The Choice of Capitalization Ratios in Practice

Abstract

Problems of value and valuation have created one of the most fertile fields for discussion to be found in the realms of economics and business. Despite the fact that the determination of value is the core thought of economics and business, there is probably no one topic about which there is less unanimity of opinion. Students of economic theory and business problems need no reminder of this fact; others need only to look at the table of contents of Bonbright's monumental treatise, The Valuation of Property,l to be convinced. This paper treats of the problem of valuing a production unit, a bundle of production factors organized as a business concern. As indicated by the title, the paper discusses one specific method of arriving at the desired valuation, i.e., capitalization of earnings. No attempt will be made here to discuss the relative merits of this procedure as opposed to some other, for such discussion the reader is referred to Bonbright's work already cited.2 However, as Bonbright points out, the most unsettled question in the field relates to the proper rate applicable to the anticipated earnings in arriving at the proper valuation. The rates used by the Securities and Exchange Commission in their advisory opinions issued pursuant to the discharge of their duties under the Chandler Act3 will serve as the core of the paper; rates applied in other instances will also be observed.