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2ND EDITION
CORPORATE FINANCE
FUNDAMENTALS OF
BERK
DEMARZO
HARFORD
FORD
MOLLICA
FINCH
Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2014 – 9781442564060 – Berk/Fundamentals of Corporate Finance 2e
2.7 Other financial statement information ......................... 49 • COMMON MISTAKE: Summing cash flows across time ..... 78
Management discussion and analysis ................................. 50 Rule 2: Compounding ........................................................ 78
Statement of changes in equity.......................................... 50 • FINANCE IN FOCUS: Rule of 72 ...................................... 80
Notes to the financial statements ....................................... 50 Rule 3: Discounting ............................................................ 80
2.8 Financial reporting in practice ..................................... 50 • USING A FINANCIAL CALCULATOR ............................... 82
Enron..................................................................................51 MyFinanceLab.................................................................... 84
HIH Insurance .....................................................................51 Review questions ............................................................... 85
Centro .............................................................................. 52 Problems ........................................................................... 85
CLERP 9 and the ASX Good Corporate Governance Notes ................................................................................. 88
Principles ....................................................................... 53
The financial statements: A useful starting point ................ 53 Chapter 4 Time Value of Money: Valuing
MyFinanceLab.................................................................... 54 Cash Flow Streams ........................................ 89
Review questions ............................................................... 57 4.1 Valuing a stream of cash flows .................................... 90
Problems ........................................................................... 57 Applying the rules of valuing cash flows to a cash
Data case........................................................................... 61 flow stream ................................................................... 90
Notes ................................................................................. 62 • USING A FINANCIAL CALCULATOR: Solving for
present and future values of cash flow streams .............. 94
PART 2 INTEREST RATES AND 4.2 Perpetuities ................................................................. 96
VALUING CASH FLOWS ................. 63 Perpetuities........................................................................ 96
Chapter 3 Time Value of Money: • FINANCE IN FOCUS: Historical examples of
An Introduction ............................................. 64 perpetuities ................................................................... 98
3.1 Cost–benefit analysis ................................................... 65 • COMMON MISTAKE: Discounting one too
Role of the financial manager ............................................ 65 many times .................................................................... 99
Quantifying costs and benefits .......................................... 66 4.3 Annuities .................................................................. 100
• FINANCE IN FOCUS: When competitive market prices Present value of an annuity .............................................. 100
are not available ............................................................ 68 Future value of an annuity ............................................... 103
3.2 Market prices and the Valuation Principle .................... 69 4.4 Growing Cash Flows ................................................. 104
The Valuation Principle ...................................................... 69 Growing perpetuity ......................................................... 104
Why there can be only one competitive price for a good ..... 70 Growing annuity.............................................................. 106
• FINANCE IN FOCUS: Arbitrage ....................................... 70 4.5 Solving for variables other than present value or
• FINANCE IN FOCUS: Your personal financial decisions ..... 71 future value ................................................................. 108
3.3 The time value of money and interest rates ................. 72 Solving for the cash flows ................................................ 108
The time value of money ................................................... 72 Rate of return ...................................................................110
The interest rate: Converting cash across time ................... 72 Solving for the number of periods ....................................113
Timelines ........................................................................... 76 MyFinanceLab...................................................................116
3.4 Valuing cash flows at different points in time .............. 77 Review questions ..............................................................117
Rule 1: Comparing and combining values........................... 77 Problems ..........................................................................117
DETAILED CONTENTS vii
Data case..........................................................................121 6.4 Why bond prices change ........................................... 165
Notes ............................................................................... 122 Interest rate changes and bond prices .............................. 166
APPENDIX A: Using a financial calculator ......................... 123 Time and bond prices ...................................................... 168
Specifying decimal places ................................................ 123 Interest rate risk and bond prices ......................................170
Toggling between the beginning and end of a period ...... 123 • FINANCE IN FOCUS: Clean and dirty prices for
Set the number of periods per year .................................. 123 coupon bonds ..............................................................173
Solving for the future value of an annuity (Example 4.5) .......124 Bond prices in practice ......................................................173
Solving for the rate of return.............................................124 6.5 Corporate bonds ........................................................175
Credit risk .........................................................................175
Chapter 5: Interest Rates ............................ 126 Corporate bond yields ......................................................175
5.1 Interest rate quotes and adjustments ..........................127 Bond ratings .....................................................................176
The effective annual rate ..................................................128 Credit spreads...................................................................176
Adjusting the discount rate to different time periods ........128 MyFinanceLab.................................................................. 180
Annual percentage rates .................................................. 130 Review questions ..............................................................181
• COMMON MISTAKE: Using the effective annual Problems ......................................................................... 182
rate in the annuity formula .......................................... 130 Data case ......................................................................... 184
5.2 Application: Discount rates and loans .........................133 Notes ............................................................................... 185
Calculating loan payments ................................................133 APPENDIX A: Solving for the yield to maturity of a
Calculating the outstanding loan balance ........................ 134 bond using a financial calculator .................................. 186
5.3 The determinants of interest rates ..............................137 APPENDIX B: The yield curve and the Law of One Price .... 187
Inflation and real versus nominal rates ..............................137 Valuing a coupon bond with zero-coupon prices ............. 187
Investment and interest rate policy................................... 139 Valuing a coupon bond using zero-coupon yields ............ 188
• FINANCE IN FOCUS: How is inflation actually Coupon bond yields......................................................... 188
calculated? .................................................................. 140 Treasury yield curves ........................................................ 190
The yield curve and discount rates ................................... 140
• COMMON MISTAKE: Using the annuity formula Chapter 7: Share Valuation:
when discount rates vary ............................................. 143 The Dividend-Discount Model .................... 191
The yield curve and the economy..................................... 143 7.1 Share basics ................................................................192
5.4 The opportunity cost of capital ................................. 146 Share market reporting: Share quotes ...............................192
MyFinanceLab.................................................................. 149 Ordinary shares.................................................................193
Review questions ............................................................. 150 Preference shares ............................................................. 194
Problems ..........................................................................151 7.2 The dividend-discount model .................................... 195
Notes ................................................................................153 A one-year investor.......................................................... 195
Dividend yields, capital gains and total returns ................. 196
Chapter 6: Bond Valuation .......................... 154 A multiyear investor ..........................................................197
6.1 Bond terminology.......................................................155 Dividend-discount model equation .................................. 198
6.2 Zero-coupon bonds .................................................. 156 7.3 Estimating dividends in the dividend-discount model .... 199
Zero-coupon bond cash flows ......................................... 156 Constant dividend growth ............................................... 199
Yield to maturity of a zero-coupon bond ..........................157 Dividends versus investment and growth ......................... 200
Risk-free interest rates ...................................................... 158 Changing growth rates .................................................... 203
6.3 Coupon bonds .......................................................... 160 • COMMON MISTAKE: Forgetting to ‘grow’ this
Coupon bond cash flows ................................................. 160 year’s dividend ............................................................. 204
Yield to maturity of a coupon bond ..................................161 Value drivers and the dividend-discount model ................ 206
• FINANCE IN FOCUS: The Australian Treasury market .... 162 7.4 Limitations of the dividend-discount model ............... 207
• FINANCE IN FOCUS: Finding bond yields on the Web... 163 Uncertain dividend forecasts ............................................ 207
Coupon bond price quotes .............................................. 164 Non-dividend-paying shares ............................................ 208
viii DETAILED CONTENTS
7.5 Share repurchases and the total payout model .......... 208 Chapter 9 Fundamentals of Capital
7.6 Putting it all together .................................................210 Budgeting ..................................................... 259
MyFinanceLab...................................................................211 9.1 The capital budgeting process ................................... 260
Review questions ..............................................................213 9.2 Forecasting incremental earnings ...............................261
Problems ..........................................................................213 Operating expenses versus capital expenditures ............... 262
Notes ................................................................................215 Incremental revenue and cost estimates ........................... 262
Part 2: Integrative case......................................................217 Taxes ............................................................................... 263
Case questions .................................................................218 Incremental earnings forecast .......................................... 263
9.3 Determining incremental free cash flow .................... 267
PART 3 VALUATION AND Converting from earnings to free cash flow ..................... 267
THE FIRM ..................................... 219 Calculating free cash flow directly.....................................271
Chapter 8 Investment Decision Rules ........ 220 Calculating the net present value ..................................... 272
8.1 The NPV decision rule................................................ 221 9.4 Other effects on incremental free cash flow .............. 273
Net present value............................................................. 221 Opportunity costs ............................................................ 273
The NPV decision rule ...................................................... 222 • COMMON MISTAKE: The opportunity cost of an
8.2 Using the NPV rule .................................................... 224 idle asset ......................................................................274
Organising the cash flows and computing the net Project externalities...........................................................274
present value ............................................................... 224 Sunk costs ........................................................................274
The NPV profile ............................................................... 225 • COMMON MISTAKE: The sunk cost fallacy .................. 275
Measuring sensitivity with the internal rate of return........ 226 Adjusting free cash flow .................................................. 275
Alternative rules versus the NPV rule ................................ 226 Replacement decisions ..................................................... 278
8.3 Alternative decision rules .......................................... 227 9.5 Analysing the project ................................................ 279
• USING EXCEL: Calculating the net present value
Sensitivity analysis ............................................................ 280
and the internal rate of return ...................................... 227
Break-even analysis .......................................................... 280
The payback rule ............................................................. 229
Scenario analysis .............................................................. 282
The IRR rule ..................................................................... 230
9.6 Real options in capital budgeting .............................. 283
• COMMON MISTAKE: Internal rate of return versus
Option to delay ................................................................ 283
the IRR rule .................................................................. 234
Option to expand ............................................................ 283
Modified internal rate of return ....................................... 235
Option to abandon .......................................................... 283
• FINANCE IN FOCUS: Why do rules other than the
MyFinanceLab.................................................................. 285
NPV rule persist?.......................................................... 235
Review questions ............................................................. 287
8.4 Choosing between projects ...................................... 237
Problems ......................................................................... 287
Differences in scale .......................................................... 239
Timing of the cash flows .................................................. 243 Data case ......................................................................... 292
8.5 Evaluating projects with different lives ...................... 244 Notes ............................................................................... 293
Important considerations when using the equivalent
annual annuity ............................................................. 246 Chapter 10 Share Valuation:
8.6 Choosing among projects when resources are limited ... 247 A Second Look ............................................. 295
Evaluating projects with different resource requirements ..... 247 10.1 The discounted free cash flow model ...................... 296
8.7 Putting it all together ................................................ 250 Valuing the enterprise ...................................................... 297
MyFinanceLab.................................................................. 252 Implementing the model.................................................. 297
Review questions ............................................................. 253 Connection to capital budgeting ..................................... 299
Problems ......................................................................... 253 10.2 Valuation based on comparable firms ..................... 301
Data case......................................................................... 258 Valuation multiples .......................................................... 302
Notes ............................................................................... 258 Limitations of multiples .................................................... 306
DETAILED CONTENTS ix
Comparison with discounted cash flow methods ............. 307 Diversifiable risk and the risk premium ............................. 347
Share valuation techniques: The final word ...................... 307 The importance of systematic risk .................................... 347
10.3 Information, competition and share prices .............. 308 • COMMON MISTAKE: A fallacy of long-run
Information in share prices ............................................... 308 diversification .............................................................. 349
Competition and efficient markets ....................................310 MyFinanceLab.................................................................. 350
• FINANCE IN FOCUS: Forms of market efficiency ............311 Review questions ..............................................................351
Lessons for investors and corporate managers ..................314 Problems ......................................................................... 352
The efficient markets hypothesis versus no arbitrage.........314 Notes ............................................................................... 354
10.4 Individual biases and trading ....................................315
Excessive trading and overconfidence ...............................315 Chapter 12 Systematic Risk and the
Hanging on to losers and the disposition effect ................316 Equity Risk Premium ................................... 355
Investor attention, mood and experience ..........................317 12.1 The expected return of a portfolio........................... 356
MyFinanceLab...................................................................318 Portfolio weights ............................................................. 356
Review questions ..............................................................319 Expected portfolio return................................................. 358
Problems ..........................................................................319 12.2 The volatility of a portfolio ...................................... 360
Data case......................................................................... 323 Diversifying risks .............................................................. 360
Notes ............................................................................... 324 Measuring shares’ co-movement: Correlation .................. 362
Part 3: Integrative case..................................................... 325 • USING EXCEL: Calculating the correlation between
Proposal 1 ....................................................................... 325 two sets of returns....................................................... 364
Proposal 2 ....................................................................... 325 Computing a portfolio’s variance and standard deviation..... 364
Case questions ................................................................ 326 The volatility of a large portfolio ...................................... 367
• FINANCE IN FOCUS: Nobel Prize .................................. 368
PART 4 RISK AND RETURN ........ 327 12.3 Measuring systematic risk ....................................... 368
Chapter 11 Risk and Return in Role of the market portfolio............................................. 368
Capital Markets............................................ 328 Share market indices as the market portfolio ................... 369
11.1 A first look at risk and return ................................... 329 Market risk and beta ........................................................ 371
11.2 Historical risks and returns of shares ........................ 330 • COMMON MISTAKE: Mixing standard deviation
Computing historical returns ............................................ 330 and beta ...................................................................... 372
Average annual returns .................................................... 333 Estimating beta from historical returns ............................. 373
• FINANCE IN FOCUS: Arithmetic average returns 12.4 Putting it all together: The Capital Asset
versus compound annual returns ................................. 334 Pricing Model .............................................................. 375
The variance and volatility of returns ................................ 336 The CAPM equation relating risk to expected return ........ 375
• USING EXCEL: Computing the standard deviation • FINANCE IN FOCUS: Why not estimate expected
of historical returns ...................................................... 337 returns directly? ........................................................... 376
• COMMON MISTAKE: Mistakes when computing The security market line ................................................... 377
standard deviation ....................................................... 338 The Capital Asset Pricing Model and portfolios ................ 379
The normal distribution.................................................... 338 Summary of the Capital Asset Pricing Model ................... 380
11.3 The historical trade-off between risk and return...... 340 The big picture ................................................................ 380
The returns of large portfolios ......................................... 340 MyFinanceLab.................................................................. 381
The returns of individual shares ........................................ 340 Review questions ............................................................. 382
11.4 Common versus independent risk ........................... 342 Problems ......................................................................... 382
Theft versus earthquake insurance: An example ............... 342 Notes ............................................................................... 386
Types of risk..................................................................... 342 APPENDIX........................................................................ 387
11.5 Diversification in share portfolios ............................ 344 Alternative models of systematic risk ............................... 387
Unsystematic versus systematic risk.................................. 344 Fama–French–Carhart factor specification ....................... 387
x DETAILED CONTENTS
Chapter 13 The Cost of Capital ................... 390 • FINANCE IN FOCUS: Facebook IPO............................... 427
13.1 A first look at the weighted average cost of capital ..... 391 Primary and secondary IPO offerings................................ 428
The firm’s capital structure............................................... 391 Other IPO types ............................................................... 433
Opportunity cost and the overall cost of capital ............... 392 • FINANCE IN FOCUS: Google’s IPO................................ 436
Weighted averages and the overall cost of capital ............ 392 14.3 IPO puzzles ............................................................. 437
Weighted average cost of capital calculations .................. 393 Underpriced IPOs ............................................................. 437
13.2 The firm’s costs of debt and equity capital .............. 394 ‘Hot’ and ‘cold’ IPO markets ............................................ 437
Cost of debt capital ......................................................... 395 High cost of issuing an IPO .............................................. 439
• COMMON MISTAKE: Using the coupon rate as the Poor post-IPO long-run share performance ...................... 440
cost of debt ................................................................. 395 14.4 Raising additional capital: The seasoned
Cost of preference share capital ....................................... 397 equity offering ............................................................. 441
Cost of ordinary share capital .......................................... 397 SEO process ..................................................................... 441
13.3 A second look at the weighted average cost SEO price reaction ........................................................... 441
of capital ..................................................................... 400 SEO costs......................................................................... 443
Weighted average cost of capital equation ...................... 400 MyFinanceLab.................................................................. 444
Weighted average cost of capital in practice .................... 401 Review questions ............................................................. 445
Methods in practice ......................................................... 401 Problems ......................................................................... 445
13.4 Using the weighted average cost of capital to Notes ............................................................................... 448
value a project ............................................................. 403

Key assumptions .............................................................. 404
Chapter 15 Debt Financing ......................... 449
15.1 Corporate debt........................................................ 450
WACC method application: Extending the life of a mine...... 405
Private debt ..................................................................... 450
Summary of the WACC method....................................... 406
• FINANCE IN FOCUS: Debt financing at Woolworths:
13.5 Project-based costs of capital .................................. 406
Bank loans ...................................................................451
Cost of capital for a new acquisition ................................ 407
Divisional costs of capital ................................................. 407
144A and private placements ...................................... 452
13.6 When raising external capital is costly ..................... 408
Public debt ...................................................................... 452
MyFinanceLab...................................................................411
Review questions ..............................................................412
Public debt .................................................................. 454
Problems ..........................................................................413
15.2 Bond covenants ...................................................... 455
Data case..........................................................................415
Types of covenants .......................................................... 456
Notes ................................................................................416
Advantages of covenants ................................................. 457
Part 4: Integrative case......................................................417
• FINANCE IN FOCUS: Wesfarmers’ covenants ................ 457
Case questions .................................................................417
15.3 Repayment provisions ............................................. 458
Call provisions.................................................................. 458
PART 5 LONG-TERM Sinking funds ................................................................... 459
FINANCING .................................. 419 Convertible provisions ...................................................... 461
Chapter 14 Raising Capital.......................... 420 • FINANCE IN FOCUS: Convertible bonds ....................... 463
14.1 Equity financing for private companies .................... 421 MyFinanceLab.................................................................. 465
Sources of funding........................................................... 421 Review questions ............................................................. 466
• FINANCE IN FOCUS: Creating angels............................ 422 Problems ......................................................................... 466
Securities and valuation ................................................... 424 Notes ............................................................................... 467
Exiting an investment in a private company...................... 426 APPENDIX........................................................................ 468
14.2 Taking your firm public: The initial public offering ..... 426 Part 5: Integrative case..................................................... 469
Advantages and disadvantages of going public................ 426 Case questions .................................................................471
DETAILED CONTENTS xi
PART 6 CAPITAL STRUCTURE 17.2 Dividends versus share repurchases in a perfect
capital market ...............................................................514
AND VALUATION ......................... 473 Alternative policy 1: Pay a dividend with excess cash .........515
Chapter 16 Capital Structure ...................... 474
Alternative policy 2: Share repurchase (no dividend)..........516
16.1 Capital structure choices ......................................... 475
• COMMON MISTAKE: Repurchases and the supply
Capital structure choices across industries........................ 475
of shares .......................................................................517
Capital structure choices within industries ....................... 476
16.2 Capital structure in perfect capital markets ............. 477 Alternative policy 3: High dividend (equity issue) ...............518
Application: Financing a new business ............................. 478 Modigliani–Miller and dividend policy irrelevance .............518
Leverage and firm value ................................................... 479 • COMMON MISTAKE: The bird in the hand fallacy ...... 520
The effect of leverage on risk and return ......................... 480 Dividend policy with perfect capital markets .................... 520
Home-made leverage ...................................................... 482 17.3 Dividends and share repurchases under
Leverage and the cost of capital....................................... 482 personal taxes.............................................................. 521
• COMMON MISTAKE: Capital structure fallacies............ 485 Taxes on dividends and capital gains ................................ 521
Leverage and earnings per share ...................................... 485 Dividend imputation ........................................................ 521
Equity issuances and dilution ........................................... 485 Taxation of capital gains .................................................. 524
Modigliani and Miller and the real world ......................... 486 Dividends versus capital gains .......................................... 525
• FINANCE IN FOCUS: Franco Modigliani and Share repurchases structured as dividends ....................... 525
Merton Miller .............................................................. 486 Optimal dividend policy with taxes .................................. 526
16.3 Debt and taxes........................................................ 487 17.4 Payout versus retention of cash ............................... 526
The interest tax deduction and firm value ........................ 487 Retaining cash with perfect capital markets ..................... 527
Value of the interest tax shield ......................................... 488 Retaining cash with imperfect capital markets ................. 528
The interest tax shield with permanent debt .................... 490 17.5 Signalling with payout policy ................................... 531
Leverage and the weighted average cost of capital Dividend smoothing......................................................... 531
with taxes .................................................................... 492 Dividend signalling ........................................................... 531
Debt and taxes: The bottom line ...................................... 492 • FINANCE IN FOCUS: National Australia Bank’s
16.4 The costs of bankruptcy and financial distress ......... 493
dividend cut ................................................................. 532
Direct costs of bankruptcy ............................................... 494
Signalling and share repurchases...................................... 532
Indirect costs of financial distress ..................................... 494
17.6 Dividend reinvestment plans and bonus issues ......... 533
16.5 Optimal capital structure: The trade-off theory ....... 495
Dividend reinvestment plans ............................................ 533
Differences across firms ................................................... 496
Bonus issues .................................................................... 534
Optimal leverage ............................................................. 496
17.7 Dividend imputation and share valuation ................. 534
16.6 Additional consequences of leverage: Agency
Valuation and franking credits: The theory ....................... 535
costs and information ................................................. 497
Estimating gamma ........................................................... 537
Agency costs ................................................................... 498
Valuation and franking credits: Market practice ............... 540
Debt and information ...................................................... 499
16.7 Capital structure: Putting it all together................... 502 • COMMON MISTAKE: Franking credits are irrelevant
MyFinanceLab.................................................................. 503 to foreign shareholders ................................................ 541
Review questions ............................................................. 505 17.8 Advice for the financial manager ............................. 542
Problems ......................................................................... 505 MyFinanceLab.................................................................. 543
Notes ................................................................................510 Review questions ............................................................. 545
Problems ......................................................................... 546
Chapter 17 Payout Policy ........................... 511 Data case ......................................................................... 548
17.1 Cash distributions to shareholders ............................512 Notes ............................................................................... 549
Dividends..........................................................................513 Part 5: Integrative case..................................................... 550
Share repurchases .............................................................514 Case questions ................................................................ 550
xii DETAILED CONTENTS
PART 7 FINANCIAL PLANNING .... 551 • COMMON MISTAKE: Using APR instead of EAR to
compute the cost of trade credit .................................. 588
Chapter 18 Financial Modelling and
Managing float ................................................................ 590
Pro-forma Analysis ...................................... 552
19.3 Receivables management ........................................ 591
18.1 Goals of long-term financial planning ...................... 553
Determining the credit policy ........................................... 591
Identify important linkages .............................................. 553
• FINANCE IN FOCUS: The 5 Cs of credit ........................ 592
Analyse the impact of potential business plans ................ 554
Monitoring accounts receivable ....................................... 592
Plan for future funding needs .......................................... 554
19.4 Payables management ............................................ 596
18.2 Forecasting financial statements: The percent
Determining accounts payable days outstanding.............. 596
of sales method ........................................................... 554
Stretching accounts payable............................................. 597
Percent of sales method................................................... 555
Pro-forma income statement ........................................... 556 19.5 Inventory management ........................................... 598
Pro-forma balance sheet .................................................. 557 Benefits of holding inventory ........................................... 598
• COMMON MISTAKE: Confusing shareholders’ Costs of holding inventory ............................................... 599
equity with retained earnings....................................... 558 • FINANCE IN FOCUS: Inventory management adds
Making the balance sheet balance: Net new to the bottom line at Woolworths................................ 600
financing ..................................................................... 558 19.6 Cash management .................................................. 600
Choosing a forecast target............................................... 559 Motivation for holding cash ............................................. 600
18.3 Forecasting a planned expansion ............................ 561 Alternative investments.................................................... 601
KMS Designs’ expansion: Financing needs ....................... 561 MyFinanceLab.................................................................. 602
KMS Designs’ expansion: Pro-forma statement ................ 563 Review questions ............................................................. 603
Forecasting the balance sheet .......................................... 564 Problems ......................................................................... 603

• COMMON MISTAKE: Treating forecasts as fact ............ 565 Data case ......................................................................... 607
18.4 Growth and firm value ............................................ 566 Notes ............................................................................... 608
Sustainable growth rate and external financing ............... 567
18.5 Valuing the expansion ............................................. 571 PART 8 SPECIAL TOPICS ............ 609
Forecasting free cash flows .............................................. 571 Chapter 20 Option Applications and
• COMMON MISTAKE: Confusing total and Corporate Finance........................................ 610
incremental net working capital ................................... 572 20.1 Option basics ...........................................................611
KMS Designs’ expansion: Effect on firm value .................. 572 Option contracts ...............................................................611
MyFinanceLab.................................................................. 576 Share option quotations ...................................................613
Review questions ............................................................. 577 Options on other financial securities .................................614
Problems ......................................................................... 577 • FINANCE IN FOCUS: Options are for more than
Notes ............................................................................... 580 just shares.....................................................................615
20.2 Option payoffs at expiration ...................................615
Chapter 19 Working Capital The long position in an option contract ............................615
Management ................................................ 581 The short position in an option contract ...........................617
19.1 Overview of working capital .................................... 582 Profits for holding an option to expiration ........................617
The cash cycle.................................................................. 582 Returns for holding an option to expiration...................... 620
Working capital needs by industry ................................... 585 20.3 Factors affecting option prices ............................... 621
Firm value and working capital ........................................ 586 Exercise price and share price ........................................... 621
19.2 Trade credit ............................................................. 587 Option prices and the exercise date ................................. 621
Trade credit terms ............................................................ 587 Option prices and the risk-free rate .................................. 622
Trade credit and market frictions...................................... 588 Option prices and volatility............................................... 622
DETAILED CONTENTS xiii
20.4 The Black–Scholes option pricing formula .............. 624 MyFinanceLab.................................................................. 660
20.5 Put–call parity ........................................................ 624 Review questions ............................................................. 662
Portfolio insurance ........................................................... 625 Problems ......................................................................... 662
20.6 Options and corporate finance ............................... 628 Notes ............................................................................... 663
MyFinanceLab.................................................................. 630
Review questions ............................................................. 631 Chapter 22 International Corporate
Problems ......................................................................... 632 Finance.......................................................... 665
Data case......................................................................... 633 22.1 Foreign exchange .................................................... 666
Notes ............................................................................... 634 The foreign exchange market........................................... 668
Exchange rates ................................................................ 669
Chapter 21 Mergers and Acquisitions ....... 635 22.2 Exchange rate risk ................................................... 670
21.1 Background and historical trends ............................. 636 Exchange rate fluctuations ............................................... 670
Merger waves .................................................................. 636 Hedging with forward contracts ...................................... 672
Types of mergers ............................................................. 638 Cash-and-carry and the pricing of currency forwards....... 674
21.2 Market reaction to a takeover ................................. 638 Hedging exchange rate risk with options ......................... 677
21.3 Reasons to acquire .................................................. 639 22.3 Internationally integrated capital markets ............... 679
Economies of scale and scope .......................................... 639 • COMMON MISTAKE: Forgetting to flip the
Vertical integration .......................................................... 640 exchange rate .............................................................. 680
Expertise.......................................................................... 640 22.4 Valuation of foreign currency cash flows ................ 682
Monopoly gains ............................................................... 640 Application: Ityesi Packaging ............................................ 682
Efficiency gains ................................................................ 641 The Law of One Price as a robustness check .................... 684
Tax savings from operating losses .................................... 641 22.5 Valuation and international taxation ...................... 686
Diversification .................................................................. 643 A single foreign project with immediate repatriation
Earnings growth .............................................................. 643 of earnings .................................................................. 686
Managerial motives to merge .......................................... 645 Multiple foreign projects and deferral of earnings
21.4 The takeover process .............................................. 646 repatriation .................................................................. 687
Valuation ......................................................................... 646 22.6 Internationally segmented capital markets ............. 688
The offer ......................................................................... 647 Differential access to markets .......................................... 688
Merger ‘arbitrage’............................................................ 648 Macro-level distortions .................................................... 689
Tax and accounting issues ................................................ 650 Implications of internationally segmented capital
Board and shareholder approval .......................................651 markets ....................................................................... 689
21.5 Takeover defences ................................................... 652 22.7 Capital budgeting with exchange rate risk .............. 692
Poison pills ....................................................................... 652 Application: Ityesi Packaging ............................................ 693
Staggered boards ............................................................ 653 Conclusion....................................................................... 694
White knights .................................................................. 653 MyFinanceLab.................................................................. 695
Golden parachutes .......................................................... 653 Review questions ............................................................. 697
Recapitalisation ............................................................... 654 Problems ......................................................................... 697
Other defensive strategies................................................ 654 Data case ......................................................................... 700
21.6 Who gets the value added from a takeover? ........... 655 Notes ............................................................................... 701
The free rider problem ..................................................... 655
Toeholds .......................................................................... 656 Chapter 23 Insurance and Risk
The leveraged buyout ...................................................... 656 Management .................................................702
Competition .................................................................... 658 23.1 Insurance ............................................................... 703
• FINANCE IN FOCUS: The leveraged buyout of MYOB..... 659 The role of insurance: An example ................................... 703
xiv DETAILED CONTENTS
Insurance pricing in a perfect market ............................... 704 Interest rate risk measurement: Duration ..........................715
The value of insurance ..................................................... 706 Duration-based hedging ...................................................715
The costs of insurance ..................................................... 708 Swap-based hedging ........................................................716
The insurance decision ......................................................710 MyFinanceLab...................................................................719
23.2 Commodity price risk ..............................................711 Review questions ............................................................. 720
Hedging with vertical integration and storage...................711 Problems ......................................................................... 720
Hedging with long-term contracts ....................................712 Notes ............................................................................... 722
Hedging with futures contracts .........................................713
23.3 Interest rate risk ......................................................715 Index ............................................................................... 723
DETAILED CONTENTS xv
PREFACE
Finance educators are united by their commitment to shaping future generations of
financial professionals as well as instilling financial awareness and skills in non-majors.
Our goal with Fundamentals of Corporate Finance is to provide an accessible presentation
for both finance and non-finance majors.
Writing an Australian edition of a popular US text is both an easy and a difficult task.
The easy component derives from the fact that we had an outstanding manuscript to
work with. Having taught corporate finance courses for many years to undergraduate
and postgraduate students, and to senior executives in various organisations, we came
to the task with a thorough knowledge both of what books were available, and of what
works and what doesn’t work for students when it comes to textbooks and their pedagogy.
We have long viewed Berk, DeMarzo and Harford as an exceptional finance textbook
and, as such, were thrilled when approached to adapt it for Australasian conditions.
The book achieves a fine balance between the theoretical underpinnings of finance—
which the authors skilfully convey in their manuscript—and relevant practical exercises
and examples that reflect contemporary market practice. Rarely have we come across
a textbook in finance that captures and explains difficult concepts in such a clear and
accessible style as this one. Accordingly, this book serves as a valuable reference for
academics, finance practitioners and students alike.
The difficult component of our task derives from the fact that we had to ensure we
upheld the reputation and integrity of the book. An adaptation is more than changing
spelling, symbols and data in tables. In many cases the essence of arguments must
change markedly when factors such as market size, tax regimes and other peculiarities
of the local region are taken into consideration. This necessitated substantial rewriting
of some chapters and fine-tuning of others. At the same time, we were mindful that
we all must go about our business in a highly integrated global market. It is not an
easy task capturing all the relevant elements of investment, financing, dividend and risk
management decisions in both a regional and an international setting. This is the goal we
set out to achieve and we trust we have achieved it.
In this second edition we have incorporated around 60 Australian firms in the
book in case studies, examples and exercises, such as a discounted cash flow valuation
of JB Hi-Fi. We have incorporated the Australian regulatory and institutional setting
where relevant, and have included a detailed discussion of how an imputation tax system
should impact on the cost of capital and valuation of Australian firms.
xvi PREFACE
NEW TO THIS EDITION
In general terms, in our work on the second edition, we took great care to update all text
discussions and figures, tables and facts to reflect key developments in the field and to
provide the clearest presentation possible. Specific highlights include the following.
• Reorganised flow of topics in Chapters 3 and 4. Mastering the tools for discounting
cash flows is central to students’ success in the introductory course. As always, mastery
comes with practice and by approaching complex topics in manageable units. We
begin our step-by-step look at the time value of money in Chapter 3, which provides
intuition for time value concepts, introduces the Valuation Principle, and presents
rules for valuing cash flows. Chapter 4 addresses cash flow valuation for multi-period
investments.
• New two-pronged approach to share valuation. Immediately following bond
valuation, Chapter 7 opens with key background coverage of share quotes and the
mechanics of share trades and then presents the dividend-discount model. We delay
the discussion of the discounted cash flow model until after we have covered capital
budgeting. In Chapter 10, we introduce the discounted cash flow model by building
on concepts already developed in the capital budgeting chapters. Chapter 10 also
discusses market efficiency and includes a new discussion of investor behaviour.
• Expanded special topics section. The new mergers and acquisitions chapter looks
at the overall market for takeovers, motivations for pursuing acquisitions and the
typical process.
Emphasis on valuation
As painful as the Global Financial Crisis was, there is a silver lining: with the increasing
focus on finance in the news, today’s undergraduate students arrive in the classroom
with an interest in finance. We strive to use that natural interest and motivation to
overcome their fear of the subject and communicate time-tested core principles. Again,
we take what has worked in the classroom and apply it to the text: by providing examples
involving companies familiar to students, making consistent use of real-world data and
demonstrating personal finance applications of core concepts, we strive to keep both
non-finance and finance majors engaged.
By learning to apply the Valuation Principle, students develop the skills to make the
types of comparisons—among loan options, investments, projects and so on—that turn
them into knowledgeable, confident financial consumers and managers. When students
see how to apply finance to their personal lives and future careers, they grasp that finance
is more than abstract, mathematically based concepts.
PREFACE xvii
GUIDED TOUR: FOR STUDENTS
BRIDGING THEORY AND PRACTICE
Study aids with a practical focus
To be successful, you need to master the core concepts and learn to identify and solve
problems that today’s practitioners face.
The Valuation Principle is presented as the foundation of all financial decision making:
the central idea is that a firm should take projects or make investments that increase the
value of the firm. The tools of finance determine the impact of a project or investment on
the firm’s value by comparing the costs and benefits in equivalent terms. The Valuation
Principle is first introduced in Chapter 3, revisited in the part openers and integrated
throughout the text.
• Execute
$100 per share 0.30 = $30 in taxes at the corporate level, leaving $100 – $30 = $70 in
after-tax earnings per share to distribute.
You will pay $70 0.45 = $31.50 in taxes on that dividend, leaving you with $38.50 from
the original $100 after all taxes.
• Evaluate
As a shareholder, you keep $38.50 of the original $100 in earnings; the remaining $30.00 +
$31.50 = $61.50 is paid as taxes. Thus, your total effective tax rate under a ‘classical’ system
of taxation is 61.50/100 = 61.5%.
EXAMPLE 1.2 CORPORATE INCOME TAX UNDER THE ‘IMPUTATION’ TAX SYSTEM
Problem
Rework Example 1.1, assuming the Australian ‘imputation’ tax system. You are a shareholder
in a corporation. The corporation earns $100 per share before taxes. After it has paid taxes,
it will distribute the rest of its earnings to you as a dividend. (We make this simplifying
assumption, but you should note that most corporations retain some of their earnings for
reinvestment.) The dividend is income to you, so you will then pay taxes on these earnings. The
corporate tax rate is 30% and your personal income tax rate is 45%. Under the ‘imputation’
system of taxation, how much of the earnings remain after all taxes are paid?
Solution
• Plan
Earnings before taxes: $100 Corporate tax rate: 30% Personal tax rate: 45%
In this case, the corporation still pays its taxes. It earned $100 per share, so the taxes paid by
the company will be 30% (the corporate tax rate) of $100. Since all of the after-tax earnings will
be paid to you as a dividend, you will pay taxes of 45% on the company's pre-tax earnings per
share; however, you will also receive credit for the tax already paid on those earnings.
• Execute
$100 per share 0.30 = $30 in taxes at the corporate level, leaving $100 – $30 = $70 in
after-tax earnings per share to distribute, plus a franking credit of $30.
You will pay tax on the grossed-up amount of the dividend of $100, being $70 in cash
plus $30 in franking credits. Therefore, your tax liability will be $100 0.45 = $45; however,
this will be partially offset by the $30 franking credit, so you will only pay $45 – $30 = $15 in
additional taxes on that dividend. This will leave you with $70 – $15 = $55 from the original
$100 after all taxes.
• Evaluate
As a shareholder, you keep $55 of the original $100 in earnings; the remaining $30 + $45 –
$30 = $45 is paid as taxes. Thus, your total effective tax rate under an ‘imputation’ system
of taxation is 45/100 = 45%, which will correspond with your personal marginal tax rate,
thereby avoiding double taxation.
8 PART 1 INTRODUCTION
Guided Problem Solutions (GPS) are examples that accompany every important concept
using a consistent problem-solving methodology that breaks the solution process into
three steps: plan, execute and evaluate. This approach aids your comprehension,
enhances your ability to model the solution process when tackling problems on your
own and demonstrates the importance of interpreting the mathematical solution.
xviii GUIDED TOUR: FOR STUDENTS
Personal Finance GPS examples showcase the use of financial EXAMPLE 4.6 ENDOWING A GROWING PERPETUITY
analysis in everyday life by setting problems in scenarios such Problem
PERSONAL FINANCE
In Example 4.3, you planned to donate money to your alma mater to fund an annual $30 000
graduation party. Given an interest rate of 8% per year, the required donation was the present
as purchasing a new car or house, and saving for retirement.

value of:
PV = $30 000/0.08 = $375 000 today
Before accepting the money, however, the student association has asked that you increase the
donation to account for the effect of inflation on the cost of the party in future years. Although
$30 000 is adequate for next year’s party, the students estimate that the party’s cost will rise
by 4% per year thereafter. To satisfy their request, how much do you need to donate now?
Solution
• Plan
0 1 2 3
...
$30 000 $30 000 1.04 $30 000 1.042
The cost of the party next year is $30 000, and the cost then increases 4% per year forever.
From the timeline, we recognise the form of a growing perpetuity and can value it that way.
• Execute
To finance the growing cost, you need to provide the present value today of:
Modified internal rate of return modified internal
rate of return PV = $30 000/(0.08 – 0.04) = $750 000 today
The fact that there can be multiple IRRs for the cash flows from a project is a clear (MIRR)
The discount rate • Evaluate
disadvantage for the IRR. To overcome this, some have proposed various ways of
that sets the NPV of You need to double the size of your gift!
modifying the cash flows before computing the IRR. All these modifications have the modified cash flows
common feature that they group the cash flows so that there is only one negative cash of a project equal to
zero. Cash flows are
flow, occurring at either the beginning or the end. In that case, there is only one sign- modified so there is
change for the cash flows as a whole and hence only one IRR. This new IRR, computed only one negative cash
as the discount rate that sets the NPV of the modified cash flows of the project equal to flow (and one sign- Growing annuity
change) to ensure that growing annuity A growing annuity is a stream of n growing cash flows, paid at regular intervals. It is
zero, is called the modified internal rate of return (MIRR). only one IRR exists.
A stream of cash a growing perpetuity that eventually comes to an end. The following timeline shows a
flows, growing
growing annuity with initial cash flow C, growing at rate g every period until period n.
at a constant rate
and paid at regular The conventions used earlier still apply: (1) the first cash flow arrives at the end of
FINANCE IN FOCUS intervals, that ends the first period, and (2) the first cash flow is before growth. The last cash flow therefore
after a specified reflects only n – 1 periods of growth.
Why do rules other than the NPV rule persist? number of periods.
The present value of an n-period growing annuity with initial cash flow C, growth
The results from previous studies in both Australia and the US found that not all rate g, and interest rate r is given by:
firms use the NPV rule. In addition, a substantial number of the firms surveyed
Present value of a growing annuity
used the payback rule. Furthermore, it appears that most firms use both the NPV
1
( ( ))
1+g n
rule and the IRR rule. Why do firms use rules other than NPV if they can lead to PV = C 1– (4.8)
erroneous decisions? One possible explanation for this phenomenon is that the r–g 1+r
survey results might be misleading. Chief financial officers (CFOs) using the IRR Because the annuity has only a finite number of terms, Eq. 4.8 also works when 4 g > r.4
as a sensitivity measure in conjunction with the NPV rule might have checked The process of deriving this simple expression for the present value of a growing annuity
both the IRR box and the NPV box on the survey. The question they were asked is the same as for a regular annuity. Interested readers may consult the online appendix
was, ‘How frequently does your firm use the following techniques when deciding for details.
which projects or acquisitions to pursue?’ By computing the IRR and using it in
conjunction with the NPV rule to estimate the sensitivity of their results, they 106 PART 2 INTEREST RATES AND VALUING CASH FLOWS
might have felt they were using both techniques. Nevertheless, a significant
minority of managers surveyed replied that they used only the IRR rule, so this
explanation cannot be the whole story.
One common reason that managers give for using the IRR rule exclusively is
that you do not need to know the opportunity cost of capital to calculate the IRR.
On a superficial level, this is true: the IRR does not depend on the cost of capital.
You may not need to know the cost of capital to calculate the IRR, but you certainly
need to know the cost of capital when you apply the IRR rule. Consequently, the
opportunity cost is as important to the IRR rule as it is to the NPV rule.
In our opinion, some firms use the IRR rule exclusively because the IRR sums
Finance in Focus boxes highlight contemporary
examples of how theory works in the real
up the attractiveness of investment opportunity in a single number without
requiring the person running the numbers to make an assumption about the cost
of capital. However, if a CFO wants a brief summary of an investment opportunity
world, impacting business problems and

but does not want an employee to make a cost of capital assumption, he or she
can also request a plot of the NPV as a function of the discount rate. Neither
this request nor a request for the IRR requires knowing the cost of capital, but
the NPV profile has the distinct advantage of being much more informative
and reliable.
company practices.
INVESTMENT DECISION RULES CHAPTER 8 235
COMMON MISTAKE
The sunk cost fallacy
Being influenced by sunk costs is such a widespread mistake that it has a special name:
Common Mistake boxes alert you to frequently made sunk cost fallacy. The most common problem is that people ‘throw good money after
bad’. That is, people sometimes continue to invest in a project that has a negative NPV
because they have already invested a large amount in the project and feel that by not
mistakes stemming from misunderstanding core concepts and continuing it, the prior investment will be wasted. The sunk cost fallacy is also sometimes
called the ‘Concorde effect’, a term that refers to the British and French governments’
decision to continue funding the joint development of the Concorde aircraft even
calculations—in the classroom and in the field.

after it was clear that sales of the plane would fall far short of what was necessary to
justify its continued development. The project was viewed by the British government
as a commercial and financial disaster. However, the political implications of halting the
project—and thereby publicly admitting that all past expenses on the project would result
in nothing—ultimately prevented either government from abandoning the project.
Past research and development expenditures. A pharmaceutical company may

spend tens of millions of dollars developing a new drug, but if it fails to produce an effect
in trials (or worse, has only negative effects), should it proceed? The company cannot
get its development costs back and the amount of those costs should have no bearing on
whether to continue developing a failed drug.
When a firm has already devoted significant resources to develop a new product,
there may be a tendency to continue investing in the product even if market conditions
have changed and the product is unlikely to be viable. The rationale that is sometimes
given is that if the product is abandoned, the money that has already been invested will
be ‘wasted’. In other cases, a decision is made to abandon a project because it cannot
possibly be successful enough to recoup the investment that has already been made. In
fact, neither argument is correct: any money that has already been spent is a sunk cost
and therefore irrelevant. The decision to continue or abandon should be based only on
the incremental costs and benefits of the product going forward.
Adjusting free cash flow

Here, we describe a number of complications that can arise when estimating a project’s
free cash flow.
Timing of cash flows. For simplicity, we have treated the cash flows in our examples
as if they occur at annual intervals. In reality, cash flows will be spread throughout the
year. While it is common to forecast at the annual level, we can forecast free cash flow on
a quarterly or monthly basis when greater accuracy is required. In practice, firms often
choose shorter intervals for riskier projects so that they might forecast cash flows at the
monthly level for projects that carry considerable risk. For example, cash flows for a new
facility in Europe may be forecasted at the quarterly or annual level, but if that same facility
were located in a politically unstable country, the forecasts might be at the monthly level.
FUNDAMENTALS OF CAPITAL BUDGETING CHAPTER 9 275
GUIDED TOUR: FOR STUDENTS xix
TEACHING EVERY STUDENT TO THINK FINANCE
Simplified presentation of mathematics
CHAPTER 4 Because one of the hardest parts of learning finance for non-
TIME VALUE OF MONEY: majors is mastering the jargon, maths and non-standardised
VALUING CASH FLOW notation, Fundamentals of Corporate Finance systematically uses:
STREAMS
LEARNING OBJECTIVES NOTATION Notation boxes. Each chapter begins with a notation box that
defines the variables and the acronyms used in the chapter and
After studying this chapter, you should be able to: C cash flow
1 value a series of many cash flows; Cn cash flow that arrives

in period n
2 value a perpetual series of regular cash flows called a
perpetuity;
FV
FVn
future value
future value in period n
serves as a ‘legend’ for your reference.
3 value a common set of regular cash flows called an
g growth rate
annuity;
n number of periods
4 value both perpetuities and annuities when the cash
A
P initial principal or s we discussed in Chapter 3, to evaluate a project a financial manager must
flows grow at a constant rate;
deposit, or equivalent compare its costs and benefits. In most cases, the cash flows in financial investments
5 calculate the number of periods, cash flow, or rate of present value involve more than one future period. Thus, the financial manager is faced with the
return of a loan or investment. PV present value task of trading off a known up-front cost against a series of uncertain future benefits.
We learned to value those costs and benefits by computing their cash value today—their
r interest rate or rate of
present values.
return
In financial management, as well as your personal finances, you will need to evaluate
series of cash flows occurring across time. In this chapter, we build on the tools we
developed in Chapter 3 to value any series of cash flows. We will develop shortcuts for
valuing annuities, perpetuities and other special cases of assets with cash flows that follow
regular patterns.
In Chapter 5, we will learn how interest rates are quoted and determined. Once we
understand how interest rates are quoted, it will be straightforward to extend the tools of
this chapter to cash flows that occur more frequently than once per year.
4.1 VALUING A STREAM OF CASH FLOWS

We refer to a series of cash flows lasting several periods as a stream of cash flows. As
LEARNING
OBJECTIVE
Value a series
1 with single cash flows, we can represent a stream of cash flows on a timeline. In this
chapter we will continue to use timelines and the rules of cash flow valuation introduced
of many cash in Chapter 3 to organise and then solve financial problems.
flows.
Numbered and labelled equations. The first stream of cash

Applying the rules of valuing cash flows to a cash flow stream
Most investment opportunities have multiple cash flows that occur at different points in
flows time. In Chapter 3, we learned the rules to value such cash flows.
time a full equation is given in notation form

A series of cash
flows lasting several Rule 1: only values at the same point in time can be compared or combined.
periods.
Rule 2: to calculate a cash flow’s future value, we must compound it using Eq. 3.1 from
it is numbered. Key equations are titled and

Chapter 3.
FVn = C (1 + r)n (4.1)
Rule 3: to calculate the present value of a future cash flow, we must discount it using
revisited in the summary and in end papers. Eq. 3.2 of Chapter 3.
C
PV = C (1 + r)n = (4.2)
(1 + r)n
The rules of cash flow valuation allow us to compare and combine cash flows that occur
at different points in time. Suppose we plan to save $1000 today and $1000 at the end of
Timelines. Introduced in Chapter 3, timelines each of the next two years. If we earn a fixed 10% interest rate on our savings, how much
will we have three years from today? Again, we start with a timeline:
0 1 2 3
are emphasised as the important first step in $1000 $1000 $1000 ?
solving every problem that involves cash flow.

90 PART 2 INTEREST RATES AND VALUING CASH FLOWS
• Execute
Using Excel boxes describe

15 000
PV = = $8375.92 today
1.0610
• Evaluate USING EXCEL

The bond is worth much less today than its final payoff because of the time value of money.
Calculating the correlation between two sets of returns
The correlations presented in Table 12.3 were all calculated by comparing the
Excel techniques and include
screenshots to serve as a
As we’ve seen in this section, we can compare cash flows at different points in time returns of two shares. Here we describe how you can use Excel to calculate these
as long as we follow the three rules of valuing cash flows, summarised in Table 3.1. correlations.
Armed with these three rules, a financial manager can compare an investment’s costs and 1 Enter or import the historical returns for the two shares into Excel.
benefits that are spread out over time and apply the Valuation Principle to make the right
decision. In the next chapter, we will show you how to apply these rules to situations
involving multiple cash flows at different points in time.
2 Next, from the Data Group, select Formulas, then Insert Function, and then
select ‘Correl’ for Correlation. guide for you when using this
3 For the ‘Input Range’ field, highlight the two columns of returns.
TABLE 3.1 The three rules of valuing cash ﬂows 4 Click OK.
5 The answer will appear in a new worksheet as the correlation between
technology.
Rule Formula
1 Only values at the same point in time can be None ‘column 1’ and ‘column 2’. The screen capture below shows the correlation
compared or combined. between Woolworths and Qantas returns to be 0.31 or 31%.
2 To calculate a cash flow’s future value, we must Future value of a cash flow:
compound it. FVn = C (1 + r)n
3 To calculate the present value of a future cash Present value of a cash flow:
flow, we must discount it.
PV = C (1 + r)n =
C
(1 + r)n
Financial calculator instruc-
tions, including a box in
Chapter 4 on solving for
USING A FINANCIAL CALCULATOR
Financial calculators are programmed to perform most present and future
value calculations. However, we recommend that you develop an understanding
of the formulas before using the shortcuts. We provide a more extensive
discussion of financial calculators in the appendix to Chapter 4, but we’ll cover future and present values,
the relevant functions for this chapter here. To use financial calculator functions,
you always enter the known values first and then the calculator solves for the
unknown.
To answer Example 3.5 with a financial calculator, do the following:
Computing a portfolio’s variance and standard deviation
We now have the tools to formally compute portfolio variance. The formula for the
and appendices to Chapters
variance of a two-share portfolio is:
Concept
Calculator Key
Number
of Periods
N
Interest Rate
per Period
I/Y
Recurring
Payments
PMT
Future
Value
FV
Accounting
for the risk
of share 1
Accounting
for the risk
of share 2
Adjustment for
how much the two shares move together 4, 6 and 15 with keystrokes
Var(Rp) = w21SD(R1)2 + w22SD(R2)2 + 2w1w2Corr(R1, R2)SD(R1)SD(R2) (12.4)
Enter 10 6 0 15000
The three parts of Eq. 12.4 each account for an important determinant of the overall
variance of the portfolio: the risk of share 1, the risk of share 2 and an adjustment for
for HP-10BII and TI BAII
how much the two shares move together (their correlation, given as Corr (R1, R2 ).2 The
82 PART 2 INTEREST RATES AND VALUING CASH FLOWS equation demonstrates that with a positive amount invested in each share, the more
the shares move together and the higher their correlation, the more volatile the portfolio
Plus Professional, highlight
364 PART 4 RISK AND RETURN
this problem-solving tool.
xx GUIDED TOUR: FOR STUDENTS
PRACTISE FINANCE TO LEARN FINANCE
Working problems is the proven way to cement and demonstrate an understanding of
finance.
Concept Check questions at the end of each section enable you to CONCEPT CHECK
3 How are operating expenses and capital expenditures treated differently when calculating
incremental earnings?
test your understanding and target areas needing further review. 4 Why do we focus only on incremental revenue and costs, rather than all revenue and
costs of the firm?
9.3 DETERMINING INCREMENTAL FREE CASH FLOW

As discussed in Chapter 2, earnings are an accounting measure of the firm’s performance.
They do not represent real profits: the firm cannot use its earnings to buy goods, pay
employees, fund new investments or pay dividends to shareholders. To do those things,
LEARNING
OBJECTIVE
Convert
3
the firm needs cash. Thus, to evaluate a capital budgeting decision, we must determine forecasted
earnings to
its consequences for the firm’s available cash. The incremental effect of a project on the
free cash flows
firm’s available cash is the project’s incremental free cash flow (FCF). and compute
a project’s net
present value.
Converting from earnings to free cash flow
As discussed in Chapter 2, there are important differences between earnings and cash
free cash flow
8 In the early 1980s, inflation was in the double-digits and the yield curve sloped sharply downward. flow. Earnings include non-cash charges, such as depreciation, but do not include (FCF)
What did the yield curve say about investors’ expectations about future inflation rates? expenditures on capital investment. To determine a project’s free cash flow from its The incremental
9 What do we mean when we refer to the ‘opportunity cost’ of capital?
incremental earnings, we must adjust for these differences. effect of a project
on a firm’s available
PROBLEMS Capital expenditures and depreciation. As we have noted, depreciation is not a cash
cash.
An asterisk * indicates problems with a higher level of difficulty. expense that is paid by the firm. Rather, it is a method used for accounting and tax purposes
to allocate the original purchase cost of the asset over its life. Because depreciation is not
Interest rate quotes and adjustments
1 Your bank is offering you an account that will pay 20% interest in total for a two-year deposit.
a cash flow, we do not include it in the cash flow forecast. However, that does not mean
Determine the equivalent discount rate for a period length of: we can ignore depreciation. The depreciation expense reduces our taxable earnings and
a. six months; in doing so reduces our taxes. Taxes are cash flows, so because depreciation affects our
b. one year; cash flows, it still matters. Our approach for handling depreciation is to add it back to the
c. one month. incremental earnings to recognise the fact that we still have the cash flow associated with it.
2 You are considering two ways of financing an Easter holiday. You could put it on your credit card, at
For example, a project has incremental gross profit (revenue minus costs) of $1 million
15% APR, compounded monthly, or borrow the money from your parents, who want an 8% interest
payment every six months. Which is the lower rate?
and a $200 000 depreciation expense. If the firm’s tax rate is 30%, then the incremental
3 Which do you prefer: a bank account that pays 5% per year (EAR) for three years or: earnings will be ($1 000 000 – $200 000) (1 – 0.30) = $560 000. However, the firm will still
a. an account that pays 2.5% every six months for three years? have $760 000 because the $200 000 depreciation expense is not an actual cash outflow.
b. an account that pays 7.5% every 18 months for three years? Table 9.1 shows the calculation to get the incremental free cash flow in this case. Blue
c. an account that pays 0.5% per month for three years? boxes indicate all of the actual cash flows in the column labelled ‘Correct’. A good way
4 You have been offered a job with an unusual bonus structure. As long as you stay with the firm, you
to check to make sure the incremental free cash flow is correct is to sum the actual cash
will get an extra $70 000 every seven years, starting seven years from now. What is the present value
of this incentive if you plan to work for the company for a total of 42 years and the interest rate is 6%
flows. In this case, the firm generated $1 000 000 in gross profit (a positive cash flow),
(EAR)? paid $240 000 in taxes (a negative cash flow), and was left with $1 000 000 – $240 000
5 You have found three investment choices for a one-year deposit: 10% APR compounded monthly, 10% = $760 000, which is the amount shown as the incremental free cash flow. In the last
APR compounded annually and 9% APR compounded daily. Compute the EAR for each investment column, labelled ‘Incorrect’, we show what would happen if you just ignored depreciation
choice. (Assume there are 365 days in the year.) altogether. Because EBIT would be too high, the taxes would be too high as well and,
6 Your bank account pays interest with an EAR of 5%. What is the APR quote for this account based on
consequently, the incremental free cash flow would be too low. (Note that the difference of
semi-annual compounding? What is the APR with monthly compounding?
7 Suppose the interest rate is 8% APR with monthly compounding. What is the present value of an
$60 000 between the two cases is entirely due to the difference in tax payments.)
annuity that pays $100 every six months for five years?
8 You have been accepted into a full-fee course at a university. The university guarantees that your tuition FUNDAMENTALS OF CAPITAL BUDGETING CHAPTER 9 267
will not increase for the three years you attend university. The first $10 000 tuition payment is due in
six months. After that, the same payment is due every six months until you have made a total of six
payments. The university offers a bank account that allows you to withdraw money every six months
and has a fixed APR of 4% (semi-annual) guaranteed to remain the same over the next three years. How
much money must you deposit today if you intend to make no further deposits and would like to make
all the tuition payments from this account, leaving the account empty when the last payment is made?
End-of-chapter problems offer first-rate

Application: Discount rates and loans
9 You make monthly payments on your car loan. It has a quoted APR of 5% (monthly compounding).
What percentage of the outstanding principal do you pay in interest each month?
10 Suppose Capital One is advertising a 60-month, 5.99% APR motorcycle loan. If you need to borrow
11
$8000 to purchase your dream Harley-Davidson, what will your monthly payment be?
Suppose La Trobe Bank is offering a 30-year mortgage with an EAR of 6.80%. If you plan to borrow
$150 000, what will your monthly payment be?
materials for you to practise and build
12 You have just taken out a $20 000 car loan with a 6% APR, compounded monthly. The loan is for five
13
years. When you make your first payment in one month, how much of the payment will go toward
the principal of the loan and how much will go toward interest?
*You are buying a house and the mortgage company offers to let you pay a ‘point’ (1% of the total
confidence. Selected end-of-chapter problems
are available in MyFinanceLab, the fully
amount of the loan) to reduce your APR from 6.5% to 6.25% on your $400 000, 30-year mortgage
with monthly payments. If you plan to be in the house for at least five years, should you do it?
INTEREST RATES CHAPTER 5 151
integrated homework and tutorial system.
Data Cases present in-depth DATA CASE4

PART 4
scenarios in a business setting You are the chief financial officer of Target. This afternoon you played golf with a member of the company’s
INTEGRATIVE CASE
board of directors. Somewhere during the back nine, the board member enthusiastically described a
recent article she had read in a leading management journal. This article noted several companies that
with questions designed to

had improved their share price performance through effective working capital management, and the
board member was intrigued. She wondered whether Target was managing its working capital effectively
and, if not, whether the company could accomplish something similar. How was Target managing its
working capital, and how does it compare to its competitor Walmart, a company well known for working
guide students’ analysis. capital management?

Upon returning home, you decide to do a quick preliminary investigation using information freely available
on the Internet.
This case draws on material from Chapters 11–13.
1 Obtain Target’s financial statements for the past four years from http://money.msn.com. You work for HydroTech, a large manufacturer of high-pressure industrial water pumps.
a. Enter the ticker symbol (TGT) in the box and click on ‘Get Quote’. The firm specialises in natural disaster services, ranging from pumps that draw water
b. Next click on ‘Income Statement’ under ‘Financials’. Copy and paste the data into Excel. from lakes, ponds and streams in drought-stricken areas to pumps that remove high
c. Click on ‘Balance Sheet’ and copy and paste the data so that it is on the same worksheet as the water volumes in flooded areas. You report directly to the chief financial officer. Your boss
income statement.
Integrative Cases occur at

has asked you to calculate HydroTech’s WACC in preparation for an executive retreat at
2 Obtain Walmart’s (WMT) ratios for comparison from the Reuters web site (www.reuters.com/finance/ Thredbo. Too bad you’re not invited, as water pumps and skiing are on the agenda! At
stocks).
least you have an analyst on hand to gather the following required information:
a. Enter the ticker symbol (WMT) in the box, click ‘Search’ and then select the symbol ‘WMT.N’.
the end of most parts and b. Select ‘Financials’ and then scroll down to find the efficiency ratios and copy and paste them into your
1 the risk-free rate of interest, in this case, the yield of the 10-year government bond,
spreadsheet where Target’s financial statements are located. which is 3%;
3 Compute the CCC for Target for each of the last four years. 2 HydroTech’s:
a. Compute the inventory days using ‘Cost of Revenue’ as cost of goods sold and a 365-day year.
present a capstone extended

a. market capitalisation (its market value of equity), $100 million;
b. Compute accounts receivable days using a 365-day year.
b. CAPM beta, 1.2;
c. Compute accounts payable days using a 365-day year.
d. Compute the CCC for each year. c. total book value of debt outstanding, $50 million;
problem for each part with a 4 How has Target’s CCC changed over the last few years?
5 Compare Target’s inventory and receivables turnover ratios for the most recent year to the industry
average.
d. cash, $10 million.
3 the cost of debt (using the quoted yields on HydroTech’s outstanding bond issues),
which is 5%.
scenario and data for you to

a. Compute the inventory turnover ratio as cost of revenue/inventory.
b. Compute the receivable turnover ratio as total revenue/net receivables. With this information in hand, you are now prepared to undertake the analysis.
c. How do Target’s numbers compare to Walmart’s?
6 Determine how Target’s free cash flow would change if Target’s inventory and accounts receivable Case questions
analyse based on that subset balances were adjusted to meet Walmart’s ratios.
7 Determine the amount of additional free cash flow that would be available if Target adjusted its accounts
payable days to 75 days.
1 Calculate HydroTech’s net debt.
2 Compute HydroTech’s equity and (net) debt weights based on the market value of
equity and the book value of net debt.
of chapters.
8 Determine the net amount of additional free cash flow and Target’s CCC if its inventory and receivables
turnover ratios were at Walmart’s levels and its payable days were 75 days. 3 Calculate the cost of equity capital using the CAPM, assuming a market risk premium
What are your impressions regarding Target’s working capital management based on this preliminary of 5%.
analysis? Discuss any advantages and disadvantages of bringing the CCC more in line with industry averages. 4 Using a tax rate of 30%, calculate HydroTech’s effective cost of debt capital.
5 Calculate HydroTech’s WACC.
6 When is it appropriate to use this WACC to evaluate a new project?
THE COST OF CAPITAL CHAPTER 13 417
WORKING CAPITAL MANAGEMENT CHAPTER 19 607
GUIDED TOUR: FOR STUDENTS xxi
GUIDED TOUR: FOR EDUCATORS
Solutions Manual
The Solutions Manual provides students with detailed, accuracy-verified solutions to all
the in-chapter and end-of-chapter problems in the book.
PowerPoint Presentation
The PowerPoint Presentation is available in lecture form and includes art and tables
from the book and additional examples. Revised for this edition, the PowerPoint
presentation includes tables and figures, examples, key terms and spreadsheet tables
from the textbook.
Test Bank
The Test Bank provides a wealth of accuracy-verified testing material. Updated for the
new edition, each chapter offers a wide variety of true/false, short answer and multiple-
choice questions. Questions are verified by difficulty level and skill type, and correlated
to the chapter topics. Numerical problems include step-by-step solutions.
Every question is available in TestGen® software for both Windows® and Macintosh®
computers. This easy-to-use testing software is a valuable test preparation tool that
allows professors to view, edit and add questions.
FLEXIBILITY GUIDE
Fundamentals of Corporate Finance offers coverage of the major topical areas for
introductory-level undergraduate courses. Our focus is on financial decision making
related to the corporation’s choice of which investments to make or how to raise the
capital required to fund an investment. We designed the book with the need for flexibility
and with consideration of time pressures throughout the semester in mind.
xxii GUIDED TOUR: FOR EDUCATORS
PART 1 INTRODUCTION
Introduces the Valuation Principle and
Ch. 1: Corporate Finance and the Financial Manager time value of money techniques for
Ch. 2: Introduction to Financial Statement Analysis single-period investments
PART 2 INTEREST RATES AND VALUING CASH FLOWS Presents how interest rates are quoted
Ch. 3: Time Value of Money: An Introduction and compounding for all frequencies
Ch. 4: Time Value of Money: Valuing Cash Flow Streams
Ch. 5: Interest Rates
New chapter introduces stocks and
Ch. 6: Bond Valuation
presents the dividend-discount model as
Ch. 7: Share Valuation: The Dividend-Discount Model an application of the time value of money
PART 3 VALUATION AND THE FIRM Introduces the NPV rule as the ‘golden
Ch. 8: Investment Decision Rules rule’ against which we evaluate other
Ch. 9: Fundamentals of Capital Budgeting investment decision rules
Ch. 10: Share Valuation: A Second Look
Provides a clear focus on the distinction

PART 4 RISK AND RETURN between earnings and free cash flow
Ch. 11: Risk and Return in Capital Markets
Ch. 12: Systematic Risk and the Equity Risk Premium Builds on capital budgeting material by
Ch. 13: The Cost of Capital valuing the ownership claim to the
firm’s free cash flows and addresses
market efficiency and behavioural finance
PART 5 LONG-TERM FINANCING
Ch. 14: Raising Capital
Ch. 15: Debt Financing Calculates and uses the firm’s overall
costs of capital with the WACC method
PART 6 CAPITAL STRUCTURE AND VALUATION

These chapters begin with perfect
Ch. 16: Capital Structure
markets and then show how frictions,
Ch. 17: Payout Policy including agency costs and asymmetric
information, can influence financial policy
PART 7 FINANCIAL PLANNING

Ch. 18: Financial Modelling and Pro-forma Analysis Makes the critical distinction between
Ch. 19: Working Capital Management sustainable and value-increasing
growth in determining the firm’s value
PART 8 SPECIAL TOPICS

Ch. 20: Option Applications and Corporate Finance New chapter looks at the overall
Ch. 21: Mergers and Acquisitions market for mergers and acquisitions and
considers the motivations for and the
Ch. 22: International Corporate Finance
typical process of a transaction
Ch. 23: Insurance and Risk Management
GUIDED TOUR: FOR EDUCATORS xxiii
MyFinanceLab for Berk/DeMarzo/Harford/Ford/Mollica/Finch
Fundamentals of Corporate Finance, 2nd edition
A guided tour for students and educators
Auto-generated tests
and assignments
Each MyLab comes
with pre-loaded
assignments,
all of which are
automatically
graded and include
selected end-of-
chapter questions and
problems from the
textbook.
Assignable content
Educators can select
content from the Study
Plan and/or Test Bank
and assign to students
as homework or
quizzes.
xxiv MYFINANCELAB: A GUIDED TOUR FOR STUDENTS AND EDUCATORS
Another random document with
no related content on Scribd:
The Project Gutenberg eBook of Journal of a
second expedition into the interior of Africa,
from the Bight of Benin to Soccatoo
This ebook is for the use of anyone anywhere in the United
States and most other parts of the world at no cost and with
almost no restrictions whatsoever. You may copy it, give it away
or re-use it under the terms of the Project Gutenberg License
included with this ebook or online at www.gutenberg.org. If you
are not located in the United States, you will have to check the
laws of the country where you are located before using this
eBook.
Title: Journal of a second expedition into the interior of Africa, from

the Bight of Benin to Soccatoo
To which is added, the journal of Richard Lander from Kano
to the sea-coast, partly by a more eastern route.
Author: Hugh Clapperton
Contributor: Sir John Barrow

Samuel Clapperton
Richard Lander
Abraham V. Salamé
Release date: October 26, 2023 [eBook #71961]
Language: English
Original publication: London: John Murray, 1829
Credits: Galo Flordelis (This file was produced from images

generously made available by The Internet Archive)
*** START OF THE PROJECT GUTENBERG EBOOK JOURNAL

OF A SECOND EXPEDITION INTO THE INTERIOR OF AFRICA,
FROM THE BIGHT OF BENIN TO SOCCATOO ***
Painted by Gildon Manton. Engraved by Thos. Lupton.
CAPT N . HUGH CLAPPERTON, R.N.
London, Published Decr. 1, 1828, by John Murray, Albemarle Street.

JOURNAL
OF A
SECOND EXPEDITION
INTO THE
INTERIOR OF AFRICA,
FROM
T H E B I G H T O F B E N I N T O S O C C AT O O .
BY THE LATE COMMANDER CLAPPERTON,

OF THE ROYAL NAVY.
TO WHICH IS ADDED,
THE JOURNAL OF RICHARD LANDER FROM KANO TO THE SEA-COAST,

PARTLY BY A MORE EASTERN ROUTE.
WITH
A PORTRAIT OF CAPTAIN CLAPPERTON, AND A MAP OF THE ROUTE,
CHIEFLY LAID DOWN FROM ACTUAL OBSERVATIONS FOR LATITUDE AND LONGITUDE.
LONDON:
JOHN MURRAY, ALBEMARLE-STREET.
MDCCCXXIX.
CO NT ENT S.
Page
Life of the author v
Introduction xi
CHAPTER I.
Journey from Badagry over the Kong mountains to the city of Eyeo or
Katunga 1
CHAPTER II.
Residence at Eyeo, or Katunga, the capital of Youriba 38
CHAPTER III.
Journal of proceedings from Katunga, or Eyeo, to Boussa, on the Niger,
or Quorra, the place where Mungo Park perished 61
CHAPTER IV.
Journey from Boussa, across the ferry of the Quorra, by Guarri and
Zegzeg, to the city of Kano 107
CHAPTER V.
Journey from Kano to the camp of Bello, and from thence to Soccatoo 169
CHAPTER VI.
Residence at Soccatoo, till the death of the author 194
LANDER’S JOURNAL.
From Kano to Soccatoo 257
Residence at Soccatoo — my master’s death — burial 269
From Soccatoo to Dunrora 282
From Dunrora back to Zegzeg 297
From Zegzeg to Badagry 305
APPENDIX.
A LIST, OR SUMMARY ACCOUNT, OF THE LATE CAPTAIN CLAPPERTON’S
ARABIC PAPERS, TRANSLATED BY MR. A. V. SALAME. 329
No. I. (A geographical description of the course of the river
Cówara, . . .) 329
No. II. Translation of the Account of the “Expedition of Forty
Christians,” &c. &c. 333
No. III. A Geographical Account of the Country, Rivers, Lakes, &c. from
Bornou to Egypt, &c. 335
Nos. IV. to IX. Traditional Account of different Nations of Africa, &c. 337
A VOCABULARY OF THE YOURRIBA TONGUE. — FELLATAH. 341
METEOROLOGICAL TABLE. 344
MAPS
Chart of the Route
The course of the Kowara or Quarra as described by Bello’s Schoolmaster.
S HO RT SKET C H
OF THE
L I F E O F C A P T A I N C L A P P E R T O N.
BY LIEUTENANT-COLONEL CLAPPERTON.
Captain Hugh Clapperton was born in Annan, Dumfries-

shire, in the year 1788. His grandfather, Robert Clapperton, M.D.,
was a man of considerable knowledge, as a classical scholar, and in
his profession. He first studied at Edinburgh; but as, in those days,
the continental colleges were considered superior in medicine and
surgery, he went to Paris, and there studied for some time. On his
return to his native country, he married Elizabeth Campbell, second
cousin of Colonel Archibald Campbell of Glenlyon; and soon after
settled in Dumfries-shire, at a place called Crowden Nows, where he
remained until George Clapperton (the father of our traveller), and
another son were born. He afterwards removed to Lochmaben,
where he had an increase to his family of four sons and one
daughter. All the sons became medical men, except the youngest
and the only survivor, who entered his Majesty’s service, in the
beginning of 1793, as a second lieutenant of marines. His eldest
son, George Clapperton, married young to a daughter of John
Johnstone, proprietor of the lands of Thorniwhate and Lochmaben
Castle, and settled in Annan, where he was a considerable time the
only medical man of repute in the place, and performed many
operations and cures which spread his fame over the borders of
England and Scotland. His father bestowed a good education upon
him, which proved so useful a passport to public favour, that he
might have made a fortune; but, unfortunately, he was, like his father,
careless of money. He married a second wife, and was the father of
no fewer than twenty-one children. Of the fruit of the first marriage,
he had six sons and one daughter who grew to men and women’s
estate. All the sons entered his Majesty’s service, the youngest of
whom was Captain Clapperton, the African traveller, and the subject
of this memoir. In his person he resembled his father greatly, but was
not so tall by two inches, being five feet eleven inches; had great
breadth of chest and expansion of shoulders, and otherwise
proportionably strong; and was a handsome, athletic, powerful man.
He received no classical education, and could do little more than
read and write, when he was put under the tuition of Mr. Bryce
Downie, a man of general knowledge, but chiefly celebrated for his
mathematical abilities. He remained with Mr. Downie until he
required a knowledge of practical mathematics, including navigation
and trigonometry. He was found an apt scholar and an obliging boy
by Mr. Downie, whose attention was never forgot by the traveller; as
he expressed a great wish, when he arrived the first journey from
Africa, that he could have had time to see his native country, and
shake his old master once more by the hand. Captain Clapperton left
Mr. Downie about the age of thirteen; when, by his own wish, he was
bound an apprentice to the owner of a vessel of considerable
burthen, trading between Liverpool and North America. After making
several voyages in that vessel, he either left her, or was impressed
into his Majesty’s service, and was put on board a Tender then lying
at Liverpool, which vessel carried him round to Plymouth, where he
with others were draughted on board of his Majesty’s ship Gibraltar,
of eighty guns. He did not remain long in that ship, as in 1806 he
arrived at Gibraltar in a naval transport; from which he was
impressed, with others, on board his Majesty’s frigate Renommée,
Captain Sir Thomas Livingston. Opportunely for our traveller, at that
time his Majesty’s ship Saturn, Captain Lord Amelias Beauclerc
(belonging to Lord Collingwood’s fleet off Cadiz), arrived for the
purpose of watering and refitting; and our traveller, learning that his
uncle (now Lieut.-Col. Clapperton) was captain of royal marines on
board the Saturn, sent him a letter describing his situation in the
Renommée. The uncle having been an old messmate of Sir
Thomas’s, when both were lieutenants at the Cape of Good Hope
many years before, made it his business immediately to see Sir
Thomas; and, through his intercession, Sir Thomas very kindly put
our traveller, for the first time, upon the quarter-deck as a
midshipman. The Renommée very soon after left Gibraltar for the
Mediterranean; and, when on the coast of Spain, had occasion to
send boats to attack some enemy’s vessels on shore. Clapperton,
being in one of the boats, was slightly, as he considered it, wounded
in the head, which, however, afterwards gave him much annoyance.
He remained in the Renommée, with Sir Thomas, until she returned
to England, and was paid off, in the year 1808. He then joined his
Majesty’s ship Venerable, Captain King, in the Downs, as a
midshipman, where he did not remain long, having heard that
Captain Briggs was going to the East Indies in the Clorinde frigate,
and wishing to go to that country, he applied for his discharge, that
he might enter with Captain Briggs; but he could not accomplish it
before the Clorinde had sailed from Portsmouth; he was ordered,
however, (by the admiral) to have a passage in a ship going to the
East Indies. In the course of the voyage, they fell in with a ship in
great distress, it then blowing a gale of wind; but humanity required
assistance, if it could be given. A boat was ordered to be got ready,
and Clapperton to go in her. He declared to his messmates his
decided opinion that the boat could not possibly live in the sea that
was then running, but that it was not for him to question the orders of
his superior officer. On pushing off, he told his messmates to share
equally among them any articles belonging to him, and bade them
good bye. The boat had scarcely put off from the ship when she
swamped, and as no assistance could be rendered, all hands
perished, with the exception of two; one of whom was Clapperton,
who, under such trying circumstances, encouraged and assisted his
only surviving companion till his own strength failed him. Among
others, he had previously struggled hard to save a warrant officer;
but finding himself nearly exhausted, he was obliged to desist, and
he perished. They then dropped off, one after the other, until the
bowman and Clapperton were the only two remaining out of the
whole boat’s crew. The latter then made use of a common sea
expression to the bowman, “Thank God, I am not the Jonah!”
meaning that he was not, by his bad conduct in life, the cause of the
Almighty visiting them with his vengeance. The bowman seconded
him in the exclamation, and they kept cheering each other until the
gale so far abated, that another boat was got out and sent to their
relief.
They then proceeded upon their voyage; and in March, 1810,
Clapperton joined his majesty’s ship Clorinde, where he received the
greatest attention from Captain Briggs during the time he was on
board. In 1812, when lying in Bombay harbour, he was joined by
another messmate, the Hon. F. Mackenzie, youngest son of the late
Lord Seaforth, between whom a most sincere friendship was
contracted. Not long after this, Mr. Mackenzie was attacked with a
severe illness, on which occasion Clapperton never left him, but
nursed him as he would his own brother, until he died; when he
added a lock of his hair to his locket, which contained that of his
father and some friends. He returned to England in the end of 1813,
or beginning of 14; and he was then sent, with some other intelligent
midshipmen, to Portsmouth dock-yard, for the purpose of being
instructed in Angelo’s sword exercise, in which he afterwards
excelled. When these midshipmen were distributed to the different
ships in the fleet as drill-masters, Clapperton volunteered his
services for the Canadian lakes, and was sent on board Sir
Alexander Cochrane’s flag ship, the Asia. This ship continued at
Spithead till the end of January, 1814. During the passage to
Bermudas, Clapperton’s services as a drill were performed on the
quarter-deck. On her arrival, he was sent to Halifax, and from thence
to the lakes, just then about to become the scene of warlike
operations. During his passage out and his stay at Bermuda, nothing
could exceed his diligence in the discharge of his duty with the
officers and men. At his own and the other mess-tables, he was the
soul and life of the party: he could sing a good song, tell humorous
tales, and his conversation was extremely amusing. He bade adieu
to all on board the Asia, and pursued his voyage to Halifax; from that
to Upper Canada.
Soon after he arrived on the lakes, in 1815, he was placed in a
situation that strongly marked that benevolence which was so strong
a feature in his character. In the winter he was in command of a
blockhouse on Lake Huron, with a party of men, for the purpose of
defending it: he had only one small gun for its defence; he was
attacked by an American schooner; the blockhouse was soon
demolished by the superiority of the enemy’s fire; and he found that
himself and the party must either become prisoners of war, or form
the resolution of immediately crossing Lake Michigan upon the ice, a
journey of nearly sixty miles, to York, the capital of Upper Canada,
and the nearest British depot. Notwithstanding the difficulty and
danger attending a journey of such length over the ice in the depth of
winter, the alternative was soon adopted, and the party set out to
cross the lake, but had not gone more than ten or twelve miles,
before a boy, one of the party, was unable to proceed from the cold;
every one of the sailors declared that they were unable to carry him,
as they were so benumbed with the cold, and had scarcely strength
sufficient to support themselves. Clapperton’s generous nature could
not bear the idea of a fellow-creature being left to perish under such
appalling circumstances, for a dreadful snow-storm had commenced;
he therefore took the boy upon his back, holding him with his left
hand, and supporting himself from slipping with a staff in his right. In
this manner he continued to go forward for eight or nine miles, when
he perceived that the boy relaxed his hold; and on Clapperton
examining the cause, he found that the boy was in a dying state from
the cold, and he soon after expired. The sufferings of the whole party
were great before they reached York; the stockings and shoes
completely worn off their feet; their bodies in a dreadful state from
the want of nourishment, they having nothing during the journey
except one bag of meal. From the long inaction of Clapperton’s left
hand, in carrying the boy upon his back, he lost, from the effects of
the frost, the first joint of his thumb.
Not long after this, Sir Edward Owen was appointed to the
command upon the lakes. A short time after his arrival, he gave to
Clapperton an acting order as a lieutenant, and appointed him to the
Confiance. While belonging to this ship, he often made excursions
on shore, with his gun, into the woods, for the purpose of getting a
little fresh meat. In these excursions he cultivated an acquaintance
with the aborigines of the forest, and was much charmed with their
mode of life. He had sent to his uncle in England the acting order
which Sir Edward Owen had given him, that it might be laid before
the Board of Admiralty for their confirmation; but, unfortunately, a
very large promotion had taken place a little before his acting order
came to England, and the Board declined confirming his
commission. No sooner was he made acquainted with its ill success,
than he formed the idea of quitting his Majesty’s service altogether,
and becoming one of the inhabitants of the North American forests.
Fortunately for him, he some time afterwards abandoned that idea.
While the Confiance was at anchor near the shores of the Lake,
Clapperton often went on shore to dinner and other parties. When he
thought it time to return on board, he never employed a boat; being
an expert swimmer, he plunged into the water with his clothes on,
and swam along-side of the vessel; but this mode of proceeding very
nearly lost him his life. One night he was so exhausted, that he could
scarcely make the people on board hear his cries: they got a boat
ready, and, as he was on the point of sinking, they picked him up,
and took him on board; but he never tried the same method of
getting on board again.
About the end of 1816, Sir Edward Owen returned to England,
and was the means of Clapperton’s commission being confirmed by
the Board of Admiralty. And in the year 1817, when our vessels on
the Canadian lakes were paid off and laid up, Lieutenant Clapperton
returned to England, and, like many more, was put on half-pay. He
went then to Edinburgh, where he remained a short time, and was
introduced to the amiable mother of his beloved friend, Mr.
Mackenzie, who died at Bombay. He afterwards retired to
Lochmaben in 1818, and lived with an aged sister of his beloved
mother’s, at the abode for many years of his grandfather. Here he
continued to amuse himself with rural sports until 1820, when he
went to Edinburgh, and there became acquainted with Dr. Oudney,
who mentioned to him the offer that had been made to employ him in
a mission to the interior of Africa. This was an opening, to
Clapperton’s enterprising mind, not to be resisted; he immediately
entreated that he might accompany the doctor, and his offer was
accepted. Dr. Oudney was told by a friend that knew Lieutenant
Clapperton well, that, in all varieties, and under every circumstance,
however trying, he would find him a steady and faithful friend, and
that his powerful and athletic form, and excellent constitution, had
never been surpassed. This person was a medical man, and was so
confirmed in the opinion that Clapperton, from the strength of his
constitution, could not fall a sacrifice to disease, that, until the arrival
of Clapperton’s servant, Richard Lander, from his last and fatal
expedition, he would not (like many more who knew Clapperton)
believe the report of his death in any way but by accident.
In the highest spirits, Lieutenant Clapperton left Edinburgh, where
he had been for a short time with his sister and other relations.
Before his departure, he was introduced by Lady Seaforth (the
mother of his friend Mackenzie) to a distinguished countryman, the
author of the Man of Feeling. Clapperton’s spirits were elated, and
he left Edinburgh and his relations with the highest hopes. He
returned to England, and was made a commander in June 22, 1825;
and before he could finish for the press an account of his former
journey, he was engaged again, by Lord Bathurst, for a second
mission, by the way of the western coast of Africa, near the Bight of
Benin. He sailed from Portsmouth in his Majesty’s sloop Brazen,
commanded by Captain Willis; and was accompanied by Doctor
Dickson, Captain Pearce, and Doctor Morrison. They called at Sierra
Leone; from that to Benin, where they landed; but Dr. Dickson
landed near Whida, and proceeded by the way of Dahomy. Captains
Clapperton, Pearce, and Dr. Morrison, pushed their way up the
country; but they were soon attacked with disease, and Captain
Pearce and Doctor Morrison died, as did also Columbus, the former
servant of Lieut.-Col. Denham. Captain Clapperton and his servant,
Richard Lander, accompanied by Mr. Houtson, a British resident at
Benin, proceeded across the mountains to Katunga, where Mr.
Houtson left them to return to the coast, where he shortly afterwards
died. Dr. Dickson reached Dahomey, and proceeded on his way to
join Clapperton, but has not since been heard of. Captain
Clapperton, with his servant, Lander, and a native black of Houssa,
reached Soccatoo in safety, where they remained many months; but
at last the captain was seized with a fever and dysentery, which
terminated his existence, and was buried, by his faithful servant, four
miles south-east of Soccatoo, at a village called Chungary, April 13,
1827.
Thus perished, in the bloom of life, an officer beloved and
respected by those of his profession who were acquainted with him;
a man of a daring and enterprising spirit; and one who, for humanity
and active benevolence, could be surpassed by none.
INTRODUCTION.
When the late Captain Clapperton made his way to Soccatoo for
the first time, in the year 1824, he received the most flattering
attentions, and every mark of kindness, from Bello, the sultan of the
Fellans, as they call themselves, or Fellatas, as they are called by
the people of Soudan. This chieftain may be said to rule over almost
the whole of that part of North Africa which is distinguished by the
name of Houssa, though he appears to have lost a considerable
portion of what his father, Hatman Danfodio, first overran; and many
of the petty chiefs still continue in a state of rebellion, some of them
within a day’s journey of his capital. In the course of frequent
conversations held with this chief, at his usual residence of
Soccatoo, Clapperton was given to understand, that the
establishment of a friendly intercourse with England would be most
agreeable to him; that he wished particularly for certain articles of
English manufacture to be sent out to him to the sea-coast, where
there was a place of great commerce belonging to him, named
Funda: he also expressed a wish that an English physician and a
consul should be appointed to reside at another sea-port, called
Raka; to the former of which places, he said, he would despatch
messengers to bring up the articles from England; and to the latter
he would send down a proper person to transact all matters of
business between the two governments, through the intervention of
the English consul; and he made no difficulty in declaring his
readiness to adopt measures for putting an entire stop to that part of
the slave-trade supposed to be carried on by his subjects with
foreigners.
On the arrival of Clapperton in England, Lord Bathurst, then
secretary of state for the colonies, considering this so favourable an
opportunity of establishing an intercourse with the interior of Africa,
and probably of putting an effectual check, through this powerful
chief, to a large portion of the infamous traffic carried on in the Bight
of Benin, and also for extending the legitimate commerce of Great
Britain with this part of Africa, and at the same time adding to our
knowledge of the country, did not hesitate in adopting the
arrangement which Clapperton had made with Bello. Accordingly it
was determined to send him out again to that chief, by the way of
Benin, with suitable companions and presents, in order that a
communication might be opened between Soccatoo and the sea-
coast, and an attempt made to carry into effect the objects to which
Bello was supposed to have given his hearty assent.
It had been arranged that, after a certain period agreed upon,
Bello should send down his messengers to Whidah, on the coast, to
meet Captain Clapperton and his companions. On their arrival,
however, in the Bight of Benin, they could neither gain any
intelligence of Bello’s messengers, nor did any of the people there
know any thing of such names as Funda or Raka, the places which
were pointed out by Bello as lying on the sea-coast. The country of
Houssa, however, was well known by name, and as the precise
geographical position of Soccatoo had been ascertained, our
enterprising travellers could have no difficulty in knowing what
direction to take; but the spot from whence it would be most
advisable to start was a point not so easily to be determined. They
finally, however, selected Badagry, for reasons that will be briefly
stated; and proceeding northerly, from one chief to another, the
survivors met with some delay, but no serious impediments, in
reaching the spot of their destination.
The conduct, however, of Bello, though at first kind, was
afterwards changed to every thing the reverse, for reasons which will
appear in the course of the journal. His desire for establishing an
amicable intercourse was not even hinted at, nor one word
respecting the physician, the consul, or the slave-trade; and, either
through ignorance or design (the former, in all probability), Bello had
totally misled Clapperton as to the position of the city or district of
Funda; which, instead of being on the sea-coast, as stated by him, is
now ascertained to be at least 150 miles from the nearest part of the
coast; and the other city, Raka, still farther in the interior. Indeed, one
would almost suspect that Clapperton, from not being sufficiently
acquainted with the Fellata language, must have mistaken the
meaning of Bello on his former visit, had not the letter in Arabic,
which he brought home from the latter, addressed to the king of
England, borne him out in his representation of the proposals made
or assented to by this chieftain. In this letter he says, “We agreed
with him upon this (the prohibition of the exportation of slaves), on
account of the good which will result from it, both to you and to us;
and that a vessel of yours is to come to the harbour of Raka, with
two cannons, and the quantities of powder, shot, &c. which they
require, as also a number of muskets: we will then send our officer to
arrange and settle every thing with your consul, and fix a certain
period for the arrival of your merchant ships; and when they come,
they may traffic and deal with our merchants. Then, after their return,
the consul may reside in that harbour (namely, Raka) as protector, in
company with our agent there, if God be pleased.”
It is clear, from this letter, that Bello understood what was
proposed and accepted, but, with regard to the geographical position
of his two sea-ports, he was evidently most grossly ignorant; for,
admitting the ambiguity of the Arabic word bahr, which signifies any
great collection of water, whether sea, lake, or river, merchant ships
could not get up to Raka, which is an inland town, not situated on
any coast or river. Be this as it may, an expedition, as already stated,
was planned without loss of time, at the head of which Clapperton
was placed. He was allowed to take with him, as a companion, a
fellow-countryman of the name of Dickson, who had been brought up
as a surgeon, in which capacity he had served in the West Indies,
but had recently been studying the law. This person considered
himself to be inured to a tropical climate, and was supposed to have
a sufficient knowledge of medicine to take care of himself and the
rest of the party.
In an enterprise of this novel and hazardous nature, it was
deemed advisable to unite two other gentlemen to those above-
mentioned; in order that, when once at Soccatoo, two of them might
be spared to set out from thence, and explore the country of Soudan
in various directions. For this purpose, Captain Pearce of the navy,
and Dr. Morrison, a naval surgeon, were selected; the former an
active and accomplished officer, and a most excellent draughtsman;
the latter well versed in various branches of natural history.
Unhappily, it was not their good fortune to live long enough to put
their respective talents in practice for the benefit of the public, or the
gratification of their friends; having each of them, on the same day,
fallen a sacrifice to the pestilential climate, at a very early period of
their journey in Africa.
The presents intended for the Sultan of the Fellatas, and also for
the Sheik of Bornou, being all ready, the four gentlemen, with their
servants, embarked in his majesty’s ship Brazen on the 27th August,
1825, and, after touching at Teneriffe and St. Jago, arrived in the
Bight of Benin on the 26th November, 1825. Mr. Dickson being
desirous of making his way alone to Soccatoo, for what reason it
does not appear, was landed at Whidah, where a Portuguese
gentleman, of the name of De Sousa, offered to accompany him as
far as Dahomey, where he had resided for some time in the employ
of the king. The offer was accepted, and Dickson, taking with him a
mulatto of the name of Columbus, who had been a servant to
Lieutenant-Colonel Denham on the former expedition to Bornou,
departed on the 26th November, arrived safe at Dahomey, where he
was well received, and sent forward to a place called Shar,
seventeen days’ from Dahomey, under a suitable escort, where he
also arrived safely, and had an escort given him from thence on his
intended journey to Youri, since which no account of him whatever
has been received. By some Dahomey messengers, which
Clapperton met with at Wawa, he sent a letter to Dickson; but it is
evident they did not fall in with him, as the letter was some months
afterwards sent down to the coast. It may here be observed, that
though Whidah was the port to which Bello was ultimately
understood to say he would despatch his messengers to convey the
travellers, and their presents and baggage, to Soccatoo, it did not
appear that any inquiries had been made there respecting them; nor
did any person there seem to know more about Bello or Soccatoo,
than was known, further on, of Funda or Raka.

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Fundamentals of Corporate Finance 2e

Australia by Jonathon Berk

DETAILED CONTENTS vii

viii DETAILED CONTENTS

value a project ............................................................. 403

xii DETAILED CONTENTS

• COMMON MISTAKE: Confusing shareholders’ Costs of holding inventory ............................................... 599

financing ..................................................................... 558 19.6 Cash management .................................................. 600

18.3 Forecasting a planned expansion ............................ 561 Alternative investments.................................................... 601

KMS Designs’ expansion: Financing needs ....................... 561 MyFinanceLab.................................................................. 602

Forecasting the balance sheet .......................................... 564 Problems ......................................................................... 603

DETAILED CONTENTS xiii

xiv DETAILED CONTENTS

xviii GUIDED TOUR: FOR STUDENTS

as purchasing a new car or house, and saving for retirement.

world, impacting business problems and

calculations—in the classroom and in the field.

Past research and development expenditures. A pharmaceutical company may

Adjusting free cash flow

FUNDAMENTALS OF CAPITAL BUDGETING CHAPTER 9 275

GUIDED TOUR: FOR STUDENTS xix

1 value a series of many cash flows; Cn cash flow that arrives

4.1 VALUING A STREAM OF CASH FLOWS

Numbered and labelled equations. The first stream of cash

time a full equation is given in notation form

it is numbered. Key equations are titled and

FVn = C  (1 + r)n (4.1)

revisited in the summary and in end papers. Eq. 3.2 of Chapter 3.

are emphasised as the important first step in $1000 $1000 $1000 ?

solving every problem that involves cash flow.

Using Excel boxes describe

• Evaluate USING EXCEL

xx GUIDED TOUR: FOR STUDENTS

9.3 DETERMINING INCREMENTAL FREE CASH FLOW

End-of-chapter problems offer first-rate

INTEREST RATES CHAPTER 5 151

integrated homework and tutorial system.

Data Cases present in-depth DATA CASE4

with questions designed to

guide students’ analysis. capital management?

Integrative Cases occur at

present a capstone extended

scenario and data for you to

THE COST OF CAPITAL CHAPTER 13 417

WORKING CAPITAL MANAGEMENT CHAPTER 19 607

GUIDED TOUR: FOR STUDENTS xxi

xxii GUIDED TOUR: FOR EDUCATORS

Provides a clear focus on the distinction

PART 6 CAPITAL STRUCTURE AND VALUATION

PART 7 FINANCIAL PLANNING

PART 8 SPECIAL TOPICS

GUIDED TOUR: FOR EDUCATORS xxiii

xxiv MYFINANCELAB: A GUIDED TOUR FOR STUDENTS AND EDUCATORS

Title: Journal of a second expedition into the interior of Africa, from

Author: Hugh Clapperton

Contributor: Sir John Barrow

Release date: October 26, 2023 [eBook #71961]

FVn = C (1 + r)n (4.1)