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Principles and Applications 5th Edition

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Jeffrey F. Jaffe
WHARTON SCHOOL OF BUSINESS, UNIVERSITY OF PENNSYLVANIA
Jeffrey F. Jaffe has been a frequent contributor to finance and economic literatures in such jour-
nals as the Quarterly Economic Journal, The Journal of Finance, The Journal of Financial and
Quantitative Analysis, The Journal of Financial Economics, and The Financial Analysts Journal. His
best-known work concerns insider trading, where he showed both that corporate insiders earn
abnormal profits from their trades and that regulation has little effect on these profits. He has also
made contributions concerning initial public offerings, the regulation of utilities, the behavior of
market makers, the fluctuation of gold prices, the theoretical effect of inflation on interest rates,
the empirical effect of inflation on capital asset prices, the relationship between small-capitalization
stocks and the January effect, and the capital structure decision.

Bradford D. Jordan
GATTON COLLEGE OF BUSINESS AND ECONOMICS, UNIVERSITY OF KENTUCKY
Bradford D. Jordan is professor of finance and holder of the Richard W. and Janis H. Furst Endowed
Chair in Finance at the University of Kentucky. He has a long-standing interest in both applied
and theoretical issues in corporate finance and has extensive experience teaching all levels of
corporate finance and financial management policy. Professor Jordan has published numerous
articles on issues such as cost of capital, capital structure, and the behavior of security prices. He
is a past president of the Southern Finance Association, and he is coauthor of Fundamentals of
Investments: Valuation and Management, 8th edition, a leading investments text, also published
by McGraw-Hill Education.
FROM THE AUTHORS
IN THE BEGINNING. . .
It was probably inevitable that the four of us would collaborate on
this project. Over the last 20 or so years, we have been working as
two separate “RWJ” teams. In that time, we managed (much to our
own amazement) to coauthor two widely adopted undergraduate
texts and an equally successful graduate text, all in the corporate
finance area. These three books have collectively totaled more than
31 editions (and counting), plus a variety of country-specific editions
and international editions, and they have been translated into at
least a dozen foreign languages.
Even so, we knew that there was a hole in our lineup at the
graduate (MBA) level. We’ve continued to see a need for a concise,
up-to-date, and to-the-point product, the majority of which can be
realistically covered in a typical single term or course. As we began
to develop this book, we realized (with wry chuckles all around)
that, between the four of us, we have been teaching and research-
ing finance principles for well over a century. From our own very
extensive experience with this material, we recognized that corpo-
rate finance introductory classes often have students with extremely
diverse educational and professional backgrounds. We also recog-
nized that this course is increasingly being delivered in alternative
formats ranging from traditional semester-long classes to highly
compressed modules, to purely online courses, taught both syn-
chronously and asynchronously.
OUR APPROACH
To achieve our objective of reaching out to the many different types
of students and the varying course environments, we worked to
distill the subject of corporate finance down to its core, while main-
taining a decidedly modern approach. We have always maintained
that corporate finance can be viewed as the working of a few very
powerful intuitions. We also know that understanding the “why”
is just as important, if not more so, than understanding the “how.”
Throughout the development of this book, we continued to take a
hard look at what is truly relevant and useful. In doing so, we have
worked to downplay purely theoretical issues and minimize the use
of extensive and elaborate calculations to illustrate points that are
either intuitively obvious or of limited practical use.
Perhaps more than anything, this book gave us the chance to
pool all that we have learned about what really works in a corporate
finance text. We have received an enormous amount of feedback
over the years. Based on that feedback, the two key ingredients that
we worked to blend together here are the careful attention to peda-
gogy and readability that we have developed in our undergraduate
books and the strong emphasis on current thinking and research
that we have always stressed in our graduate book.
From the start, we knew we didn’t want this text to be encyclo-
pedic. Our goal instead was to focus on what students really need to
carry away from a principles course. After much debate and consul-
tation with colleagues who regularly teach this material, we settled
on a total of 21 chapters. Chapter length is typically 30 pages, so
most of the book (and, thus, most of the key concepts and applica-
tions) can be realistically covered in a single term or module. Writing
a book that strictly focuses on core concepts and applications nec-
essarily involves some picking and choosing with regard to both
topics and depth of coverage. Throughout, we strike a balance by
introducing and covering the essentials, while leaving more special-
ized topics to follow-up courses.
As in our other books, we treat net present value (NPV) as the
underlying and unifying concept in corporate finance. Many texts
stop well short of consistently integrating this basic principle. The
simple, intuitive, and very powerful notion that NPV represents the
excess of market value over cost often is lost in an overly mechani-
cal approach that emphasizes computation at the expense of com-
prehension. In contrast, every subject we cover is firmly rooted in
valuation, and care is taken throughout to explain how particular
decisions have valuation effects.
Also, students shouldn’t lose sight of the fact that financial
management is about management. We emphasize the role of the
financial manager as decision maker, and we stress the need for
managerial input and judgment. We consciously avoid “black box”
approaches to decisions, and where appropriate, the approximate,
pragmatic nature of financial analysis is made explicit, possible pit-
falls are described, and limitations are discussed.
NEW AND NOTEWORTHY TO THE FIFTH EDITION
All chapter openers and examples have been updated to reflect the
financial trends and turbulence of the last several years. In addition,
we have updated the end-of-chapter problems in every chapter.
We have tried to incorporate the many exciting new research find-
ings in corporate finance. Several chapters have been extensively
rewritten.
• In the eight years since the “financial crisis” or “great
recession,” we see that the world’s financial markets
are more integrated than ever before. The theory and
practice of corporate finance has been moving forward
at a fast pace and we endeavor to bring the theory
and practice to life with completely updated chapter
 openers, many new modern examples, completely
updated end of chapter problems and questions.
• In recent years we have seen unprecedented high
stock and bond values and returns as well as histori-
cally low interest rates and inflation. Chapter 10 Risk
and Return: Lessons from Market History updates and
internationalizes our discussion of historical risk and
return. With updated historical data, our estimates of
the equity risk premium are on stronger footing And
our understanding of the capital market environment is
heightened.
• Given the importance of debt in most firms capital
structure, it is a mystery that many firms use no debt.
There is new and exciting research of this “no debt”
behavior that sheds new light on how firms make actual
capital structure decisions. Chapter 15 Capital Structure:
Limits to the Use of Debt explores this new research
and incorporates it into our discussion of Capital
Structure.
• Chapter 16 Dividends and Other Payouts updates the
record of earnings, dividends, and repurchases for
large U.S. firms. The recent trends show repurchases
far outpacing dividends in firm payout policy. Since
firms may use dividends or repurchases to pay out cash
to equity investors, the recent importance of repur-
chases suggests a changing financial landscape.
• There are several twists and turns to the calculation
of the firms weighted average of capital. Since the
weighted average cost of capital is the most important
benchmark we use for capital budgeting and repre-
sents a firm’s “opportunity cost,” its calculation is criti-
cal. We update our estimates of Eastman Chemical cost
of capital using readily available data from the Internet
to distinguish the nuances of this calculation.
Our attention to updating and improving also extended to
the extensive collection of support and enrichment materials that
accompany the text. Working with many dedicated and talented
colleagues and professionals, we continue to provide supplements
that are unrivaled at the graduate level (a complete description
appears in the following pages). Whether you use just the textbook,
or the book in conjunction with other products, we believe you will
be able to find a combination that meets your current as well as
your changing needs.
—Stephen A. Ross
—Randolph W. Westerfield
—Jeffrey F. Jaffe
—Bradford D. Jordan
ements
w PEDAGOGY
2
frequently means that the value of the compa-
Confirming Pages
2015, Microsoft announced that it would write
phone business the previous year. What made OPENING
d only paid $7.2 billion for the phone business.
the five largest publicly traded oil companies
Corporate Finance: Core
1 billion for the first nine months of the year.
CASE8 Making Capital
Principles
ue of oil production facilities in &
thatApplications
state. Investment Decisions
is rich
ord holder is media inTime
giant valuable learning
Warner, which
OPENING
Everyone knows that computer chips evolve quickly, getting smaller, faster, and cheaper.
In fact, the famous Moore’s Law (named after Intel cofounder Gordon Moore) predicts that the
rter of 2002. This enormous write-off followed
tools and support to help CASE
number of transistors placed on a chip will double every two years (and this prediction has
held up very well since it was published in 1965). This growth often means that companies
need to build new fabrication facilities. For example, in 2015, GlobalFoundries announced

ies lose billionsstudents succeed

of dollars when
these assets
swer is probably thenot.fundamentals
Understanding whyof
hapter, that all-important substance known as
in learning
that it was going to spend about $646 million to further expand its manufacturing plant in
Saratoga, New York. The expansion at the plant would allow the company to produce more
of its new 14 nanometer (nm) chips. Not to be outdone, IBM announced that it was investing
financial
ulti- $3 billion in a public-private partnership with New York State, GlobalFoundries, and Samsung
in an effort to manufacture 7 nm chips, which would be smaller, faster, and consume less
energy than current chips.

management. This chapter follows up on our previous one by delving more deeply into capital budget-
ing and the evaluation of projects such as these chip manufacturing facilities. We identify the
relevant cash flows of a project, including initial investment outlays, requirements for net
working capital, and operating cash flows. Further, we look at the effects of depreciation and
est developments in the world of corporate finance.
taxes. We also examine the impact of inflation and show how to evaluate consistently the NPV

Chapter Opening Case analysis of a project.

Please visit us at corecorporatefinance.blogspot.com for the latest developments in the world of corporate finance.

Each chapter begins with a recent real-

world event to introduce students to chap-
ter concepts.

8.1 INCREMENTAL CASH FLOWS

Core Calculator
Cash Flows—Not AccountingSkills
Income
T ExcelMaster
coverage online
You may not have thought about it, but there is a big difference between corporate finance
courses and financial accounting courses. Techniques in corporate finance generally use
This icon, located in the margins of the text near key con-
cash flows, whereas financial accounting generally stresses income or earnings numbers.

ot of the firm’s accounting value on a par- www.mhhe.com/RossCore5e

Certainly, our text follows this tradition, as our net present value techniques discount cash
cepts and equations, indicates that additional coverage is
flows, not earnings. When considering a single project, we discount the cash flows that

arily still. The balance sheet has two sides: the firm receives from the project. When valuing the firm as a whole, we discount the
available describing how to use a financial calculator when
cash flows—not earnings—that an investor receives.

the liabilities and stockholders’ equity. The studying the topic. This additional coverage can be found
ow it is financed. The accounting definition 230 PART 2 Valuation and in aBudgeting
Capital special calculator section, Appendix C.
he balance is
Confirming Pages

y [2.1] ros89907_ch08_230-261.indd 230 11/10/16 10:29 AM

Finance Matters
ce equation to indicate that it must always
quity is defined to be the difference between FINANCE MATTERS
ciple, equity By
is exploring
what theinformation
stockholdersfoundwould
in recent publica-
BEAUTY IS IN THE EYE OF THE BONDHOLDER
ligations. tions and building upon concepts learned in each Many bonds have unusual or exotic features. One of the most common types is an asset-backed, or securitized, bond.
ce sheets forchapter, these boxes
the fictitious U.S. work through real-world
Composite Mortgage-backed securities were big news in 2007. For several years, there had been rapid growth in so-called sub-

are listed in issues

orderrelevant
by thetolength
the surrounding
of timetext.
it Two excellent sources
prime mortgage loans, which are mortgages made to individuals with less than top-quality credit. However, a combina-
tion of cooling (and in some places dropping) housing prices and rising interest rates caused mortgage delinquencies
ert them to cash. The asset side depends on for company financial and foreclosures to rise. This increase in problem mortgages caused a significant number of mortgage-backed securities
information are finance. to drop sharply in value and created huge losses for investors. Bondholders of a securitized bond receive interest and
nt chooses to conduct it. Management must yahoo.com and money. principal payments from a specific asset (or pool of assets) rather than a specific company. For example, at one point
securities, credit versus cash sales, whether cnn.com. rock legend David Bowie sold $55 million in bonds backed by future royalties from his albums and songs (that’s some
serious ch-ch-ch-change!). Owners of these “Bowie” bonds received the royalty payments, so if Bowie’s record sales fell,
there was a possibility the bonds could have defaulted. Other artists have sold bonds backed by future royalties, includ-
ing James Brown, Iron Maiden, and the estate of the legendary Marvin Gaye.
Mortgage-backs are the best known type of asset-backed security. With a mortgage-backed bond, a trustee pur-
chases mortgages from banks and merges them into a pool. Bonds are then issued, and the bondholders receive pay-
CHAPTER 2 Financial Statements and Cash Flow 19 derived from payments on the underlying mortgages. One unusual twist with mortgage bonds is that if interest
ments
rates decline, the bonds can actually decrease in value. This can occur because homeowners are likely to refinance at
the lower rates, paying off their mortgages in the process. Securitized bonds are usually backed by assets with long-term
payments, such as mortgages. However, there are bonds securitized by car loans and credit card payments, among
other assets, and a growing market exists for bonds backed by automobile leases.
The reverse convertible is a relatively new type of structured note. This type generally offers a high coupon rate, but
the redemption at maturity can be paid in cash at par value or paid in shares of stock. For example, one recent General
Motors (GM) reverse convertible had a coupon rate of 16 percent, which is a very high coupon rate in today’s interest rate
11/10/16 09:10 AM
environment. However, at maturity, if GM’s stock declined sufficiently, bondholders would receive a fixed number of GM
 Confirming Pages

How t o Ca lcula t e Bond Prices and

Yield s Using a S pre adsheet
SPREADSHEET TECHNIQUES

Most spreadsheets have fairly elaborate routines available for calculating bond values and yields; many of
these routines involve details that we have not discussed. However, setting up a simple spreadsheet to cal-
Spreadsheet Techniques
culate prices or yields is straightforward, as our next two spreadsheets show:
Confirming Pages
A B C D E F G H
This feature helps students to improve their Excel spreadsheet
1
2 Using a spreadsheet to calculate bond values
skills, particularly as they relate to corporate finance. This feature
3
4 Suppose we have a bond with 22 years to maturity, a coupon rate of 8 percent, and a yield to
appears in self-contained sections and shows students how to set
5
6
maturity of 9 percent. If the bond makes semiannual payments, what is its price today?
up Asspreadsheets to isanalyze
indicated, this ratio called the common financial
delta of the call. In words,problems—a
a $1 swing in thevital
price of
7 Settlement date: 1/1/00
8 Maturity date: 1/1/22 parttheofstock gives business
every rise to a $1/2 student’s
swing in the price of the call. For
education. Because
evenwe are trying help
more to dupli-
9 Annual coupon rate: .08 cate the call with the stock, it seems sensible to buy one-half a share of stock instead of
10
11
Yield to maturity:
Face value (% of par):
.09
100
using
buyingExcel, students
one call. havetheaccess
In other words, to Excel
risk of buying one-halfMaster,
a share of an
stockin-depth
should be the
same as the risk of buying one call.
12
13
Coupons per year:
Bond price (% of par): 90.49
2
online tutorial.
14
15 The formula entered in cell B13 is =PRICE(B7,B8,B9,B10,B11,B12); notice that face value and bond DETERMINING THE AMOUNT OF BORROWING How did we know how much to borrow?
16 price are given as a percentage of face value.
Buying one-half a share of stock brings us either $30 or $20 at expiration, which is exactly
$20 more than the payoffs of $10 and $0, respectively, from the call. To duplicate the call
A B C D E F G H through a purchase of stock, we should also borrow enough money so that we have to pay
1 back exactly $20 of interest and principal. This amount of borrowing is merely the present
Using a spreadsheet to calculate bond yields
2
value of $20, which is $18.18 (= $20/1.10).
3
4 Suppose we have a bond with 22 years to maturity, a coupon rate of 8 percent, and a price of Now that we know how to determine both the delta and the amount of borrowing, we
5 $960.17. If the bond makes semiannual payments, what is its yield to maturity? can write the value of the call as:
Numbered Equations
6
7
8
9
Settlement date:
Maturity date:
Annual coupon rate:
1/1/00
1/1/22
.08
Value of call = Stock price × Delta − Amount borrowed [17.2]
10 Bond price (% of par): 96.017
Confirming Pages = 1
$ 6.82 $50 × __ − $18.18
Key equations are numbered within the text and listed on the
11
12
Face value (% of par):
Coupons per year:
100
2
2

back end sheets for easy reference.

13 Yield to maturity: .084
14 We will find this intuition very useful in explaining the Black−Scholes model.
15 The formula entered in cell B13 is =YIELD(B7,B8,B9,B10,B11,B12); notice that face value and bond
16 price are entered as a percentage of face value.
17
RISK-NEUTRAL VALUATION Before leaving this simple example, we should comment on
a remarkable feature. We found the exact value of the option without even knowing the
www.mhhe.com/RossCore5e
In our spreadsheets, notice that we had to enter two dates, a settlement date and a maturity date. The probability that the stock would go up or down! If an optimist thought the probability
settlement date is just the date you actually pay for the bond, and the maturity date is the day the bond of an up move was very high and a pessimist thought it was very low, they would still
actually matures. In most of our problems, we don’t explicitly have these dates, so we have to make them
up. For example, since our bond has 225.years
Book Valueswe
to maturity, versus Market
just picked Values
1/1/2000 Under
(January standard
1, 2000) as accounting rules, it is possibleagree on the option value. How could that be? The answer is that the current $50 stock
for a company’s
the settlement date and 1/1/2022 (January 1,liabilities
2022) as totheexceed
maturity its assets.
date. When
Any two datesthis occurs,
would the owners’ equity is negative. Canprice
do as long already
this happen withbalances the views of the optimist and the pessimist. The option reflects that
as they are exactly 22 years apart, but these are particularly
market values?easy
Whytoorwork
whywith.
not?Finally, notice that we had balance because its value depends on the stock price.
to enter the coupon rate and yield to maturity in annual terms and then explicitly provide the number of This insight provides us with another approach to valuing the call. If we don’t need the
END-OF-CHAPTER MATERIAL
coupon payments per year. 6. Cash Flow from Assets Suppose a company’s cash flow from assets was negative for a particular
probabilities of the two states to value the call, perhaps we can select any probabilities
period. Is this necessarily a good sign or a bad sign?
we want and still come up with the right answer. Suppose we selected probabilities such
7. Operating Cash Flow Suppose a company’s operating cash flow was negative forthat
several
theyears
return on the stock is equal to the risk-free rate of 10 percent. We know that the
running. Is this necessarily a good sign or a bad sign? stock return given a rise is 20 percent (= $60/$50 − 1) and the stock return given a fall is
The end-of-chapter material reflects
8. Net Working Capital and Capital Spending Could a company’s change in net working
138 PART 2 Valuation and Capital Budgeting
−20 capital
percent (= $40/$50 − 1). Thus, we can solve for the probability of a rise necessary to
achieve
be negative in a given year? (Hint: Yes.) Explain how this might come about. What about an expected return of 10 percent as:
net capital
spending?
and builds on the
9. Cash concepts
Flow to Stockholders and learned
Creditors Could a company’s cash flow to stockholders10% = Probability of a rise × 20% + 1 − Probability of a rise × − 20%
be negative
in a given year? (Hint: Yes.) Explain how this might come about. What about cash flow to creditors?
Solving this formula, we find that the probability of a rise is 3/4 and the probability of a
from the chapter
10. Firmand study back tofeatures.
ros89907_ch05_130-164.indd 138 11/10/16 04:18 PM
Values Referring the Microsoft example used at the beginning of the fall
chapter, noteIfthat
is 1/4. we apply these probabilities to the call, we can value it as:
we suggested that Microsoft’s stockholders probably didn’t suffer as a result of the reported loss. What
do you think was the basis for our conclusion? 3
__ 1
× $10 + __ × $0
4 4
Value of call = _______________ = $6.82
1.10
Q U E ST IO N S A N D P R O B L E M S
1. Building a Balance Sheet Burnett, Inc., has current assets of $6,800, net fixed assets theofsame
$29,400,Questions and Problems
value that we got from the duplicating approach.
Why did we select probabilities such that the expected return on the stock is 10 percent?
current liabilities of $5,400, and long-term debt of $13,100. What is the value of the shareholders’
Basic equity account for this firm? How much is net working capital? We wanted to work with the special case where investors are risk-neutral. This case occurs
(Questions 1–10) whenBecause solving
the expected return onproblems is so critical
any asset (including to students’
both the stock and the call)learning,
is equal to the
2. Building an Income Statement Bradds, Inc., has sales of $528,600, costs of $264,400, depreciation
risk-free rate. In other words, this case occurs when investors demand no additional com-
we provide extensive end-of-chapter questions and prob-
expense of $41,700, interest expense of $20,700, and a tax rate of 35 percent. What is the net income
pensation beyond the risk-free rate, regardless of the risk of the asset in question.
for the firm? Suppose the company paid out $27,000 in cash dividends. What is the addition to retained
earnings? lems. The questions and problems are segregated into three
What would have happened if we had assumed that the expected return on the stock was
greater than the risk-free rate? The value of the call would still be $6.82. However, the cal-
3. Market Values and Book Values Klingon Cruisers, Inc., purchased new cloaking machinery learning
culations would levels:
three Basic, For
be more difficult. Intermediate,
example, if we and Challenge.
assumed All prob-
that the expected return on
years ago for $7 million. The machinery can be sold to the Romulans today for $5.3 million. Klingon’s
current balance sheet shows net fixed assets of $3.9
530million,
PART current
5 Specialliabilities
lems are fully annotated so that students and instructors can
Topics of $1.075 million, and
net working capital of $320,000. If all the current accounts were liquidated today, the company would
readily identify particular types. Also, most of the problems
receive $410,000 cash. What is the book value of Klingon’s total assets today? What is the sum of the
market value of NWC and market value of assets? are available in McGraw-Hill’s Connect—see the next section
4. Calculating Taxes The Alexander Co. had $328,500 in taxable income. Using the rates from Table 2.3
ros89907_ch17_515-549.indd 530
of this preface for more details.
in the chapter, calculate the company’s income taxes. What is the average tax rate? What is the marginal 11/23/16 11:27 AM
tax rate?
5. Calculating OCF Timsung, Inc., has sales of $30,700, costs of $11,100, depreciation expense of $2,100,
and interest expense of $1,140. If the tax rate is 40 percent, what is the operating cash flow, or OCF?
6. Calculating Net Capital Spending Busch Driving School’s 2016 balance sheet showed net fixed assets
of $3.75 million, and the 2017 balance sheet showed net fixed assets of $4.45 million. The company’s
2017 income statement showed a depreciation expense of $395,000. What was the company’s net
capital spending for 2017?
7. Building a Balance Sheet The following table presents the long-term liabilities and stockholders’
equity of Information Control Corp. one year ago:

Long-term debt $37,000,000

 www.mhhe.com/RossCore5e

b. What are the expected return and standard deviation of a portfolio consisting of 70 percent of Stock
A and 30 percent of Stock B?
c. What is the beta of the portfolio in part (b)?
38. Minimum Variance Portfolio Assume Stocks A and B have the following characteristics:

STO C K EXPECTED RETURN (%) STA N DA R D D E V I AT I O N ( % )

A 13 34
B 11 58

The covariance between the returns on the two stocks is .01.

What’s On the Web?

a. Suppose an investor holds a portfolio consisting of only Stock A and Stock B. Find the portfolio
weights, XA and XB , such that the variance of his portfolio is minimized. (Hint: Remember that the
sum of the two weights must equal 1.)
Theseb.c. end-of-chapter
What is the expected return on the minimum variance portfolio?
activities show students how to use and learn from
If the covariance between the returns on the two stocks is –.15, what are the minimum variance
the vastweights?
amount of financial resources available on the Internet.
d. What are the variance and standard deviation of the portfolio in part (c)?

W H AT’ S ON T H E W E B ?
EXCE L M AST E R IT ! P R O B L E M
www.mhhe.com/RossCore5e
Q U ESTIO NS AND P R O BLE MS
1. Determining Portfolio Weights What are the portfolio weights for a portfolio that has 125 shares of
Stock A that sell for $38 per share and 175 shares of Stock B that sell for $26 per share?
2. Portfolio Expected Return You own a portfolio that has $3,850 invested in Stock A and $6,100
354 PART 3 Risk and Return
invested in Stock B. If the expected returns on these stocks are 7.2 percent and 13.1 percent,
respectively, what is the expected return on the portfolio?
3. Portfolio Expected Return You own a portfolio that is 20 percent invested in Stock X, 35 percent
1. Expected Return You want to find the expected return for Honeywell using the CAPM. First you need
the market risk premium. Go to money.cnn.com and find the current interest rate for three-month
Treasury bills. Use the historic market risk premium from Chapter 10 as the market risk premium. Next,
go to finance.yahoo.com, enter the ticker symbol HON for Honeywell, and find the beta for Honeywell.
What is the expected return for Honeywell using CAPM? What assumptions have you made to arrive at
this number?
2. Portfolio Beta You have decided to invest in an equally weighted portfolio consisting of American
Express, Procter & Gamble, Home Depot, and DuPont and need to find the beta of your portfolio. Go to
finance.yahoo.com and find the beta for each of the companies. What is the beta for your portfolio?
3. Beta Which companies currently have the highest and lowest betas? Go to finance.yahoo.com and find
the “Stock Screener” link. Enter 0 as the maximum beta and search. How many stocks currently have a
beta less than or equal to 0? What is the lowest beta? Go back to the stock screener and enter 3 as the
minimum. How many stocks have a beta above 3? What stock has the highest beta?
4. Security Market Line Go to finance.yahoo.com and enter the ticker symbol IP for International Paper.
Follow the “Key Statistics” link to get the beta for the company. Next, find the estimated (or “target”)
price in 12 months according to market analysts. Using the current share price and the mean target
price, compute the expected return for this stock. Don’t forget to include the expected dividend
payments over the next year. Now go to money.cnn.com and find the current interest rate for three-
month Treasury bills. Using this information, calculate the expected return on the market using the
reward-to-risk ratio. Does this number make sense? Why or why not?
Confirming Pages
The CAPM is one of the most thoroughly researched models in financial economics. When beta is estimated
in practice, a variation of CAPM called the market model is often used. To derive the market model, we start
with the CAPM:
E(Ri) = RF × β[E(RM) − RF]
Since CAPM is an equation, we can subtract the risk-free rate from both sides, which gives us
E(R i) − R F = β[E(R M) − R F]
Basic
(Questions 1–19)

Excel Problems
invested in Stock Y, and 45 percent invested in Stock Z. The expected returns on these three stocks are
9.2 percent, 11.8 percent, and 14.3 percent, respectively. What is the expected return on the portfolio?
4. Portfolio Expected Return You have $10,000 to invest ros89907_ch11_316-356.indd
in a stock portfolio. Your choices
354are Stock X with an 11/17/16 01:53 PM
expected return of 12.4 percent and Stock Y with an expected return of 10.2 percent. If your goal is to create
a portfolio with an expected return of 10.9 percent, how much money will you invest in Stock X? In Stock Y? Indicated by the Excel icon in the margin, these problems
5. Calculating Expected Return Based on the following information, calculate the expected return.
are integrated in the Questions and Problems section of
STATE OF P ROB AB ILITY OF R AT E O F R ET U R N
EC ONOM Y STATE OF EC ONOM Y IF STAT E O CCU R S almost all chapters. Located on the book’s website, Excel
Recession .35 –.09 templates have been created for each of these problems.
Normal .50 .15
Boom .15 .34 Students can use the data in the problem to work out the
6. Calculating Returns and Standard Deviations Based on the following information, calculate the solution using Excel skills.
expected return and standard deviation for the two stocks.

RATE OF R ET U R N IF STAT E O C CU R S
STATE OF P ROB AB ILITY OF
E C ONOM Y STATE OF EC ONOM Y STOCK A STO C K B

Recession .15 .01 –.19

Normal .50 .09 .11
Boom .35 .13 .37

7. Calculating Returns and Standard Deviations Based on the following information, calculate the
expected return and standard deviation of the following stock.

STATE OF P ROB AB ILITY OF R AT E O F R ET U R N

EC ONOM Y STATE OF EC ONOM Y IF STAT E O CCU R S
Depression .10 –.279
Recession .20 –.128
Normal .45 .141
Boom .25 .365
 Confirming Pages

www.mhhe.com/RossCore5e

EXC E L M AST E R I T ! P R O B L E M Excel Master-It! Problems

Companies often buy bonds to meet a future liability or cash outlay. Such an investment is called a dedicated
portfolio because the proceeds of the portfolio are dedicated to the future liability. In such a case, the port- These more in-depth mini-case studies highlight higher-
folio is subject to reinvestment risk. Reinvestment risk occurs because the company will be reinvesting the
coupon payments it receives. If the YTM on similar bonds falls, these coupon payments will be reinvested at level Excel skills. Students are encouraged to use Excel
a lower interest rate, which will result in a portfolio value that is lower than desired at maturity. Of course, if
interest rates increase, the portfolio value at maturity will be higher than needed.
to solve real-life financial problems using the concepts
Suppose Ice Cubes, Inc., has the following liability due in five years. The company is going to buy five-year they have learned in the chapter and the Excel skills
bonds today to meet the future obligation. The liability and current YTM are below:
they have acquired thus far.
Amount of liability: $100,000,000
Current YTM: 8%

a. At the current YTM, what is the face value of the bonds the company has to purchase today to meet
its future obligation? Assume that the bonds in the relevant range will have the same coupon rate as
the current YTM and these bonds make semiannual coupon payments.
b. Assume the interest rates remain constant for the next five years. Thus, when the company reinvests
the coupon payments, it will reinvest at the current YTM. What is the value of the portfolio in five years?
c. Assume that immediately after the company purchases the bonds, interest rates either rise or fall by
1 percent. What is the value of the portfolio in five years under these circumstances?
One way to eliminate reinvestment risk is called immunization. Rather than buying bonds with the same maturity
as the liability, the company instead buys bonds with the same duration as the liability. If you think about the ded-
icated portfolio, if the interest rate falls, the future value of the reinvested coupon payments decreases. However,
as interest rates fall, the price of bonds increases. These effects offset each other in an immunized portfolio.
Another advantage of using duration to immunize a portfolio is that the duration of a portfolio is the
weighted average of the duration of the assets in the portfolio. In other words, to find the duration of a portfo-
lio, you simply take the weight of each asset multiplied by its duration and then sum the results.

d. What is the duration of the liability for Ice Cubes, Inc.?

e. Suppose the two bonds shown below are the only bonds available to immunize the liability. What
face amount of each bond will the company need to purchase to immunize the portfolio?
BOND A BOND B

Settlement 1/1/2000 1/1/2000

Maturity 1/1/2003 1/1/2008 Confirming Page
Coupon rate 7.00% 8.00%
YTM 7.50% 9.00%
Coupons per year 2 2

End-of-Chapter Cases
CLO S ING CAS E CLOS I N G CAS E
Located at the end of each chapter, these mini-cases focus
onFINANCING
common company EAST COAST situationsYACHTS’ that embody EXPANSIONimportantPLANS THE COST OF CAPITAL FOR SWAN MOTORS
WITH Afinance
corporate BOND topics. ISSUEEach case presents a new sce-
You have recently been hired by Swan Motors, Inc. (SMI), in its relatively new treasury management depart-
nario, data,
After Dan’s EFNand
analysisafor
dilemma. Several
East Coast Yachts questions
(see the Closing at the
Case in Chapter endhas
3), Larissa ofdecided to expand ment. SMI was founded eight years ago by Joe Swan. Joe found a method to manufacture a cheaper battery
the company’s operations. She has asked Dan to enlist an underwriter to help sell $45 million in new 30-year with much greater energy density than was previously possible, giving a car powered by the battery a range of
each case require students to analyze and focus on all of
bonds to finance new construction. Dan has entered into discussions with Renata Harper, an underwriter from 700 miles before requiring a charge. The cars manufactured by SMI are midsized and carry a price that allows
firm of Crowe & Mallard, about which bond features East Coast Yachts should consider and also what coupon the company to compete with other mainstream auto manufacturers. The company is privately owned by Joe
thethematerial they learned in that chapter. and his family, and it had sales of $97 million last year.
SMI primarily sells to customers who buy the cars online, although it does have a limited number of
company-owned
CHAPTER 5 Interest Rates and Bonddealerships. The customer selects any customization and makes a deposit of 20 percent of
Valuation 163
the purchase price. After the order is taken, the car is made to order, typically within 45 days. SMI’s growth to
date has come from its profits. When the company had sufficient capital, it would expand production. Relatively
little formal analysis has been used in its capital budgeting process. Joe has just read about capital budget-
ing techniques and has come to you for help. For starters, the company has never attempted to determine its
cost of capital, and Joe would like you to perform the analysis. Because the company is privately owned, it
ros89907_ch05_130-164.indd 163 11/10/16 04:18 PM
is difficult to determine the cost of equity for the company. Joe wants you to use the pure play approach to
estimate the cost of capital for SMI, and he has chosen Tesla Motors as a representative company. The follow-
ing questions will lead you through the steps to calculate this estimate.
1. Most publicly traded corporations are required to submit 10Q (quarterly) and 10K (annual) reports to the
SEC detailing their financial operations over the previous quarter or year, respectively. These corporate
filings are available on the SEC website at www.sec.gov. Go to the SEC website and enter “TSLA” for
Tesla in the “Search for Company Filings” link and search for SEC filings made by Tesla. Find the most
recent 10Q or 10K and download the form. Look on the balance sheet to find the book value of debt
and the book value of equity. If you look further down the report, you should find a section titled either
“Long-Term Debt” or “Long-Term Debt and Interest Rate Risk Management” that will list a breakdown of
Tesla’s long-term debt.
2. To estimate the cost of equity for Tesla, go to finance.yahoo.com and enter the ticker symbol “TSLA.”
Follow the various links to find answers to the following questions: What is the most recent stock
price listed for Tesla? What is the market value of equity, or market capitalization? How many shares of
stock does Tesla have outstanding? What is the beta for Tesla? Now go back to finance.yahoo.com and
follow the “Bonds” link. What is the yield on three-month Treasury bills? Using a 7 percent market risk
premium, what is the cost of equity for Tesla using the CAPM?
3. Go to www.reuters.com and find the list of competitors in the industry. Find the beta for each of these
competitors, and then calculate the industry average beta. Using the industry average beta, what is the
cost of equity? Does it matter if you use the beta for Tesla or the beta for the industry in this case?
4. You now need to calculate the cost of debt for Tesla. Go to http://finra-markets.morningstar.com/
BondCenter/Default.jsp, enter Tesla as the company, and find the yield to maturity for each of Tesla’s
bonds. What is the weighted average cost of debt for Tesla using the book value weights and the
COMPREHENSIVE TEACHING

INSTRUCTOR SUPPORT
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prepared by Melissa Frye, University of Central Florida, Ann Marie Whyte,
University of Central Florida, and Joseph Smolira, Belmont University
A great place to find new lecture ideas. The IM has three main sections. The first
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for each chapter includes lecture tips, real-world tips, ethics notes, suggested
PowerPoint slides, and, when appropriate, a video synopsis. Detailed solutions for
all end-of-chapter problems appear in Section three.
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University of Central Florida
Customize our content for your course. This presentation has been thoroughly
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in Excel. You can also go to the Notes Page function for more tips on presenting the
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Financial Analysis with an Electronic Calculator, Sixth Edition
by Mark A. White, University of Virginia, McIntire School of Commerce
(ISBN 10: 0073217093/ISBN 13: 9780073217093)
The information and procedures in this supplementary text enable students to master the
use of financial calculators and develop a working knowledge of financial mathematics
and problem solving. Complete instructions are included for solving all major problem
types on three popular models: HP 10B and 12C, TI BA II Plus, and TI-84. Hands-on
problems with detailed solutions allow students to practice the skills outlined in the text
and obtain instant reinforcement. Financial Analysis with an Electronic Calculator is a
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Connect Insight gives the user the ability to
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ACKNOWLEDGMENTS To borrow a phrase, writing a finance textbook is
easy—all you do is sit down at a word processor and
open a vein. We never would have completed this
book without the incredible amount of help and sup-
port we received from our colleagues, students, edi-
tors, family members, and friends. We would like to
thank, without implicating, all of you.
Clearly, our greatest debt is to our many col-
leagues (and their students). Needless to say, without
this support and feedback we would not be publish-
ing this text.
We owe a special thanks to Joseph Smolira of
Belmont University for his work on this book. Joe
worked closely with us to develop portions of the
Instructor’s Manual, along with the many vignettes
and real-world examples. In addition, we would like
to thank Melissa Frye, University of Central Florida,
and Ann Marie Whyte, University of Central Florida,
for their work on the PowerPoint and Instructor’s
Manual. We would also like to thank Kay Johnson for
her terrific work and attention to detail in updating
our test bank.
Steve Hailey did outstanding work on this edition.
To him fell the unenviable task of technical proofread-
ing, and in particular, careful checking of each calcu-
lation throughout the text and Instructor’s Manual.
Finally, in every phase of this project, we have
been privileged to have had the complete and
unwavering support of a great organization, McGraw-
Hill Education. We especially thank the McGraw-Hill
Education sales organization. The suggestions they
provide, their professionalism in assisting potential
adopters, and the service they provide have been a
major factor in our success.
We are deeply grateful to the select group of pro-
fessionals who served as our development team on
this edition: Chuck Synovec, director; Jennifer Upton,
senior product developer; Trina Maurer, senior mar-
keting manager; Kathryn Wright, core content proj-
ect manager; Bruce Gin, senior assessment project
manager; and Matt Diamond, senior designer. Others
at McGraw-Hill Education, too numerous to list here,
have improved the book in countless ways.
Finally, we wish to thank our families, Carol, Kate,
Jon, Suh-Pyng, Mark, Lynne, and Susan, for their for-
bearance and help.
Throughout the development of this edition,
we have taken great care to discover and eliminate
errors. Our goal is to provide the best textbook avail-
able on the subject. To ensure that future editions are
error-free, we gladly offer $10 per arithmetic error to
the first individual reporting it as a modest token of
our appreciation. More than this, we would like to
hear from instructors and students alike. Please write
and tell us how to make this a better text. Forward
your comments to: Dr. Brad Jordan, c/o Editorial-
Finance, McGraw-Hill Education, 1333 Burr Ridge
Parkway, Burr Ridge, IL 60527.
—Stephen A. Ross
—Randolph W. Westerfield
—Jeffrey F. Jaffe
—Bradford D. Jordan
ACKNOWLEDGMENTS xix
 PART ONE OVERVIEW
BRIEF CONTENTS CHAPTER ONE Introduction to Corporate Finance 1
CHAPTER TWO Financial Statements and Cash Flow 19
CHAPTER THREE Financial Statements Analysis and Financial
Models 43
PART TWO VALUATION AND CAPITAL BUDGETING
CHAPTER FOUR Discounted Cash Flow Valuation 83
CHAPTER FIVE Interest Rates and Bond Valuation 130
CHAPTER SIX Stock Valuation 165
CHAPTER SEVEN Net Present Value and Other Investment
Rules 195
CHAPTER EIGHT Making Capital Investment Decisions 230
CHAPTER NINE  Risk Analysis, Real Options, and Capital
Budgeting 262
PART THREE RISK AND RETURN
CHAPTER TEN Risk and Return: Lessons from Market
History 287
CHAPTER ELEVEN Return and Risk: The Capital Asset Pricing Model
(CAPM) 316
CHAPTER TWELVE Risk, Cost of Capital, and Valuation 357
PART FOUR CAPITAL STRUCTURE AND DIVIDEND POLICY
CHAPTER THIRTEEN Efficient Capital Markets and Behavioral
Challenges 390
CHAPTER FOURTEEN Capital Structure: Basic Concepts 423
CHAPTER FIFTEEN Capital Structure: Limits to the Use of Debt 451
CHAPTER SIXTEEN Dividends and Other Payouts 480
PART FIVE SPECIAL TOPICS
CHAPTER SEVENTEEN Options and Corporate Finance 515
CHAPTER EIGHTEEN Short-Term Finance and Planning 550
CHAPTER NINETEEN Raising Capital 582
CHAPTER TWENTY International Corporate Finance 618
CHAPTER TWENTY ONE Mergers and Acquisitions (web only)
APPENDIX A Mathematical Tables 644
APPENDIX B Solutions to Selected End-of-Chapter
Problems 653
APPENDIX C Using the HP 10B and TI BA II Plus Financial
Calculators 658
Indexes 662

BRIEF CONTENTS xxi

 CONTENTS

PART ONE OVERVIEW Value versus Cost 21

CHAPTER ONE 2.2 The Income Statement 22
Generally Accepted Accounting Principles 22
Introduction to Corporate
Noncash Items 23
Finance 1
Time and Costs 24
1.1 What Is Corporate Finance? 1
2.3 Taxes 24
The Balance Sheet Model of the Firm 1
Corporate Tax Rates 24
The Financial Manager 3
Average versus Marginal Tax Rates 25
1.2 The Corporate Firm 3
2.4 Net Working Capital 27
The Sole Proprietorship 4
2.5 Cash Flow of the Firm 28
The Partnership 4
2.6 The Accounting Statement of Cash Flows 31
The Corporation 5
Cash Flow from Operating Activities 31
A Corporation by Another Name . . . 6
Cash Flow from Investing Activities 32
1.3 The Importance of Cash Flows 7
Cash Flow from Financing Activities 32
1.4 The Goal of Financial Management 9
Summary and Conclusions 33
Possible Goals 10
The Goal of Financial Management 10 Closing Case: Cash Flows at East Coast
Yachts 41
A More General Goal 11
1.5 The Agency Problem and Control of the
Corporation 11 CHAPTER THREE
Agency Relationships 12 Financial Statements Analysis and
Management Goals 12 Financial Models 43
Do Managers Act in the Stockholders’ 3.1 Financial Statements Analysis 43
Interests? 13 Standardizing Statements 43
Stakeholders 14 Common-Size Balance Sheets 44
1.6 Regulation 14 Common-Size Income Statements 45
The Securities Act of 1933 and the Securities 3.2 Ratio Analysis 46
Exchange Act of 1934 16 Short-Term Solvency or Liquidity
Summary and Conclusions 16 Measures 47
Closing Case: East Coast Yachts 18 Long-Term Solvency Measures 49
Asset Management or Turnover
Measures 50
CHAPTER TWO
Profitability Measures 52
Financial Statements and Cash
Market Value Measures 54
Flow 19
3.3 The DuPont Identity 57
2.1 The Balance Sheet 19
A Closer Look at ROE 57
Accounting Liquidity 20
Problems with Financial Statement
Debt versus Equity 21 Analysis 59
xxii CONTENTS
3.4 Financial Models 60 CHAPTER FIVE
A Simple Financial Planning Model 60 Interest Rates and Bond Valuation 130
The Percentage of Sales Approach 62 5.1 Bonds and Bond Valuation 130
3.5 External Financing and Growth 66 Bond Features and Prices 131
EFN and Growth 67 Bond Values and Yields 131
Financial Policy and Growth 69 Interest Rate Risk 134
A Note about Sustainable Growth Rate Finding the Yield to Maturity: More Trial and Error 136
Calculations 73
5.2 More on Bond Features 137
3.6 Some Caveats Regarding Financial Planning
Models 73 Long-Term Debt: The Basics 139

Summary and Conclusions 74 The Indenture 140

Terms of a Bond 140
Closing Case: Ratios and Financial Planning at East
Coast Yachts 80 Security 141
Seniority 141
Repayment 141
The Call Provision 142
PART TWO VALUATION AND CAPITAL
BUDGETING Protective Covenants 142
5.3 Bond Ratings 143
CHAPTER FOUR
5.4 Some Different Types of Bonds 144
Discounted Cash Flow Valuation 83 Government Bonds 144
4.1 Valuation: The One-Period Case 83
Zero Coupon Bonds 145
4.2 The Multiperiod Case 86
Floating-Rate Bonds 146
Future Value and Compounding 86
Other Types of Bonds 146
The Power of Compounding: A Digression 89
5.5 Bond Markets 148
Present Value and Discounting 90
How Bonds Are Bought and Sold 148
The Algebraic Formula 94
Bond Price Reporting 148
4.3 Compounding Periods 96
A Note on Bond Price Quotes 151
Distinction between Annual Percentage Rate and
5.6 Inflation and Interest Rates 152
Effective Annual Rate 98
Real versus Nominal Rates 152
Compounding over Many Years 99
The Fisher Effect 153
Continuous Compounding 99
5.7 Determinants of Bond Yields 154
4.4 Simplifications 101
The Term Structure of Interest Rates 154
Perpetuity 101
Bond Yields and the Yield Curve: Putting It All Together 155
Growing Perpetuity 102
Conclusion 157
Annuity 104
Summary and Conclusions 158
Trick 1: A Delayed Annuity 106
Trick 2: Annuity Due 107 Closing Case: Financing East Coast Yachts’ Expansion
Plans with a Bond Issue 163
Trick 3: The Infrequent Annuity 108
Trick 4: Equating Present Value of Two Annuities 108
Growing Annuity 109 CHAPTER SIX
4.5 Loan Types and Loan Amortization 111 Stock Valuation 165
Pure Discount Loans 111 6.1 The Present Value of Common Stocks 165
Interest-Only Loans 111 Dividends versus Capital Gains 165
Amortized Loans 112 Valuation of Different Types of Stocks 166
4.6 What Is a Firm Worth? 115 Case 1 (Zero Growth) 167
Summary and Conclusions 117 Case 2 (Constant Growth) 167
Closing Case: The MBA Decision 128 Case 3 (Differential Growth) 168

CONTENTS xxiii
 6.2 Estimates of Parameters in the Dividend Discount 7.3 The Discounted Payback Period Method 200
Model 170 7.4 The Average Accounting Return Method 201
Where Does g Come From? 170 Defining the Rule 201
Where Does R Come From? 171 Step 1: Determining Average Net Income 202
A Healthy Sense of Skepticism 172 Step 2: Determining Average Investment 202
The No-Payout Firm 174 Step 3: Determining AAR 202
6.3 Comparables 174 Analyzing the Average Accounting Return Method 202
Price-to-Earnings Ratio 174 7.5 The Internal Rate of Return 203
Enterprise Value Ratios 176 7.6 Problems with the IRR Approach 206
6.4 Valuing Stocks Using Free Cash Flows 177 Definition of Independent and Mutually Exclusive
6.5 Some Features of Common and Preferred Stocks 179 Projects 206
Common Stock Features 179 Two General Problems Affecting Both Independent and
Shareholder Rights 179 Mutually Exclusive Projects 206
Proxy Voting 180 Problem 1: Investing or Financing? 206
Classes of Stock 180 Problem 2: Multiple Rates of Return 208
Other Rights 181 NPV Rule 208
Dividends 181 Modified IRR 209
Preferred Stock Features 182 The Guarantee against Multiple IRRs 209
Stated Value 182 General Rules 210
Cumulative and Noncumulative Dividends 182 Problems Specific to Mutually Exclusive Projects 210
Is Preferred Stock Really Debt? 182 The Scale Problem 210
6.6 The Stock Markets 182 The Timing Problem 212
Dealers and Brokers 183 Redeeming Qualities of IRR 214
Organization of the NYSE 183 A Test 214
Members 183 7.7 The Profitability Index 215
Operations 184 Calculation of Profitability Index 215
Floor Activity 184 Application of the Profitability Index 215
NASDAQ Operations 185 7.8 The Practice of Capital Budgeting 217
ECNs 187 Summary and Conclusions 219
Stock Market Reporting 188 Closing Case: Bullock Gold Mining 229
Summary and Conclusions 188
Closing Case: Stock Valuation at Ragan Engines 194 CHAPTER EIGHT
Making Capital Investment Decisions 230
CHAPTER SEVEN 8.1 Incremental Cash Flows 230
Net Present Value and Other Investment Cash Flows—Not Accounting Income 230
Rules 195 Sunk Costs 231
7.1 Why Use Net Present Value? 195 Opportunity Costs 231
7.2 The Payback Period Method 197 Side Effects 232
Defining the Rule 197 Allocated Costs 232
Problems with the Payback Method 198 8.2 The Baldwin Company: An Example 233
Problem 1: Timing of Cash Flows within the Payback An Analysis of the Project 234
Period 199 Investments 234
Problem 2: Payments after the Payback Period 199 Income and Taxes 235
Problem 3: Arbitrary Standard for Payback Period 199 Salvage Value 236
Managerial Perspective 199 Cash Flow 237
Summary of Payback 200 Net Present Value 237

xxiv CONTENTS
Another random document with
no related content on Scribd:
 From the opposite side came a different cry:
“He’s your meat, Lefty! Get him, and it’s all over! Don’t lose him,
on your life!”
It was to be the great test. A clean hit would leave Hoover still
supreme in the league; a strike-out would place another far above
him. The lips of the Bully at bat curled back from his teeth, and he
stood there ready, like a man made of steel springs. With a sort of
placid grimness, Locke swung into his delivery.
Hoover fouled the first one into the bleachers.
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“Do it again!”
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the hit might be effective when he landed on the ball. He had felt of
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himself cantering over the sacks, with the runners ahead of him
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“Ball-l-l!”
Jock sneered at Locke’s teaser. What a chump the fellow was to
think he would reach for anything like that!
“Put one over!” he invited. “You don’t dare!”
It came—whistling, high, and taking an inward shoot. Hoover did
not graze the horsehide.
“Strike tuh!”
 That set the Kingsbridgers off again:
“Get him, Lefty—get him!”
“Oh, you, Lefty!”
“You’re the stuff, old boy!”
“Sic him, you wiz!”
“Mow him down!”
“Polish him off!”
“End his suffering, Lefty!”
“Oh, you, Lefty! Oh, you, Lefty!”
Hoover’s teeth were grinding together like millstones. Although
angered by his failure, he still gripped and held his confidence that
he could hit Locke at this time when a hit meant so much; for, as a
pinch hitter, he had an enviable record.
Another shoot came over. Jock hit it. But again the ball went into
the bleachers, causing the umpire to stop the base runners with a
bellow:
“Foul!”
“That’s the best he can do, Lefty! He’s going! He’s almost gone!”
There was a delay. Some one had pocketed the ball, and
presently a spotless, fresh one was tossed out to Locke.
“Where’ll that one go when he hits it?” yelled a Bancrofter.
“When he hits it!” mocked a Kingsbridger. “He never will!”
Leaning forward to get Oulds’ signal, Locke gave his head a
shake. The sign for a drop was instantly changed to one calling for
an inshoot, and the young pitcher lost no time.
There was a white streak in the air, and the ball almost seemed to
twist round Hoover’s neck, slightly grazing the bat close to his
knuckles as he swung. Into Oulds’ big mitt it plunked.
 “Y’re out!” was the cry of the umpire, as he flung his hand upward
above his head.
Instantly Hoover called Tom Locke a vile name, and sent the bat,
with all the strength of his quivering, muscular arms, spinning
straight at the pitcher’s head.
 CHAPTER XIV
AFTER THE GAME

T he indescribable uproar which greeted the strike-out that settled

the game prevented Hoover’s words from reaching Locke’s ears,
but the glare in his eyes, the expression of his face, and the
movement of his lips told well enough what he said. The triumphant
pitcher barely avoided the whistling bat by an agile side spring. In
another instant, his face went white; he was coming at Hoover with a
rush.
Tense with excitement, Janet Harting saw it all; she saw the
steady, youthful, almost boyish, Kingsbridge pitcher fool the Caliban-
faced Bully for the final fruitless slash which settled the game, two to
nothing, in the home team’s favor; saw Hoover, snarling, hurl the bat;
and then beheld a swirling rush of shouting, wrathy human beings,
who smashed the restraining rails in front of the bleachers, and
poured upon the field like a spring flood from a bursted reservoir.
“I think,” said Benton King, gathering the reins, “that it is time for
me to take you away from here, Janet.”
Trembling, she grasped his arm. “No, no!” she cried. “What are
they going to do? That wretch threw his bat at—at Lefty.”
“Yes; and he’ll get his, if his friends don’t look out for him well.
Locke has got all Kingsbridge behind him, and they’re a tough bunch
when they get good and mad. There’s likely to be some broken
heads.”
“Oh, wait a moment!” she entreated. “Look! They’re trying to hold
the crowd off, and I believe Lefty is helping them.”
Out there on the diamond, raging, frothing men were shaking their
fists at the offending pitcher; while others, including a number of
Kingsbridge players, having packed themselves round the
threatened man, were holding the hot-heads back by main force.
And it was true that Tom Locke was one of those who sought to
protect Jock Hoover from the wolfish mob.
“Stop!” his voice rang out, clear and distinct. “Keep back! The
trouble is between that man and me. We’ll settle it.”
“Let-a me git at-a him!” raged an Italian, the same who had
amused the crowd after the striking out of Mace in the first inning, by
asking what was the matter with Lefty. “He throw-a da bat! I knock-a
da block off-a da sneak-a!”
His cigar gone, his hat smashed, his collar torn awry, Mike Riley
succeeded in reaching Hoover.
“You infernal idiot!” he puffed. “Didn’t you know better? What made
ye do it?”
“Bah!” retorted Jock with contempt and courage worthy of a better
cause. “These barking curs won’t do anything. Give me a show, and
I’ll break that left-handed dub’s face. He hasn’t got the courage to
give me an opportunity right now—here. He’s a——” The concluding
epithet was a repetition of the insult he had hurled at Locke along
with the bat.
“No man can swallow that!” muttered Larry Stark. “Somebody
must fight that miserable rowdy.”
“Give me the chance,” said Tom Locke, “and give him the same
even show, without interference. Let the crowd keep back.” They
marveled at his calmness.
Some of Hoover’s friends sought to rush him off, against his will,
and the vociferous, twisting, lunging mass of humanity swept over to
one side of the diamond, where Bent King had his hands full in the
task of restraining his fretting span from plunging forward and
trampling some of them. King had listened to Janet’s appeal, and
dallied a few moments too long; now they were caught in the midst
of the mob that packed close on all sides. Two men, taking note of
his difficulty, grasped the horses by the bits; but the crowd,
seemingly deaf and oblivious to everything except the imminent fist
fight, could not be induced to make way.
 “I’m sorry, Janet,” said the lumberman’s son. “This is no place for
you. I was a fool to wait a minute when the trouble began.”
“Never mind,” she returned, her voice quivering a little, her face
quite colorless. “I—I want to see. It isn’t right for them to fight; it isn’t
fair. Lefty can’t be a match for that ruffian. Why don’t they stop it?”
Not much time was wasted in preparation when it was understood
that Locke was ready to meet his challenger. Members of the two
teams began pushing the crowd back to make room, begging them
to give the men a chance, and a fifteen-foot space was finally
cleared. Eager spectators climbed upon the shoulders of those in
front of them; the bleachers, at one end, were loaded to the cracking
point with human beings; and every stout limb of a near-by tree
quickly bore human fruit.
Bareheaded, the men met in the center of the cleared space.
Hoover came with a rush, and Locke was not dilatory. Plainly the
Bully weighed ten or fifteen pounds more than his slender
antagonist, and many a sympathizer with the youth feared the match
must prove to be pitifully one-sided.
Jock led, right and left; but the youngster parried, blocked, and
countered like lightning, closing in without hesitation. His jaw was
set, and he was still cool, while the Bancrofter blazed with all the fury
of a conflagration.
The sound of thudding blows caused Janet Harting to drop her
parasol, which she had closed; her hands went up to her heart, and
her lips were parted that she might breathe, the open air seeming
close and smothery.
 CHAPTER XV
MAN TO MAN

I t was a scene to be printed indelibly on the memory: The palpitant,

swaying crowd, those in front pushed forward by those behind; the
baseball players round the edges of the cleared space, bracing to
hold the mob back almost by main strength; human beings climbing
on other human beings to get a momentary glimpse of the fighters;
men and boys jammed in a dense mass on the bleachers, and still
more of them clinging like monkeys to the bending limbs of the tree
—and every face ablaze with the primitive passion of mankind, the
savage zest of battle, the barbarous joy of witnessing a sanguinary
struggle between two of their specie.
But Janet saw only the fighters; not for a moment did her straining
eyes waver or wander. She watched them leap and retreat, meet
again, stagger, recover, sway this way and that, all the time turning
round and round to the left or to the right, their arms flashing out,
their battering fists giving forth sounds now sharp, now sodden, as
they smashed on head or body. She saw the head of the brown-
haired youth jerk backward before a blow full on the mouth; and
then, as blood stained his lips, a cry—half snarl, half roar—broke
from the crowd.
Hoover had drawn first blood, seeing which, an expression of
malicious joy contorted his repellent face, and he seemed spurred to
still fiercer efforts. He thirsted to leave the stamp of his fists indelibly
recorded on that clean-cut face; to mark the youth for life would be
an exquisite pleasure, lingering long in aftertaste.
Locke, however, continued to keep his head, improving such
openings as he could find or make. A cut lip was of no consequence
when he had not felt the blow much; but he must take care that his
antagonist did not reach his jaw with a swing like that, having a bit
more steam behind it. And he must husband his energy and bide his
time, for this was no fight by rounds, and Hoover had set a pace
which flesh and blood could not keep up protractedly. In time, he
must weary and slacken, and Locke hoped to be ready to make the
most of it when this faltering came.
The youth’s left-handed guard bothered Jock somewhat, causing
him to fret and snarl. Twice he pinned Locke up against the crowd,
that could not make room for his free movement; but once Tom got
under his arm and away, and once he met the aggressor with such a
sudden storm of blows that Hoover was checked and driven back.
After that both men were bleeding, the Bully having received a stiff
smash on the nose.
The crowd shouted applause and instruction:
“Fine work, Lefty!”
“Keep after him, Jock! Put him out!”
“You’ve got him going! Follow him up!”
“Look out for his left, boy!”
“Soak him another in the same place—that’s the stuff!”
“Well,” said Bent King, in wonderment, “I’ll be hanged if Locke isn’t
holding his own with that terrier!”
Apparently Janet did not hear him. A little color had risen into her
cheeks, and her bosom was heaving against her tightly clenched
hands. She was still fearful of the final result, but he with whom her
throbbing heart sympathized had met his brutal enemy like a man of
courage, and made it a worthy battle. She could hear Hoover
breathing heavily, like one on whom the tremendous strain was
beginning to tell at last, while Locke, although his breast rose and fell
rapidly, was, to all outward seeming, the fresher of the two.
Once a little, choking gasp escaped her, for the youth was sent
reeling by a blow, Jock rushing forward to follow it up. Locke,
however, kept his feet with the agility of a cat, avoiding that rush, and
getting in a body punch that made the other man grunt.
 Following this, discovering at last the drain his efforts were putting
upon him, Hoover sought to take it easier, and recuperate. This
quickly became apparent, and a cry arose:
“He’s stalling, Lefty! Go to him! Don’t let him get his wind back!”
Locke had no intention of permitting his antagonist to rest, and
now he took the aggressive, and kept at it with persistence that wore
on Hoover.
Up to this point, Mike Riley had entertained no doubt as to what
the end must be, but now uncertainty seized him, followed by alarm
as he beheld tokens which seemed to denote that Hoover was
becoming a bit groggy.
The Bancroft manager had no wish to see his puissant slabman
whipped, for that would leave him no longer the terror he had been
to opposing batsmen; and much of his success as a pitcher had
doubtless come through the awe which he had inspired.
“Hey!” croaked Riley suddenly. “I guess this here’s gone ’bout fur
enough.”
But, with his first movement to interfere, he was seized by more
than one pair of hands, jerked back, and held.
“Guess again!” cried Larry Stark. “Hoover forced it on the boy, and
now he’ll have to take his medicine.”
“That’s right! That’s right!” shouted half a hundred voices.
“You bet it’s right!” roared a big millman in the crowd. “If this
Bancroft bunch tries to meddle now in a square fight, they’ll have the
whole o’ Kingsbridge on top of ’em.”
Possibly a free-for-all fight might have broken out at this point, but
suddenly Tom Locke’s fist fell on Hoover’s jaw with a crack like a
pistol report, and the Bancroft pitcher’s legs seemed to melt beneath
him.
Prone upon the trampled ground he sank in a huddled heap, while
Locke, lowering his hands at his sides, stepped back and stood
looking down at him. A hush came over the crowd. The fallen man
made a blind, feeble effort to lift himself, turned his body partly, then
slumped back, his face in the turf, and lay still.
“He’s put Jock out!” said some one in an awed and marveling
voice.
With a yell, Larry Stark leaped forward and seized the victor’s
hand. That yell was echoed by the mob.
“Lefty did it!”
“Oh, you, Lefty! Oh, you, Lefty!”
Locke’s face was sober and unsmiling, betraying no elation.
Satisfied that it was really over, he lifted his eyes, and found himself
unexpectedly gazing into the wide blue eyes of a girl who was
looking down at him from a carriage round which the crowd was
wedged. For a moment they stared at each other, while the cheering
continued, and slowly a flush of shame mounted into Tom Locke’s
cheeks. He turned away.
“Come, Bent,” said Janet in a husky voice, “can’t we get out of
here now? I’m really faint. Please hurry.”
 CHAPTER XVI
BENTON KING AWAKENS

J anet was pale and silent as King drove into town. Glancing at her,
he saw that her lips were pressed together, her smooth brow
puckered a bit, and her eyes filled with a strange, thoughtful
expression. Her hands tightly gripped the handle of her parasol.
“I’m sorry it happened that way, Janet,” he said apologetically. “It
was thoughtless of me to get caught in that mob, so that you were
compelled to suffer the humiliation of witnessing such a brutal
spectacle.”
“You were not to blame,” she returned, in a low, queer voice. “I
begged you to wait. I’m glad I did.”
“You’re what—glad?” he exclaimed, astonished. “It was not a thing
for a girl like you to see and hear.”
“Still,” she declared, “I am glad I saw it. I know now that any man
with an atom of manhood in his make-up may sometimes be
compelled to fight.”
“That’s right,” he agreed, “and he can’t always pick a gentleman,
or a man of his own class, for an antagonist.”
She looked at him quickly. “Do you think Tom Locke is a
gentleman?”
“Oh, I don’t know about that; it’s doubtful, considering the
company he’s with.”
“Do gentlemen never play baseball?”
“Certainly—in college games.”
“But they never play professionally?”
 “I wouldn’t say that, you know,” was his slow answer. “Some
college men go in for professional baseball after graduating. Almost
always, they need the money to give them a start in some chosen
profession or business. But not all college players are gentlemen, by
any means; far from it. At Harvard, even though baseball and football
players and members of the track team were decidedly popular in a
general way, there were none of them in my set, and I didn’t see fit to
associate with them much.”
Even as he said it, he flushed a bit, knowing she, like many others
in Kingsbridge, must be fully aware of the fact that his exasperated
father had removed him from Harvard in his sophomore year to
avoid the disgrace of his suspension, or possible expulsion, because
of certain wild escapades in which he had been concerned, along
with some others of his own particularly swift set. Nevertheless, he
had his standards of deportment and qualifications essential to the
gentleman, though, doubtless, it would be no easy matter to make
them clear to some strait-laced, narrow-minded persons.
He was nettled by the conviction that Janet was suddenly taking
altogether too much interest in the practically unknown Kingsbridge
pitcher, who, following his surprising double victory of the day, was
surely destined to become a popular idol in the town. He had known
Janet three years, having met her at a church sociable in the days
when Cyrus King was setting about in earnest, by the construction of
his mills, to turn Kingsbridge from a dull, sleepy settlement into a
hustling, chesty town. At first she had seemed to be an unusually
pretty, vivacious little girl, with somewhat more refinement and good
sense than the usual run of country maidens; but that he would ever
become genuinely and deeply interested in her had not occurred to
him as a remote possibility. Even after he had left college and begun
work in the big sawmill, although he found her much matured and
developed, and therefore still more interesting, he but slowly came to
realize that she was the possessor of some potent charm, indefinite,
elusive, indescribable, which was casting a powerful spell over him.
Not until this day, however, had he realized how firmly this spell
had gripped him. It had come upon him as a surprise which he
obstinately tried to misinterpret; for why should he, the only son and
heir of old Cy King, several times over a millionaire, permit himself to
be bewitched past self-mastery by this little country girl, daughter of
a broken-down village parson, who had not tried to bewitch him at
all? It seemed ridiculous, something to demand self-reproach; for,
least of all, when he thought of such a thing, which was rarely, had
he fancied himself silly enough to be caught in such a net. Moreover,
he knew what stormy anger the knowledge would produce in his
father if the knowledge ever came to him.
The truth had stabbed him there upon the baseball field. It had
taken the piercing form of a jealous pang, which he had sought to
conceal when he saw that Janet was becoming interested in the new
Kingsbridge pitcher; and it cut deeper and deeper as her interest
grew and developed into out-spoken admiration. He had seen her
watching that fierce fist fight, knowing all the while that she was
praying that Locke might conquer, and, though she had held herself
marvelously in hand, he seemed to fathom all the torture and dread
which filled her heart. That she should care so much what might
happen to a total stranger, even though he were the new-found idol
of the Kingsbridge fans, was sufficient to skim the scales swiftly from
Benton King’s eyes, and leave him confessing to himself, without
shame, that she was very dear to him. For, trite but true, that which
we desire very much becomes a thousand times more desirable as
our chance of possession grows less.
And now, as they drove slowly homeward, something writhed and
burned within him at the further evidence of her interest in Locke. He
was tempted to speak up boldly and say that there was not one
chance in a million that the fellow could be a gentleman; but he had
not yet lost his head, even if his heart was gone, and he had sense
enough to know that such a course might be the most unwise one he
could pursue. So he held himself in check, registering an inward vow
that he would see to it that this fellow Locke found as little chance as
might be to give him worriment over Janet.
Too soon the little parsonage, a modest story-and-a-half house,
one of the oldest in Kingsbridge, came into view. Too soon they were
at the door, and he was helping her to alight. He held her hand to the
extreme limit of good taste, held it and pressed it, saying:
 “I shall be at church to-morrow. If you don’t mind, it would give me
pleasure to escort you home after the services.”
She looked at him in surprise, her lips parted in an odd little smile,
her violet eyes emphasizing her wonderment.
“Why, Bent, you’ve scarcely attended church half a dozen times
since you came home from college. What brings you out to-
morrow?”
“You!” he answered, feeling himself thrill and choke a bit. “I’m a
heathen, I admit; but I’m coming out to-morrow to worship—you.” He
had said such things before, to other girls, but he had spoken them
lightly, and without a tremor; now little electric vibrations were
running along his nerves, and, though he knew that his face was
pale, he could feel his swollen heart pulsing hard, and his temples
drumming. He had never dreamed that saying such a “little thing” to
a pretty girl would come so near unmanning him.
Her surprise had grown, but she was self-possessed. “Thou shalt
not worship false gods,” she laughed. Then, as if she saw something
in his eyes which made her fear he would go further, she hastily
gave her consent: “If you come out to church to-morrow I’ll permit
you to walk home with me—after Sabbath School. That’ll be your
reward for listening to father’s sermon. Now, for the first time in my
life, I feel that I have really done something for the heathen.”
Laughing, she ran up the steps of the trellised porch, turning a
moment to say good night, framed in an arch of June green vines.
Head bared, he gazed at that picture, and found it the fairest his
eyes had ever looked upon. There was now in his mind no question,
no doubt; he knew.
“Good night, Janet,” he said softly. “Until to-morrow, and that will
be—a year.” He had laughed at silly, lovesick chaps who said things
like that; but now, before he knew what he was saying, he had
uttered it with all the sincerity of his soul.
 CHAPTER XVII
FATHER AND DAUGHTER

T he door of the Reverend John Harting’s study was open. In the

softened afternoon light which came from the window above his
desk, he sat, giving his morrow’s sermon the last polishing touches.
But when Janet would have slipped past, he heard her light footstep,
and called to her. She stopped at the door.
“Come in, my dear,” he said, lifting his spectacles to his forehead,
and turning from the outspread pages of manuscript. “Would you
mind sitting down a moment? I have something I wish to say to you.”
He spoke precisely and formally, and even in ordinary
conversation he had a touch of that singsong intonation which all
old-time ministers affected. A fringe of white locks, carefully combed,
added to the somewhat stern, but almost patriarchal, expression of
his angular, deeply lined face. It was the fearless face of a good-
hearted man, and yet there was something about it indicative of
narrowness and bigotry. Such a face, one fancied, might have
belonged to a leader of martyrs.
She came to him, and sat upon the arm of his chair, encircling his
neck, and patting his cheek.
“Now, father, dear,” she laughed coaxingly, “I hope you’re not
going to scold. I know you didn’t want me to go to the ball game, but
I was just dying to go, and Benton invited me, and—”
“He came round here, and cajoled me into consenting, against my
will. He is a young man with a most persuasive and flattering
tongue.”
“I’ll not dispute you,” she said, thinking of those parting words at
the door. “He needed a persuasive tongue to win you over, you are
so dreadfully set against baseball. You can’t seem to realize that the
game itself is really harmless and clean, and two-thirds of the people
of this town are crazy over it. They’ll be crazier still after to-day, for
we beat Bancroft—shut ’em out without a single tally, gave ’em nine
beautiful goose eggs. What do you think of that, father?”
He looked a bit puzzled. “What have goose eggs to do with
baseball, my dear?”
“Oh,” she laughed, “I mean to say that we handed them a beautiful
coat of whitewash, and we bingled out a couple of merit marks for
ourselves. The crowd just went crazy when our new southpaw slant
artist started the fireworks going in the sixth with a clean wallop,
moved up a peg on a sacrifice, pilfered the third hassock, and slid
home on a beautiful squeeze that gave us our first count, and—”
“Stop, Janet!” he cried, bewildered. “What are you talking about?”
“Why, baseball, daddy! I’m simply telling you how we won the
game.”
“You may be trying to tell me, but you are not doing it simply. ‘Coat
of whitewash,’ ‘bingle,’ ‘southpaw slant artist,’ ‘clean wallop,’ ‘third
hassock,’ ‘beautiful squeeze’! My dear, it’s dreadful for a young lady
to use such language. It is ample evidence of the absolutely
demoralizing influence of this game called baseball.”
She laughed still more gayly, and again patted his cheek
caressingly. “That’s simply the idiom of the game, which every true
fan understands.”
“But you should remember that I am not a true fan, whatever that
may mean. I abhor slang, especially from the lips of a refined girl.
You know my efforts alone last year prevented the desecration of the
Sabbath by this dreadful game, which seems to turn people’s heads,
and is productive of untold strife and bitterness. What will be thought
now when my daughter is seen attending these games?”
“But they are not playing Sunday baseball, daddy, and I agree that
you were quite right in bringing your influence to bear against that,
though, as I said before, I hold that there is no harm in the game
itself.”
 “There is harm in whatever produces harm, which is sufficient
answer to your argument. And look at the class of men who take part
in those games. Would you be proud to associate with them? Would
you choose them as friends?”
“No,” she confessed; “not many of them; but still there are some
really decent ones who play. Larry Stark is one. I know him, and I’m
not ashamed of it.”
“There may be an occasional exception, but you know the old
saying that exceptions prove the rule. Once in a while a respectable
young man may be led by necessity to make a business of baseball,
but I am sure no such young man will long continue to follow it up.”
“Respectable people watch the games. Some of the best people in
Kingsbridge were there to-day.”
“Which denotes a deplorable tendency of the times. And you must
not forget that this town has changed from a peaceful country
settlement to a place that is rough and crude, and filled with
viciousness and vice. I am having a struggle against these evil
influences, and I need the moral support of my daughter’s example,
at least. If your mother had lived—”
“Now, father, please don’t! You seem to have an idea that I’m a
most reckless, wicked young person, and you always use that form
of argument to shame me in my sinful ways. I saw in the grand stand
to-day several of the most respectable ladies in town, at least two of
whom are regular attendants at your church.”
“Some seed must fall on barren ground. I hope young King will not
ask you to go with him again. If he comes to me, I shall refuse my
consent; if you go, you will do so against my wishes.”
With him in this inflexible mood, she knew the uselessness of
persuasion or cajolery, and she left him, to run up to her room a few
moments before the maid should call them to tea. Removing her hat
before the mirror, she pouted a little at the charming reflection in the
glass.
“Father is so set,” she murmured; “yet I’ve always been able to
bring him round some way, and I must do it about this; for I just can’t
stay away from the games. I guess I’m a real fan, all right, and I’ll be
worse than ever with Kingsbridge winning from Bancroft, and—and
Lefty pitching. He’s surely what they can call some pitcher. And he
can fight—gracious!”
She shivered a bit at the recollection of the scene she had
witnessed after the game was over. Again she seemed to behold
those fighting men hammering at each other with their bare fists,
savage, bloodstained, brutal. She shuddered at the remembered
glare of their eyes, the wheezing of their panted breathing, and the
crushing sound of their blows. From her parted lips came a little
gasp, as once more on her ears seemed to fall the clear crack of
Tom Locke’s fist smiting his foe full on the point of the jaw with such
force that Hoover’s legs had given way beneath him like props of
straw.
“He can pitch, and he can fight,” she whispered. “He looks clean
and manly, too. I wonder what he’s really like. I suppose he must be
coarse and vulgar. When father hears about that affair, he’ll be far
more set against the game than ever, and he’s sure to hear, for the
whole town must be talking of it now.”
While she made her toilet for tea, the clean-cut, determined face of
the young pitcher seemed to haunt her. Vexed by this, she decided
to put him resolutely out of her mind.
“I’m like a silly schoolgirl, seeking a hero to worship,” she laughed,
blushing at her folly. “I’m old enough to know better. Such heroes
always have feet of clay. Still, I’d like to think of him as well as I can
—as a pitcher; and, to do so, it is wise that I should view him from
afar, that his flaws may not be too apparent. I’ll take care about that.”
Then her thoughts turned to Benton King, and a little frown
gathered upon her face. To-day, as they were driving homeward, and
especially as they were saying good night at the door, there had
been something in his manner and his words that he had never
before unveiled to her. Hitherto they had been just good friends—he
deferential, in a way—yet free and easy, as such friends might be,
with no self-consciousness or constraint; but now, after this,
something warned her that it would be changed, even though, as
she believed, he had been neither deep nor sincere in what he had
felt or said.
“I’m sorry,” she murmured, still frowning; “for I like Bent, and he’s
about the only young man in Kingsbridge I’d care to be really friendly
with. I suppose it’s been so long since he’s had an opportunity to talk
such nonsense to a girl that he just had to try it on some one to keep
in practice. But I don’t like it, and I’ll have to stop it. Next time he tries
it, I’ll chaff him till he quits. I’ll tell him I like Lefty.”
She could not have chosen a more certain method of preventing
Benton King from quitting.
 CHAPTER XVIII
THE GREEN-EYED MONSTER

T he sermon was dry and tiresome, old-fashioned and overflowing

with “doctrine.” John Harting had never made a pretense of
sympathizing with the liberality of modern dominies who relied wholly
for the saving of souls upon “the message of love.” True, he had
ceased openly to preach “hell fire,” but doubtless he still believed in
it, if not as a literal punishment for the sinful hereafter, then as the
only adequate synonym of the penalty that should be meted out to
the evil-doer who died unregenerate.
He had found that such preaching, instead of attracting and
holding congregations, left the pews of the little old church sadly
vacant; and the effort to modify his sermons had taken from them the
little heart they once possessed, and made them wearisome and
soporific.
The day was warm and sunny, and at times faint little grateful
breezes, venturing in at the open windows, brought the June odors
of flowers, and grass, and green growing things. Birds were singing
in the trees which shaded the church, and away out yonder the river
smiled, and the woods beckoned one to cool shadows and mossy
glades.
Thoughts of those glades and shadows occupied Janet in her pew
far more than thoughts of the sermon. But those were not by any
means her only thoughts; once or twice she had ventured an
admirably careless and unstudied glance in the direction of two
young men who were sitting far over at the side of the church, both
of whom were maintaining a commendable and heroic mien of strict
attention to the words of the parson.
It was not, however, Larry Stark who had drawn her glances; her
eyes had been directed toward the clear profile of Larry’s pewmate,