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CORPORATE
FINANCE
EIGHTH CANADIAN EDITION
Stephen A. Ross
Sloan School of Management, Massachusetts Institute of Technology
Randolph W. Westerfield
Marshall School of Business, University of Southern California
Jeffrey F. Jaffe
Wharton School of Business, University of Pennsylvania
Gordon S. Roberts
Schulich School of Business, York University
Hamdi Driss
Sobey School of Business, St. Mary’s University
Corporate Finance
Eighth Canadian Edition
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A B OU T T H E AUT HO R S
STEPHEN A. ROSS Sloan School of Management, trading, where he showed both that corporate insiders earn
Massachusetts Institute of Technology. Stephen Ross is the abnormal profits from their trades and that regulation has
Franco Modigliani Professor of Financial Economics at the little effect on these profits. He has also made contributions
Sloan School of Management, Massachusetts Institute of concerning initial public offerings, regulation of utilities, the
Technology. One of the most widely published authors in behaviour of marketmakers, the fluctuation of gold prices, the
finance and economics, Professor Ross is recognized for his theoretical effect of inflation on the interest rate, the empiri-
work in developing the arbitrage pricing theory, as well as for cal effect of inflation on capital asset prices, the relationship
having made substantial contributions to the discipline through between small capitalization stocks and the January effect,
his research in signalling, agency theory, option pricing, and the and the capital structure decision.
theory of the term structure of interest rates, among other top-
ics. A past president of the American Finance Association, he GORDON S. ROBERTS Schulich School of Business,
currently serves as an associate editor of several academic and York University. Gordon Roberts was a Canadian Imperial
practitioner journals. He is a trustee of CalTech and a director Bank of Commerce Professor of Financial Services at the
of the College Retirement Equity Fund (CREF), Freddie Mac, Schulich School of Business, York University. A winner of
and Algorithmics Inc. He is also the co-chairman of Roll and numerous teaching awards, his extensive experience included
Ross Asset Management Corporation. finance classes for undergraduate and MBA students, execu-
tives, and bankers in Canada and internationally. Professor
RANDOLPH W. WESTERFIELD Marshall School of Roberts conducted research in corporate finance and bank-
Business, University of Southern California. Randolph W. ing. He served on the editorial boards of several Canadian
Westerfield is Dean of the University of Southern California’s and international academic journals. Professor Roberts was
Marshall School of Business and holder of the Robert R. a consultant to a number of regulatory bodies responsible
Dockson Dean’s Chair of Business Administration. for the oversight of financial institutions and utilities.
He came to USC from the Wharton School, University Gordon Roberts passed away in March 2017 and his many
of Pennsylvania, where he was the chairman of the finance contributions to education and finance will be missed.
department and a member of the finance faculty for 20 years.
He is a member of several public company boards of direc- HAMDI DRISS Sobey School of Business, Saint Mary’s
tors, including Health Management Associates Inc., William University. Hamdi Driss is an Assistant Professor of Finance
Lyon Homes, and the Nicholas Applegate growth fund. at the Sobey School of Business, Saint Mary’s University.
His areas of expertise include corporate financial policy, His experience includes teaching corporate finance for
investment management, and stock market price behaviour. undergraduate and Master of Finance students. A holder of
several research grants, Professor Driss conducts research on
JEFFREY F. JAFFE Wharton School of Business, corporate finance and financial intermediation. Notably, he
University of Pennsylvania. Jeffrey F. Jaffe has been a fre- has made contributions to research on the certification func-
quent contributor to finance and economic literature in such tion of credit rating agencies and the quality of credit rat-
journals as the Quarterly Economic Journal, The Journal of ings under competition. His recent work was published in the
Finance, The Journal of Financial and Quantitative Analysis, Journal of Corporate Finance. Professor Driss has served as
The Journal of Financial Economics, and The Financial a referee for several Canadian and international academic
Analysts Journal. His best-known work concerns insider journals.
IN ME M O R IA M
We at McGraw-Hill Education Canada lost one of our most esteemed authors with the passing of
Gordon S. Roberts in March of 2017. Gordon was a professor emeritus of finance at the Schulich
School of Business at York University and a McGraw-Hill author for many years.
Gordon S. Roberts will be remembered as an extremely creative and thoughtful scholar with
a rigorous approach to questions of great importance. His contributions to the field of finance are
unquestioned and are reflected in his outstanding international reputation, research contributions,
and many awards and honours. In particular, Gordon will be remembered for making significant
contributions to the current textbook. His expertise and rigorous approach were key to making this
textbook exciting, accurate, fair, well-paced, and immediately useful.
Prior to development work on this eighth Canadian edition text, our very own portfolio manager,
Alwynn Pinard, had the pleasure of working closely with Gordon. Of him she says, “Gordon’s profes-
sionalism, adherence to deadlines and commitment to quality were all attributes that endeared him to
us here at McGraw-Hill Education and created the Canadian resource you are reading, today. Thank
you, Gordon. We will miss your dedication to your work and your students and perhaps most of all,
your warmth and wit.”
On behalf of the entire staff at McGraw-Hill Education who had the pleasure of working with
Gordon personally, or the pleasure of working on all the legacy projects he helped to build, we offer
our deepest sympathies to Gordon’s wife, Sonita, and his family. Gordon’s contributions to learning
will be treasured and never forgotten.
BRIEF CONTE N TS
PA RT 1 17 Capital Structure: Limits to the Use of Debt 459

Appendix 17A Some Useful Formulas of Financial
Overview 1
Structure (Available on Connect)
1 Introduction to Corporate Finance 1 Appendix 17B The Miller Model and the Graduated
Appendix 1A Taxes 25 Income Tax (Available on Connect)
Appendix 1B Finance Professional Careers 18 Valuation and Capital Budgeting for the
(Available on Connect) Levered Firm 493
2 Accounting Statements and Cash Flow 30 Appendix 18A The Adjusted Present Value Approach
Appendix 2A Financial Statement Analysis 46 to Valuing Leveraged Buyouts (Available on Connect)
Appendix 2B Statement of Cash Flows 56 19 Dividends and Other Payouts 512
3 Financial Planning and Growth 60
PA RT 5
PA RT 2 Long-Term Financing 545
Value and Capital Budgeting 78 20 Issuing Equity Securities to the Public 545
4 Financial Markets and Net Present Value: 21 Long-Term Debt 569
First Principles of Finance 78 22 Leasing 592
5 The Time Value of Money 96
Appendix 22A Adjusted Present Value Approach
Appendix 5A Using Financial Calculators to Leasing (Available on Connect)
(Available on Connect)
6 How to Value Bonds and Stocks 136
PA RT 6
Appendix 6A The Term Structure of Interest Rates 166
7 Net Present Value and Other Investment Rules 176 Options, Futures, and Corporate Finance 617
8 Net Present Value and Capital Budgeting 206 23 Options and Corporate Finance: Basic Concepts 617
Appendix 8A Capital Cost Allowance 235 24 Options and Corporate Finance: Extensions and
Appendix 8B Derivation of the Present Value of Applications 655
the Capital Cost Allowance Tax Shield Formula 240 25 Warrants and Convertibles 676
9 Risk Analysis, Real Options, and Capital Budgeting 242 26 Derivatives and Hedging Risk 695
PA RT 3 PA RT 7
Risk 267 Financial Planning and Short-Term Finance 724
10 Risk and Return: Lessons From Market History 267 27 Short-Term Finance and Planning 724
Appendix 10A The U.S. Equity Risk Premium: 28 Cash Management 751
Historical and International Perspectives
(Available on Connect) 29 Credit Management 768
11 Risk and Return: The Capital Asset Pricing Model 290 Appendix 29A Inventory Management
Appendix 11A Is Beta Dead? (Available on Connect)
12 An Alternative View of Risk and Return:
The Arbitrage Pricing Theory 328 PA RT 8
13 Risk, Return, and Capital Budgeting 348 Special Topics 786
Appendix 13A Economic Value Added and
30 Mergers and Acquisitions 786
the Measurement of Financial Performance 379
31 Financial Distress 821
PA RT 4 Appendix 31A Predicting Corporate Bankruptcy:
The Z-Score Model (Available on Connect)
Capital Structure and Dividend Policy 383 32 International Corporate Finance 835
14 Corporate Financing Decisions and Efficient Appendix A: Mathematical Tables
Capital Markets 383 (Available on Connect)
15 Long-Term Financing: An Introduction 414 Appendix B: Answers to Selected End-of-Chapter
16 Capital Structure: Basic Concepts 430 Problems (Available on Connect)
CON T ENTS
Pr ef ace xviii CHAPTER 2

PA RT 1 Accounting Statements and Cash Flow 30
Overview 1 Executive Summary 30
2.1 T H E S TAT E ME N T OF FI N AN C I AL
CHAPTER 1 P OS I T I ON 30
Liquidity 31
Introduction to Corporate Finance 1 Debt Versus Equity 31
Value Versus Cost 32
Executive Summary 1
Concept Questions 32
1.1 W H AT IS C OR P OR ATE F IN A NC E ? 2
2.2 S TAT E ME N T OF C OMP RE H E N S IVE
The Balance-Sheet Model of the Firm 2
I N C OME 32
Capital Structure 3
International Financial Reporting Standards 33
The Financial Manager 3
Non-Cash Items 34
Identification of Cash Flows 5
Time and Costs 34
Timing of Cash Flows 6
Risk of Cash Flows 7
2.3 N E T WORKI N G CAP I TAL 35
Concept Questions 7
1.2 C ORPO R ATE S EC UR I TI ES A S
C ON TIN GE NT C LA I MS ON TOTA L 2.4 FI N AN C I AL CAS H FLOW 35
F IRM VA LUE 7 Concept Questions 38
Concept Questions 8 2.5 S U MMARY AN D C ON C L U S I ON S 38
1.3 B U S IN E SS O RG A NI Z AT IO N FOR MS 8 Minicase: Cash Flows at Eshopwise Ltd. 44
The Sole Proprietorship 9 Appendix 2A Financial Statement Analysis 46
The Partnership 9 Appendix 2B Statement of Cash Flows 56
The Corporation 10
The Income Trust 11 CHAPTER 3
1.4 GOA LS O F T HE C OR P OR ATE F I R M 11 Financial Planning and Growth 60
Agency Costs and the Set-of-Contracts Executive Summary 60
Viewpoint 12 3.1 W H AT I S FI N AN C I AL P L AN N I N G? 60
Managerial Goals 12 Concept Questions 61
Separation of Ownership and Control 13
3.2 A FI N AN C I AL P L AN N I N G MODE L :
In Their Own Words: B. Espen Eckbo
T H E I N G RE DI E N T S 61
on corporate governance 14
Concept Questions 16 3.3 T H E P E RC E N TAG E OF S AL E S
ME T H OD 62
1.5 F IN A N C IA L IN ST IT UT IO NS, The Statement of Comprehensive Income 64
F IN A N C IA L MA R KE TS, A ND
TH E C O R PO R ATI ON 16 The Statement of Financial Position 65
Financial Institutions 16 Concept Questions 67
Money Versus Capital Markets 18 3.4 W H AT DE T E RMI N E S G ROW T H ? 67
Primary Versus Secondary Markets 18 Concept Questions 71
Listing 19 Some Caveats on Financial Planning Models 71
Foreign Exchange Market 20 In Their Own Words: Robert C. Higgins on
Concept Questions 20 sustainable growth 71
1.6 TR E N D S IN F IN A NC IA L MA R K E T S 3.5 S U MMARY AN D C ON C L U S I ON S 72
A N D MA N AGE MEN T 21 Minicase: Ratios and Financial Planning
In Their Own Words: Maria Strömqvist at East Coast Yachts 76
on hedge funds and the financial crisis
of 2008 22 PA RT 2
Concept Question 22 Value and Capital Budgeting 78
1.7 OU TLIN E O F T HE T EX T 22
1.8 SU M MA RY A ND C ON CL US IO N S 24 CHAPTER 4
Appendix 1A Taxes 25
Appendix 1B Finance Professional Careers Financial Markets and Net Present Value:
(Available on Connect) First Principles of Finance 78
Contents vii
Executive Summary 78 CHAPTER 6

4.1 THE FIN A NC IA L MA R K E T
E C O N OMY 79 How to Value Bonds and Stocks 136
The Anonymous Market 79
Executive Summary 136
Market Clearing 80
Concept Questions 80 6.1 DE FI N I T I ON AN D E X AMP L E O F
A B ON D 13 6
4.2 MA K I NG C ON SU MPT IO N C H OI C E S
OV ER TI ME 81 6.2 H OW TO VAL U E B ON DS 13 6
Concept Questions 82 Pure Discount Bonds 136
Level-Coupon Bonds 137
4.3 THE CO MPE TI TI V E MA R KE T 83
Consols 139
How Many Interest Rates Are There in a
Competitive Market? 84
Concept Questions 84 6.3 B ON D C ON C E P T S 140
Interest Rates and Bond Prices 140
4.4 THE BA S IC P R IN CI PL E 84
Yield to Maturity 141
Concept Question 84
Current Yield 141
4.5 PR ACT IS IN G TH E PR I N C I P L E 85
Holding-Period Return 141
A Lending Example 85
The Present Value Formulas for Bonds 141
A Borrowing Example 86
6.4 T H E P RE S E N T VAL U E OF C O M MO N
4.6 ILLU ST R AT IN G TH E IN V E S T ME N T S TOC KS 142
D E CI SI ON 87
Dividends Versus Capital Gains 142
Valuation of Different Types of Stocks 143
4.7 C O R PO R AT E IN V ES TME N T
6.5 E S T I MAT E S OF PARAME T E RS I N THE
D E CI SI ON MA K IN G 90
DI VI DE N D DI S C OU N T MO DE L 146
Concept Question 92
Where Does g Come From? 146
4.8 SUM MA RY A N D CO NC L U S I ON S 93 Where Does r Come From? 147
A Healthy Sense of Skepticism 148
CHAPTER 5 6.6 G ROW T H OP P ORT U N I T I ES 148
The Time Value of Money 96 NPVGOs of Real Companies 149
Growth in Earnings and Dividends
Executive Summary 96 Versus Growth Opportunities 151
5.1 THE ON E- PE R IO D CA SE 96 Dividends or Earnings: Which to Discount? 151
Concept Questions 99 The No-Dividend Firm 151
5.2 THE MULT IP ER I OD CA S E 99 6.7 T H E DI VI DE N D G ROW T H M O DE L AND
Future Value and Compounding 99 T H E N PVG O MODE L ( ADVAN C E D) 152
The Power of Compounding: The Dividend Growth Model 152
A Digression 103 The NPVGO Model 152
Present Value and Discounting 103 Summary 154
Finding the Number of Periods 107 6.8 C OMPARAB L E S 154
The Algebraic Formula 108 Price–Earnings Ratio 154
Concept Questions 108 Concept Questions 155
5.3 C O M PO UN DI NG P ER I OD S 108 6.9 VAL U I N G T H E E N T I RE FIRM 155
Compounding Over Many Years 110 6.10 S TOC K MARKE T RE P ORTI N G 157
Continuous Compounding (Advanced) 111 6.11 S U MMARY AN D C ON C L U SI O N S 157
Concept Questions 113 Minicase: Stock Valuation at Ragan Engines 165
5.4 SIMPL IF ICATI ON S 113 Appendix 6A The Term Structure of Interest Rates 166
Perpetuity 113 Concept Question 168
Growing Perpetuity 114
Annuity 116
Mortgages 118 CHAPTER 7
Using Annuity Formulas 119
Net Present Value and Other Investment Rules 176
Growing Annuity 122
Concept Questions 123 Executive Summary 176
5.5 WHAT I S A F IR M WORT H ? 1 23 7.1 W H Y U S E N E T P RE S E N T VAL UE ? 176
5.6 SUM MA RY A N D CO NC L U S I ON S 1 24 Concept Questions 178
Minicase: The MBA Decision 135 7.2 T H E PAY BAC K P E RI OD RUL E 178
Appendix 5A Using Financial Calculators Defining the Rule 178
(Available on Connect) Problems With the Payback Method 179
viii Contents
Managerial Perspective 179 The Tax Shield Approach 218

Summary of Payback 180 Conclusion 218
Concept Questions 180 8.5 AP P LY I N G T H E TAX S H I E L D
7.3 TH E D ISC O UN TE D PAY BAC K AP P ROAC H TO T H E MAJ E S T I C
PE R IO D RU LE 1 80 MU LC H AN D C OMP OS T
7.4 TH E AV E R AG E AC CO UN TI NG C OMPAN Y P ROJ E CT 218
R E TUR N 1 81 Present Value of the Tax Shield on Capital
Defining the Rule 181 Cost Allowance 219
Analyzing the Average Accounting Total Project Cash Flow Versus Tax Shield
Return Method 182 Approach 220
7.5 TH E IN TE RN A L R AT E OF R E TU R N 1 83 8.6 I N VE S T ME N T S OF U N E Q UAL L I VE S:
T H E E Q U I VAL E N T AN N UAL C OST
Concept Question 185
ME T H OD 221
7.6 PRO B LE MS W IT H TH E IN TE R N A L The General Decision to Replace (Advanced) 222
R ATE O F R E TU R N A PP ROACH 1 85
Definition of Independent and Mutually
Exclusive Projects 185 8.7 S U MMARY AN D C ON C L U S I ON S 226
Two General Problems Affecting Both Minicase: Beaver Mining Company 233
Independent and Mutually Exclusive Projects 186 Minicase: Goodweek Tires Inc. 234
Problems Specific to Mutually Exclusive Appendix 8A Capital Cost Allowance 235
Projects 189 Appendix 8B Derivation of the Present Value of
Redeeming Qualities of the Internal the Capital Cost Allowance Tax Shield Formula 240
Rate of Return 193
A Test 194 CHAPTER 9
7.7 TH E PRO FITA B I LI TY IN DE X 1 94 Risk Analysis, Real Options, and Capital Budgeting 242
7.8 TH E PR ACTI CE O F CA P ITA L 9.1 DE C I S I ON T RE E S 242
B U DGE TIN G 196 Concept Questions 244
7.9 SU M MA RY A ND C ON CL US IO N S 1 97 9.2 S E N S I T I VI T Y AN ALYS I S,
Minicase: BC Copper Mining 205 S C E N ARI O AN ALYS I S, AN D
B RE AK-E VE N AN ALYS I S 244
CHAPTER 8 Sensitivity Analysis and Scenario Analysis 244
Break-Even Analysis 247
Net Present Value and Capital Budgeting 206
Executive Summary 206 Break-Even Analysis, Equivalent Annual
8.1 IN C R E ME N TA L CA SH F LOW S 20 6 Cost, and Capital Cost Allowance 250
Cash Flows—Not Accounting Income 206 9.3 MON T E CARLO S I MU L AT I ON 2 50
Sunk Costs 207 Step 1: Specify the Basic Model 251
Opportunity Costs 207 Step 2: Specify a Distribution for Each
Side Effects 207 Variable in the Model 251
Allocated Costs 208 Step 3: The Computer Draws One Outcome 253
Concept Questions 208 Step 4: Repeat the Procedure 253
8.2 TH E MA JE S TI C MULCH A N D Step 5: Calculate Net Present Value 254
C OM PO ST C OMPA N Y : 9.4 RE AL OP T I ON S 2 54
A N E X A MPLE 20 8 The Option to Expand 255
An Analysis of the Project 210 The Option to Abandon 256
Which Set of Books? 211 Timing Options 258
A Note on Net Working Capital 212 Real Options in the Real World 259
Interest Expense 212 Concept Questions 260
Concept Questions 213 9.5 S U MMARY AN D C ON C L U S I ON S 2 60
8.3 IN FLATIO N A N D CA PI TA L Minicase: Bunyan Lumber, LLC 265
B U DGE TIN G 21 3
Interest Rates and Inflation 213 PA RT 3
Cash Flow and Inflation 214
Discounting: Nominal or Real? 215
RISK 267
8.4 A LTE R N ATI V E DE FIN IT IO NS O F CHAPTER 10
OPE R ATIN G CA S H FLOW 21 7
Risk and Return: Lessons From Market History 267
The Bottom-Up Approach 217
The Top-Down Approach 218 Executive Summary 267
Contents ix
10.1 R E TUR N S 268 11.6 DI VE RS I FI CAT I ON : AN E X AM P L E 3 06

Dollar Earnings 268 Risk and the Sensible Investor 309
Percentage Returns or Rate of Return 269 Concept Questions 309
Concept Questions 271 11.7 RI S K-FRE E B ORROW I N G
10.2 HO LD IN G- PE R IO D R ET U R N S 27 1 AN D L E N DI N G 3 09
Concept Questions 275 The Optimal Portfolio 311
10.3 R E TUR N S TAT IS TI CS 27 5 Concept Questions 312
Concept Question 276 11.8 MARKE T E Q U I L I B RI U M 3 13
10.4 AV E R AGE S TO CK R E TU R N S Definition of the Market Equilibrium Portfolio 313
A N D R I SK-F R EE R E TU R N S 27 6 Definition of Risk When Investors Hold
Concept Questions 278 the Market Portfolio 313
10.5 R ISK STATI ST IC S 27 8 The Formula for Beta 315
Variance and Standard Deviation 279 A Test 316
Normal Distribution and Its Implications Concept Questions 316
for Standard Deviation 279 11.9 RE L AT I ON S H I P B E T W E E N
Value at Risk 280 RI S K AN D E X P E CT E D RE TURN
Further Perspective on Returns and Risk 281 ( CAP I TAL AS S E T P RI C I NG M O DEL) 3 16
Concept Questions 281 Expected Return on Market 316
Expected Return on Individual Security 317
10.6 MO RE O N AV E R AGE R E T U R N S 282
Arithmetic Versus Geometric Averages 282
Calculating Geometric Average Returns 282 11.10 S U MMARY AN D C ON C L U SI O N S 320
Arithmetic Average Return or Geometric Minicase: A Job at Deck Out My Yacht,
Average Return? 283 Part 2 327
Concept Question 284 Appendix 11A Is Beta Dead? (Available on Connect)
10.7 200 8: A Y E A R O F F IN A N C I A L
C R ISI S 284 CHAPTER 12
10.8 SUM MA RY A N D CO NC L U S I ON S 285 An Alternative View of Risk and Return:
Minicase: A Job at Deck Out My Yacht
The Arbitrage Pricing Theory 328
Corporation 287
Appendix 10A The U.S. Equity Risk Premium: Executive Summary 328
Historical and International Perspectives 12.1 FACTOR MODE L S :
(Available on Connect) AN N OU N C E ME N T S, S U RP RI SE S,
AN D E X P E CT E D RE T U RNS 328
CHAPTER 11 12.2 RI S K: SYS T E MAT I C AN D
U N SYS T E MAT I C 330
Risk and Return: The Capital Asset
Pricing Model 290
12.3 SYS T E MAT I C RI S K AN D BE TAS 331
Executive Summary 290 Concept Questions 333
11.1 IN D I V ID UA L SE CU R IT IE S 290 12.4 P ORT FOL I OS AN D FACTOR
11.2 E X PECTE D R ET UR N , VA R I A N C E , MODE L S 333
A N D C OVA R I A NC E 291 Portfolios and Diversification 335
Expected Return and Variance 291 Concept Questions 337
Covariance and Correlation 293 12.5 B E TAS AN D E X P E CT E D RE TURNS 337
Concept Questions 295 The Linear Relationship 337
11.3 THE R IS K A ND R E TU R N FOR The Market Portfolio and the Single Factor 338
PO RT FOL IO S 296 Concept Question 339
The Example of Supertech and Slowpoke 296 12.6 T H E CAP I TAL AS S E T P RIC I N G
The Expected Return on a Portfolio 296 MODE L AN D T H E ARB I T RAG E
Variance and Standard Deviation of a P RI C I N G T H E ORY 339
Portfolio 297 Differences in Pedagogy 339
Concept Questions 300 Differences in Application 339
11.4 THE EF FIC IE NT S ET F OR T WO Concept Questions 340
A SS ET S 30 0 12.7 PARAME T RI C AP P ROAC H E S TO
Application to International Diversification 303 AS S E T P RI C I N G 3 41
Concept Questions 303 Empirical Models 341
11.5 THE EF FIC IE NT S ET F OR MA N Y Style Portfolios 342
SE CU R IT IE S 30 4 Concept Questions 342
Variance and Standard Deviation in a 12.8 S U MMARY AN D C ON C L U SI O N S 3 42
Portfolio of Many Assets 305 Minicase: The Fama–French Multifactor
Concept Questions 306 Model and Mutual Fund Returns 346
x Contents
CHAPTER 13 14.1 CAN FI N AN C I N G DE C I S I ON S

C RE AT E VAL U E ? 383
Risk, Return, and Capital Budgeting 348 Concept Question 385
14.2 A DE S C RI P T I ON OF E FFI C I E N T
CAP I TAL MARKE T S 385
13.1 TH E C O ST OF E QU IT Y CA P ITA L 349 Foundations of Market Efficiency 387
13.2 E STIMATIO N OF B E TA 351 14.3 T H E DI FFE RE N T T Y P E S OF
Concept Question 353 E FFI C I E N CY 388
Beta Estimation in Practice 353 The Weak Form 388
Stability of Beta 354 The Semistrong and Strong Forms 388
Using an Industry Beta 354 Some Common Misconceptions About the
Concept Questions 355 Efficient Market Hypothesis 390
13.3 D E TE R MIN A NT S OF B E TA 356 Concept Questions 391
Cyclicality of Revenues 356 14.4 T H E E VI DE N C E 3 91
Operating Leverage 356 The Weak Form 391
Financial Leverage and Beta 358 The Semistrong Form 392
Concept Questions 359 The Strong Form 395
13.4 E XT E N SIO N S OF T HE BA SI C Concept Questions 396
M OD E L 359 14.5 T H E B E H AVI OU RAL C H AL L E N G E
The Firm Versus the Project: TO MARKE T E FFI C I E N CY 3 96
Vive la différence 359 Concept Question 397
The Cost of Debt 360 14.6 E MP I RI CAL C H AL L E N G E S TO
The Cost of Preferred Stock 360 MARKE T E FFI C I E N CY 3 97
The Weighted Average Cost of Capital 360 Concept Question 401
The Capital Structure Weights 361 14.7 RE VI E W I N G T H E DI FFE RE N C E S 402
Taxes and the Weighted Average In Their Own Words: A random talk
Cost of Capital 361 with Burton Malkiel 403
14.8 I MP L I CAT I ON S FOR C ORP ORATE
13.5 E STIMATIN G TH E CO ST O F FI N AN C E 404
CA P ITA L F O R SU NC OR EN ERGY 36 5 Accounting and Efficient Markets 404
Concept Question 367 The Timing Decision 405
13.6 F LOTATIO N CO ST S A ND T HE Speculation and Efficient Markets 407
W E IGHTE D AV E R AGE C OS T Information in Market Prices 407
OF CA PITA L 367
The Basic Approach 367
14.9 S U MMARY AN D C ON C L U S I ON S 409
Flotation Costs and Net Present Value 368
Minicase: Your Retirement Plan at Deck
Internal Equity and Flotation Costs 369
Out My Yacht 412
13.7 R E D UC IN G TH E CO ST O F
CA P ITA L 36 9 CHAPTER 15
What Is Liquidity? 370
Liquidity, Expected Returns, and the Long-Term Financing: An Introduction 414
Cost of Capital 370
Liquidity and Adverse Selection 371 Executive Summary 414
What the Corporation Can Do 371 15.1 C OMMON S TOC K 41 4
Concept Questions 371 Authorized Versus Issued Common Stock 415
13.8 SU M MA RY A ND C ON CL US IO N S 372 Retained Earnings 415
Minicase: The Cost of Capital for Goff Market Value, Book Value, and
Communications Inc. 378 Replacement Value 416
Shareholders’ Rights 416
Appendix 13A Economic Value Added and the
Measurement of Financial Performance 379 Dividends 417
Classes of Shares 418
In Their Own Words: Shares climb as
PA RT 4 Stronach to give up voting control 419
Capital Structure and Dividend Policy 383 Concept Questions 420
15.2 C ORP ORAT E LON G -T E RM DE BT :
CHAPTER 14 T H E BAS I C S 42 0
Interest Versus Dividends 420
Corporate Financing Decisions and Efficient Is It Debt or Equity? 420
Capital Markets 383 Basic Features of Long-Term Debt 420
Different Types of Debt 421
Executive Summary 383 Repayment 421
Contents xi
Seniority 422 CHAPTER 17

Security 422
Indenture 422 Capital Structure: Limits to the Use of Debt 459
15.3 PR E F ER R E D SH A R ES 423
17.1 C OS T S OF FI N AN C I AL DI STRE SS 459
Stated Value 423
Bankruptcy Risk or Bankruptcy Cost? 459
Cumulative and Non-Cumulative Dividends 423
Are Preferred Shares Really Debt? 423
Preferred Shares and Taxes 424 17.2 DE S C RI P T I ON OF C OS T S 461
Beyond Taxes 425 Direct Costs of Financial Distress:
Legal and Administrative Costs of
Liquidation or Reorganization 462
15.4 IN C O ME TRUS TS 425 Indirect Costs of Financial Distress 462
Income Trust Income and Taxation 425 Agency Costs 463
15.5 PAT T ER N S OF LON G-T E R M Concept Questions 465
FIN A NC IN G 426
17.3 CAN DE BT C OS T S B E REDUC E D? 465
Protective Covenants 465
15.6 SUM MA RY A N D CO NC L U S I ON S 427 Consolidation of Debt 467
CHAPTER 16 17.4 I N T E G RAT I ON OF TAX
Capital Structure: Basic Concepts 430 E FFE CT S AN D FI N AN C I AL
DI S T RE S S C OS T S 467
Executive Summary 430 Pie Again 468
16.1 THE CA PI TA L ST RU CT U R E Concept Questions 470
QUES TI ON A N D TH E PI E MODE L 430 17.5 S I G N AL L I N G 470
Concept Question 431 Concept Questions 471
16.2 MA X IMI Z IN G FIR M VA L U E 17.6 SHIRKING, PERQUISITES, AND
V E RS US MA X I MIZ I NG BAD INVESTMENTS: A N OT E
SHA R EH OL DE R I NT ER E S T S 431 ON AG E N CY C OS T OF E QUI TY 472
Concept Question 432 Effect of Agency Costs of Equity on
16.3 FIN A NC IA L L EV E R AGE A N D Debt-to-Equity Financing 473
FIR M VA L UE : A N EX A M P L E 433 Free Cash Flow 473
Leverage and Returns to Shareholders 433 Concept Questions 474
The Choice Between Debt and Equity 434 17.7 T H E P E C KI N G -ORDE R T HE O RY 474
A Key Assumption 437 Rules of the Pecking Order 475
Concept Questions 437 Implications 476
16.4 MO D IG LI A NI A N D MIL L E R : Concept Questions 477
PRO P OS IT IO N II ( NO TA X E S ) 437 17.8 G ROW T H AN D T H E DE BT-TO -
Risk to Equityholders Rises With Leverage 437 E Q U I T Y RAT I O 477
Proposition II: Required Return to No Growth 477
Equityholders Rises With Leverage 438 Growth 478
Modigliani and Miller: An Interpretation 443 Concept Question 479
In Their Own Words: Merton Miller on 17.9 P E RS ON AL TAX E S 479
the MM results 444
The Miller Model 480
16.5 TA X ES 445
17.10 H OW FI RMS E S TAB L I S H CAP I TAL
The Basic Insight 445 S T RU CT U RE 48 3
Taxation of Corporate Income 445 Concept Questions 487
Present Value of the Tax Shield 446
17.11 S U MMARY AN D C ON C L U SI O N S 48 7
Value of the Levered Firm 447
Minicase: McKenzie Restaurants
Expected Return and Leverage Under Capital Budgeting 491
Corporate Taxes 449
The Weighted Average Cost of Capital Appendix 17A Some Useful Formulas of
and Corporate Taxes 450 Financial Structure (Available on Connect)
Stock Price and Leverage Under Appendix 17B The Miller Model and the
Corporate Taxes 450 Graduated Income Tax (Available on Connect)
16.6 SUM MA RY A N D CO NC L U S I ON S 452 CHAPTER 18
Minicase: Stephenson Real Estate
Valuation and Capital Budgeting
Recapitalization 458
for the Levered Firm 493
xii Contents
Executive Summary 493 19.4 RE P U RC H AS E OF S TOC K 52 0

18.1 A D JUSTE D PR E SE NT VA LU E Dividend Versus Repurchase:
A PPROAC H 49 3 Conceptual Example 521
Concept Questions 495 Dividends Versus Repurchases:
18.2 F LOW TO EQ UI TY A PP ROACH 49 5 Real-World Considerations 522
Step 1: Calculating Levered Cash Flow 495
Step 2: Calculating rS 496 19.5 P E RS ON AL TAX E S, I S S UAN C E
C OS T S, AN D DI VI DE N DS 52 3
Step 3: Valuation 496
Firms Without Sufficient Cash to
Pay a Dividend 523
18.3 W E IGHTE D AV E R AGE C OS T OF Firms With Sufficient Cash to Pay a Dividend 524
CA P ITA L ME TH OD 49 6
Summary of Personal Taxes 525
18.4 A C O MPA RI SO N OF T HE A D JU S T E D
19.6 RE AL-WORL D FACTORS FAVOU RI N G
PR E SE N T VA LU E, FLOW TO EQ U I T Y,
A H I G H -DI VI DE N D P OL I CY 52 6
A N D WE IGH TE D AV E R AGE C OS T
OF CA PITA L A PP ROACH ES 497 Desire for Current Income 526
Caveat: Adjusted Present Value, Flow to Behavioural Finance 526
Equity, and Weighted Average Cost of Capital Agency Costs 527
Do Not Always Yield the Same Results 498 Information Content of Dividends and
A Guideline 498 Dividend Signalling 528
Concept Questions 500 Concept Question 530
18.5 A D JUSTE D PR E SE NT VA LU E 19.7 T H E C L I E N T E L E E FFE CT :
E XAMPLE 50 0 A RE S OL U T I ON OF RE AL-WORLD
Concept Question 502 FACTORS ? 53 0
18.6 CA P ITA L B U DG ET IN G WH EN
TH E D ISC O UN T R AT E MUS T In Their Own Words: Why Amazon.com
B E E STIMAT ED 50 2 Inc. pays no dividend 532
Concept Question 504 Why Rogers Communications pays
dividends 532
18.7 B E TA A N D L EV E R AGE 50 4
19.8 W H AT W E KN OW AN D DO N OT
The Project Is Not Scale Enhancing 505
KN OW AB OU T DI VI DE N D P OL I CY 53 2
Corporate Dividends Are Substantial 532
18.8 SU M MA RY A ND C ON CL US IO N S 50 6 Fewer Companies Pay Dividends 533
Minicase: The Leveraged Buyout of Corporations Smooth Dividends 533
Cheek Products Ltd. 510
Some Survey Evidence on Dividends 534
Appendix 18A The Adjusted Present Value 19.9 P U T T I N G I T AL L TOG E T H E R 53 5
Approach to Valuing Leveraged Buyouts
19.10 S TOC K DI VI DE N DS AN D
S TOC K S P L I T S 53 6
Some Details on Stock Splits and
CHAPTER 19 Stock Dividends 536
Value of Stock Splits and Stock Dividends 537
Dividends and Other Payouts 512 Reverse Splits 538
19.11 S U MMARY AN D C ON C L U S I ON S 53 8
19.1 D IFFE R E N T T Y PE S OF
D IV ID E N D S 51 2 Minicase: Electronic Timing Ltd. 544
19.2 STA N DA R D MET HO D OF CA S H
D IV ID E N D PAY ME NT 51 3 PA RT 5
Concept Questions 515 Long-Term Financing 545
19.3 TH E B E N C HMA R K CA S E:
A N ILLUSTR AT IO N OF T HE
IR R E LE VA N CE O F D IV I DE ND CHAPTER 20
POL ICY 51 5
Current Policy: Dividends Set Equal to Issuing Equity Securities to the Public 545
Cash Flow 515
Alternative Policy: Initial Dividend
Is Greater Than Cash Flow 516 20.1 T H E P U B L I C I S S U E 545
The Indifference Proposition 516 20.2 T H E BAS I C P ROC E DU RE FOR
Homemade Dividends 516 A NEW ISSUE 546
A Test 519 The Prompt Offering Prospectus System 547
Dividends and Investment Policy 519 Alternative Issue Methods 548
Contents xiii
20.3 THE CA SH O FFER 548 21.5 S OME DI FFE RE N T T Y P E S

Types of Underwriting 548 OF B ON DS 58 3
The Selling Period 549 Zero-Coupon Bonds 583
The Overallotment Option 549 Floating-Rate Bonds 584
Investment Banks 549 Financial Engineering and Bonds 585
The Offering Price and Underpricing 550 Concept Questions 586
The Decision to Go Public 550 21.6 DI RE CT P L AC E ME N T C OM PARE D
Pricing Initial Public Offerings 550 TO P U B L I C I S S U E S 58 6
Underpricing: A Possible Explanation 551 Concept Questions 586
In Their Own Words: Jay Ritter on 21.7 LON G -T E RM SY N DI CAT E D
IPO underpricing around the world 552 BAN K LOAN S 58 6
20.4 THE A NN OU NC EME NT O F N E W 21.8 S U MMARY AN D C ON C L U SI O N S 58 7
E QUI TY A ND T HE VA LU E OF Minicase: Financing the Expansion of
THE FIR M 553 East Coast Yachts With a Bond Issue 590
20.5 THE CO ST O F I SS UI NG
SE CU R IT IE S 554
The Costs of Going Public: A Case Study 556
CHAPTER 22
Concept Questions 556 Leasing 592
20.6 R IGHT S 556
The Mechanics of a Rights Offering 556 Executive Summary 592
Subscription Price 557 22.1 T Y P E S OF L E AS E S 592
Number of Rights Needed to Purchase a Share 557 The Basics 592
The Value of a Right 558 Operating Leases 593
Ex-Rights 560 Financial Leases 594
Value of Rights After Ex-Rights Date 560 Concept Questions 594
The Underwriting Arrangements 561 22.2 AC C OU N T I N G AN D L E ASI N G 595
Effects on Shareholders 561 Concept Questions 596
Cost of Rights Offerings 561 22.3 TAX E S AN D L E AS E S 597
20.7 THE PR I VATE E QU IT Y M A R KE T 562 22.4 T H E CAS H FLOW S OF FI N AN C I AL
Private Placement 562 L E AS I N G 597
The Private Equity Firm 562 The Incremental Cash Flows 597
Venture Capital 563 Concept Questions 599
Suppliers of Venture Capital 563 22.5 A DE TOU R ON DI S C OU N TI N G
Stages of Financing 564 AN D DE BT CAPAC I T Y W I TH
Some Venture Capital Realities 564 C ORP ORAT E TAX E S 599
Concept Questions 564 Present Value of Risk-Free Cash Flows 599
20.8 SUM MA RY A N D CO NC L U S I ON S 565 Optimal Debt Level and Risk-Free Cash
Minicase: East Coast Yachts Goes Public 567 Flows (Advanced) 600
CHAPTER 21 22.6 N E T P RE S E N T VAL U E AN ALYSI S
OF T H E L E AS E -VE RS U S -B UY
Long-Term Debt 569 DE C I S I ON 601
The Discount Rate 601
Asset Pool and Salvage Value 602
21.1 LO NG -TE R M D EBT: A R E V I E W 569
22.7 DE BT DI S P L AC E ME N T AN D
21.2 THE PU B LI C IS SU E OF B ON DS 57 0 L E AS E VAL UAT I ON 602
The Basic Terms 570 The Basic Concept of Debt Displacement
Security 572 (Advanced) 602
Seniority 573 Optimal Debt Level in the TransCanada
Protective Covenants 573 Taxis Example (Advanced) 603
The Sinking Fund 573 22.8 DOE S L E AS I N G E VE R PAY?
The Call Provision 574 T H E BAS E CAS E 606
Concept Questions 574 22.9 RE AS ON S FOR L E AS I N G 607
21.3 B O N D R EF UN DI NG 574 Good Reasons for Leasing 607
Should Firms Issue Callable Bonds? 575 Bad Reasons for Leasing 610
Calling Bonds: When Does It Make Sense? 577 Leasing Decisions in Practice 610
21.4 B O N D R AT IN GS 580 22.10 S OME U N AN S W E RE D Q U E STI O NS 611
Junk Bonds 581 Are the Uses of Leases and of
Concept Questions 583 Debt Complementary? 611
xiv Contents
Why Are Leases Offered by Both Executive Summary 655

Manufacturers and Third-Party Lessors? 611 24.1 E X E C U T I VE S TOC K OP T I ON S 655
Why Are Some Assets Leased More Why Options? 655
Commonly Than Others? 611 Executive Compensation: Where Are
22.11 SU M MA RY A ND C ON CL US IO N S 612 We Now? 656
Minicase: The Decision to Lease or In Their Own Words: Jim Middlemiss on
Buy at Warf Computers Ltd. 615 options backdating 657
Appendix 22A Adjusted Present Value Approach Valuing Executive Compensation 658
to Leasing (Available on Connect) Concept Question 660
24.2 VAL U I N G A S TART-U P 660
PA RT 6 Concept Questions 663
Options, Futures, and Corporate Finance 617 24.3 MORE AB OU T T H E B I N OMI AL
MODE L 663
Heating Oil 663
CHAPTER 23
24.4 S H U T DOW N AN D RE OP E N I N G
Options and Corporate Finance: Basic Concepts 617 DE C I S I ON S 668
Valuing a Gold Mine 668
Executive Summary 617 The Abandonment and Opening Decisions 669
23.1 OPT IO N S 617 Valuing the Simple Gold Mine 669
23.2 CA L L O PTIO N S 618 24.5 S U MMARY AN D C ON C L U S I ON S 673
The Value of a Call Option at Expiration 618 Minicase: Exotic Cuisines Employee
Concept Questions 619 Stock Options 675
23.3 PU T O PTIO NS 6 20
The Value of a Put Option at Expiration 620 CHAPTER 25
Warrants and Convertibles 676
23.4 SE LLIN G OP TI ON S 6 21
23.5 STOC K O PT IO N QU OTATI ON S 6 22 Executive Summary 676
Long-Term Equity Anticipation Securities 622 25.1 WARRAN T S 676
23.6 C OM B IN AT IO NS O F O PT IO NS 6 24 Concept Question 678
Concept Questions 627 25.2 T H E DI FFE RE N C E B E T W E E N
23.7 VA LUIN G O PT IO NS 6 27 WARRAN T S AN D CAL L
OP T I ON S 678
Bounding the Value of an American Call 627
How the Firm Can Hurt Warrant Holders 680
The Factors Determining Call Option Values 627
A Quick Discussion of Factors Determining
Put Option Values 630 25.3 WARRAN T P RI C I N G AN D T H E
Concept Questions 631 B L AC K–S C H OL E S MODE L
( ADVAN C E D) 68 0
23.8 A N O PTIO N P R IC IN G FOR MU L A 6 31
A Two-State Option Model 632
25.4 C ON VE RT I B L E B ON DS 68 1
The Black–Scholes Model 634
25.5 T H E VAL U E OF C ON VE RT I B L E
23.9 STOC KS A ND B O ND S
B ON DS 68 2
A S O PTIO N S 6 38
Straight Bond Value 683
The Firm Expressed in Terms of Call Options 639
Conversion Value 683
The Firm Expressed in Terms of Put Options 640
Option Value 684
A Resolution of the Two Views 641
A Note on Loan Guarantees 642
Concept Questions 643 25.6 RE AS ON S FOR I S S U I N G
WARRAN T S AN D
23.10 IN V E STME NT I N R EA L P RO JE CT S C ON VE RT I B L E S 68 5
A N D O PTIO NS 6 43
Convertible Debt Versus Straight Debt 685
Convertible Debt Versus Common Stock 686
23.11 C ON TIN GE NT VA LU E R IG HT S, The “Free Lunch” Story 686
M E RGE R S, A N D CO R PO R AT E
The “Expensive Lunch” Story 687
D E C ISIO N S 6 45
A Reconciliation 687
23.12 SU M MA RY A ND C ON CL US IO N S 6 46
25.7 W H Y ARE WARRAN T S AN D
Minicase: Clissold Industries Options 653
C ON VE RT I B L E S I S S U E D? 68 8
Matching Cash Flows 688
C H A P T E R 24 Risk Synergy 688
Options and Corporate Finance: Agency Costs 689
Backdoor Equity 689
Extensions and Applications 655
Contents xv
25.8 C O NV E R SI ON P OL ICY 689 Concept Questions 728

Concept Questions 690 27.3 T H E OP E RAT I N G CYC L E AN D
25.9 SUM MA RY A N D CO NC L U S I ON S 690 T H E CAS H CYC L E 72 8
Minicase: S&S Air’s Convertible Bond 694 Interpreting the Cash Cycle 730
CHAPTER 26 27.4 S OME AS P E CT S OF S H O RT-TE RM
FI N AN C I AL P OL I CY 73 0
Derivatives and Hedging Risk 695 The Size of the Firm’s Investment in Current
Assets 731
Alternative Financing Policies for Current
26.1 D E R IVAT IV E S, H ED GI NG , Assets 733
A N D R I SK 695
Current Assets and Liabilities in Practice 735
The Impact of Financial Risk:
The Credit Crisis of 2007–09 696
27.5 CAS H B U DG E T I N G 73 6
26.2 FO RWA R D CO NT R ACTS 696
Cash Outflow 737
The Cash Balance 738
26.3 FUTUR E S CO NT R ACTS 697
27.6 T H E S H ORT-T E RM FI N ANC I AL
26.4 HE DG IN G 701 P L AN 73 8
Hedging With Futures Versus Hedging Short-Term Planning and Risk 738
With Options 703
Short-Term Borrowing 739
In the Absence of Short-Term Borrowing 741
26.5 IN TE R ES T R AT E FUT UR E S Concept Questions 741
C O NT R ACTS 703
27.7 S U MMARY AN D C ON C L U SI O N S 742
Pricing of Government of Canada Bonds 703
Minicase: Keafer Manufacturing Working
Pricing of Forward Contracts 703
Capital Management 750
Futures Contracts 705
Hedging in Interest Rate Futures 705 CHAPTER 28
26.6 D UR AT IO N HE DG IN G 709 Cash Management 751
The Case of Zero-Coupon Bonds 709
The Case of Two Bonds With the Same
Maturity but With Different Coupons 710 28.1 RE AS ON S FOR H OL DI N G CASH 751
Duration 711 The Speculative and Precautionary Motives 751
Matching Liabilities With Assets 712 The Transaction Motive 752
Duration in Practice 714 Costs of Holding Cash 752
Concept Questions 715 Cash Management Versus Liquidity
Management 752
26.7 SWAP C ON TR ACT S 715
Interest Rate Swaps 715
Currency Swaps 716 28.2 MAN AG I N G T H E C OL L E CTI O N
AN D DI S B U RS E ME N T OF CASH 753
Electronic Data Interchange:
Credit Default Swaps 717
The End of Float? 755
Exotics 718
Accelerating Collections 756
Movement Toward Exchange Trading
Controlling Disbursements 759
for Swaps 718
Ethical and Legal Questions 759
26.8 ACTUA L U SE O F D ER I VAT I V E S 719
26.9 SUM MA RY A N D CO NC L U S I ON S 720
28.3 I N VE S T I N G I DL E CAS H 760
Minicase: Williamson Mortgage Inc. 723
Seasonal or Cyclical Activities 761
Planned Expenditures 761
PA RT 7 Characteristics of Short-Term Securities 761
Financial Planning and Short-Term Finance 724 Some Different Types of Money
Market Securities 763
CHAPTER 27 In Their Own Words: Credit crisis made
in Canada 764
Short-Term Finance and Planning 724 Concept Questions 765
28.4 S U MMARY AN D C ON C L U SI O N S 765
Executive Summary 724 Minicase: Cash Management at
27.1 TR ACI NG CA S H A ND N E T Richmond Ltd. 767
WO RK IN G CA PI TA L 725
27.2 D E FIN IN G CA SH I N TE R MS OF CHAPTER 29
OTHE R E LE MEN TS 725
The Sources and Uses of Cash Statement 727 Credit Management 768
xvi Contents
Executive Summary 768 30.4 DE T E RMI N I N G T H E SY N E RGY

29.1 TE R MS O F T HE S A LE 769 FROM AN AC Q U I S I T I ON 792
Why Trade Credit Exists 769 30.5 S OU RC E S OF SY N E RGY FROM
The Basic Form 770 AC Q U I S I T I ON S 792
Credit Period 770 Revenue Enhancement 792
Cash Discounts 771 Cost Reduction 793
Credit Instruments 773 Tax Gains 795
Concept Questions 773 Lower Cost of Capital 796
29.2 TH E D E C IS IO N TO G R A NT C R E DI T : Concept Question 796
R ISK A N D I NF OR MATI ON 773 30.6 CALC U L AT I N G T H E VAL U E OF TH E
The Value of New Information About FI RM AFT E R AN AC Q U I S I T I ON 796
Credit Risk 774 Avoiding Mistakes 797
Future Sales 775 30.7 A C OS T TO S H ARE H OL DE RS
Concept Question 776 FROM RE DU CT I ON I N RI S K 797
29.3 OPT IMA L CR E DI T PO LI CY 776 The Base Case 798
Credit Insurance 777 The Case Where One Firm Has Debt 799
Concept Question 778 How Can Shareholders Reduce Their Losses
From the Coinsurance Effect? 799
29.4 C R E D IT A NA LYS IS 778
Credit Information 778
Credit Evaluation and Scoring 778 30.8 T WO “ BAD” RE AS ON S FOR
ME RG E RS 8 00
Earnings Growth 800
29.5 C OL LE CTIO N P OL ICY 779
Diversification 800
Average Collection Period 779
Aging Schedule 780
30.9 T H E N E T P RE S E N T VAL U E OF
Collection Effort 780
A ME RG E R 8 01
Cash 801
29.6 OTHE R A SP ECTS O F C R ED IT Common Stock 802
POL ICY 7 81
Cash Versus Common Stock 803
Factoring 781
How to Finance Trade Credit 781
Defensive Tactics 804
Divestitures 804
29.7 SU M MA RY A ND C ON CL US IO N S 7 82 The Control Block and the Corporate Charter 806
Minicase: Credit Policy at Braam Industries 784 Standstill Agreements 807
Appendix 29A Inventory Management Exclusionary Offers and Non-Voting Stock 807
(Available on Connect) Going Private and Leveraged Buyouts 807
Other Defensive Devices 808
PA RT 8 Concept Question 809
SPECIAL TOPICS 786 30.10 S OME E VI DE N C E ON
AC Q U I S I T I ON S 8 09
CHAPTER 30 Do Acquisitions Benefit Shareholders? 809
The Managers Versus the Shareholders 811
Mergers and Acquisitions 786 Real Productivity 813
30.11 S U MMARY AN D C ON C L U S I ON S 813
30.1 TH E BA SIC FOR MS O F
Minicase: The Birdie Golf–Hybrid
AC Q UISITIO N S 7 86
Golf Merger 819
Merger or Consolidation 786
Acquisition of Stock 787
CHAPTER 31
Acquisition of Assets 788
A Classification Scheme 788 Financial Distress 821
A Note on Takeovers 788
30.2 TH E TA X FO R MS O F 31.1 W H AT I S FI N AN C I AL DI S T RE S S ? 821
AC Q UISITIO N S 790 Concept Questions 824
Determinants of Tax Status 790 31.2 W H AT H AP P E N S I N FI N AN C I AL
Taxable Versus Tax-Free Acquisitions 790 DI S T RE S S ? 8 24
30.3 AC C O UN TIN G FOR 31.3 BANKRUPTCY LIQUIDATION AND
AC Q UISITIO N S 790 REORGANIZATION 826
The Acquisition Method 790 Bankruptcy Liquidation 826
Concept Questions 791 Bankruptcy Reorganization 828
Contents xvii
Agreements to Avoid Bankruptcy 830 32.4 I N T E RE S T RAT E S AN D

Concept Questions 830 E XC H AN G E RAT E S 8 42
31.4 C UR R EN T IS SU ES I N FI N A N C I AL The Dollar Investment 843
D IST R ES S 830 The Euro Investment 843
Private Workout or Bankruptcy: The Forward Discount and Expected
Which Is Better? 830 Spot Rates 844
Holdouts 830 Exchange Rate Risk 844
Complexity 831 More Advanced Short-Term Hedges 845
Lack of Information 831 The Hedging Decision in Practice 846
Prepackaged Bankruptcy 831 Concept Questions 846
Concept Questions 831 32.5 I N T E RN AT I ON AL CAP I TAL
31.5 THE DE CI SI ON TO SE EK C OU RT B U DG E T I N G 8 46
PROT ECTI ON : TH E CA S E OF Foreign Exchange Conversion 847
CA NW ES T GLOBA L Unremitted Cash Flows 847
C O M MUN ICATI ON S The Cost of Capital for International Firms 848
C O R PO R AT IO N 832 Concept Questions 850
Concept Questions 832 32.6 I N T E RN AT I ON AL FI N AN C I N G
31.6 SUM MA RY A N D CO NC L U S I ON S 833 DE C I S I ON S 8 50
Appendix 31A Predicting Corporate Bankruptcy: Short-Term and Medium-Term Financing 851
The Z-Score Model (Available on Connect) International Bond Markets 851
In Their Own Words: Merkel:
Europe faces historic test in euro crisis 853
CHAPTER 32 Concept Questions 854
International Corporate Finance 835 32.7 RE P ORT I N G FORE I G N
OP E RAT I ON S 8 54
Executive Summary 835 Concept Question 855
32.1 TE R M IN OLOGY 835 32.8 P OL I T I CAL RI S K 8 55
Concept Question 836 32.9 S U MMARY AN D C ON C L U SI O N S 8 55
32.2 FO RE IG N EXC HA N GE M A R KE T S Minicase: East Coast Yachts Goes
A N D E XCH A NG E R AT ES 837 International 859
Exchange Rates 837 Appendix A Mathematical Tables
Types of Transactions 840 (Available on Connect)
Concept Questions 840 Appendix B Answers to Selected
32.3 THE LAW OF O NE P R IC E A N D End-of-Chapter Problems (Available on Connect)
PURC HA S IN G POW ER PA R I T Y 840
Concept Questions 842 Glossary GL- 1
Index IN- 1
P R E FAC E
The teaching and practice of corporate finance in Canada are more challenging and exciting
than ever before. The last decade alone has seen fundamental changes in financial markets and
financial instruments. In the early years of the twenty-first century, announcements in the finan-
cial press about takeovers, junk bonds, financial restructuring, initial public offerings, bank-
ruptcy, and derivatives are still commonplace. In addition, there is the new recognition of “real”
options (Chapter 9), private equity and venture capital (Chapter 20), and the reappearing divi-
dend (Chapter 19). The world’s financial markets are more integrated than ever before. Both the
theory and practice of corporate finance have been moving ahead with uncommon speed, and our
teaching, as always, must keep pace.
These developments place new burdens on the teaching of corporate finance. On the one hand,
the changing world of finance makes it more difficult to keep materials up to date. On the other
hand, the teacher must distinguish the permanent from the temporary and avoid the temptation to
follow fads. Our solution to this problem is to emphasize the modern fundamentals of the theory
of finance and make the theory come to life with contemporary examples. All too often, the novice
student views corporate finance as a collection of unrelated topics that are unified largely because
they are bound together between the covers of one book. As in the previous editions, our aim is
to present corporate finance as the collaboration of a small number of integrated and powerful
institutions.
This book has been written for the introductory courses in corporate finance at the MBA level
and for the intermediate courses in many undergraduate programs. Some instructors will find this
text appropriate for the introductory course at the undergraduate level as well.
It is assumed that most students either will take, or will be concurrently enrolled in, courses in
accounting, statistics, and economics. This exposure will help students understand some of the more
difficult material. However, the book is self-contained, and prior knowledge of these areas is not
essential. The only mathematics prerequisite is basic algebra.
NEW TO THE EIGHTH CANADIAN EDITION

• Executive summaries have been updated.
• Minicases have been reviewed and replaced where necessary to ensure that each is related to the
material covered in the corresponding chapter.
• Practice problems have been updated and new ones have been added.
• Tables, figures, and examples have been updated throughout the text.
• New and recent Canadian examples have been added.
• Concept questions have been updated and new ones have been added.
• End-of-chapter material has been substantially updated and refreshed.
• New highlighted concepts have been added.
• The discussion on taxes in Chapter 1 has been updated.
• The discussion on capital cost allowance in Chapter 8 has been streamlined and special cases have
been introduced.
• New examples on real options have been added in Chapter 9.
• Capital market data have been updated through 2016 in Chapter 10.
PEDAGOGY
Keeping the theory and concepts current is only one phase of developing our corporate finance text.
To be an effective teaching tool, the text must present the theory and concepts in a coherent way that
can be easily learned. With this in mind, we have included the following study features.
Executive Summary
Each chapter begins with a road map that describes the objectives of the chapter and how it connects
with concepts already learned in previous chapters. Real company examples that will be discussed
are highlighted in this section.
Ch a p t er 1
Introduction to Corporate Finance Preface xix
E XE CUTIV E S UMMA RY
Barrick Gold Corporation has long been known as the largest gold mining company in the world. With the recent recession,
gold prices and Barrick’s share price increased as investors sought a safe investment. However, in 2013 Barrick’s shares
plunged in value by 54 percent to a 20-year low. While the accompanying fall in the value of gold was beyond the compa-
ny’s control, the poor performance was attributed primarily to the failure of key projects, misallocation of capital resources,
and the legal mess associated with the Pascua-Lama mine in Chile. Accompanying this poor performance, the company’s
proxy circular revealed that six executives were to be compensated for a combined $47.4 million and board chair Peter
Munk was to receive $4.3 million. In addition, the company awarded a US$11.9 million signing bonus to John Thornton for
joining the company as co-chair.1 Consequently, several major shareholders of Barrick Gold Corporation invoked a “say
on pay” vote, which rejected the pay packages and led to the appointment of new independent directors and to Munk
stepping down as board chair. Recent events at Barrick Gold Corporation illustrate both the importance of governance
issues and the need for management to make key corporate finance decisions relating to the following questions:
1. What long-term investment strategy should a company take on?
2. How can cash be raised?
In Their Own Words Boxes

3. How much short-term cash flow does a company need to pay its bills?
These are not the only questions of corporate finance. For example, another important question covered in this
Located
14 threethroughout
text is: How should a
Part 1 on the chapters,
company
Overview this unique
divide earnings between series
payoutsconsists of articles
to shareholders written
(dividends) by distinguished
and reinvestment? The
questions our list are among the most important, however, and, taken in order, they provide a rough outline
scholars or book.
of our practitioners onwekey
In Section 1.1 topics.
introduce the basic ideas of corporate finance.
One way that companies raise cash to finance their investment activities is by selling or issuing securities. The
securities, sometimes called financial instruments or claims, may be roughly classified as equity or debt, loosely called
IN THEIR OWN WORDS
stocks or bonds. The difference between equity and debt is a basic distinction in the modern theory of finance. All
securities of a firm are claims that depend on or are contingent on the value of the firm.2 In Section 1.2 we show how
B. ESPEN ECKBO on corporate governance
debt and equity securities depend on the firm’s value, and we describe them as different contingent claims.
In Section 1.3 we discuss different organizational forms and the pros and cons of the decision to become a corporation.
The In Section growth
substantial 1.4 we take a close
in equity indexlook at the over
investing goalstheof the corporation
easily swamps and discuss returns.
investment why maximizing shareholder
As a result, they no
wealth is likely
past twenty yearstohasbelowered
its primary goal.
average Throughout
shareholder the rest
incen- of the
longer book,
show up we assume
to annual that theand
meetings firm’s performance
either vote with
depends
tives to on the value
monitor it creates for of
the management its individual
shareholders. Shareholders
portfolio are made
management or better
simplyoff when the value
throw proxyofform
theirinshares
the
is increasedThe
companies. by the firm’sshareholder
resulting decisions. absenteeism effec- wastebasket. The resulting combination of voluntary
tivelyA transfers
company raises cashcontrol
corporate by issuing securities
rights in the financial
to increasingly markets. In
shareholder Section 1.5 we
absenteeism anddescribe
strong some of theinsid-
corporate basic
features
powerful of the financial
corporate markets.
executives and Roughly speaking,
other insiders. there ers
Today, are creates
two types of financial
a problem thatmarkets:
lies at money markets
the heart and
of many
capital markets.
an important counterweight to this massive shift in the bal- of today’s governance controversies. An important his-
anceSection
of power 1.6between
covers trends in financial
the firm’s owners andmarkets and management,
managers and the
is torical lesson last the
is that section of this shareholder
absentee chapter (Section
system1.7)
outlines
a small settheofrest of the
active book. who occasionally decide to can breed arrogance on the part of corporate insid-
investors
bear the cost of challenging incumbent management teams. ers. A vigorous Chaptercorporate
1 Introduction
governance to Corporate
system isFinance
thus 7
In countries with highly developed financial systems, required to prevent shareholder rights being expropri-
much of the governance 1 debate focuses on this shift in ated by insiders.
the balance of power between Risk of Cash Flows
Theresa Tedesco, “Barrick Gold could have avoided say-on-pay public backlash,” Financial Post, April 23, 2013. http://business
shareholders, boards, and A major task of the board is to hire and fire top manag-
.financialpost.com/news/fp-street/barrick-gold-executive-compensation-wednesday
top executives in widely Theheld
2 public
firm
We tend to use companies.
mustthe words firm,The
consider risk.
company, anders
bal- The andinterchangeably.
amount
business to and
set their
timing compensation.
of cash
However, Therefore,
there isflows notcorporate
are between
a difference usually
these andknown with
ance is affected by four major factors,
certainty.
a corporation. Wewhich
Most tend
investors
discuss tohave
differin
this difference insiders
anSection 1.3. come
aversion with an inherent conflict of interest when
to risk.
greatly across countries: (1) The cost of taking legal action they sit on boards. Nevertheless, corporate insiders sit
and the strength of law enforcement. (2) The efficiency of on boards in major developed countries. In the United
the director election process EXandAMPL 1.3
the costE of challeng- States, until twenty years ago, it was even common for the
ing and replacing directors. (3) The cost of shareholder chief executive officer (CEO) to occupy the post of board
activism and of transacting in the market for corporate chair. Several companies have since voluntarily replaced
The Midland
control. (4) The political strength
ros70114_ch01_001-029.indd 1 Company
of employee is considering
unions. thisexpanding
practice operations overseas.role
with a split-chair It is(using
evaluating Europe and
a combination Japan
12/3/18 5:45 as
PM
possible
Early in a firm’s lifecycle, when sites.
shareEurope
ownershipis considered
is of toCEO
be relatively
chair and safe, whereas
a “lead” Japan or
director) is seen as very risky.
a complete In both cases
separa-
highly concentrated, this balance of power
the company would is close
hardly tion of the
an operations
down roles
after oneofyear.
CEO and chair.
issue. However, as the company Aftergrows
doing aand prospers,
complete In Europe,
financial analysis, the tradition
Midland has come hasup been
withnot thetofollowing
place thecashCEOflows of the
and founders diversify their initial investment by bring- in the chair, in some countries by statute. However, while
alternative plans for expansion under three scenarios: pessimistic, realistic, and optimistic.
ing in new and smaller owners, the balance starts to non-executive members make up a clear majority of direc-
change. Corporate insiders, who themselves have much tors in the United States, there is a tradition in Europe for
of their human capital invested in the firm, increasingly placing a greater portion of employees on boards, which
Pessimistic Realistic Optimistic
view shareholders as a remote constituency and even as also raises conflict of interest issues.
irrelevant for the company on a daily basis.Europe By choosing $75,000
The typical defence of$100,000
having insiders on $125,000
boards is one
to diversify, shareholders for their part agree Japan to play a of efficiency: 0 the board requires
150,000CEO and200,000 other manage-
diminished role in the company’s affairs. ment input to make proper decisions. What this defence
For shareholders who diversify their investment leaves unanswered, however, is why the CEO needs a
across a broad portfolio of Ifcompanies,we ignore the thepessimistic vote onperhaps
cost of scenario, the boardJapan(letisalone the chair)
the better in order
alternative. to supply
When we take the pes-
actively monitoring the performance
simistic scenario of into account, thethe
management board
choice with his Japan
is unclear. or herappears
information.
to be riskier, but it may also offer a
Concept Questions
higher expected level of cash flow. What is risk and how can it be defined? We must try to answer this
important question. Corporate finance cannot avoid coping with risky alternatives, and much of our book
Included after each major issection
closely devoted toindeveloping
a chapter,
held corporations. Concept
methods
However, Questions
for evaluating
shareholders risky
have point
control to
opportunities.
several essential
devices material
(some more effectiveand
allow students to test their recalltoand
than others) bondcomprehension before moving
management to the self-interest forward.
of shareholders:
CONCEPT • What are three basic questions of corporate finance?

QUESTIONS 1. Shareholders determine the membership of the board of directors by voting. Thus, share-
• Describe capital structure.
holders control the directors, who in turn select the management team.
• List three reasons why value creation is difficult.
2. Contracts with management and arrangements for compensation, such as stock option
plans, can be made so that management has an incentive to pursue shareholders’ goals.
Similarly, management may be given loans to buy the firm’s shares.
1.2 C O R P O R ATE SE CUR ITIE S A S CO N TIN GE N T
3. If the price of a firm’s stock drops too low because of poor management, the firm may
Figures Cand
L A ITables
be acquired by a group of shareholders, another firm, or an individual. This is called a
M S O N TOTA L FIR M VA L UE
takeover. In a takeover, top management of the acquired firm may find itself out of a job.
This text makes extensive use For of
example, the CEO
real data andof Chapters
presentsInc.them
lost his
injob when thefigures
various bookseller wastables.
and taken over by
Explana-
WhatIndigo
is theinessential
2001. This pressures
difference management
between to make
debt and decisions
equity? in the can
The answer shareholders’ inter-
be found by thinking about
tions in the narrative, examples,
whatests.
andof
Fear
happens
end-of-chapter
a takeover
to the payoffsgives
problems
managers
to debt
will refertake
an incentive
and equity
to many
when thetovalue actions of these
that
of the firm
exhibits.
will maximize
changes.
stock prices.feature of debt is that it is a promise by the borrowing firm to repay a fixed dollar
The basic
amount by a certain date. The shareholders’ claim on firm value at the end of the period is the amount
that remains after the debtholders are paid. Of course, shareholders get nothing if the firm’s value is
equal to or less than the amount promised to the debtholders.
ate payment is known with certainty, whereas the later inflows can only be estimated. Thus, we need to know the
relationship between a dollar today and a (possibly uncertain) dollar in the future before deciding on the project.
This relationship is called the time value of money concept. It is important in such areas as capital budgeting,
xx Preface
lease-versus-buy decisions, accounts receivable analysis, financing arrangements, mergers, and pension funding.
The basics are presented in this chapter. We begin by discussing two fundamental concepts: future value and
present value. Next, we explore simplifying formulas such as perpetuities and annuities.
Examples
Separate called-out examples are integrated throughout the chapters. Each example illustrates
an intuitive or mathematical application in a step-by-step format. There is enough detail in the
5.1 THEexplanations
O NE -PE RIO Ddon’t
that students CASE
have to look elsewhere for additional information.
EX A M PLE 5.1
Antony Robart is trying to sell a piece of land in Saskatchewan. Yesterday, he was offered $10,000 for the
property. He was ready to accept the offer when another individual offered him $11,424. However, the
second offer was to be paid a year from now. Antony has satisfied himself that both buyers are honest,
10 soPart
he 1has no
Overview
fear that the offer he selects will fall through. These two offers are pictured as cash flows in
Figure 5.1. Which offer should Antony choose?
It is very difficult for large business organizations to exist as sole proprietorships or
partnerships. The main advantage is the cost of getting started. Afterward, the disadvantages,
FIGURE which
5.1 may become severe, are (1) unlimited liability, (2) limited life of the enterprise, and
Cash Flow(3)
fordifficulty
Antony’s of transferring
Sale ownership. These three disadvantages lead to (4) the difficulty of
raising cash.
Alternative $10,000 $11,424

saleThe
pricesCorporation
Of the many forms of business enterprise, the corporation is by far the most important. Most large
Canadian firms, such as Bank of Montreal and Bombardier, are organized as corporations. As a
distinct legal entity, a corporation can have a name and enjoy many of the legal powers of natural
persons. For example, corporations can acquire and exchange property. Corporations may enter into
contracts and may sue and be sued. For jurisdictional purposes, the corporation is a citizen of its
Year province of incorporation. (It cannot vote, however.) 0 1
Starting a corporation is more complicated than starting a proprietorship or partnership. The
incorporators must prepare articles of incorporation and a set of bylaws. The articles of incorporation
must include
Equations 1. Name of the corporation.

2. Business purpose.
Key equations are numbered and highlighted
3. Number of shares that thefor easy reference.
corporation is authorized to issue, with a statement of limitations
and rights of different classes of shares.
Highlighted Concepts 4. Nature of the rights granted to shareholders.

5. Number of members of the initial board of directors.
Throughout the text, important ideas are pulled out and presented in a box—signalling to students
that this material is particularly relevant and critical to their understanding.
A Comparison of Partnerships and Corporations

Corporation Partnership
Liquidity and Common stock can be listed on a stock exchange. Units are subject to substantial restrictions on
marketability transferability. There is no established trading market for
partnership units.
Voting rights Usually each share of common stock entitles each holder Limited partners have some voting rights. However,
to one vote per share on matters requiring a vote and general partners have exclusive control and management
on the election of the directors. Directors determine top of operations.
management.
Taxation Corporate income is taxable at the corporate tax rate. Partnership income is taxed as personal income to the
Dividends to shareholders are also taxable with partial partners.
integration through use of the dividend tax credit.
Reinvestment and Corporations have broad latitude on dividend payout Partnerships are generally prohibited from reinvesting
dividend payout decisions. partnership cash flow. All net cash flow is distributed
to partners.
Liability Shareholders are not personally liable for obligations of the Limited partners are not liable for obligations of
corporation. partnerships. General partners may have unlimited
liability.
Continuity of existence Corporations have a perpetual life. Partnerships have a limited life.
The bylaws (the rules to be used by the corporation to regulate its own existence) concern its
shareholders, directors, and officers. Bylaws for the corporation’s management range from the brief-
End-of-Chapter Material est possible statement of rules to hundreds of pages of text.
In its simplest form, the corporation comprises three sets of distinct interests: the
The end-of-chapter material reflects
shareholders (the and builds
owners), upon theand
the directors, concepts learned
the corporation in the(the
officers chapter.
top management).
Traditionally, the shareholders control the corporation’s direction, policies, and activities.
The shareholders elect a board of directors, who in turn select top management who serve as
corporate officers.
ros70114_ch01_001-029.indd 10 12/3/18 5:45 PM

tain or expand the current asset base. (We return to free cash flow in Chapter 17.)
CONCEPT • How is cash flow different from changes in net working capital? Preface xxi
QUESTIONS • What is the difference between the operating cash flow and the total cash flow of the
firm?
Summary and Conclusions • What is free cash flow?
The numbered summary provides a quick review of key concepts in the chapter.
2.5 S UMMA RY A N D C O N C L U S I O N S
Besides introducing you to corporate accounting, the purpose of this chapter was to teach you how
to determine cash flow from the accounting statements of a typical company.
1. Cash flow is generated by the firm and paid to creditors and shareholders. It can be
classified as
a. Cash flow from operations.
b. Cash flow from changes in long-term assets.
c. Cash flow from changes in working capital.
2. There is a cash flow identity that says that cash flow from assets equals cash flow to bondhold-
ers and shareholders.
3. Calculations of cash flow are not difficult, but they require care and particular attention to
detail in properly accounting for non-cash expenses such as depreciation and deferred taxes. It
is especially important that you do not confuse cash flow with changes in net working capital
and net income.
List of Key Terms

ros70114_ch02_030-059.indd 38 12/3/18 8:51 PM
A list of the boldfaced key terms in the text with page numbers is included for easy reference.
Questions and Problems

Because solving problems is so critical to a student’s learning, new questions and problems have
been added and existing questions and problems have been revised. All problems have also been thor-
oughly reviewed and checked for accuracy. Problems have been grouped according to the concepts
they test, with the concept headings listed at the beginning of each group.
Additionally, we have tried to make the problems in the critical “concept” chapters—such
as those on value, risk, and capital structure—especially challenging and interesting. We provide
answers to selected problems in Appendix B, available on Connect.
Microsoft Excel Problems

Indicated by the Microsoft Excel icon in the margin, these Microsoft Excel problems
can be found at the end of almost all chapters. Located on Connect, Microsoft Excel
templates have been created for each of these problems, where students can use the
data in the problem to work out the solution using Microsoft Excel skills.
Minicases
These Minicases, located in most chapters, apply what is learned in a number of chapters to a real-
world scenario. After presenting the facts, the case gives students guidance in rationalizing a sound
business decision.
MARKET LEADING TECHNOLOGY

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tests online. McGraw-Hill Connect is a learning platform that continually adapts to each student,
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Connect makes teaching and learning personal, easy, and proven.
xxii Preface
Connect Key Features

SmartBook®
As the first and only adaptive reading experience, SmartBook is changing the way students read
and learn. SmartBook creates a personalized reading experience by highlighting the most important
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Connect Insight is Connect’s new one-of-a-kind visual analytics dashboard—now available for
instructors—that provides at-a-glance information regarding student performance, which is imme-
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instructors the ability to take a just-in-time approach to teaching and learning, which was never
before available. Connect Insight presents data that helps instructors improve class performance in a
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Simple Assignment Management
With Connect, creating assignments is easier than ever, so instructors can spend more time teaching
and less time managing.
• Assign SmartBook learning modules.
• Edit existing questions and create personalized questions.
• Draw from a variety of text specific questions, resources, and test bank material to assign online.
• Streamline lesson planning, student progress reporting, and assignment grading to make
classroom management more efficient than ever.
Smart Grading
When it comes to studying, time is precious. Connect helps students learn more efficiently by
providing feedback and practice material when they need it, where they need it.
• Automatically score assignments, giving students immediate feedback on their work and
comparisons with correct answers.
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overall—with detailed grade reports.
• Reinforce classroom concepts with practice tests and instant quizzes.
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and Moodle.
Mobile Access
Connect makes it easy for students to read and learn using their smartphones and tablets. With
the mobile app, students can study on the go—including reading and listening using the audio
functionality—without constant need for Internet access.
Instructor Library
The Connect Instructor Library is a repository for additional resources to improve student engage-
ment in and out of the class. It provides all the critical resources instructors need to build their
course.
• Access instructor resources.
• View assignments and resources created for past sections.
• Post your own resources for students to use.
Instructor Resources
• Instructor’s Manual. Prepared by Larbi Hammami, Desautels Faculty of Management,
McGill University.
• Instructor’s Solutions Manual. Prepared by Hamdi Driss, Sobey School of Management,
St. Mary’s University.
Preface xxiii
• Microsoft PowerPoint Presentations. Updated by Tsvetanka Karagyozova, Department of

Economics, Faculty of Liberal Arts and Professional Studies, York University.
• Computerized Test Bank. Prepared by Shantanu Dutta, Telfer School of Management,
University of Ottawa.
• Microsoft Excel Templates (with solutions). Prepared by Vishaal Baulkaran, Dhillon School of
Business, University of Lethbridge.
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For more information, please visit us online: http://www.mheducation.ca/he/solutions
ACKNOWLEDGMENTS
Many people have contributed their time and expertise to the development and production of this
text. I extend my thanks and gratitude for their contributions.
A special thank-you must be given to our technical checker, Larbi Hammami of the Desautels
Faculty of Management at McGill University. Thank you for your vigilant efforts reviewing this text
and its solutions. Your keen eye and attention to detail have contributed greatly to the quality of the
final product.
Much credit must go to a first-class group of people at McGraw-Hill Education who worked on
the eighth Canadian edition. Leading the team were senior product managers Alwynn Pinard and
Sara Braithwaite, and content developer Tammy Mavroudi. Copy editing and proofreading of the
manuscript was diligently done by Laurel Sparrow, with in-house supervision by Janie Deneau. And
many thanks to Alison Lloyd Baker for overseeing permissions for this project.
Through the development of this edition, our team has taken great care to discover and eliminate
errors. Our goal is to provide the best Canadian textbook available on this subject. Please send com-
ments and feedback to:
Professor Hamdi Driss

Sobey School of Business, Saint Mary’s University
923 Robie Street
Halifax, Nova Scotia
B3H 3C3
Email: hamdi.driss@smu.ca.
Sincerely,
Hamdi Driss
This page intentionally left blank
PA RT 1 OV E RV IE W
Chapter 1
Introduction to Corporate Finance
E XE C UT IV E S UM M A RY
Barrick Gold Corporation has long been known as the largest gold mining company in the world. With the recent recession,
gold prices and Barrick’s share price increased as investors sought a safe investment. However, in 2013 Barrick’s shares
plunged in value by 54 percent to a 20-year low. While the accompanying fall in the value of gold was beyond the compa-
ny’s control, the poor performance was attributed primarily to the failure of key projects, misallocation of capital resources,
and the legal mess associated with the Pascua-Lama mine in Chile. Accompanying this poor performance, the company’s
proxy circular revealed that six executives were to be compensated for a combined $47.4 million and board chair Peter
Munk was to receive $4.3 million. In addition, the company awarded a US$11.9 million signing bonus to John Thornton for
joining the company as co-chair.1 Consequently, several major shareholders of Barrick Gold Corporation invoked a “say
on pay” vote, which rejected the pay packages and led to the appointment of new independent directors and to Munk
stepping down as board chair. Recent events at Barrick Gold Corporation illustrate both the importance of governance
issues and the need for management to make key corporate finance decisions relating to the following questions:
1. What long-term investment strategy should a company take on?
2. How can cash be raised?
3. How much short-term cash flow does a company need to pay its bills?
These are not the only questions of corporate finance. For example, another important question covered in this
text is: How should a company divide earnings between payouts to shareholders (dividends) and reinvestment? The
three questions on our list are among the most important, however, and, taken in order, they provide a rough outline
of our book. In Section 1.1 we introduce the basic ideas of corporate finance.
One way that companies raise cash to finance their investment activities is by selling or issuing securities. The
securities, sometimes called financial instruments or claims, may be roughly classified as equity or debt, loosely called
stocks or bonds. The difference between equity and debt is a basic distinction in the modern theory of finance. All
securities of a firm are claims that depend on or are contingent on the value of the firm.2 In Section 1.2 we show how
debt and equity securities depend on the firm’s value, and we describe them as different contingent claims.
In Section 1.3 we discuss different organizational forms and the pros and cons of the decision to become a corporation.
In Section 1.4 we take a close look at the goals of the corporation and discuss why maximizing shareholder
wealth is likely to be its primary goal. Throughout the rest of the book, we assume that the firm’s performance
depends on the value it creates for its shareholders. Shareholders are made better off when the value of their shares
is increased by the firm’s decisions.
A company raises cash by issuing securities in the financial markets. In Section 1.5 we describe some of the basic
features of the financial markets. Roughly speaking, there are two types of financial markets: money markets and
capital markets.
Section 1.6 covers trends in financial markets and management, and the last section of this chapter (Section 1.7)
outlines the rest of the book.
1
Theresa Tedesco, “Barrick Gold could have avoided say-on-pay public backlash,” Financial Post, April 23, 2013. http://business
.financialpost.com/news/fp-street/barrick-gold-executive-compensation-wednesday
2
We tend to use the words firm, company, and business interchangeably. However, there is a difference between these and
a corporation. We discuss this difference in Section 1.3.
2 Part 1 Overview
1.1 WHAT I S COR PO RATE F I NA NC E ?

Suppose you decide to start a firm to make tennis balls. To do this, you hire managers to buy
raw materials and assemble a workforce that will produce and sell finished tennis balls. In the
language of finance, you make an investment in assets, such as inventory, machinery, land, and
labour. The amount of cash you invest in assets must be matched by an equal amount of cash
raised by financing. When you begin to sell tennis balls, your firm will generate cash. This is
the basis of value creation. The purpose of the firm is to create value for you, the owner (share-
holder). In other words, the goal of the firm and its managers should be to maximize the value
of the shareholders’ wealth. The value is reflected in the framework of the simple balance-sheet
model of the firm.
The Balance-Sheet Model of the Firm

Suppose we take a financial snapshot of the firm and its activities at a single point in time. Figure 1.1,
a graphic conceptualization of the balance sheet, will help introduce you to corporate finance.
FIGURE 1.1
The Balance-Sheet Model of the Firm
Net Current liabilities

working
Current assets capital
Long-term debt
Fixed assets
1. Tangible fixed
assets
2. Intangible fixed Shareholders’ equity
assets
Total value of assets Total value of the firm to investors

Left side: total value of assets. Right side: total value of the firm to investors, which determines how the value
is distributed.
The assets of the firm are on the left side of the balance sheet. These assets can be thought of
as current and fixed. Fixed assets are those that will last a long time, such as a building. Some fixed
assets are tangible, such as machinery and equipment. Other fixed assets are intangible, such as
patents, trademarks, and the quality of management. The other category of assets, current assets,
comprises those that have short lives, such as inventory. The tennis balls that your firm has made
but not yet sold are part of its inventory. Unless you have overproduced, they will leave the firm
shortly.
Before a company can invest in an asset, it must obtain financing, which means that it
must raise the money to pay for the investment. The forms of financing are represented on the
right side of the balance sheet. A firm will issue (sell) pieces of paper called debt (loan agree-
ments) or equity shares (share certificates). Just as assets are classified as long lived or short
lived, so too are liabilities. A short-term debt is called a current liability. Short-term debt rep-
resents loans and other obligations that must be repaid within one year. Long-term debt is debt
that does not have to be repaid within one year. Shareholders’ equity represents the difference
between the value of the assets and the debt of the firm. In this sense, it is a residual claim on
the firm’s assets.
Chapter 1 Introduction to Corporate Finance 3
From the balance-sheet model of the firm, it is easy to see why finance can be thought of as the
study of the following three questions:
1. In what long-lived assets should the firm invest? This question concerns the left side of the
balance sheet. Of course, the types and proportions of assets the firm needs tend to be set
by the nature of the business. We use the terms capital budgeting and capital expenditure
to describe the process of making and managing expenditures on long-lived assets.
2. How can the firm raise cash for required capital expenditures? This question concerns the
right side of the balance sheet. The answer involves the firm’s capital structure, which
represents the proportions of the firm’s financing from current and long-term debt and
equity.
3. How should short-term operating cash flows be managed? This question concerns the
upper portion of the balance sheet. There is a mismatch between the timing of cash
inflows and cash outflows during operating activities. Furthermore, the amount and
timing of operating cash flows are not known with certainty. Financial managers must
attempt to manage the gaps in cash flow. From an accounting perspective, short-term
management of cash flow is associated with a firm’s net working capital, defined as
current assets minus current liabilities. From a financial perspective, the short-term
cash flow problem comes from the mismatching of cash inflows and outflows. It is the
subject of short-term finance.
Capital Structure
Financing arrangements determine how the value of the firm is sliced up like a pie. The persons or
institutions that buy debt from the firm are called creditors.3 The holders of equity shares are called
shareholders.
Thinking of the firm as a pie, initially, the size of the pie will depend on how well the firm has
made its investment decisions. After the firm has made its investment decisions, financial markets
determine the value of its assets (e.g., its buildings, land, and inventories).
The firm can then determine its capital structure. It might initially have raised the cash to invest
in its assets by issuing more debt than equity; now it can consider changing that mix by issuing more
equity and using the proceeds to buy back some of its debt. Financing decisions like this can be made
independently of the original investment decisions. The decisions to issue debt and equity affect how
the pie is sliced.
The pie we are thinking of is depicted in Figure 1.2. The size of the pie is the value of the firm
in the financial markets. We can write the value of the firm, V, as
V=B+S
where B is the value of the debt (bonds) and S is the value of the equity (shares). The pie diagram
considers two ways of slicing the pie: 50 percent debt and 50 percent equity, and 25 percent debt
and 75 percent equity. The way the pie is sliced could affect its value. If so, the goal of the financial
manager is to choose the ratio of debt to equity that makes the value of the pie—that is, the value of
the firm, V—as large as it can be.
The Financial Manager

In large firms, the finance activity is usually associated with a senior officer of the firm (such as a
chief financial officer (CFO)) and some lesser officers. Figure 1.3 depicts one example of a general
organizational structure emphasizing the finance activity within the firm. Reporting to the CFO are
the treasurer and the controller. The treasurer is responsible for handling cash flows, analyzing capi-
tal expenditures, and making financing plans. The controller handles the accounting function, which
includes taxes, cost and financial accounting, and information systems. Our discussion of corporate
finance is much more relevant to the treasurer’s function.
3
We tend to use the words creditors, debtholders, and bondholders interchangeably. In later chapters we examine the
differences among the kinds of creditors.
4 Part 1 Overview
FIGURE 1.2
Two Pie Models of the Firm
25% debt
50% debt 50% equity 75% equity
Capital structure 1 Capital structure 2
As Figure 1.3 shows, there are four general position categories under the treasurer. Corpora-
tions usually hire BA or MBA graduates with a finance background for these positions. In contrast,
the positions under the controller are geared more toward graduates with accounting majors or
professional designations, such as CGA, CMA, or CA.
We think that a financial manager’s most important job is to create value from the
firm’s capital budgeting, financing, and liquidity activities. How do financial managers create
value?
FIGURE 1.3
Hypothetical Organization Chart
Board of Directors
Chairman of the Board and

Chief Executive Officer (CEO)
Vice President and Chief

Financial Officer (CFO)
Treasurer Controller
Cost Accounting
Cash Manager Credit Manager Tax Manager Manager
Financial Information
Capital Financial
Accounting Systems
Expenditures Planning
Manager Manager
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Silloin kuuli hän Schornin tulevan. Hän sen täytyi olla, hänen
askeleensa ne olivat. Hän meni työpajaansa ja kuului sieltä kohta
palaavan puotiin.
Etuhuoneesta veivät portaat suoraan puodin viereiseen

huoneeseen. Rassmann meni sinne ja kuuli, kuinka Schorn kertoi
vaimolleen jutun kadonneesta avaimesta ja että "kaikki oli jälleen
kunnossa".
Nämä sanat tuntuivat hänestä epäselviltä. Mutta hän tuumi

itsekseen, ettei varkautta oltu vielä keksitty, sillä Schorn ei tiennyt
siitä mitään, ainoastaan, että avaimen otaksuttiin kadonneen.
Sitte kuuli hän, kuinka toveri kysyi häntä ja puhui hänestä yhtä
viattomasti kuin ennenkin. Tämä oli nyt sentään jonkinlainen
lohdutus hänelle ja vahvisti ehdottomasti hänen rohkeuttaan. Mutta
Ehlert ei ollut voinut huomata varkautta, koska, kuten Schorn tuumi,
kaikki oli kunnossa. Mutta olkoonpa — hän saattoi malttaa mielensä
ja — miettiä edelleen.
Niin kului tunti, silloin kuuli agitaattori toistamiseen askeleita

eteisessä. Jälleen hiipi hän portaihin. Kauppias kysyi rouva
Schornilta hänen miestään. "Hän on työpajassaan, herra Ehlert",
vastasi tämä; sitte tervehti hän huolettomalla äänellä:
"Ah — hyvää päivää, herra komissarius, mikä suuri kunnia.

Näkeekö teidät kerran —"
Mutta Rassmann vapisi kuumeisesti; hän tiesi, että nyt tuli

ratkaisu, sillä Ehlert oli tullut poliisin kera.
"Pois!" Hän ei tahtonut kuulla enempää. Arasti hiipi hän takaisin
huoneeseensa. Hän sulki ikkunan, istuutui pöydän ääreen ja tukki
korviaan. Ei, ei, hän ei tahtonut kuulla mitään.
Oli kulunut parisen minuuttia, kun hän kuuli alhaalta vihlaisevan

huudon, jollaisen täytyy päästää sen, joka ei löydä sanoja häntä
kohdanneen iskun johdosta, mutta jonka täytyi kuitenkin ahdistetusta
rinnastaan päästää jokin ääni.
Silloin kaikui kuin puoleksi rukoileva avunhuuto hänelle:
"Gustav, Gustav, missä olet. Kuules toki! Minä muka olen varas.
Gustav,
Gustav!"
Rassmann avasi jälleen ikkunan. Uteliaisuus kuulla omaa

häpeäänsä pakotti hänet ottamaan selvää tekonsa seurauksista.
Niin hänen nojatessaan ikkunasta ulos, valtasi hänen pirullinen

levollisuus. Schornin ensimäinen tuskanhuuto oli ohitse: sekuntti,
jota ajatellessaan hän oli vavissut. Ja talo ei ollut horjahtanut, se
seisoi vielä vanhalla paikallaan.
Toistamiseen kuuli Rassmann Schornin huutavan kuten

mielipuolen:
"Gustav, Gustav, missä olet?! — Minä muka olen varas!"
Silloin temmattiin ovi auki hänen takanaan; Hanna syöksähti

sisään kalman kalpeana ja huusi:
"Gustav, Jumalan tähden, tule alas, Vilhelmiä epäillään, että hän

olisi Ehlertillä varastanut — tulkaa minua auttamaan. En tiedä, mitä
minun on tehtävä. Luulen, että hän tulee mielipuoleksi tai tapahtuu
jokin onnettomuus!"
Ei, hän ei ollut huono, tämä kaunis rouva Schorn. Hänen itkusta
punertuneet silmänsä, todellinen tuska, joka muutamissa
minuuteissa oli vääristänyt hänen piirteensä, hänen solakan
vartalonsa vapiseminen, itse kädetkin, jotka olivat ristiytyneet kuin
rukoukseen — kaikki puhui hänen puhtaudestaan.
Rassmannista oli hän niin hurmaavan kaunis. Ja Rassmann osasi

mainiosti teeskennellä.
"M—itä, mitä on tapahtunut?"
"Taivaan tähden, tulkaa!"
Hanna tarttui Rassmannin käsivarteen, ikäänkuin tahtoisi vetää

kotiystävän pois.
He menivät alas, suuri toveri tuntien, että nyt riippui koko hänen
elämän onnensa hänen levollisuudestaan.
Takahuoneessa nojasi Schorn kalpeana seinään, puoleksi

murtuneena, kuten ruoko, johon äkillinen myrskyn puuska on
sattunut.
Schorn, kovan työn mies, joka oli aina ollut sama eikä koskaan
menettänyt levollisuuttaan, oli sinä hetkenä, jona hänen kunniaansa
rohettiin epäillä, tullut heikoksi kuin lapsi.
Että uskalsivatkin!
Kun Ehlert ja poliisi esittivät hänelle hellävaroen asian, ei hän
löytänyt järkevää sanaa: ainoastaan hirveä huuto, jonka Rassmann
oli kuullut, pääsi hänen rinnastaan. Sitte huusi hän äänekkäästi
toveriaan apuun, täytyi olla joku, joka suojeli häntä tässä
musertavassa tilaisuudessa, puhui hänen puolestaan, ja se saattoi
olla vain ystävä, sellainen hyvä, rakas ystävä ja puoluetoveri kuin
Rassmann, jolla oli samallainen käsitys elämästä kuin hänelläkin,
joka ajatteli kuten hän, tunsi kuten hän.
Schorn katsoi toveriinsa.
"Gustav, Gustav, suojele minua — kuules toki, minä olen muka

varas —"
Rassmann ei puhunut sanaakaan. Hän katsoi ympärilleen ja

silmäili toisia, ikäänkuin hänen täytyisi ensin saada selitys.
Ja Ehlert, luullen, ettei Schornin liiketoveri tiennyt vielä mitään,

kertoi kaikessa lyhykäisyydessä tapahtuman liikkeessään.
Rassmann kuunteli sellaisella hämmästyksellä kuin ei voisi selvitä
kummastuksestaan.
Huonekalukauppias kääntyi sitte jälleen Schorniin, häntä

viihdyttääkseen, poliisi puhutteli häntä samoin ystävällisesti ja sanoi:
"Herra Schorn, mieleni on paha, mutta laki vaatii sen ja

velvollisuuteni samoin. Minun täytyy pitää teillä kotitarkastus ja
samoin tarkastaa vaatteenne. Uskon teidän olevan syytön, niin totta
kuin tunnen teidät rehelliseksi mieheksi, mutta minun täytyy. Älkää
vaikeuttako virkani tehtäviä, pyydän sitä."
Schorn puhtaine ominetuntoineen tunsi näiden hyvää tarkettavien
sanojen johdosta itsensä rohkeammaksi.
Hän nousi pystyyn ja sanoi nopeasti, iloisesti liikutettuna:
"Kyllä, kyllä — etsikää talon jokainen nurkka, mutta ensiksi pukuni.

Odottakaas, tuolla riippuu vielä työpajassani takkini, joka minulla oli
samoin mukanani siellä, käyn sen noutamassa."
Ja kiireisesti poistui hän huoneesta, kuin sähkön elvyttämättä.

Virkamies seurasi häntä. Sitte astuivat molemmat jälleen sisään,
Schorn takkinsa kädessään.
Rassmann tarttui muutamaan tuoliin, nojatakseen siihen. Hän oli

luullut että rahat olivat jo löydetyt, ja hirmuinen hetki oli vasta nyt
tuleva — tämä ajoi hien hänen otsalleen.
Jos Schorn olisi pitänyt nippua tavallisena paperituppuna ja

viskannut pois? Silloin olisi paholainen vasta oikein pitänyt hänen
kanssansa peliään ja hän, hienostunut ihmiskunnan onnellistuttaja,
olisi joutunut yksin narriksi pelissä.
Schorn penkoi läsnäolijain nähden vielä liikutuksesta vapisevin

käsin takkinsa ulkotaskut. Samalla sanoi hän:
"Tässä, tässä — nähkääs, katsokaa tarkoin, herra komisarius, ei

mitään.
Ja katsokaas, rintataskussa samoin —"
Hän pysähtyi. Nurin käännetystä taskusta putosi kokoonpuristettu

paperitukku.
"Ainoastaan vanha, arvoton sanomalehden kappale", sanoi
Schorn jälleen, välittämättä paperista. Mutta virkamies kumartui,
nosti tupun ylös, levitti sen auki ja setelit tulivat näkyviin.
"Luulen sentään, etteivät nämä ole mitään arvottomia

sanomalehden kappaleita", sanoi hän, ja tällä kertaa ei hänen
äänessään kuulunut sääliä.
Samalla katsoi hän terävästi nuoreen mestariin, ikäänkuin tahtoisi

lukea hänen sielunsa syvyydet. Oliko Schorn tiennyt, että setelit
olivat siellä ja tarkotuksella antanut paperin pudota aivan arvotonna
lattialle? Virkamies, joka kiinnitti tarkkaavaisuutensa tähän
kysymykseen, tahtoi jotakin sanoa, mutta Schorn oli jo huomannut
rahat.
"Olen syytön, niin totta kuin Jumala tietää kaiken", sai hän
suustaan korisevalla äänellä. Samalla horjui hän kuin juopunut.
Kaikki hänen ympärillään oli sumussa, hän näki vain setelit, joihin
hänen silmänsä jäykkinä tuijottivat.
Ja samassa päästi hänen vaimonsa huudon; hänkin oli nähnyt

rahat.
Rassmann seisoi vielä liikahtamatta syrjässä. Mitä oli hänen

sanottava?
Näytelläkseen oikeaa hämmästystä oli hänen oltava vaiti.
Ehlert katsoi milloin Schorniin, milloin virkamieheen, joka yhä

pitäen rahoja kädessään kääntyi nyt häneen:
"Niitä on täsmälleen kaksisataa viisikymmentä markkaa. Eri

setelien suuruus sopii myös yhteen, ja — odottakaas, tahdon verrata
— noin — nähkääs, setelien numerot samoin. Ei epäilemistäkään,
varastetut rahanne ovat löytyneet."
Ja Ehlertillä ei ollut siihen mitään vastattavaa, hän vain nyökäytti

päätään; mutta virkamies sanoi lyhyesti:
"Herra Schorn — pyydän teitä seuraamaan minua. Lain nimessä

vangitsen teidät todistettuna syylliseksi varkauteen."
"Hyvä, hyvä — seuraan teitä, herra komissarius — olen syytön,

niin totta kuin Jumala elää."
Schorn, kalmankalpea Schorn, tuli jälleen vanhaksi maltilliseksi

mieheksi, joka aina osasi taipua välttämättömyyteen. Mutta Hanna
huudahti vielä kerran, sitte lyhistyi hän kokoon ja kaatui Rassmannin
syliin. Lapset syöksyivät sisään ja alkoivat äänekkäästi itkeä, niin
että Schorn kumartui alas heidän puoleensa ja sanoi kumpaakin
suudellen:
"Olkaa rauhalliset, olkaa rauhalliset. Isä palaa pian ja tuo lahjan

tullessaan."
Oi, hän uskoi niin vuorenlujasti pian palaavansa. Ja suureen

toveriin kääntyen lisäsi hän:
"Pidä kaikki kunnossa, Gustav — vanha Jumala elää vielä,

rangaistakseen sen lurjuksen, joka on tehnyt minulle tämän."
Ja vihdoin puhkesi hän kuumiin kyyneliin, joita oli niin kauvan

pidättänyt, heittäytyi Hannan syliin ja nyyhkytti:
"Oi, vaimoparkani — oi, te lapsiparkani, tulen niin kunniallisena ja

puhtaana takaisin kuin tekin olette." Ja he menivät.
Rassmann näki tämän, kuuli tämän, tunsi kaiken, mutta hän ei
syössyt esiin tunnustamaan syyllisyyttään.
Hän tunsi nuoren vaimon lämpimän ruumiin sylissään, hän näki

hengessään tämän pikku paratiisin ilman herraa ja vaikeni.
Hän oli lähellä päämääräänsä.
Kun Ami, koira, näki kuinka agitaattori piti hänen emäntäänsä

sylissään, syöksähti se jälleen ikenet irvillään pöydän alta
kotiystävän kimppuun. Vinkuen pakeni se takaisin.
Kun Schorn saattajineen kulki puodin lävitse kadulle, olivat

naapurit jo paikoillaan, tyydyttääkseen uteliaisuutensa
kurkistelemalla ovien raosta ja ikkunoista uutimien takaa.
Tämä oli tapaus, joka jo oli puhumisen arvoinen!
Marat toinen viiruili samoin parturituvastaan ja tirskui itsekseen:

"Oikein, oikein — nyt saat nähdä, mitä huono seura on — mutta
minä en sano mitään, en yleensä tiedä mitään. Jopahan, hihihi ‒"
Hän nauroi yksikseen ja tarttui pulloonsa.

XV
Kaupunki oli kovasti kuohuksissaan.
Schornista, tähän asti niin nuhteettomasta, niin arvossa pidetystä

Schornista, oli tullut varas. Kuka olisi sitä kuunaan ajatellut, kuka
olisi yleensä uskaltanut, huolimatta kaikista juoruista, jotka jo
kuukausia olivat kierrelleet huonosta taloudesta nuoren mestarin
talossa, epäillä kuunaan hänen persoonallista rehellisyyttään.
Ja kuitenkin oli hän varas, todellinen varas. Hänethän oli pidätetty,

setelit oli löydetty häneltä.
Lisäksi tulivat ne tosiasiat, että hän vielä pari päivää aikaisemmin

oli tarvinnut rahaa, kuten sanottiin, maksaakseen vekselin, joka oli
varkauspäivänä lankeava, mutta ettei hän ollut voinut saada niin
paljoa kuin sillä hetkellä tarvitsi. Tämä kaikki kulki väestön kesken
suusta suuhun ja leimasi hänet satunnaiseksi varkaaksi, sillä suurilla
joukoilla on tällaisissa oloissa tapana hörhistää korviaan, ymmärtää
kaikki väärin, mutta itserakkaudessaan lisätä yhä enemmän huhuun,
kunnes vihdoin alkuperäinen kirppu on onnellisesti kasvanut
elefantiksi.
Mutta kuinka olisi Schorniin nähden voinut toisin ollakaan.

Oi, nämä viisaat, he olivat kaiken tienneet edeltäpäin!
Tämä oli seuraus kommunistisesta yhteiselämästä. Siitä ei voinut

tulla mitään hyvää, kun mies sallii, että hänen vaimonsa hänen
omien silmiensä edessä — sen täytyy kaiken viedä perikatoon.
Sanaa "kommunistinen talous" käytettiin nyt jokaisessa
tilaisuudessa, milloin vain Schornin nimeä mainittiin.
"Pidä kaikki kunnossa", oli Schorn sanonut toverilleen, kun hänet

vangittiin, ja Rassmann tiesi menetellä sen mukaan.
Rouva Schorn oli jälleen toipunut ja istui ylhäällä etuhuoneessa

muutamalla nojatuolilla; molemmilla puolillaan lapset, jotka eivät
voineet lakata itkemästä.
"Mitä tästä tulee, Gustav?" sanoi Hanna, "Olen niin heikko, että
voin tuskin pysyä pystyssä. Ymmärrykseni pysähtyy, kun koetan
ajatella, että mieheni tosiaankin — mutta ei, ei, niin ei voi olla —
hänen viattomuutensa täytyy tulla selville."
Rassmann koetti lohduttaa, sitte sanoi hän:
"Hanna, te tiedätte, että olen ystävänne, miehenne on

poissaolonsa ajaksi jättänyt kaiken minun käsiini. Meidän täytyy
sentähden olla avomieliset. Ihminen on ikuinen arvoitus. Emme
tiedä, mitä miehenne sielussa on tapahtunut. Puhutaan yleensä, että
Vilhelmillä oli tänään joku vekseli lunastettavana, ja niin tosiaankin
on, hän on sen minulle sanonut. Kahden aikaan piti hänen maksaa
suurempi summa Samuel Hirschille alhaalla torin varrella. Velka
täytyy meidän suorittaa tai ainakin saada aikaan joku sopimus.
Tiedättekö, onko vielä rahaa kassassa?"
Rouva Schorn ojensi hänelle heti avaimen.
"Tässä katsokaa — luulen, että siellä on vielä kaksisataa taalaria.

Jollei muu auta, otamme viimeisetkin — maksakaa te. On vielä
joukko laskuja perittävänä, niistä saamme taas pian rahaa."
Rassmann tarttui avaimeen, jonka saamista haltuunsa hän jo oli

odottanut, ja viimeinenkin pula oli voitettu, ilman että hänen arvonsa
oli siitä kärsinyt. Kun herra Samuel Hirsch täsmälleen kahden
aikaan, aavistamatta vielä Schornin vangitsemisesta, saapui
esittämään vekseliään, sai hän rahansa penniä myöten.
Miten syvän kumarruksen hän tekikään!
"Jos milloin joudutte pulaan, herra Rassmann —"
Agitaattori välitti hänestä viisi. Hän saattoi nyt maksaa samalla

mitalla, sillä hänellä oli nyt kädessään valtikka, jota hän oli niin
monina unettomina öinä kaihonnut.
Kaksi viikkoa oli kulunut Schornin vangitsemisen jälkeen. Tutkinto

oli toimitettu ilman että mitään vapauttavaa esiintyi hänen
hyväkseen. Kaikki puhui häntä vastaan: hänen olonsa yksin
huoneustossa, hänen paikantuntemuksensa, se tosiasia, että tarvitsi
rahaa ja ennen kaikkea se seikka, että rahat oli löydetty häneltä.
Piirioikeuden yleinen syyttäjä antoi julkisen kehotuksen henkilöille,
jotka tiesivät jotakin asiaan, ja muutamia kaupungin asukkaita
ilmottautuikin. Ilmottautui Schornin kelpo kilpailija, jolta tämä oli
pyytänyt kuuttasataa taalaria. Hän kertoi siitä tuiki tarkkaan, ja arveli
(haluten näytellä jutussa pääosaa), että Schorn oli ollut hirveän
kiihottunut, ja oli tehnyt häneen sen vaikutuksen kuin täytyisi hänen
joutua epätoivoon, jollei saisi rahoja.
Sitte tuli Schornin liikeystävä Pitkäkadulta, hän, jolta Schorn oli
saanut rahat vekseliä vastaan. Mutta ainoastaan viisisataa taalaria.
Hän tarvitsi siis vielä varmaan sata taalaria.
Schorn kielsi kaiken.
"Olen viaton, niin totta kuin Jumala sen tietää", sanoi hän yhä ja
niin pyhällä vakavuudella, että jokainen, joka nämä sanat kuuli, läksi
sieltä järkytettynä ja uskoi häneen.
Häneltä kysyttiin, mitä hän sitten oli tehnyt saamillaan rahoilla,

hänen oli näytettävä, kenelle hänellä oli vekselivelka maksettavana.
Schorn vaikeni, hänen täytyi vaieta. Pettäisikö hän oman
puolueensa? Paljastaisiko hän Rassmannin sosiaalidemokraattiseksi
agitaattoriksi? Oliko hänen sanottava, että viisisataa taalaria tarvittiin
agitatsioonitarkotuksiin Rassmannin valtiopäivämiesvaalin hyväksi?
Oliko hänen ja Rassmannin siten antauduttava alttiiksi poikkeuslaille
ja kärsittävä sen määräämä rangaistus kaikessa ankaruudessaan?
Ei, ei, se ei käynyt. Itse olisi kyllä voinut rangaistuksen kärsiä, häntä
ei olisi puolue kaivannut, mutta Rassmann, Rassmann olisi ollut
puolueelta mennyt mies; aivan katsomatta siihen, että koko
puolueen järjestö olisi mahdollisesti saanut tuntuvan iskun. Ei, vielä
kerran ei, mieluummin oli pysyttävä vaiti tai jätettävä oikeus siihen
uskoon, että hänellä oli tosiaankin ollut vekselisitoumuksia.
"Niin", sanoi hän sitte tutkintatuomarille, "se on totta, minulla on

ollut ahdistavia vekselisitoumuksia, mutta minä en sano kenelle, ja
vaikka kiduttaisitte minua, herra tuomari, en sano sittekään. Mutta
minä vannon Jumalan vanhurskauden nimessä — en ole varas."
Tuomari pudisti päätänsä. Hänen kävi sääliksi, mutta hän ei

päässyt tästä miehestä selville. Sitte kysyi hän Schornilta kadonnutta
avainta, sama vastaus kuin ennenkin!
Sitte ilmottautui eräänä päivänä muuan peltomies, tuoden

mukanaan jo puoleksi ruostuneen avaimen, se tunnettiin Ehlertin
omaisuudeksi. Mies oli sen löytänyt pellolta Schornin puutarhan
takaa.
Mestari oli sen siis heittänyt sinne — kentiesi puutarhansa aidan

ylitse? Tämä oli viimeinen todistus, joka sulki ketjun Schornin
ympärille. Nyt ei käynyt enää kieltäminen. "Niin paatunut ihminen",
sanoivat rakkaat lähimmäiset. "Kuka olisi sitä uskonut, mutta
tyynessä vedessä kalat kutevat."
Itse oikeus ja poliisi alkoivat nyt horjua mielipiteessään Schornin

hyväksi, ja virkamiehet katsoivat häneen toisilla silmin kuin tähän
asti. Jos hän olisi heti kaiken tunnustanut, olisivat tuominneet
lempeämmin, mutta vetää heitä siten nenästä! Tämä ärsytti heitä.
Ja kuitenkin tunnettiin kaupungissa osanottoa Schornin kohtaloon

ja uskottiin hänen viattomuuteensa. Eihän voitu vieläkään käsittää!
Nähtiin yhä silmien edessä tämä aina ystävällinen, hyväntahtoinen
mies sinisine esiliinoineen, joka ei voinut kärpäsellekään tehdä
pahaa ja kymmenen kertaa mieluummin kärsi itse vahinkoa kuin teki
kenellekään väärin, tai ketään vahingoitti.
"Oikeus kyllä huomaa hänen viattomuutensa, siitähän se lopulta

riippuu", sanoivat uskovaiset ja rauhottuivat siihen.
Rassmannin oli muutamia kertoja sallittu puhutella Schornia

vankilassa virkamiehen läsnäollessa. Luonnollisesti ei Rassmann
sitä tehnyt mielellään, mutta hänen täytyi se tehdä, vanki oli häntä
halunnut tavata. Hanna tahtoi myös nähdä miestään, mutta
Rassmann osasi sen estää, sanoen: "Vilhelm käski sanoa
nimenomaan, ettette tulisi — hänenhän täytyy kuitenkin muutamain
päiväin kuluttua päästä vapaaksi".
Oi, hän oli lujasti vakuutettu, että toveri kyllä tuomittaisiin.
Muutaman kerran heidän keskustellessaan sai Schorn myös

tilaisuuden kysyä hiljaa: "Kuinka on vaalisi laita?" — "Hyvin, hyvin,
oivallisesti", vastasi Rassmann, "niin pian kuin olet vapaa, lähden
matkalle. Kymmenen päivän kuluttua on ratkaisu. Minut on
yksimielisesti asetettu ehdokkaaksi ja pääsen lävitse. Siinä ei ole
epäilemistäkään."
Se oli lohdutus Schornille yksinäisyydessään.
"Pidä kaikki kunnossa ja sano Hannalle, että sinä saat kaikkia

asioita hallita ja vallita kuten tahdot. Kun ei minua ole siellä, olet sinä
herra talossa. Onhan sinulla valtakirjani, ja mikä minun on, se on
sinun, sen tiedät jo aikoja sitte. Mutta odotas", lisäsi hän nopeasti,
"kirjotan sen mieluummin itse Hannalle, tiedäthän, millaisia naiset
ovat —"
Ei ollut vaikea saada paperia ja kirjottaa se heti. Ja kun avoimessa

kirjeessä ei ollut mitään epäiltävää, saattoi Rassmann ottaa sen
mukaansa.
Nyt oli hänellä mustaa Valkosella — hän oli herra.
Oi, kuinka hän osasikaan kotona näytellä murheellista ja sanoi

Hannalle kymmenen kertaa tunnissa, ettei hän voinut olla onnellinen
liikettä johtaessaan. Oi, kuinka hän yhtenä minuuttina surkutteli
ystävätään, ja toisena valoi pisaroittain myrkkyä nuoren vaimon
mieleen, että tämän täytyi uskoa miehensä syyllisyyteen.
Kun Hanna sitte sanoi: "Mutta, Gustav, minä en voi sitä uskoa, se.
olisi ikuinen häpeä nimellemme", — niin oli Rassmannilla vanha
reseptinsä, joka kuului aina samoin: "Mutta me olemme kaikki
ihmisiä, Hanna, ja voimme tehdä syntiä. Vilhelmillä on salaisuudessa
täytynyt olla paljo velkoja, mihin hän muuten olisi tarvinnut viisisataa
taalaria? Kenties ei liike ole viime aikoina käynyt niin hyvin — hänen
on täytynyt tehdä se epätoivossaan —"
Tämän sanoi hän niin usein ja sellaisella valittavalla äänellä, että

usko miehensä syyllisyyteen täytyi piintyä rouva Schornin mieleen.
Samalla ei Rassmann koskaan unhottanut, että hänellä

kotiystävänä ja sosialistina oli aina vanha oikeutensa sosialistirouvaa
kohtaan. Hän kietoi käsivartensa rouva Schornin vyötärölle, aivan
kuin tämä olisi hänen vaimonsa, jota hän lohdutteli, eikä erään
toisen.
Mutta hänellähän oli oikeus siihen, sillä: "Toverin vaimo oli myös
hänen vaimonsa".
Oikeuden istuntopäivä tuli. Kaupungissa sellaisessa kuin X oli

tämä tapaus, joka piti mieliä kiihkossa.
Oikeussaliin eivät mahtuneet kaikki uteliaat, jotka virtailivat

saapuville katsoakseen Schornia kasvoista kasvoihin.
Syytöskirja luettiin, todistajat, jotka kaikki puhuivat Schornia

vastaan, tekivät valansa, ja hän — kielsi kaiken. Se oli vanha juttu.
Hänen äänensä kuului rauhalliselta, vaatimattomalta ja
kohteliaalta kuten aina.
Hän ei tiennyt, miten rahat olivat tulleet hänen taskuunsa. Kaikki

olivat liittoutuneet häntä vastaan, mutta hän oli viaton, sen tiesi
parhaiten hänen omatuntonsa. Jumala tuomitsisi kyllä kerran ne,
jotka hänet tuomitsevat tänään.
Kun hän oli tämän sanonut lujalla äänellä, värisi jokainen,

ikäänkuin olisi sen totuudesta vakuutettu; mutta kuka voi syytettyä
auttaa? Ei kukaan. Yksi sentään. Takana istui nurkkaan
kyyristyneenä, tuskin näkyvissä pieni kähertäjä ja hiustenleikkaaja
Pätzoldt yhteenpuristetuin huulin. Hän olisi voinut astua esiin ja
kertoa kuinka oli nähnyt Rassmannin hyppäävän ulos ikkunasta, ja
koko asiankäsittely olisi silloin saanut toisen käänteen. Mutta Marat
toisen viha porvaristoa kohtaan ja erittäin tätä miestä, joka oli
hänestä käyttänyt sanoja "huono seura", oli suurempi kuin hänen
oikeudenrakkautensa. Todellinen syyllinen sai pikemmin olla
vapaalla jalalla kuin tämä Schorn. Rassmann kyllä saisi katua
tekoaan! Siihen oli Pätzoldtilla suunnitelmansa valmiina. Mutta ensin
täytyi Schornin kaatua.
Ja kenpä tiesi pitäisikö Schorn siitä, jos Rassmann tehtäisiin

epäluulon alaiseksi? Siitä saattoi pieni kähertäjä pian saada
todistuksen.
Oikeus tahtoi juuri vetäytyä neuvotteluun, kun tuomarit vielä kerran

panivat viisaat päänsä yhteen. Syntyi yleinen liike. Viime
hengenvedossa oli vielä ilmottautunut uusi todistaja. Muuan Ehlertin
naapuri luuli nähneensä varkauden aikana "herra Rassmannin,
Schornin liiketoverin", kuinka tämä poistui Ehlertin talosta ja meni yli
kadun. Hän luuli voivansa tuntea aivan varmasti mainitun herran, ja
tahtoi mennä siitä valalle.
Katsojain puolelta kuului äänekästä hälinää. Ilmoittautui vielä eräs

rouva, joka samoin luuli nähneensä "herra liiketoverin" samaan
aikaan.
Rassmann, joka istui rouva Schornin rinnalla todistajain penkillä,

tuli kalmankalpeaksi. Äkkiä kuuli hän, kuinka hänen naapurinsa
kuiskutti: "Mutta ettehän te ollut poissa kotoa koko siihen aikaan."
Nämä sanat riittivät antamaan Rassmannille vanhan varmuutensa.

Hän tiesi, että kaikki riippui hänen rauhallisuudestaan.
Agitaattoria kuulusteltiin heti.
Kovalla äänellä, puoleksi hymyillen, sanoi hän:
"Hyvät herrat, tunnen omantuntoni liian puhtaaksi, ryhtyäkseni

vastaamaan juuri herätettyyn epäluuloon. Molempien todistajain
lausunnot voivat perustua ainoastaan näköhäiriöön. Tässä
kaupungissa on useampia ihmisiä, joiden ulkonäkö muistuttaa
minua. Sitä paitsi voi rouva Schorn ja hänen palvelustyttönsä
todistaa, että kymmenen aikaan palattuani eräiltä liikeasioilta en
enää poistunut huoneestani koko aamupäivän kuluessa. Mutta
varkauden on täytynyt tapahtua kymmenen tienoilla."
Hän sanoi tämän niin rauhallisesti ja vakuuttavasti kuin olisi

hänestä naurettavaa, jos joku vielä epäilisi hänen sanojaan.
Rouva Schorn todisti ne. Oikeus päätti kutsua myös palvelustytön,

kuusitoistavuotiaan orvon, heti kuulusteltavaksi.
Tyttö oli epävarma. Hän ei voinut tarkoin sanoa, oliko Rassmann
tosiaankin ollut koko ajan kotona. Tämä lisäsi uutta jännitystä. Mutta
ei ollut lainkaan ajateltavissa, että Rassmann olisi tehnyt teon. Mitä
syytä olisi ollut sivistyneellä miehellä leimata ystävänsä varkaaksi?
Puheenjohtaja itse painosti tätä ja kehotti molempia todistajia

harkitsemaan, eivätkö he olleet erehtyneet, kun luulivat nähneensä
Rassmannin. Nämä pysyivät lausunnossaan. Rassmann vapisi koko
ruumiiltaan.
Puheenjohtaja selitti siinä tapauksessa täytyvänsä määrätä uuden

tutkimuksen ja lykätä käsittelyn toistaiseksi. Rassmann silmäili kuin
apua rukoillen Schorniin. Heidän katseensa kohtasivat toisensa.
Schorn ymmärsi tämän katseen.
Jos Rassmann nyt joutuisi tutkittavaksi tällaisessa jutussa, silloin

olisivat ainaiseksi lopussa hänen toiveensa päästä valtiopäiville. Ja
hänet toki täytyi säilyttää puolueelle! Kuinka uskalletuinkaan hänen
paras ystävänsä asettaa epäiltäväksi moisesta teosta?
Rehellisen Schornin sydän kuohui.
Eikö edes voitu uskoa hänen vaimonsa sanoihin? Ja hän oli ne

sentään vahvistanut valallaan. Ei, mieluummin antoi hän itsensä
tuomita syyllisenä kuin saattaa onnettomuutta rakkaimmilleen.
Schorn taisteli muutamassa minuutissa itsekseen hirvittävän

taistelun. Huomattiin, että syytetty tahtoi vielä kerran puhua. Hänelle
myönnettiin sananvuoro. Tuli haudanhiljaisuus.
Ja Schorn sanoi puolimurtuneella äänellä, mutta selvästi:

"Nyt, kun näen että syyttömiä koetetaan tehdä epäiltäviksi, en
tahdo enää kieltää. Tunnustan tehneeni varkauden — — tarvitsin
rahaa maksaakseni vekselin ja jouduin kiusaukseen — antakoon
Jumala minulle anteeksi — hän tietää —"
Hän ei päässyt pitemmälle, vaan kaatui maahan. Todistajain

penkiltä kuului vihlaiseva naisen huuto — Schornin vaimon. Seurasi
hälinä ja käsittämätön mielten hämminki. Noudettiin vettä ja vietiin
Schornin vaimo ulos.
Tuomarit vetääntyivät pois. Puolen tunnin kuluttua langettivat he

tuomion. Schorn tuomittiin vuodeksi kuritushuoneeseen.
Uteliaat virtailivat ulos, kiintyneinä äänekkääseen mielipiteiden

vaihtoon. "Sääli häntä", sanoi muuan. "Niin paatunut!" sanoi toinen.
Rassmannia onniteltiin, ja niitä kahta todistajaa, jotka esiintyivät

häntä vastaan, nimitettiin "kurjiksi panettelijoiksi".
Mutta Marat toinen silmäili ivallisesti agitaattoriin ja kuiskasi

hänelle kiviportaissa:
"Kansalainen Rassmann — olette tällä kertaa päässyt kolhulla,

mutta katsokaa eteenne, ettette ensi kerralla juostessanne
kompastu". Ja samalla hän nauroi vanhan kiirityksensä.
Agitaattori kuuli tuskin sitä, mutta pieni kähertäjä hieroi käsiään.

Hänellä olivat, kuten sanottu, omat suunnitelmansa.
XVI
Schorn oli viety Sonnenbergin kuritushuoneeseen. Ensin oli

suostuttu hänen viimeiseen pyyntöönsä, että hän saisi vielä kerran
puhutella liiketoveriaan Rassmannia. Hänelle sanottiin, että hänen
vaimonsa samoin tahtoi häntä vielä kerran puhutella, että hänen
lapsensa ikävöivät häntä. — Schorn pudisti päätänsä. Hän tahtoi
puhutella vain liiketoveriaan. Kun hän nyt puhui, ei hän enää
kohottanut katsettaan, ei katsonut ketään kasvoihin. Hän ei enää,
hymyillyt kuten ennen, hänellä ei ollut sama hyväntahtoinen ilme
kasvoillaan — hänen kasvonsa olivat jäykät, hänen liikkeensä olivat
vielä kulmikkaammat kuin ennen, hänen niskansa vielä kumarampi
kuin konsanaan: hän näytti ukolta, jolle kohtalo oli hänen elämänsä
kukoistusaikaan antanut musertavan iskun. Takanaan näki hän
onnen sillan olevan poikki, edessään haudan portit avoinna.
"Olen häväisty", sanoi hän Rassmannille. "Niin kauvan kun

nimessäni on vielä tahra, ei vaimoni eivätkä lapseni saa minuun
koskettaa, en tahdo heidän huuliaan saastuttaa. Ja kuitenkin olen
minä niin puhdas, oi, Gustav, Gustav —"
Hän heittäytyi toverinsa rintaa vasten, mutta ei voinut itkeä. Hänen

sydämensä oli luja, vaikka se olikin niin hellä. Mutta Rassmann pysyi

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Corporate Finance Canadian Edition &

4 More Prof Stephen A. Ross (Author)

Printed and bound in Canada.

Director of Product, Canada: Rhondda Mcnabb

PA RT 1 17 Capital Structure: Limits to the Use of Debt 459

Pr ef ace  xviii CHAPTER 2

Executive Summary 78 CHAPTER 6

Managerial Perspective 179 The Tax Shield Approach 218

10.1 R E TUR N S 268 11.6 DI VE RS I FI CAT I ON : AN E X AM P L E 3 06

CHAPTER 13 14.1 CAN FI N AN C I N G DE C I S I ON S

Seniority 422 CHAPTER 17

Executive Summary 493 19.4 RE P U RC H AS E OF S TOC K 52 0

20.3 THE CA SH O FFER 548 21.5 S OME DI FFE RE N T T Y P E S

Why Are Leases Offered by Both Executive Summary 655

25.8 C O NV E R SI ON P OL ICY 689 Concept Questions 728

Executive Summary 768 30.4 DE T E RMI N I N G T H E SY N E RGY

Agreements to Avoid Bankruptcy 830 32.4 I N T E RE S T RAT E S AN D

NEW TO THE EIGHTH CANADIAN EDITION

In Their Own Words Boxes

CONCEPT • What are three basic questions of corporate finance?

Alternative $10,000 $11,424

Equations 1. Name of the corporation.

Highlighted Concepts 4. Nature of the rights granted to shareholders.

A Comparison of Partnerships and Corporations

ros70114_ch01_001-029.indd 10 12/3/18 5:45 PM

Summary and Conclusions • What is free cash flow?

List of Key Terms

Questions and Problems

Microsoft Excel Problems

MARKET LEADING TECHNOLOGY

Connect Key Features

• Microsoft PowerPoint Presentations. Updated by Tsvetanka Karagyozova, Department of

SUPERIOR LEARNING SOLUTIONS AND SUPPORT

Professor Hamdi Driss

1.1 WHAT I S COR PO RATE F I NA NC E ?

The Balance-Sheet Model of the Firm

Net Current liabilities

Total value of assets Total value of the firm to investors

The Financial Manager

50% debt 50% equity 75% equity

Capital structure 1 Capital structure 2

Chairman of the Board and

Vice President and Chief

Etuhuoneesta veivät portaat suoraan puodin viereiseen

Nämä sanat tuntuivat hänestä epäselviltä. Mutta hän tuumi

Niin kului tunti, silloin kuuli agitaattori toistamiseen askeleita

"Ah — hyvää päivää, herra komissarius, mikä suuri kunnia.

Mutta Rassmann vapisi kuumeisesti; hän tiesi, että nyt tuli

Oli kulunut parisen minuuttia, kun hän kuuli alhaalta vihlaisevan

Silloin kaikui kuin puoleksi rukoileva avunhuuto hänelle:

Rassmann avasi jälleen ikkunan. Uteliaisuus kuulla omaa

Niin hänen nojatessaan ikkunasta ulos, valtasi hänen pirullinen

Toistamiseen kuuli Rassmann Schornin huutavan kuten

Silloin temmattiin ovi auki hänen takanaan; Hanna syöksähti

"Gustav, Jumalan tähden, tule alas, Vilhelmiä epäillään, että hän

Rassmannista oli hän niin hurmaavan kaunis. Ja Rassmann osasi

"M—itä, mitä on tapahtunut?"

"Taivaan tähden, tulkaa!"

Hanna tarttui Rassmannin käsivarteen, ikäänkuin tahtoisi vetää

Takahuoneessa nojasi Schorn kalpeana seinään, puoleksi

Schorn katsoi toveriinsa.

"Gustav, Gustav, suojele minua — kuules toki, minä olen muka

Rassmann ei puhunut sanaakaan. Hän katsoi ympärilleen ja

Pr ef ace xviii CHAPTER 2