Summary:
This chapter discusses the cost of financing and management in the context of investment trusts, particularly using the example of Petroleum Corporation of America. The chapter outlines three primary costs incurred by buyers of the corporation's stock:
1. Cost of Financing: The difference between the stock's sale price to the public and the amount received by the corporation, usually taken by underwriters and sellers.
2. Value of Option Warrants: Issued to organizers, these warrants essentially allowed holders to buy stock at a set price, effectively reducing the value of common stock by allowing warrant holders to profit from any increase in the company's value.
3. Salaries and Taxes: Costs related to managerial salaries and the taxes incurred due to the corporate structure.
This analysis reveals that a significant portion (25-30%) of the public's investment in the enterprise was effectively consumed by these costs, rather than being used in the business itself. The chapter criticizes this structure for being opaque and not in the best interests of stock buyers.
Further, the chapter discusses the role of investment banking firms in such setups, noting a shift from traditional principles of stock financing. It points out the potential conflicts of interest and lack of transparency in these arrangements. The chapter also explores the broader implications of such financing practices on the market and the economy, suggesting legislative changes to protect public investors from potentially exploitative or unsound investments.
The chapter is a critical examination of investment trust financing practices, highlighting issues like high management costs, lack of transparency, and potential conflicts of interest that can adversely affect investors.