Suppose a 20% Decline Say Earnings $1,000,000 $800,000 Exp. (70%) 700,000 560,000 ---------- -------- Net $300,000 $240,000 If F. C. 75% = 225,000 225,000 ---------- -------- Surplus for div. $75,000 $15,000 (Case I) Decrease 80% If F. C. 25% = 75,000 75,000 ---------- -------- Surplus $225,000 $165,000 Decrease 26% (Case II) “It will be seen from the above that a 20% decline in the net earnings would, in the first instance, mean a decrease of 80% in the surplus; while in the second case, the same decline would mean a decrease of only 26% in the surplus--figures which sufficiently indicate what a high percentage of fixed charges means. “In this connection it may be further noted that in the large holding companies, like the Pennsylvania, the New York Central, the Union Pacific, and others, the factor of safety and the surplus shown tends to be relatively more stable than in companies largely or exclusively dependent upon the earnings of their own roads. This is due to the general custom of American Railways of paying out in dividends only a part of the actual surplus earned. From this it results that dividends are much more stable than earnings, and that the income of the holding companies from this source will correspondingly show smaller fluctuations than earnings. When, therefore, as in the case of some of the large holding companies named, the income from investments represents a considerable portion of the total net income shown, the surplus, other things being equal, will be much more stable than in other companies. “It is needless to add that this stability is still further heightened when, as in the case of the Pennsylvania, Union Pacific and some other roads, the percentage of fixed charges is at the same time low.”--From “American Railways as Investments,” by Carl Snyder. _Borrowing and Lending Stocks._ “When a speculator sells stock which he does not possess (when he sells it short) he (or what is the same thing, the broker who acts for him) has to borrow the stock to make delivery to the purchaser. The one who possesses stock (who is long of it) is, in ordinary circumstances, as anxious to lend it as the one who has sold it short is anxious to borrow it. “The lender of stock receives from the borrower the market value of it in money, but except when the stock is lending flat (without interest) or at a premium, the lender of the stock pays to the borrower of it interest on the money paid for the stock by the borrower. The rate of interest is determined by bid and offer.