 

 be checked. Capitalization may also be regulated to conform 

 to the reasonable requirements and to the true earning power 

 of the business. The effect of such regulation will cause dis- 

 proportionate differences between the capital value placed 

 upon a business and its actual cost, to shrink to reasonable 

 proportions, and the balance sheet to show a margin of profit 

 more in keeping with the best interests of the public from whom 

 must come the income upon which these values rest. 



73. The Problem of the Balance Sheet. Accounting prac- 

 tice is based on an equation in which 



goods or assets = liabilities + proprietorship. 

 The left-hand member of this equation represents the tangible 

 and intangible assets, at book value, or whatever value is 



