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 critics, especially those who fancy that there is something wicked about earning profits, by exaggerating the apparent return on the company's capital. For instance if a company with a capital of £1,000,000 has accumulated reserves of £500,000 and earns a profit of £150,000, it seems to be earning 15 per cent. on its capital of a million, but what it is really doing is to earn 10 per cent. on a total capital of a million and a half, because the half-million of reserves is in fact fresh capital that has been added out of profits. It is thus liable to be called a exploiter earning 15 per cent. out of the patient public, whereas it is only earning 10 per cent. for its patient shareholders who have seen part of their profits held back year by year and put into the expansion of the business.

To correct this misapprehension and secure the acquiescence of the shareholders in the continuance of the reserve fund policy, it is now a common practice for Boards of Directors to capitalize reserve funds or part of them by an issue of bonus shares, that is by an issue of shares to shareholders without payment on their part, by the conversion of reserves into shares.

If we return to the example just imagined, of a company with a capital of £1,000,000