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GLOBAL
EDITION
Principles Managerial
of Finance
SIXTEENTH EDITION
Chad J. Zutter | Scott B. Smart
Principles of
Managerial Finance
A01_ZUTT0648_16_GE_FM.indd 1 24/03/21 5:29 PM

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SIXTEENTH EDITION
GLOBAL EDITION
Principles of
Managerial Finance
Chad J. Zutter
University of Pittsburgh
Scott B. Smart
Indiana University
Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong
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© Pearson Education Limited 2022
The rights of Chad J. Zutter and Scott B. Smart to be identified as the authors of this work have been asserted by them in accordance
with the Copyright, Designs and Patents Act 1988.
Authorized adaptation from the United States edition, entitled Principles of Managerial Finance, 16th edition, ISBN 978-0-13-
694588-8, by Chad J. Zutter and Scott B. Smart, published by Pearson Education © 2022.
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British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library
ISBN 10: 1-292-40064-1

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Dedicated to my parents who
have always been there for me.
CJZ
Dedicated to
my father, Kenneth Smart.
SBS


Brief Contents
Contents 9
About the Authors 29
Preface 31
Acknowledgments 41
PART 1 Introduction to Managerial PART 6 Long-Term Financial

Finance 45 Decisions 639
1 The Role of Managerial Finance 46 13 Capital Structure 640
2 The Financial Market Environment 87 14 Payout Policy 685
PART 2 Financial Tools 123 PART 7 Short-Term Financial

3 F
inancial Statements and Ratio
Decisions 735
Analysis 124 15 W
orking Capital and Current Assets
4 Long- and Short-Term Financial Management 736
Planning 189 16 Current Liabilities Management 774
5 Time Value of Money 238
PART 8 Special Topics in Managerial
PART 3 Valuation of Securities 307 Finance 809
6 Interest Rates and Bond Valuation 308 17 Hybrid and Derivative Securities 810
7 Stock Valuation 362 18 Mergers, LBOs, Divestitures, and Business
Failure 848
PART 4 Risk and the Required Rate 19 International Managerial Finance 892
of Return 403
8 Risk and Return 404
9 The Cost of Capital 463
Appendix A-1
PART 5 Long-Term Investment
Glossary G-1
Decisions 499
Index I-1
10 Capital Budgeting Techniques 500
11 Capital Budgeting Cash Flows 546
12 Risk and Refinements in Capital
Budgeting 588


Contents
About the Authors 29

Preface 31
Acknowledgments 41
PART 1 Introduction to Managerial Finance 45
1 1.1 Finance and the Firm 48 FOCUS ON PEOPLE, PLANET/

PROFITS: The Business Roundtable
The Role of What Is Finance? 48
Revisits the Goal of a Corporation 68
Managerial What Is a Firm? 49
Finance 46 Agency Problems and Agency Costs 73
What Is the Goal of the Firm? 49
Corporate Governance 74
FOCUS ON ETHICS:
➔ REVIEW QUESTIONS 78
Do Corporate Executives Have a
Social Responsibility? 50
1.4 Developing Skills for Your
The Role of Business Ethics 54
Career 78
FOCUS ON PRACTICE:
Critical Thinking 78
Must Search Engines Screen Out Fake
News? 55 Communication and Collaboration 78
▲ Paul Andreassen/Alamy Financial Computing Skills 79
Stock Photo
Summary 79
1.2 Managing the Firm 56
Opener-In-Review 80
The Managerial Finance Function 57
Self-Test Problem 81
➔ REVIEW QUESTIONS 64 Warm-Up Exercises 81
Problems 82
1.3 Organizational Forms, Spreadsheet Exercise 86
Taxation, and the Principal–Agent
Relationship 65
Legal Forms of Business
Organization 65

10 Contents
2 2.1 Financial Institutions 89 2.4 The Securities Issuing

Process 105
The Financial Commercial Banks, Investment Banks, and
Market Environ- the Shadow Banking System 89 Issuing Common Stock 105
ment 87 ➔ REVIEW QUESTIONS 91 ➔ REVIEW QUESTIONS 112
2.2 Financial Markets 91 2.5 Financial Markets in

The Relationship Between Institutions and Crisis 112
Markets 91 Financial Institutions and Real Estate
The Money Market 92 Finance 112
▲ YuniqueB/Shutterstock The Capital Market 93 Spillover Effects and Recovery from the
FOCUS ON PRACTICE: Great Recession 114
Berkshire Hathaway: Can Buffett Be Pandemic Effects on Financial Mar-
Replaced? 94 kets 115
The Efficient Markets Hypothesis 98 FOCUS ON PEOPLE/PLANET/
FOCUS ON ETHICS: PROFITS: Financial Institutions Pressure
Companies on ESG Scores 115
Should Insider Trading Be
Legal? 102 ➔ REVIEW QUESTIONS 116
Summary 116
Opener-In-Review 118
2.3 Regulation of Financial
Markets and Institutions 103
Warm-Up Exercises 118
Regulations Governing Financial
Problems 119
Institutions 103
Spreadsheet Exercise 121
Regulations Governing Financial
INTEGRATIVE CASE 1 South
Markets 104
Trading Ltd. 122

11
Contents
PART 2 Financial Tools 123
3 3.1 Mandatory Financial

Reports of Public Companies 126
Times Interest Earned Ratio 150
Financial Fixed-Payment Coverage Ratio 150
Statements and The Letter to Stockholders 126 ➔ REVIEW QUESTIONS 151
Ratio Analysis 124 The Four Key Financial Statements 126
FOCUS ON PRACTICE: 3.6 Profitability Ratios 151
More Countries Adopt International Common-Size Income Statements 151
Financial Reporting Standards 127
Gross Profit Margin 152
FOCUS ON ETHICS:
Operating Profit Margin 154
Earnings Shenanigans 130
Net Profit Margin 154
Notes to the Financial Statements 133
▲ Gado Images/Alamy Earnings per Share (EPS) 155
Stock Photo
Consolidating International Financial
Statements 134 Return on Total Assets (ROA) 156
➔ REVIEW QUESTIONS 135 Return on Equity (ROE) 156
3.2 Using Financial Ratios 135
Interested Parties 135 3.7 Market Ratios 158
Types of Ratio Comparisons 135 Price/Earnings (P/E) Ratio 158
Cautions About Using Ratio Market/Book (M/B) Ratio 160
Analysis 138 ➔ REVIEW QUESTION 161
3.8 A Complete Ratio
3.3 Liquidity Ratios 139 Analysis 161
Current Ratio 140 Summary of Target’s Financial
Quick (Acid-Test) Ratio 141 Condition 162
DuPont System of Analysis 163
3.4 Activity Ratios 143
Summary 166
Inventory Turnover Ratio 143
Average Collection Period 144 Self-Test Problems 168
Average Payment Period 145 Warm-Up Exercises 169
Total Asset Turnover 146 Problems 170
➔ REVIEW QUESTION 146 Spreadsheet Exercise 187
3.5 Debt Ratios 147

Debt Ratio 148
Debt-to-Equity Ratio 149

12 Contents
4 4.1 The Financial Planning

Process 191
4.4 Profit Planning: Pro Forma
Statements 212
Long- and Short-
Term Financial Long-Term (Strategic) Financial Plans 191 Current Year’s Financial Statements 212
Planning 189 Short-Term (Operating) Financial Sales Forecast 214
Plans 192 ➔ REVIEW QUESTION 214
4.5 Preparing the Pro Forma
4.2 Measuring the Firm’s Cash Income Statement 214
Flow 193 Considering Types of Costs and
Depreciation 193 Expenses 215
Depreciation Methods 194 ➔ REVIEW QUESTIONS 216
▲ Graham Oliver/Alamy
Stock Photo Developing the Statement of Cash
Flows 196 4.6 Preparing the Pro Forma
Free Cash Flow 201 Balance Sheet 216
FOCUS ON ETHICS: FOCUS ON PEOPLE/PLANET/
PROFITS: Financial Planning and Financial
Is Excess Cash Always a Good
Sustainability 218
Thing? 202
FOCUS ON PRACTICE: ➔ REVIEW QUESTIONS 219
Free Cash Flow at Abercrombie &
Fitch 203 4.7 Evaluation of Pro Forma
Statements 219
4.3 Cash Planning: Cash
Summary 220
Budgets 204
The Sales Forecast 204
Self-Test Problems 222
Preparing the Cash Budget 205 Warm-Up Exercises 223
Evaluating the Cash Budget 210 Problems 224
Coping with Uncertainty in the Cash Spreadsheet Exercise 237
Budget 211

13
Contents
5 5.1 The Role of Time Value in

Finance 240
A General Equation for
Compounding 266
Time Value of
Money 238 Future Value Versus Present Value 240 Using Computational Tools for
Compounding 267
Computational Tools 241
Continuous Compounding 268
Basic Patterns of Cash Flow 243
Nominal and Effective Annual Rates
➔ REVIEW QUESTIONS 244 of Interest 268
5.2 Single Amounts 244
FOCUS ON ETHICS:
Future Value of a Single Amount 244
Was the Deal for Manhattan a
▲ Piotr Swat/Alamy Stock Present Value of a Single Amount 248 Swindle? 271
Photo
➔ REVIEW QUESTIONS 251 ➔ EXCEL REVIEW QUESTIONS 272
➔ EXCEL REVIEW QUESTIONS 251
5.6 Special Applications of Time
5.3 Annuities 252 Value 272
Types of Annuities 252 Determining Deposits Needed to
Finding the Future Value of an Ordinary Accumulate a Future Sum 272
Annuity 253 Loan Amortization 273
Finding the Present Value of an Finding Interest or Growth Rates 275
Ordinary Annuity 254 FOCUS ON PRACTICE:
Finding the Future Value of an Annuity New Century Brings Trouble for
Due 256 Subprime Mortgages 276
Finding the Present Value of an Annuity Finding an Unknown Number of
Due 257 Periods 278
Finding the Present Value of a ➔ REVIEW QUESTIONS 279
Perpetuity 259
➔ EXCEL REVIEW QUESTIONS 280
FOCUS ON PEOPLE/PLANET/
PROFITS: The Time Value of Money Heats Up Summary 280
Climate Change Debate 260 Opener-In-Review 281
➔ REVIEW QUESTIONS 261 Self-Test Problems 282
➔ EXCEL REVIEW QUESTIONS 261 Warm-Up Exercises 283
Problems 284
5.4 Mixed Streams 261 Spreadsheet Exercise 301
INTEGRATIVE CASE 2 Epix Ltd. 302
Future Value of a Mixed Stream 261
Present Value of a Mixed Stream 263
➔ REVIEW QUESTION 264
➔ EXCEL REVIEW QUESTION 264
5.5 Compounding Interest More

Frequently Than Annually 265
Semiannual Compounding 265
Quarterly Compounding 265

14 Contents
PART 3 Valuation of Securities 307
6 6.1 Interest Rates and Required

Returns 310
6.3 Valuation Fundamentals 331
Interest Rates Key Inputs 331
and Bond Interest Rate Fundamentals 310 Basic Valuation Model 332
Valuation 308 Term Structure of Interest Rates 315 ➔ REVIEW QUESTIONS 333
FOCUS ON PRACTICE:
I-Bonds Adjust for Inflation 316 6.4 Bond Valuation 334
Risk Premiums: Issuer and Issue Bond Fundamentals 334
Characteristics 321
Bond Values for Annual Coupons 334
Bond Values for Semiannual Coupons 336
Changes in Bond Prices 338
6.2 Government and Corporate
Bonds 322 Yield to Maturity (YTM) 343
▲ Liam Edwards/Alamy
Stock Photo Legal Aspects of Corporate Bonds 323 ➔ REVIEW QUESTIONS 347
Cost of Bonds to the Issuer 324 ➔ EXCEL REVIEW QUESTIONS 347
General Features of a Bond Issue 325
Summary 347
Bond Yields 325
Bond Prices 326 Self-Test Problems 349
Bond Ratings 326 Warm-Up Exercises 350
Common Types of Bonds 327 Problems 351
International Bond Issues 327 Spreadsheet Exercise 361
FOCUS ON ETHICS:
“Can Bond Ratings Be Trusted?” 329
FOCUS ON PEOPLE/
PLANET/PROFITS: How Do I Love Thee?
Let Me Count the Yield 330

15
Contents
7 7.1 Differences Between Debt

and Equity 364
Free Cash Flow Stock Valuation
Model 380
Stock
Valuation 362 Voice in Management 364 Other Approaches to Common Stock
Valuation 383
Claims on Income and Assets 364
FOCUS ON ETHICS:
Maturity 364
Index Funds and Corporate
Tax Treatment 365 Governance 385
➔ REVIEW QUESTION 365 ➔ REVIEW QUESTIONS 386
▲ Creativeneko/Shutterstock 7.2 Common and Preferred 7.4 Decision Making and

Stock 365 Common Stock Value 387
Common Stock 365 Changes in Expected Dividends 387
FOCUS ON PEOPLE/PLANET/ Changes in Risk 388
PROFITS: Shrinking and Growing at the
Combined Effect 388
Same Time 366
Preferred Stock 370 ➔ REVIEW QUESTIONS 389
➔ REVIEW QUESTIONS 372 Summary 389

7.3 Common Stock Self-Test Problems 392
Valuation 372 Warm-Up Exercises 392
Market Efficiency and Stock Problems 393
Valuation 372
Common Stock Dividend Valuation INTEGRATIVE CASE 3 Meyer Bargains
Model 374 AG 402
FOCUS ON PRACTICE:
Understanding Human Behavior Helps
Us Understand Investor
Behavior 375

16 Contents
PART 4 Risk and the Required Rate of Return 403
8 8.1 Risk and Return

Fundamentals 406
8.4 Risk and Return: The Capital
Asset Pricing Model (CAPM) 432
Risk and
Return 404 FOCUS ON ETHICS: Types of Risk 432
If It Seems Too Good to Be True, It The Model: CAPM 433
Probably Is 406 FOCUS ON PEOPLE/PLANET/
What Is Risk? 407 PROFITS: Happy Employees Signal High
What Is Return? 407 Stock Returns 443
Risk Preferences 409 ➔ REVIEW QUESTIONS 443
▲ Helen Sessions/Alamy Summary 443
Stock Photo and Andrew Opener-In-Review 445
Paterson/Alamy Stock Photo 8.2 Risk of a Single Asset 410
Risk Assessment 410 Warm-Up Exercises 446
Risk Measurement 413 Problems 447
➔ REVIEW QUESTIONS 418 Spreadsheet Exercise 461
8.3 Risk of a Portfolio 419

Portfolio Return and Standard
Deviation 419
Correlation 422
Diversification and Efficient Portfolios 424
Summary of the Effect of Correlation on
Risk and Return 430
FOCUS ON GLOBAL
FINANCE:
An International Flavor to
Diversification 431

17
Contents
9 9.1 Overview of the Cost of

Capital 465
9.5 Weighted Average Cost of
Capital 479
The Cost of
Capital 463 FOCUS ON ETHICS: Calculating the Weighted Average Cost
The Cost of Capital Also Rises 465 of Capital (WACC) 479
The Basic Concept 466 FOCUS ON PRACTICE:
Sources of Long-Term Capital 468 Uncertain Times Make for an
Uncertain Weighted Average Cost
➔ REVIEW QUESTIONS 469 of Capital 481
Capital Structure Weights 482
9.2 Cost of Long-Term Debt 469 WACC as a Hurdle Rate 482
Net Proceeds 469
▲ II.studio/Shutterstock FOCUS ON PEOPLE/PLANET/
Before-Tax Cost of Debt 470 PROFITS: Diverse Boards Borrow Less 483
After-Tax Cost of Debt 471 ➔ REVIEW QUESTIONS 484
Summary 484
9.3 Cost of Preferred Stock 473 Opener-In-Review 485
Preferred Stock Dividends 473
Calculating the Cost of Preferred
Problems 487
Stock 473
INTEGRATIVE CASE 4 Finch Interiors
PLC 497
9.4 Cost of Common Stock 474
Finding the Cost of Common Stock
Equity 474
Cost of Retained Earnings 478

18 Contents
PART 5 Long-Term Investment Decisions 499
10 10.1 Overview of Capital

Budgeting 502
10.5 Comparing NPV and IRR
Techniques 520
Capital Budgeting
Techniques 500 The Capital Budgeting Process 502 Net Present Value Profiles 521
Terminology 503 Conflicting Rankings 522
Capital Budgeting Techniques 503 Other Problems with IRR 524
➔ REVIEW QUESTION 505 Modified IRR 526
Is NPV or IRR Better? 528
10.2 Payback Period 505 FOCUS ON ETHICS:
Decision Criteria 505 Baby You Can Drive My Car—Just Not
Pros and Cons of Payback Analysis 506 a VW Diesel 529
▲ Michael DeFreitas/Rober-
FOCUS ON PEOPLE/PLANET/ ➔ REVIEW QUESTIONS 529
tharding/Alamy Stock Photo
PROFITS: Payback from the Sun 508
Discounted Payback 509 Summary 530
10.3 Net Present Value (NPV) 510 Problems 533
Decision Criteria 511 Spreadsheet Exercise 545
NPV and the Profitability Index 513
NPV and Economic Value Added 514
10.4 Internal Rate of Return

(IRR) 517
Decision Criteria 517

19
Contents
11 11.1 Project Cash Flows 548 11.4 Finding the Terminal Cash
Flow 565
Capital Budgeting Incremental Cash Flows 549
Cash Flows 546 Sunk Costs and Opportunity Costs 550 After-Tax Proceeds from the Sale of New
and Old Assets 565
FOCUS ON ETHICS:
Change in Net Working Capital 566
Fumbling Sunk Costs 551
Financing Costs 552 ➔ REVIEW QUESTION 568

11.5 Putting It All Together 568
▲ Phuong D. Nguyen/Shut- ➔ REVIEW QUESTION 570
11.2 Finding the Initial Cash
terstock
Flow 553
Summary 570
Installed Cost of the New Asset 554
After-Tax Proceeds from the Sale of the Self-Test Problems 572
Old Asset 554
Change in Net Working Capital 557 Problems 574
Summary: Calculating the Initial Cash Spreadsheet Exercise 586
Flow 558
11.3 Finding the Periodic Cash

Flows 559

20 Contents
12 12.1 Assessing Risk in Capital

Budgeting 590
12.4 Capital Budgeting
Refinements 612
Risk and Refine-
ments in Capital Break-Even Analysis 590 Comparing Projects with Unequal
Budgeting 588 Operating Leverage 595 Lives 612
Recognizing Real Options 615
FOCUS ON PRACTICE:
Operating Leverage and Steel 598 FOCUS ON PEOPLE/PLANET/
PROFITS: Operating Leverage, Real Options,
Sensitivity Analysis 599
and Green Energy Investments 617
Scenario Analysis 600
Capital Rationing 617
Simulation 602
FOCUS ON PRACTICE:
▲ rafapress/Shutterstock ➔ EXCEL REVIEW QUESTION 620
The Monte Carlo Method: The Forecast
Is for Less Uncertainty 604
Summary 620
➔ EXCEL REVIEW QUESTION 604 Self-Test Problem 622
12.2 International Risk Problems 624
Considerations 605 Spreadsheet Exercise 636
➔ REVIEW QUESTION 606 INTEGRATIVE CASE 5 Eco Media
Limited 637
12.3 Risk-Adjusted Discount
Rates 606
Determining Risk-Adjusted Discount
Rates (RADRS) 606
FOCUS ON ETHICS:
Remain Calm—All Is Well 609
Estimating RADRS 610
Portfolio Effects 611

Contents 21
PART 6 Long-Term Financial Decisions 639
13 13.1 Financial Leverage and Its

Effects 642
The Increasing Marginal Cost of Debt:
Bankruptcy 664
Capital
Structure 640 FOCUS ON ETHICS: A Capital Structure Tradeoff Model 666
Repo 105 Man 647 Asset Characteristics and Bankruptcy
Costs 668
13.2 Capital Structure Irrelevance
in Perfect Markets 648 13.5 Other Factors That Influence
Proposition One: Value Is Independent of Capital Structure Choices 669
Financing Mix 648 Agency Costs 669
▲ Konwicki Marcin/Shut- Proposition Two: WACC Is Independent Asymmetric Information 672
terstock of Financing Mix 652 FOCUS ON PRACTICE:
➔ REVIEW QUESTIONS 655 Evidence from a CFO Survey 674
13.3 M&M and Taxes 655
Corporate Taxes 655 Summary 675
FOCUS ON PEOPLE/PLANET/ Opener-In-Review 677
PROFITS: Green Apple 658 Self-Test Problems 678
Personal Taxes 658 Warm-Up Exercises 678
Problems 679
13.4 Trading Off Debt’s Benefits
and Costs 661
The Declining Marginal Tax Benefit of
Debt 663

22 Contents
14 14.1 The Basics of Payout

Policy 687
Owner Considerations 709
Payout Policy 685 Market Considerations 710
Elements of Payout Policy 687 ➔ REVIEW QUESTION 710
Trends in Earnings and Dividends 688
Trends in Dividends and Share 14.5 Types of Dividend
Repurchases 689 Policies 710
➔ REVIEW QUESTIONS 692 Constant-Payout-Ratio Dividend
FOCUS ON ETHICS: Policy 710
▲ Kristoffer Tripplaar/Alamy Buyback Mountain 693 Regular Dividend Policy 711
Stock Photo Low-Regular-and-Extra Dividend
14.2 The Mechanics of Payout Policy 712
Policy 693 ➔ REVIEW QUESTION 713
Cash Dividend Payment Procedures 695
Share Repurchase Procedures 696 14.6 Other Forms of
Tax Treatment of Dividends and
Dividends 713
Repurchases 698 Stock Dividends 713
FOCUS ON PRACTICE: Stock Splits 714
Capital Gains and Dividend Tax Treat- ➔ REVIEW QUESTIONS 717
ment Extended to 2012 and Beyond
for Some 699
14.7 Criticisms of Payout
Dividend Reinvestment Plans 699 Policy 717
Stock Price Reactions to Corporate
Payouts 700
➔ REVIEW QUESTIONS 702 Summary 720
14.3 Value Relevance of Payout Self-Test Problem 721
Policy 702 Warm-Up Exercises 722
The Dividend Irrelevance Theory 702 Problems 723
The Impact of Dividends in Imperfect Spreadsheet Exercise 730
Markets 705 INTEGRATIVE CASE 6 O’Grady
Why Payout Policy Matters 705 Apparel Company 731
Residual Theory of Dividends 706
14.4 Factors Affecting Payout

Policy 708
Legal Constraints 708
Contractual Constraints 709
Growth Prospects 709

23
Contents
PART 7 Short-Term Financial Decisions 735
15 15.1 Net Working Capital

Fundamentals 738
15.5 Management of Receipts
and Disbursements 761
Working Capital
and Current Assets Working Capital Management 738 Float 761
Management 736 Net Working Capital 739 Speeding Up Collections 762
Tradeoff Between Profitability and Slowing Down Payments 763
Risk 739 Cash Concentration 763
➔ REVIEW QUESTIONS 741 Zero-Balance Accounts 764
Investing in Marketable Securities 765
15.2 Cash Conversion Cycle 741
Calculating the Cash Conversion
Cycle 742
Summary 767
Funding Requirements of the Cash Opener-In-Review 769
Conversion Cycle 744
Strategies for Managing the Cash Warm-Up Exercises 769
▲ Koya979/Fotolia Conversion Cycle 747
Problems 770
➔ REVIEW QUESTIONS 748 Spreadsheet Exercise 773
15.3 Inventory Management 748

Differing Viewpoints About Inventory
Level 748
Common Techniques for Managing
Inventory 749
FOCUS ON PRACTICE:
In Bed with RFID 753
15.4 Accounts Receivable

Management 754
Credit Selection and Standards 754
FOCUS ON ETHICS:
If You Can Bilk It, They Will Come 755
Credit Terms 757
Credit Monitoring 759

24 Contents
16 16.1 Spontaneous Liabilities 776 Summary 797

Current Liabilities Accounts Payable Management 776
Management 774 Self-Test Problem 799
Accruals 781
Problems 800
16.2 Unsecured Sources of Short- INTEGRATIVE CASE 7 Sums Metal
Term Loans 781 Casting 807
FOCUS ON ETHICS:
Bank Loans and Shareholder
Wealth 782
▲ Tim Cuff/Alamy Stock Bank Loans 782
Photo
FOCUS ON PEOPLE/
PLANET/PROFITS: Banks Transmit Values
Through Loans 785
Commercial Paper 788
FOCUS ON PRACTICE:
The Ebb and Flow of Commercial
Paper 789
International Loans 790
16.3 Secured Sources of Short-

Term Loans 792
Characteristics of Secured Short-Term
Loans 792
Use of Accounts Receivable as
Collateral 793
Use of Inventory as Collateral 796

25
Contents
PART 8 Special Topics in Managerial Finance 809
17 17.1 Overview of Hybrids and

Derivatives 812
17.4 Stock Purchase Warrants 827
Hybrid and Key Characteristics 827
Derivative ➔ REVIEW QUESTION 812 Implied Price of an Attached Warrant 828
Securities 810 Values of Warrants 829
17.2 Leasing 812
Types of Leases 812
FOCUS ON PRACTICE: 17.5 Options 832
I’d Like to Return This (Entire Store), Calls and Puts 832
Please 814
Options Markets 833
Leasing Arrangements 814
▲ ZUMA Press, Inc./Alamy Options Trading 833
Stock Photo Lease-Versus-Purchase Decision 815
Role of Call and Put Options in Fund
Advantages of Leasing 819
Raising 834
➔ REVIEW QUESTIONS 820 FOCUS ON ETHICS:
Banking on Options 835
17.3 Convertible Securities 820
Hedging Foreign-Currency Exposures
Types of Convertible Securities 820 with Options 836
General Features of Convertibles 821 ➔ REVIEW QUESTIONS 836
FOCUS ON PEOPLE/PLANET/
PROFITS: Green CoCo Bonds 823 Summary 836
Financing with Convertibles 823 Opener-In-Review 838
Determining the Value of a Convertible Self-Test Problems 839
Bond 825 Warm-Up Exercises 840
➔ REVIEW QUESTIONS 827 Problems 840

26 Contents
18 18.1 Merger Fundamentals 850 18.4 Business Failure

Fundamentals 873
Mergers, LBOs, Terminology 850
Divestitures, Motives for Merging 852 Types of Business Failure 873
and Business FOCUS ON ETHICS: Major Causes of Business Failure 873
Failure 848 Is There Any Good in Greed? 853 Voluntary Settlements 874
Types of Mergers 855 ➔ REVIEW QUESTIONS 875
18.5 Reorganization and
18.2 LBOs and Divestitures 856 Liquidation in Bankruptcy 876
Leveraged Buyouts (LBOS) 856 Bankruptcy Legislation 876
Divestitures 857 Reorganization in Bankruptcy
▲ Robert Evans/Alamy
Stock Photo (Chapter 11) 877
Liquidation in Bankruptcy
(Chapter 7) 879
18.3 Analyzing and Negotiating
Mergers 859 ➔ REVIEW QUESTIONS 880
Valuing the Target Company 859

Summary 881
Stock Swap Transactions 861 Opener-In-Review 882
Merger Negotiation Process 867 Self-Test Problems 883
Holding Companies 868 Warm-Up Exercises 883
International Mergers 870 Problems 884
FOCUS ON GLOBAL
FINANCE:
International Mergers 872

27
Contents
19 19.1 The Multinational Company

and Its Environment 894
Capital Structure 913
International Long-Term Debt 914
Managerial Key Trading Blocs 894 FOCUS ON GLOBAL
Finance 892 GATT and the WTO 896 FINANCE:
Take an Overseas Assignment to Take a
Legal Forms of Business Organization 897 Step Up the Corporate Ladder 915
Taxes 898 Equity Capital 916
Financial Markets 899 ➔ REVIEW QUESTIONS 917
19.5 Short-Term Financial
▲ Motoring Picture Library/
Alamy Stock Photo 19.2 Financial Statements 900 Decisions 918
Subsidiary Characterization Cash Management 920
and Functional Currency 900 Credit and Inventory Management 922
Translation of Individual Accounts 900
➔ REVIEW QUESTION 902 Summary 923
19.3 Risk 902 Self-Test Problem 925
Exchange Rate Risks 902 Warm-Up Exercises 926
Political Risks 910 Problems 926
FOCUS ON ETHICS:
INTEGRATIVE CASE 8 Organic
Is Fair-Trade Coffee Fair? 911 Solutions 930
19.4 Long-Term Investment

and Financing Decisions 912
Foreign Direct Investment 912
Investment Cash Flows
and Decisions 912
Appendix A-1
Glossary G-1
Index I-1


About the Authors
Chad J. Zutter is a finance professor and the James Allen Faculty Fellow at
the Katz Graduate School of Business at the University of Pittsburgh. Dr. Zutter
received his B.B.A. from the University of Texas at Arlington and his Ph.D. from
Indiana University. His research has a practical, applied focus and has been the
subject of feature stories in, among other prominent outlets, The Economist and
CFO Magazine. His papers have been cited in arguments before the U.S. Supreme
Court and in consultation with companies such as Google and Intel. Dr. Zutter
won the prestigious Jensen Prize for the best paper published in the Journal of
Financial Economics and a best paper award from the Journal of Corporate Fi-
nance, where he is currently an Associate Editor. He has won teaching awards at
the Kelley School of Business at Indiana University and the Katz Graduate School
of Business at the University of Pittsburgh. Dr. Zutter also serves on the board of
Lutheran SeniorLife and, prior to his career in academics, he was a submariner in
the U.S. Navy. Dr. Zutter and his wife have four children and live in Pittsburgh,
Pennsylvania. In his free time he enjoys horseback riding and downhill skiing.
Scott B. Smart is a finance professor and the Fettig/Whirlpool Finance Fac-

ulty Fellow at the Kelley School of Business at Indiana University. Dr. Smart re-
ceived his B.B.A. from Baylor University and his M.A. and Ph.D. from Stanford
University. His research focuses primarily on applied corporate finance topics
and has been published in journals such as the Journal of Finance, the Journal of
Financial Economics, the Journal of Corporate Finance, Financial Management,
and others. His articles have been cited by business publications including The
Wall Street Journal, The Economist, and Business Week. Winner of more than
a dozen teaching awards, Dr. Smart has been listed multiple times as a top busi-
ness school teacher by Business Week. He has held Visiting Professor positions
at the University of Otago and Stanford University, and he worked as a Visiting
Scholar for Intel Corporation, focusing on that company’s mergers and acqui-
sitions activity during the ‘‘Dot-com’’ boom in the late 1990s. As a volunteer,
Dr. Smart currently serves on the board of the Indiana University Credit Union
and on the Finance Committee for Habitat for Humanity of Monroe County. In
his spare time he enjoys outdoor pursuits such as hiking and fly fishing.
29


Preface
NEW TO THIS EDITION

Finance is a dynamic discipline, and as we made plans to publish the sixteenth
edition, we were mindful of feedback from users of the fifteenth edition and of
changes in managerial finance practices that have taken hold in recent years. For
example, firms now operate in an environment in which they are judged not only
by their financial results, but also by their performance on environmental, social,
and governance metrics. In this edition we highlight how companies may tap spe-
cialized bond markets to fund green investments, how diversity influences board
decisions, and how leaders of some of the world’s largest businesses are engaging
in new debates about the goals their firms should pursue.
In every chapter, our changes focused on keeping the material current and
relevant for students. In appropriate places, new topics were added and new or
updated features appear in each chapter. Here is a list of some of the revisions:
• We replaced or updated all of the chapter-opening vignettes that feature sto-
ries gathered from the business press that illustrate key ideas or concepts in
each chapter. Many of the chapter openers feature companies such as Rolls-
Royce, Tesla, Tesco, TikTok, Coca-Cola, Emirates, Aramco, and Diageo that
are familiar to students. We designed these opening vignettes to impress upon
students that the material they will see in each chapter is relevant for business
in the “real world.”
• To add further value to the chapter-opening vignettes, at the end of each chap-
ter we provide an Opener-In-Review question that asks students to apply a
concept they have learned in the chapter to the business situation described in
the chapter opener.
• We have updated many of the Focus on Practice and Focus on Ethics boxes
that appear throughout the chapters, and we have added a Focus on People/
Planet/Profits box in most chapters. The Focus on People/Planet/Profits boxes
highlight how firms’ decisions and prices in financial markets reflect societal
concerns about issues ranging from climate change to diversity and inclusion.
• In this edition we added more in-chapter examples and end-of-chapter prob-
lems that expose students to real-world data.
The chapter sequence is essentially unchanged from the prior edition, though
there is new content in every chapter, and some chapters (especially Chapter 13)
were heavily revised. This edition contains nineteen chapters divided into eight
parts. Each part is introduced by a brief overview, which is intended to give stu-
dents an advance sense for the collective value of the chapters included in the part.
Part 1 contains two chapters. Chapter 1 provides an overview of the role of
managerial finance in a business enterprise and emphasizes the goal of the firm and
the broad principles that financial managers use in their pursuit of that goal. This
edition highlights the renewed debate, sparked in part by The Business Round-
table, about whether firms should act in the interests of their shareholders or on
behalf of a larger group of stakeholders. Chapter 2 describes the financial market
31

32 Preface
environment in which firms operate and interact with investors through the vari-
ous financial institutions and markets. This edition includes expanded discussion
of the efficient market hypothesis and security price movements, as well as new
content on the effects of the COVID-19 pandemic on financial markets.
Part 2 contains three chapters focused on basic financial skills such as finan-
cial statement analysis, cash flow analysis, and time-value-of-money calculations.
Chapter 3 provides an overview of financial statements and in-depth financial ratio
analysis using real data from Target Corporation. The financial ratio analysis pro-
vides opportunities for interesting discussion about Target’s financial performance
for its three most recent fiscal years and relative to some of its key competitors.
Chapter 4 emphasizes first the broad goals of strategic and operational financial
planning and then the importance of cash flow within any financial plan. Chap-
ter 5 provides straightforward and intuitive coverage of all time-value-of-money
concepts used throughout the textbook. Chapter 5 also introduces newly format-
ted calculator screenshots that demonstrate the exact keystrokes used to complete
time-value-of-money calculations. Figure 5.5 offers a new visual representation of
how simple and compound interest accumulate over time.
Part 3 focuses on bond and stock valuation. We placed these two chapters just
ahead of the risk and return chapter to provide students with exposure to basic ma-
terial on bonds and stocks that is easier to grasp than are some of the more theoreti-
cal concepts in the next part. New in Chapter 6 is an expanded discussion of bond
price sensitivity to interest rate changes and Figure 6.6 that illustrates this relation
for several bonds with varying characteristics. Chapter 7 continues to provide com-
prehensive coverage of methods for stock valuation with rewritten examples valuing
Rocky Mountain Chocolate Factory, Procter & Gamble, and Broadcom with (re-
spectively) the zero-growth, constant-growth, and variable-growth dividend models.
The chapter also includes a free-cash-flow valuation of Ruth’s Chris Steak House.
Part 4 contains the risk and return chapter as well as the chapter on the cost
of capital. We believe that following the risk and return chapter with the cost of
capital material helps students understand the important principle that the expec-
tations of a firm’s investors shape how the firm should approach major investment
decisions (which are covered in Part 5). In other words, Part 4 helps students un-
derstand where a project “hurdle rate” comes from before they start using hurdle
rates in capital budgeting problems. Updates to Chapter 8 include expanded cov-
erage of the role that correlation plays in portfolio formation using data on JPM-
organ, Morgan Stanley, and Medtronic. Chapter 9 now emphasizes finding the
cost of debt by calculating a bond’s YTM using a calculator or Excel rather than
an algebraic approximation. Chapter 9 also has a new section that discusses when
the WACC is the correct hurdle rate for investment analysis versus when it is not.
Part 5 contains three chapters on various capital budgeting topics. Chapter 10
focuses on capital budgeting methods such as payback and net present value anal-
ysis. New presentations in Chapter 10 include discounted payback period, proj-
ect EVA for a finite-lived project, and modified internal rate of return (MIRR).
Chapter 11 explains how financial analysts construct cash flow projections, and
this edition includes a revised discussion of how to determine which cash flows
are incremental and which are not, as well as expanded coverage of why analysts
ignore financing cash flows such as interest expense when calculating an invest-
ment project’s cash flows. Chapter 12 describes how firms analyze the risks as-
sociated with capital investments and make refinements to the capital budgeting
process. In addition to new discussion of operating-leverage and its impact on
project risk, much of the discussion in this chapter has been revised or expanded.

33
Preface
Part 6 deals with the topics of capital structure and payout policy. We revised
Chapter 13 extensively so that it now follows a more contemporary format that,
after introducing financial leverage and its effects, follows the seminal work of
Modigliani and Miller before discussing roles of trade-off theory, agency theory,
and signaling theory. Chapter 14 also includes expanded treatment of the Modi-
gliani and Miller theory of payout policy and a new section that discusses recent
criticisms of corporate share buybacks.
Part 7 contains two chapters centered on working capital issues. A major de-
velopment in business has been the extent to which firms have found new ways
to economize on working capital investments. The first chapter in Part 7 explains
why and how firms work hard to squeeze resources from their investments in
current assets such as cash and inventory. The second chapter in this part focuses
more on management of current liabilities.
Finally, Part 8 has three chapters covering a variety of topics, including hybrid se-
curities, mergers and other forms of restructurings, and international finance. These
subjects are some of the most dynamic areas in financial practice, and we have
made a number of changes here to reflect current practices. Chapter 17 contains
new examples of convertible securities issued by firms such as Southwest Airlines
and Tesla. Chapter 18 covers important merger concepts with examples featuring
recent transactions involving Anthem-Cigna, Fiat-Chrysler, Dow-DuPont, Berk-
shire Hathaway-Dominion Energy Transmission, and Broadcom Ltd.-Maxlinear.
Chapter 19 discusses the Regional Comprehensive Economic Partnership signed by
China and 14 other countries in November 2020. The chapter adds new material
on purchasing power and interest rate parity relationships that link exchange rate
movements to differences in inflation and interest rates across countries.
Although the text content is sequential, instructors can assign almost any chap-
ter as a self-contained unit, enabling instructors to customize the text to various
teaching strategies and course lengths.
Like the previous editions, the sixteenth edition incorporates a proven learning
system, which integrates pedagogy with concepts and practical applications. It
concentrates on the knowledge that is needed to make keen financial decisions in
an increasingly competitive business environment. The strong pedagogy and gen-
erous use of examples—many of which use real data from markets or companies—
make the text an easily accessible resource for in-class learning or out-of-class
learning, such as online courses and self-study programs.
SOLVING TEACHING AND LEARNING CHALLENGES

The desire to write Principles of Managerial Finance came from the experience
of teaching the introductory managerial finance course. Those who have taught
the introductory course many times can appreciate the difficulties that some stu-
dents have absorbing and applying financial concepts. Students want a book that
speaks to them in plain English and explains how to apply financial concepts to
solve real-world problems. These students want more than just description; they
also want demonstration of concepts, tools, and techniques. This book is written
with the needs of students in mind, and it effectively delivers the resources that
students need to succeed in the introductory finance course.
Courses and students have changed since the first edition of this book, but
the goals of the text have not changed. The conversational tone and wide
use of examples set off in the text still characterize Principles of Managerial
Finance. Building on those strengths, sixteen editions, and numerous translations,

34 Preface
Principles has evolved based on feedback from both instructors and students,
from adopters, nonadopters, and practitioners. In this edition, we have worked
to ensure that the book reflects contemporary thinking and pedagogy to further
strengthen the delivery of the classic topics that our users have come to expect.
Below are descriptions of the most important resources in Principles that help
meet teaching and learning challenges.
Users of Principles of Managerial Finance have praised the effectiveness of the
book’s Teaching and Learning System, which they hail as one of its hallmarks.
The system, driven by a set of carefully developed learning goals, has been re-
tained and polished in this sixteenth edition. The “walkthrough” on the pages
that follow illustrates and describes the key elements of the Teaching and Learn-
ing System. We encourage both students and instructors to acquaint themselves at
the start of the semester with the many useful features the book offers.
Six Learning Goals at the start of the

chapter highlight the most impor-
1
CHAPTER
tant concepts and techniques in the

chapter. Students are reminded to
think about the learning goals while
The Role of Managerial Finance working through the chapter by stra-
tegically placed learning goal icons.
LEARNING GOALS WHY THIS CHAPTER MATTERS TO YOU
LG 1 Define finance and the

In your professional life
Every chapter opens with a feature,
managerial finance
function. ACCOUNTING You need to understand the relationships between the account- titled Why This Chapter Matters
ing and finance functions within the firm, how decision makers rely on the financial
LG 2 Describe some goals that
financial managers pursue,
statements you prepare, why maximizing a firm’s value is not the same as maximiz-
ing its profits, and the ethical duty you have when reporting financial results to
to You, that helps motivate student
interest by highlighting both profes-
and link achievement of
investors and other stakeholders.
those objectives to the
general goal of maximizing INFORMATION SYSTEMS You need to understand why financial information is
the wealth of the firm’s important to managers in all functional areas, the documentation that firms must
produce to comply with various regulations, and how manipulating information for
sional and personal benefits from
owners.
LG 3 Identify the primary

personal gain can get managers into serious trouble.
achieving the chapter learning goals.
MANAGEMENT You need to understand the various legal forms of a business
activities of the financial
organization, how to communicate the goal of the firm to employees and other
manager.
stakeholders, the advantages and disadvantages of the agency relationship be-
tween a firm’s managers and its owners, and how compensation systems can align
Its first part, In Your Professional
LG 4 Explain the key principles
that financial managers use
when making business
or misalign the interests of managers and investors.
MARKETING You need to understand why increasing a firm’s revenues or market
Life, discusses the intersection of the
decisions. share is not always a good thing, how financial managers evaluate aspects of
customer relations such as cash and credit management policies, and why a firm’s
finance topics covered in the chapter
LG 5 Describe the legal forms of
business organization.
brands are an important part of its value to investors.
OPERATIONS You need to understand the financial benefits of increasing a firm’s
with the concerns of other major
LG 6 Describe the nature of the
principal–agent
production efficiency, why maximizing profit by cutting costs may not increase the
firm’s value, and how managers have a duty to act on behalf of investors when
business disciplines. It encourages
relationship between the
owners and managers of a
operating a corporation.
students majoring in accounting,
corporation, and explain In your personal life information systems, management,
how various corporate
governance mechanisms
marketing, and operations to appre-
Many principles of managerial finance also apply to your personal life. Learning a
attempt to manage agency few simple principles can help you manage your own money more effectively.
problems.
ciate how financial acumen will help
them achieve their professional goals.
The second part, In Your Personal
Life, identifies topics in the chapter
that will have particular application
to personal finance. This feature also
46 helps students appreciate the tasks
performed in a business setting by
pointing out that the tasks are not
necessarily different from those that
are relevant in their personal lives.

35
Preface
Each chapter begins with a short opening vignette

that describes a recent real-company event related to
the chapter topic. These stories raise interest in the
chapter by demonstrating its relevance in the business
WEWORK
world. Most of these opening vignettes are entirely
WeWork’s IPO Doesn’t
new to this edition.
YuniqueB/Shutterstock
A s the coronavirus outbreak locked down much of

the U.S. economy in March 2020, executives at
Softbank, Japan’s second largest company, were backing out of a deal. Three years earlier it had
invested $1.3 billion to buy an initial stake of 7.7% of the common stock of WeWork, a company
that leased shared office space to high-tech startups. With its 2010 co-founder, Adam Neumann,
serving as CEO, WeWork looked like one of the hottest startups in the market, growing its
operations by 100% in 2015. WeWork’s growth was funded by venture capital partnerships such
as DAG in the U.S. and Aleph in Israel, investment banks such as JPMorgan Chase and
Goldman Sachs, and even the Harvard University endowment. Collectively, this group invested
nearly $14 billion from 2009 to 2019, but no one invested more than Softbank. After an
additional $2 billion Softbank investment in January 2019, WeWork’s estimated market value hit
$47 billion.
WeWork decided it was time to “go public” by conducting an initial public offering (IPO).
As part of that process, the U.S. Securities and Exchange Commission requires companies
seeking to do an IPO to disclose financials and other details about the business in a document
called a prospectus. The August 2019 prospectus was a revelation, and not in a good way.
The company had racked up huge losses, and Wall Street experts combing over the docu-
ments questioned whether the company could ever become profitable. Questions surfaced
about Neumann’s erratic and perhaps unethical behavior, such as charging the company $5.9
million to license the name “We Company” from an entity that he personally controlled. Just
a few weeks after filing the prospectus, WeWork announced that it would postpone its IPO,
and by the end of the year the company’s estimated value had dropped 83% to $8 billion. In
November WeWork laid off 2,400 workers, nearly 20% of its workforce.
Softbank had pledged to buy $3 billion in stock from existing investors and employees,
but a few months later, with office buildings empty due to the “shelter-in-place” orders in many
states, WeWork’s already precarious prospects dimmed. Softbank rescinded its promise to in-
ject new funds into WeWork, claiming that ongoing S.E.C. investigations of WeWork gave it an
“out” from its contractual obligations.1
1. “Softbank Backs Away From Part of Planned WeWork Bailout,” by Liz Hoffman and Eliot Brown, wsj.com, March 18,
2020; “WeWork Funding Rounds, Valuations, and Investors,” craft.co, April 11, 2020.
88
LG 1 LG 2 1.1 Finance and the Firm

Learning goal icons tie chapter content to the learn-
The field of finance is broad and dynamic. Finance influences everything that
ing goals and appear next to related text sections and
firms do, from hiring personnel to building factories to launching new advertis-
ing campaigns. Because almost any aspect of business has important financial
again in the chapter-end summary, end-of-chapter
dimensions, many financially oriented careers await those who understand the
principles of finance. Even if you see yourself pursuing a career in another dis- problems, and exercises.
cipline such as marketing, operations, accounting, supply chain, or human re-
sources, you’ll find that understanding a few crucial ideas in finance will enhance
your professional success. Knowing how financial managers think is important,
especially if you’re not one yourself, because they are often the gatekeepers of
corporate resources. Fluency in the language of finance will improve your ability
to communicate the value of your ideas to your employer. Financial knowledge
will also make you a smarter consumer and a wiser investor.
THE ROLE OF BUSINESS ETHICS

For help in study and review, boldfaced key terms
business ethics Business ethics are standards of conduct or moral judgment that apply to per- and their definitions appear in the margin where they
Standards of conduct or moral sons engaged in commerce. Violations of these standards involve a variety of
judgment that apply to persons
engaged in commerce.
actions: “creative accounting,” earnings management, misleading financial
forecasts, insider trading, fraud, bribery, and kickbacks. The press has reported
are first introduced. These terms are also boldfaced
many such violations in recent years, involving such well-known companies as
Facebook, which was hit with a record $5 billion fine for mishandling users’
in the book’s index and appear in the end-of-book
information, and Volkswagen, where engineers set up elaborate deceptions to
get around pollution controls. In these and similar cases, the offending compa-
glossary.
nies suffered various penalties, including fines levied by government agencies,
damages paid to plaintiffs in lawsuits, or lost revenues from customers who
abandoned the firms because of their errant behavior. Most companies have
MATTER OF FACT Matter of Fact boxes provide interesting empirical

Consolidation in the U.S. Banking Industry facts, usually featuring recent data that add
The U.S. banking industry has been going through a long period of consolidation.
According to the Federal Deposit Insurance Corporation (FDIC), the number of commer-
background and depth to the material covered in the
cial banks in the United States declined from 14,400 in early 1984 to 4,492 by October chapter.
2019, a decline of almost 69%. The decline is concentrated among small community
banks, which larger institutions have been acquiring at a rapid pace.

36 Preface
In Example 5.8 involving Braden Company, we calculated a $3,116.28 present

Examples are an important component
IRF E X A MP L E 5 . 10
value for Braden’s $700, five-year ordinary annuity discounted at 4%. We now of the book’s learning system. Num-
assume that Braden’s $700 annual cash inflow occurs at the start of each year and
is thereby an annuity due. The following timeline illustrates the new situation. bered and clearly set off from the text,
Timeline for present value Year they provide an immediate and con-
of an ordinary annuity with 0 1 2 3 4 5
$700 end-of-year cash flows, crete demonstration of how to apply fi-
discounted at 4%, over five
years
$700 $700 $700 $700 $700
nancial concepts, tools, and techniques.
$ 700.00
673.08
Many of these feature real-world data.
647.19
622.30 Examples illustrating time-value-of-
598.36
Present Value $3,240.93
money techniques often show the
Calculator use Remember for annuity due calculations you must switch your
use of time lines, equations, financial
2ND [BGN] 2ND [SET] calculator to beginning-of-period mode using the BGN function key, depending calculators, and spreadsheets (with cell
on your specific calculator. Then, using the inputs shown at the left, you can
2ND [P/Y] 1 ENTER verify that the present value of the annuity due equals $3,240.93. (Note: Don’t formulas). For instructors who prefer
2ND [QUIT] forget to switch your financial calculator back to end-of-period payment mode.)
to use tables with interest rate factors,
Spreadsheet use The following spreadsheet shows how to calculate the present
5 N
value of the annuity due. an IRF icon appearing with some ex-
4 I/Y amples indicates that the example can
700 PMT
1
A
PRESENT VALUE OF AN ANNUITY DUE
B
be solved using the interest rate factors.
CPT PV 23,240.93 2 Annual annuity payment $700
3 Annual rate of interest 4%
4 Number of years 5
5 Present value –$3,240.93
Entry in Cell B5 is =PV(B3,B4,B2,0,1).
The minus sign appears before the $3,240.93
in B5 because the annuity’s present value
is a cost and therefore a cash outflow.
Fran Abrams wishes to determine how much money she

Personal Finance Examples demon-
IRF PER SONAL F I N A N C E EX A M PL E 5 . 7
will have after five years if she chooses annuity A, the strate how students can apply mana-
ordinary annuity. She will deposit the $1,000 annual payments that the annuity
provides each year into a savings account paying 7% annual interest. The follow- gerial finance concepts, tools, and
ing timeline depicts the situation.
techniques to their personal financial
Timeline for future value
of an ordinary annuity with 0 1 2
Year
3 4 5
decisions.
$1,000 end-of-year deposits,
earning 7%, for five years $1,000 $1,000 $1,000 $1,000 $1,000
$1,000.00
1,070.00
1,144.90
1,225.04
1,310.80
$5,750.74 Future Value
The timeline shows after five years, Fran will have $5,750.74 in her account.
Note that because she makes deposits at the end of the year, the first deposit will
Key Equations appear in green boxes

PV0 = CF1 , r (5.7)
throughout the text to help readers
identify the most important mathemati-
cal relationships.

37
Preface
➔ REVIEW QUESTIONS Review Questions appear at the end of each

5–10 What is the difference between an ordinary annuity and an annuity major text section. These questions challenge
due? Which is more valuable? Why? readers to stop and test their understanding
5–11 What are the most efficient ways to calculate the present value of an
ordinary annuity?
of key concepts, tools, techniques, and prac-
5–12 How can the formula for the future value of an annuity be modified to tices before moving on to the next section.
find the future value of an annuity due?
5–13 How can the formula for the present value of an ordinary annuity be Some sections have dedicated Excel Review
modified to find the present value of an annuity due?
5–14 What is a perpetuity? Why is the present value of a perpetuity equal to
Questions that ask students to demonstrate
the annual cash payment divided by the interest rate? Why doesn’t this their ability to solve a financial problem us-
chapter provide an equation showing you how to calculate the future ing Excel.
value of a perpetuity?
➔ EXCEL REVIEW QUESTIONS

5–15 Because tax time comes around every year, you smartly decide to make
equal $5,000 contributions to your IRA at the end of every year for
30 years. Assuming a 9.5% annual rate of return, use Excel to calculate
the future value of your IRA contributions when you retire in 30 years.
5–16 Rather than making contributions to an IRA at the end of each year,
you decide to make equal $5,000 contributions at the beginning of each
year for 30 years. Assuming a 9.5% annual rate of return, use Excel to
solve for the future value of your IRA contributions when you retire.
Focus On... boxes offer insights into

FOCUS ON ETHICS
The Cost of Capital Also Rises

important topics in managerial finance
Gertrude Stein––who shaped 20th- millions of unauthorized accounts. debt. Going into 2016, Wells had not through the experiences of real compa-
century art and literature through When the dust settled, CEO John reported a loss in 45 years––a record
discussions in her 1920s Paris home
with the likes of Pablo Picasso and
Stumpf was out, and the bank faced a in part traceable to emphasis on con-
$185 million fine from the Consumer sumer financial products and services,
nies, both large and small. There are four
Ernest Hemingway––famously wrote
of Oakland, California, “There is no
Financial Protection Bureau in addition which rank among the most steady
to $110 million in civil settlements with business lines for commercial banks.
categories of Focus On... boxes:
there, there.” Had she lived until wronged customers. Even worse, con- This emphasis helps account for the
Focus on Ethics boxes in every chapter

September 2016, she might have said sumer faith earned over 164 years was low beta on Wells Fargo common
FOCUS
the same about ONconsumer
PRACTICE accounts in badly shaken. Wells Fargo became the stock, 0.9 in August 2016––meaning
the megabank across the bay in San largest business to ever lose accredita- Wells’ stock was less risky than the av-
II-Bonds
Bonds Adjust for Inflatio
Francisco.
Inflation
Wells Fargo entered 2016 in an en-
tion with the Better Business Bureau.
The account scandal had broader
erage stock (beta = 1) as well as the
stocks of other megabanks like Bank
help readers understand and appreciate
One disadvantage of bonds is thatfinancialinconsequences.
viable position. The bank easily weath- this index indicates
ered the 2008 financial crisis by remain- following disclosure, the price of
they usually offer a fixed interest rate. has occurred.
In the month
As the rate of
of America (beta
that inflation = 1.6).the
occurs, Butchange
publicity from the scandal together
inflation
bad in the CPI-U is
negative, and the adjustable portion
important ethical issues and problems
related to managerial finance.
ing focused on its core business––retail Wells’s stock tumbled 13.5% as with Wells’ decision to end sales
Once ainbond
banking is issued, its
bricks-and-mortar rate moves
interest damaging
branches. details upemerged.
and down, ThenI-bond
on interest
quotas produced of an
a 40%I-bond’s
drop ininterest
new also turns neg-
typically
In July 2015, cannot
U.S. Newsadjust
and as in- rates
expectedOctober
World 18, inadjust (with a short
an uncommon move lag).checking
Interestaccounts ative. For example,
in 2016 and a 43%if the fixed-rate
FOCUS
flationtouted
Report ONWells
changes. GLOBAL
This
as therigidityFINANCE
“best presents
bank earnings are exempt
for an investment-grade firm, Wellsfrom state and
falloff component
in credit-card on an
applications. I-bond is 2% and
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focus that relates a business event or situ-
“most valuable brand in banking” for Ratings raised the likelihood of a
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of currency fluctuations. If its
thebor-energy firms toprices,
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goods
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falling so
leads when
to deflation group
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value of the U.S. dollar falls against and give up control
rowing habits. Specifically, companies decision making, and indeed they of oil projects in
not include any domestic
that assets,
other currencies, the investments
whose boards exhibited more diver-
denominated in foreign currency may
sity in terms
Venezuela.
found that corporate policies focused
To explore whether interna-
show
whereas global mutual funds
not many firms follow
this advice. Most use at least some in financial markets reflect societal con-
poorlyof age,translated
gender,back ethnicity, on investment wasdecisions
beneficial, and branding
include both foreign and domestic
cerns about issues ranging from climate
perform when tional diversification debt in their capital structures.
anddollars,
other characteristics were relatively
of board Elroy Dimson, stable over time. assets.
The How might this difference
into even if the home-country Paul Marsh, and Mike
What are
affect their correlation some
with U.S. of the pros and
members
returns relied less
are positive. heavily
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political same policies
calculated theathistorical
companies with less
compared to firms with less diverse diverse boards were prone to greater
equity mutual cons
funds?of using leverage?
change to diversity and inclusion.
boards. Because they borrowed less, year-to-year changes.8
All four types of Focus On... boxes end

with one or more critical thinking ques-
tions to help readers broaden the lesson
from the content of the box.

38 Preface
SUMMARY
The end-of-chapter Summary consists of two
sections. The first section, Focus on Value,
FOCUS ON VALUE
explains how the chapter’s content relates to
The time value of money is a tool that managers and investors use to compare
cash inflows and outflows occurring at different times. Because firms routinely the firm’s goal of maximizing owner wealth.
make investments that produce cash inflows over long periods, the effective
application of time-value-of-money techniques is extremely important. These This feature helps reinforce understanding
techniques allow managers to compare the costs of investments they make today
to the cash inflows those investments will generate later. Such comparisons are of the link between the financial manager’s
REVIEW OF necessary to create
LEARNING value for investors.
GOALS actions and share value.
LG 1
Discuss the role of time value in finance, the use of computational tools, The second part of the Summary, the
and the basic patterns of cash flow. Financial managers and investors use time- Review of Learning Goals, restates each
value-of-money techniques when assessing the value of expected cash flow
streams. Alternatives can be assessed by either compounding to find future learning goal and summarizes the key mate-
value or discounting to find present value. Financial managers rely primarily rial that was presented to support mastery of
on present-value techniques. Financial calculators and electronic spreadsheets
the goal. This review provides students with
an opportunity to reconcile what they have
learned with the learning goal and to confirm
their understanding before moving forward.
OPENER-IN-REVIEW Opener-In-Review questions at the end of each

In the chapter opener, you learned that the shareholders of Kirin want the management
chapter revisit the opening vignette and ask
to distribute some of the cash reserves as dividends. Kirin’s shares are currently trading
at ¥2,500. One market analyst has estimated that Kirin can pay dividends of ¥1,500
students to apply lessons from the chapter to that
per share and the share value will remain at ¥1,500 after the dividends have been paid.
Will the shareholders of Kirin be better or worse off with dividend payment? Calculate
business situation.
the percentage change in the shareholders’ wealth including the cash they received and
the change in the value of their stock that would hypothetically occur if Kirin acted
on this plan. Now suppose Kirin has 835 million shares outstanding. What will be the Self-Test Problems, keyed to the learning goals,
SELF-TEST PROBLEMS
total yen value of(Solutions
the wealth in Appendix)
created or destroyed by the proposed dividend plan?
give readers an opportunity to strengthen their
LG 2 LG 5 ST5–1 Future values for various compounding frequencies Delia Martin has $10,000 that
she can deposit in any of three savings accounts for a three-year period. Old Reliable understanding of topics by doing a sample prob-
IRF Bank compounds interest on an annual basis, Third National Bank compounds in-
terest twice each year, and Friendly Credit Union compounds interest each quarter. lem. For reinforcement, solutions to the Self-Test
All three have a stated annual interest rate of 4%.
a. What amount would Ms. Martin have after three years, leaving all interest paid Problems appear in the appendix at the back of
on deposit, in each financial institution?
b. What effective annual rate (EAR) would she earn in each situation? the book.
c. On the basis of your findings in parts a and b, which institution should Ms.
Martin deal with? Why?
d. If American Bank, also with a 4% stated interest rate, compounds interest
continuously, how much would Ms. Martin have after three years? Does this
alternative change your recommendation in part c? Explain why or why not.
Warm-Up Exercises follow the Self-Test

WARM-UP EXERCISES
Problems. These short, numerical exercises
LG 2 E5–1 Assume that Amaya Chidori makes a ¥40,000 deposit into an investment account in
a bank in Sendai, Japan. If this account is currently paying 0.5% per annum, what
give students practice in applying tools and
will the account balance be after two years? techniques presented in the chapter.
LG 2 LG 5 E5–2 Paul Jackson saved £6,200 over last two years and decided to invest in an individual
savings account (ISA), which is a type of savings account that offers tax exemptions
to residents of the United Kingdom. If the ISA pays 3% annual interest, what will
the account balance be after three years?

39
Preface
The Excel icon indicates auto-graded Excel projects available Comprehensive Problems, keyed to the
PROBLEMS in MyLab Finance. Excel templates for end-of-chapter problems are also
available in MyLab Finance.
learning goals, are longer and more complex
than the Warm-Up Exercises. In this section,
LG 1 P5–1 Using a timeline Barnaby PLC is considering starting a new branch of its business in
Northern Ireland that requires an initial outlay of £280,000 and is expected to pro- instructors will find multiple problems that
duce cash inflows of £80,000 at the end of years 1, 2, and 3; £70,000 at the end of
years 4 and 5; and £90,000 at the end of year 6. address the important concepts, tools, and
a. Draw and label a timeline depicting the cash flows associated with Barnaby’s
proposed investment. techniques in the chapter.
b. Use arrows to demonstrate, on the timeline in part a, how compounding to find
future value can be used to measure all cash flows at the end of year 6.
c. Use arrows to demonstrate, on the timeline in part a, how discounting to find
A short descriptor identifies the essential concept
present value can be used to measure all cash flows at the beginning of the period
(time zero).
or technique of the problem. Problems labeled
d. Which of the approaches—future value or present value—do you think financial as Integrative tie together related topics.
managers rely on most often for decision making?
On MyLab Finance, students can find

LG 4 LG 6 P7–23 Integrative: Risk and valuation The Best Equipment Company just released a suc-
cessful new and innovative product. It is expected that the product will bring huge Excel templates that help them set up
profits to the company, and its dividend will grow at 7% every year from now on.
The last annual dividend of the company was $0.50 per share. The current risk-free
a structure for solving end-of-chapter
rate of return is 5%, and you require a 6% risk premium to hold the stock. How
much will you pay for a share of the stock? Assume that the share price is $50.
problems. These templates not only help
them get started on a problem, but they
also provide examples of how to begin
to set up basic Excel models.
Personal Finance Problem Personal Finance Problems
Time value Isabella wishes to purchase a Nissan GTR. The car costs £85,000 today
specifically relate to personal
LG 2 P5–6
and, after completing her graduation, she has secured a well-paying job and is able
to save for the car. The price trend indicates that its price will increase by 3% to 6%
every year. Isabella wants to save enough to buy the car in five years from today. finance situations and Personal
LG 6 P5–66
h f h fi f h b
ETHICS PROBLEM Samantha Fong sold her home in San Francisco in 2020 for Finance Examples in each
$1.34 million, which was the median home price for that city. Samantha had lived
in that house for 17 years, having purchased it from Michael Shoven in 2003 for
chapter. These problems will
$711,000. What average annual rate of return did Samantha earn on her home, help students see how they can
ignoring things such as property taxes and the costs of maintaining the home?
Would you say that Samantha somehow “swindled” Michael? Would your an-
apply the tools and techniques
swer to that question be influenced by the knowledge that over those 17 years, the of managerial finance in
average annual return on U.S. stocks was a little more than 10%?
managing their own finances.
Every chapter includes a Spreadsheet
SPREADSHEET EXERCISE
Exercise. This exercise gives students
Excel At the end of 2019, Uma Corporation is considering a major long-term project in an an opportunity to use Excel software
effort to remain competitive in its industry. The production and sales departments have
determined the potential annual cash flow savings that could accrue to the firm if it acts to create one or more spreadsheets
soon. Specifically, they estimate that a mixed stream of future cash flow savings will with which to analyze a financial
occur at the end of the years 2020 through 2025. The years 2026 through 2030 will see
consecutive $90,000 cash flow savings at the end of each year. The firm estimates that problem. The spreadsheet to be created
its discount rate over the first six years will be 7%. The expected discount rate over the
years 2026 through 2030 will be 11%.
is often modeled on a table or Excel
screenshot located in the chapter.
An Integrative Case at the end of each

part of the book challenges students
Integrative Case 1
122 PART ONE Introduction to Managerial Finance
to use what they have learned over the
course of several chapters.
South Trading Ltd.
J atin Koorgi, CFO of South Trading Ltd., is working on the financial plans and
projections for his next board meeting. South Trading trades in coffee and tea
produced across India, and is one of the world’s largest suppliers for multinational
tea and coffee brands. It now plans to acquire coffee plantations in Asia, South
America, and Africa and vertically integrate its supply chain. It is expected that
this vertical integration will allow South Trading more control on the quality and
supply of varieties of tea and coffee and charge premium prices for its products.
South Trading is expected to invest 6 billion in this plan. Jatin’s immediate task is
to brief the board on the possible ways of raising this required capital for this
expansion.
So far, South Trading has been operating as a private company, mostly using
internal sources of capital and borrowing from its bankers to finance any capital in-
vestments. Jatin has outlined two possible options for the board to consider.
Option 1: South Trading could approach its banker, DFHC Bank, with whom
it has a long-term relationship. The firm has ongoing long-term loans with this
bank and uses its seasonal credit lines for procurement on a regular basis.However,
Rajesh Kumar, DFHC Bank’s representative to South Trading, has informed Jatin
that it is unlikely for the bank to lend the entire sum of 6 billion to the firm.
Rajesh has further explained that DFHC will gather a group of banks and each
bank will share a portion of that loan. As a condition to lending such a large sum,
the group of banks will demand that South Trading limits further borrowing and
provides DFHC with periodic financial disclosure so that the group of banks can
monitor the firm’s financial condition.

40 Preface
DEVELOPING EMPLOYABILITY SKILLS

For students to succeed in a rapidly changing job market, they should be aware of
their career options and how to go about developing a variety of skills. We focus
on developing these skills in a variety of ways.
Excel modeling skills—Each chapter contains a Spreadsheet Exercise that asks
students to build an Excel model to help solve a business problem. Many chapters
provide screenshots showing completed Excel models designed to solve in-chapter
examples. Many chapters contain Excel Review Questions that prompt students
to practice using Excel to solve specific types of problems. Excel templates are
available on MyLab Finance that help students structure end-of-chapter problems
so they can solve them in Excel.
Ethical reasoning skills—The Focus on Ethics boxes appearing in each chap-
ter describe situations in which business professionals have violated ethical (and
in some cases even legal) standards and have suffered consequences as a result.
These boxes will help students recognize the ethical temptations they are likely to
face while pursuing a finance career and the consequences that they may suffer
if they behave unethically. Each chapter ends with an Ethics Problem that asks
students to consider the ethical dimensions of some business decision.
Critical thinking skills—Nearly every significant financial decision requires
critical thinking because making optimal decisions means weighing the marginal
benefits and costs of alternative plans. To weigh those benefits and costs, one
must first identify and quantify them. Nearly every chapter in this textbook dis-
cusses how financial analysts place a value on the net benefits associated with a
particular decision. Students who master this material will be prepared to ask the
tough questions necessary to assess whether a particular course of action creates
value for shareholders.
Data analysis skills—Financial work is about data. Financial analysts have
to identify the data that are relevant for a particular business problem, and they
must know how to process that data in a way that leads to good decision making.
In-chapter examples and end-of-chapter problems require students to sort out
relevant from irrelevant data and to use the data that they have to make a clear
recommendation about what course of action a firm should take.
TABLE OF CONTENTS OVERVIEW

The text’s organization conceptually links the firm’s actions and its value as deter-
mined in the financial market. We discuss every significant financial problem or
decision in terms of both risk and return to assess the potential impact on owners’
wealth. A Focus on Value element in each chapter’s Summary helps reinforce the
student’s understanding of the link between the financial manager’s actions and
the firm’s share value.
In organizing each chapter, we have adhered to a managerial decision-making
perspective, relating decisions to the firm’s overall goal of wealth maximization.
Once a particular concept has been developed, its application is illustrated by an
example, which is a hallmark feature of this book. These examples demonstrate,
and solidify in the student’s thought, financial decision-making considerations
and their consequences.

Acknowledgments
TO OUR COLLEAGUES, FRIENDS, AND FAMILY

Pearson sought the advice of a great many excellent reviewers, all of whom influ-
enced the revisions of this book. Our special thanks go to the following individu-
als who contributed to the manuscript in the current and previous editions:
Saul W. Adelman Omer Carey Sharon Garrison

M. Fall Ainina Patrick A. Casabona Gerald D. Gay
Gary A. Anderson Johnny C. Chan Deborah Giarusso
Ronald F. Anderson Robert Chatfield R. H. Gilmer
James M. Andre K. C. Chen Anthony J. Giovino
Gene L. Andrusco Paul Chiou Lawrence J. Gitman
Antonio Apap Roger G. Clarke Michael Giuliano
David A. Arbeit Terrence M. Clauretie Philip W. Glasgo
Allen Arkins Mark Cockalingam Jeffrey W. Glazer
Saul H. Auslander Kent Cofoid Joel Gold
Peter W. Bacon Boyd D. Collier Ron B. Goldfarb
Matt Baldwin Thomas Cook Dennis W. Goodwin
Richard E. Ball Maurice P. Corrigan David A. Gordon
Thomas Bankston Mike Cudd J. Charles Granicz
Alexander Barges Donnie L. Daniel C. Ramon Griffin
Charles Barngrover Prabir Datta Reynolds Griffith
Michael Becker Joel J. Dauten Arthur Guarino
Rhoda Belemjian Lee E. Davis Lewell F. Gunter
Omar Benkato Irv DeGraw Melvin W. Harju
Robert Benson Richard F. DeMong John E. Harper
Scott Besley Peter A. DeVito Phil Harrington
Douglas S. Bible R. Gordon Dippel George F. Harris
Charles W. Blackwell James P. D’Mello George T. Harris
Alan Blaylock Carleton Donchess John D. Harris
Russell L. Block Thomas W. Donohue Mary Hartman
Calvin M. Boardman Lorna Dotts R. Stevenson Hawkey
Paul Bolster Vincent R. Driscoll Roger G. Hehman
Robert J. Bondi Betty A. Driver Harvey Heinowitz
Jeffrey A. Born David R. Durst Glenn Henderson
Jerry D. Boswell Dwayne O. Eberhardt Russell H. Hereth
Denis O. Boudreaux Ronald L. Ehresman Kathleen T. Hevert
Kenneth J. Boudreaux Ted Ellis J. Lawrence Hexter
Thomas J. Boulton F. Barney English Douglas A. Hibbert
Wayne Boyet Hsing Fang Roger P. Hill
Ron Braswell Greg Filbeck Linda C. Hittle
Christopher Brown Ross A. Flaherty James Hoban
William Brunsen Rich Fortin Hugh A. Hobson
Samuel B. Bulmash Timothy J. Gallagher Keith Howe
Francis E. Canda George W. Gallinger Kenneth M. Huggins
41

42 Acknowledgments
Jerry G. Hunt John B. Mitchell Mukunthan

Mahmood Islam Daniel F. Mohan Santhanakrishnan
James F. Jackson Charles Mohundro William L. Sartoris
Stanley Jacobs Gene P. Morris William Sawatski
Dale W. Janowsky Edward A. Moses Steven R. Scheff
Carolyn Jarmon Tarun K. Mukherjee Michael Schellenger
Jeannette R. Jesinger William T. Murphy Michael Schinski
Nalina Jeypalan Randy Myers Tom Schmidt
Jerry Johnson Lance Nail Carl J. Schwendiman
Timothy E. Johnson Donald A. Nast Carl Schweser
Roger Juchau Vivian F. Nazar Jim Scott
Ashok K. Kapoor G. Newbould John W. Settle
Daniel J. Kaufman Jr. Charles Ngassam Richard A. Shick
Joseph K. Kiely Alvin Nishimoto A. M. Sibley
Terrance E. Kingston Gary Noreiko Sandeep Singh
Raj K. Kohli Dennis T. Officer Surendra S. Singhvi
Thomas M. Krueger Kathleen J. Oldfather Stacy Sirmans
Lawrence Kryzanowski Barry D. Smith
Kathleen F. Oppenheimer
Harry R. Kuniansky Gerald Smolen
Richard M. Osborne
William R. Lane Ira Smolowitz
Jerome S. Osteryoung
Richard E. La Near Jean Snavely
Prasad Padmanabahn
James Larsen Joseph V. Stanford
Roger R. Palmer
Rick LeCompte John A. Stocker
Don B. Panton
B. E. Lee William Stough
John Park
Scott Lee Lester B. Strickler
Ronda S. Paul
Sharon Lee Gordon M. Stringer
Bruce C. Payne
Suk Hun Lee Elizabeth Strock
Gerald W. Perritt
Michael A. Lenarcic Donald H. Stuhlman
Gladys E. Perry
A. Joseph Lerro Sankar Sundarrajan
Stanley Piascik Philip R. Swensen
Yin Li
Gregory Pierce S. Tabriztchi
Thomas J. Liesz
Hao Lin Mary L. Piotrowski John C. Talbott
Alan Lines D. Anthony Plath Gary Tallman
Larry Lynch Jerry B. Poe Harry Tamule
Christopher K. Ma Gerald A. Pogue Richard W. Taylor
James C. Ma Suzanne Polley Rolf K. Tedefalk
Dilip B. Madan Ronald S. Pretekin Richard Teweles
Judy Maese Fran Quinn Kenneth J. Thygerson
James Mallet Monika Rabarison Robert D. Tollen
Inayat Mangla Rich Ravichandran Emery A. Trahan
Bala Maniam David Rayone Barry Uze
Timothy A. Manuel Walter J. Reinhart Pieter A. Vandenberg
Brian Maris Jack H. Reubens Nikhil P. Varaiya
Daniel S. Marrone Benedicte Reyes Oscar Varela
William H. Marsh William B. Riley Jr. Mark Vaughan
John F. Marshall Hong Rim Kenneth J. Venuto
Linda J. Martin Ron Rizzuto Sam Veraldi
Stanley A. Martin Gayle A. Russell James A. Verbrugge
Charles E. Maxwell Patricia A. Ryan Ronald P. Volpe
Timothy Hoyt McCaughey Murray Sabrin John M. Wachowicz Jr.
Lee McClain Kanwal S. Sachedeva Faye (Hefei) Wang
Jay Meiselman R. Daniel Sadlier William H. Weber III
Vincent A. Mercurio Hadi Salavitabar Herbert Weinraub
Joseph Messina Gary Sanger Jonathan B. Welch

43
Acknowledgments
Grant J. Wells Bernard J. Winger Seung J. Yoon

Larry R. White Tony R. Wingler Charles W. Young
Peter Wichert Alan Wolk Philip J. Young
C. Don Wiggins I. R. Woods Joe W. Zeman
Howard A. Williams John C. Woods John Zietlow
Richard E. Williams Robert J. Wright J. Kenton Zumwalt
Glenn A. Wilt Jr. Richard H. Yanow Tom Zwirlein
A hearty round of applause also goes to the publishing team assembled by

Pearson—including Emily Biberger, Olutosin Aje-Adegbite, Meredith Gertz,
Melissa Honig, Miguel Leonarte, Gina Linko, and others who worked on the
book—for the inspiration and the perspiration that define teamwork. Also, spe-
cial thanks to the formidable Pearson sales force in finance, whose ongoing efforts
keep the business fun!
Finally, and most important, many thanks to our families for patiently pro-
viding support, understanding, and good humor throughout the revision process.
To them we will be forever grateful.
Chad J. Zutter
Pittsburgh, Pennsylvania
Scott B. Smart
Bloomington, Indiana
Global Edition Acknowledgments

Pearson would like to thank the following experts for their work on the Global
Edition:
CONTRIBUTOR
Mohammad Rajjaque, Sheffield Business School
REVIEWERS
Rezart Erindi, CFA
Ruzanifah Bt. Kosnin, Universiti Malaysia Kelantan
Hameedah Sayani, Mohammed Bin Rashid School of Government


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enough.”
Then she turned to Bettina. Since the beginning of their
conversation Bettina had not spoken. Polly scarcely remembered her
making a dozen speeches since her arrival, unless they were answers
to questions. As she had been talking all her life whenever there was
the least opportunity, Polly Burton feared that she was not going to
be able to understand Bettina. Then Betty had written such odd
letters about her only daughter, as if she herself did not altogether
understand her.
But Betty’s letters had placed Bettina on a kind of pedestal,
suggesting that she lived in a finer, purer atmosphere than other
girls. Mrs. Burton was not so sure. At this moment she did not like
the fashion in which Bettina had received a mysterious note from
Ralph Marshall. It looked secretive. And Bettina was still flushed and
embarrassed.
Polly felt a sudden qualm. After all, she knew little about girls, and
if anything happened to Betty’s or Mollie’s daughter while under her
care, would she not always feel responsible?
Bettina at this instant suddenly jumped up, her face growing warm
and lovely as she started running across the grass lawn like a graceful
child.
The next moment, forgetting her years and everything else, Mrs.
Burton fled after her.
For they had both discovered almost simultaneously that a
carriage was entering the gate which divided the Webster farm from
the grounds about the house. And out of the carriage a handkerchief
was being riotously waved.
At their approach the carriage stopped and a woman alighted.
She put her hands on Bettina’s shoulders kissing her on both
cheeks.
“You are looking better, darling.”
Then she turned.
“Polly O’Neill, didn’t you know I would come from Washington as
soon as I learned you were in this part of the world? How can you
look so exactly like you always did as a girl, in spite of your age and
honors? You are thin as a rail.”
It was Betty Ashton—Mrs. Anthony Graham—exquisitely dressed
and perhaps more beautiful than ever. She was now recognized as
one of the loveliest women in Washington; indeed in the United
States.
Yet she and the really great actress came gaily walking across the
lawn, with their arms about each other like school girls.
“Don’t tell me you think I have gained a pound, Polly O’Neill
Burton, or I shall never forgive you, though of course I know I have
gained twenty. How did I find out you were here? Why, Bettina
telegraphed me. Isn’t she lovely. She said you had some wonderful
scheme on hand. Whoever saw Polly without a problem. Have your
own way, dear, as far as I am concerned. It isn’t such a bad way as it
sometimes seems. But I do wish you looked stronger.”
Then Mollie joined her sister and friend.
CHAPTER III
The Human Equation
In an unscientific fashion Mrs. Burton was searching for her purse.

She had peered in the bureau drawers, in her dismantled trunk, and
was now sitting on the edge of her bed trying mentally to discover the
lost object.
Since her arrival at her sister’s home when had she last seen her
pocketbook and for what purpose had she used it?
Ordinarily Mrs. Burton traveled with a maid, who attended to as
many details of life for her as were possible, in order that she might
save her strength for her work. Also because Polly Burton was not
much more dependable about small matters than Polly O’Neill had
been. But at present Marie was away on a holiday, trying to reconcile
herself to the prospect of a year of life in the wilderness, instead of in
hotels, or in Mr. and Mrs. Burton’s New York city apartment, where
they lived when they were acting in New York.
As Polly with her usual impetuosity had decided to follow her
letter to her niece a few hours after the letter was written, there had
been no opportunity to find another maid. Not that one was in the
least useful or desirable in Mollie’s house. Mrs. Burton was not
spoiled into the idea of thinking that she required the services of a
maid except when she was at work.
However, at present she was still in her dressing gown and with
her bed unmade. Mollie always insisted that her sister have her
breakfast in bed during the first of her visit and until she was entirely
rested. It was now nine o’clock. The early search for the pocketbook
was really due to this fact. At any moment the other Polly, whom the
family were now struggling to learn to call Peggy, might appear to
offer her aid and to help make the bed.
This morning visit represented the one opportunity when she and
her adored Tante might have a talk without being interrupted.
And this was why Mrs. Burton had been searching for her money.
For here was her chance for bestowing a gift upon her namesake, and
through her upon Dan and Billy, without family discussion or
objection. Always she looked forward to this moment as one of the
chief pleasures of her visit to her sister.
Not that Mollie and her husband were poor. They were unusually
prosperous, owning one of the best farms in New England. But they
did not have money for unnecessary things. Indeed, no matter what
they might have had, they would never have permitted it to be used
extravagantly. Therefore Peggy—and her adopted name will be used
henceforth, since no one, not even the public, could call her
distinguished aunt by any name save Polly Burton—and her brothers
rarely had much money of their own to spend. Tante, however, was a
delightfully extravagant person, who never had forgotten how poor
she used to be herself, and how many impossible things she had then
wished for.
Therefore, a few moments later, when Peggy knocked at her door,
an abstracted voice bade her enter. For the purse had not even been
mentally found. Yet, as far as she could recall, Polly thought she had
put it in her top bureau drawer. There at present, however, it was
not.
She lifted her eyes as her niece came in.
“‘Peggy of my Heart,’ look in the bureau drawer and find my
pocketbook,” she began nonchalantly, knowing that it was a wise
method to pursue in persuading another person to find a lost
treasure. Better to begin by not confusing the searcher with the sense
of loss.
So Peggy looked for five minutes and, being a matter-of-fact
person, she looked thoroughly.
“It isn’t here,” she announced, with the conviction characteristic of
her.
Her aunt waved a vague hand.
“Be sure to look everywhere, dear.”
And Peggy conscientiously looked, Mrs. Polly Burton assisting
with less energy.
But by and by, when both of them were exhausted from the most
fatiguing occupation in the world—searching for and not finding a
desired object—they sat down on opposite sides of the bed, facing
each other.
“How much money did you have in your purse, Tante?” Peggy
demanded, speaking with the severity each member of her family
and her intimate friends employed in discussing practical matters
with the famous but sometimes erratic lady.
“A hundred dollars,” Polly returned with emphasis. “Only
yesterday afternoon when we came in from tea I counted the money
carefully and then thought I put the purse in the top drawer.
Afterwards I was out of my room until about ten o’clock last night
and then your mother and Aunt Betty and I came up here and
talked.”
Peggy frowned.
It amused her aunt to watch her. Peggy had so much the look of
her father—the boy with whom Polly O’Neill had used to have so
many quarrels—in spite of the difference in their coloring. If Peggy
was as obstinate as he had been, it was to be hoped that aunt and
niece would have few differences of opinion.
But Peggy’s attention at present was concentrated on the lost
money.
“Mother will be terribly distressed when she hears, for it must have
been one of the servants. And we have had all of them a long time.”
“Oh, for goodness sake, it does not matter so much as all that.”
Polly spoke like an embarrassed girl. “And in any case please don’t
tell mother.”
“She will not only be worried but vexed with me as well. Somehow
I must have been careless, and there is nothing worse, I think, than
holding other people responsible for one’s carelessness. The money
will turn up or else I’ll write Uncle Richard.”
But Peggy was not so easily diverted from an idea or a purpose.
There was a characteristic line from her forehead to the end of her
short, straight nose. Also she had a fashion of lifting her head and
looking fearlessly ahead, as if she were contemplating something in
the outside world, when in reality she was only thinking.
“Billy might help us,” she said suddenly. “He knows all the
servants on the place and they like him better than they do the rest of
us.”
And, without waiting for her aunt’s consent, Peggy disappeared.
She was gone a long time—so long that Mrs. Burton grew annoyed.
She made her own bed and made it extremely well, having never
forgotten this part of her Camp Fire education. She also wrote a note
to her husband, who was on a tour in the West. She was just
contemplating dressing and joining the others downstairs when
Peggy came back. Billy was with her, and Billy bore the lost
pocketbook.
His expression was odd, but it was Peggy about whom Polly felt
suddenly frightened. Her usually brilliant color was gone, and her
lips were in a hard line.
“Billy took your purse,” and then in a queer voice, “but please
make him explain. I cannot.”
Billy laid the purse gently on his aunt’s knee and looked directly at
her.
It chanced that Polly was sitting in a tall chair so that her eyes were
on a level with the boy’s.
It had always been Polly’s impression that Billy was her favorite of
her sister’s children; perhaps because he was not the favorite with his
mother or father. And then undeniably he was a problem.
“I took your pocketbook, Tante.”
He spoke with a little embarrassment—not a great deal. “I needed
some money at once and knew you would give it to me later. There
was no chance to ask. You were downstairs and when I came up
afterwards to tell you mother and Aunt Betty were in here and I did
not wish them to know.”
There was a slight exclamation of consternation and shame from
Peggy, but Mrs. Burton was speechless.
She was not a moralist—that is, it was difficult for her to know how
to preach. But would preaching or anything she could say make Billy
understand the wrong he had done? His mother and father were the
most punctilious people in the world? What must they not have said
to him in times past? He was not a child.
“I am sorry, Billy; it wasn’t square,” Polly said finally, but looking
and feeling more ashamed than the boy himself apparently did.
Billy’s blue eyes were puzzled and regretful, but not conscience-
smitten.
“You intended to persuade father to take me west with you and I
would rather have gone than anything in the world,” he remarked
slowly in reply. “Now you don’t want me to go because you are afraid
of the responsibility I would be, and you don’t trust me.”
He did not put this as a question. He was making a statement.
Nevertheless his aunt answered, “Yes.”
Then, without any further explanation and without even asking to
be forgiven, Billy walked out of the room.
“He is the queerest boy in the world,” Peggy said in distressed
tones when the door closed; “and worries mother and father nearly
to death. No one of us understands him. He does whatever he likes
and then accepts his punishment without a word. He does not like
the farm as Dan and I do, and has never been a hundred miles away.
Yet he would rather do a horrid thing like this and so spoil his chance
for going west with you. Father might have given in.”
Polly arose. “Let’s not talk about it. Run downstairs, dear; I am
going to put on my riding habit. Will you see if the horses will be
ready at eleven? Aunt Betty and I are going to ride over the country
together. I can’t walk very far and it is our best chance for
discovering our old haunts. I knew every inch of this country once as
a girl and want to see our old Sunrise Hill cabin again. Don’t speak of
what has happened.”
Then as Peggy started to leave, her aunt thrust the delayed gifts for
herself and Dan into her hand. They were two ten-dollar bills.
Afterwards when Peggy had gone, she nervously counted over her
money; Billy had taken only ten dollars—her usual gift to him. For
even this she was thankful. But for what purpose had the boy needed
money in such a hurry? And why had she discovered him on the
night of her arrival waiting alone at the side of the road when he
should have been at home with his family?
Well, perhaps it was best to have found out Billy’s peculiarities
before taking him away with her. Nevertheless, Mrs. Burton was
profoundly sorry. Certainly the boy needed help of some kind. Yet
she would probably not be equal to the problem of suddenly
adopting a large and nearly grownup family of girls.
“Fools rush in,” Polly smiled and then sighed. “But, after all, I
won’t have an opportunity for worrying over my own health very
often.”
Then she went down to the living room.
CHAPTER IV
The April Woods
“Again the blackbirds sing; the streams

Wake, laughing, from their winter dreams,
And tremble in the April showers
The tassels of the maple flowers.”
Polly recited Whittier’s verse with a wistful inflection in her voice

that made her companion turn from looking at the scenery to gaze at
her.
“Don’t make a cheerful poem sound like a lament for all the lost
springs in the world, Polly darlint,” Betty Graham pleaded. “I declare
you become more of a fascinator the older you grow. But I suppose
that is a part of your genius. Funny we didn’t know you were a genius
in the old Sunrise Hill Camp Fire days, and only thought you were
‘fee’ as the Irish say. Queer there is another Camp Fire organization
of girls now, with our old title and with Mollie Webster for their
guardian! Ah well, times do change, though I know that is not an
original remark.”
Polly laughed. The two friends were cantering along side by side
through a lane in the New Hampshire woods. They were on their way
to see the old cabin where long ago they had lived and worked
together with nearly a dozen other girls for a happy year.
The riding was difficult because the road was still muddy from
spring rains, but Polly rode frequently in Central Park when she
happened to be in New York City and Betty, in an effort to keep her
figure, had daily horseback exercise in Washington. At present they
were actually paying more attention to each other’s conversation
than to their horses.
“And here I am adopting some of Mollie’s Camp Fire
responsibilities without being half so well equal to them as she is. Do
you think my scheme of taking a few of her Camp Fire girls and some
of my own to camp on the edge of the Painted Desert with me a mad
scheme, Betty? Of course, I have to see the girls first and choose the
ones I wish and then argue the matter with their parents. You and
Anthony are going to allow me to have Bettina?”
Involuntarily both women had slowed down their horses.
“We cannot help it very well, Polly,” Mrs. Graham replied. “Bettina
has thought of nothing else and dreamed of nothing else since you
first wrote of your plan to her and to Polly—oh, to Peggy, I mean. I do
hate this business of two persons in one family having the same
name. We have had trouble enough with the difficulty in our own
family. Bettina has even written some charming verses about the
desert, which she showed to me the night of my arrival.
“But I am afraid I shall never have any more influence over my
daughter after she has been with you, dear. Truth is, Bettina and I
adore each other but are not in the least alike. And Anthony says I
must give Bettina the chance to do the thing she believes she would
love. She does not care in the least for society or many people, and it
is so hard for me to understand,” Betty Graham ended wistfully.
But in return her beloved friend only laughed. “Nonsense, Betty;
we are not all born beauties and belles, as you were. Oh, yes, I do
think your Bettina is very pretty, so don’t get your mother bird
feathers ruffled. But I don’t think ‘the little Princess’ is the beauty her
mother was and is.” Then seriously, “Of course I shall do my best to
look after your daughter, Betty dear, if anything should—” she
hesitated.
Her friend answered gravely, “Of course her father and I will both
understand. But Bettina knows nothing of the actual world. She has
lived in her ambitions and dreams. Hard as it is for us, she must take
her own risks and learn her own lessons.”
“If only you would come with me, Betty—you or Mollie. I may not
be equal to the task alone,” Polly suddenly announced, having felt
another qualm at the task ahead of her. Then she laughed.
“I have just had the funniest letter from Sylvia Wharton. You see, I
wrote and asked Sylvia to take a year from her hospital work and
come west to look after me. Doctor Sylvia flatly declines and suggests
that she has more important things to do. Still, she has done a
Sylviaesque thing! She proposes, or rather orders me, to take with
me a young woman who started her hospital training and has broken
down. She has recovered, but Sylvia thinks the change will help her.
Also, she says the young woman is particularly well adapted for
looking after all of us.
“She writes that I won’t need a maid and am to leave poor Marie in
New York. She is right, I expect, about Marie, but I won’t do that.
However, I don’t think it will be a bad idea, if the young woman
Sylvia wishes me to take is fairly agreeable. She can teach my Camp
Fire girls first-aid requirements and then, if any one is ill, help in an
emergency.”
Mrs. Betty Graham nodded her handsome head.
“Sylvia is always sensible and has been from her youth up, in
contrast to you, dear. However, don’t think that you and your girls
are to be left in peace in your desert camp, Polly. I cannot go along
with you at present, but I wouldn’t miss the experience of being with
you for a time for a year of every-day life. So I’ll turn up some time
when you least expect me—and I shall bring my Tony. You haven’t
invited my son to your camp, Polly; are you taking Dan and Billy?”
For the second time Mrs. Burton’s expression changed to one of
anxiety. “I wish I knew whether to ask your advice about something,
Betty.”
But, before she had finished, her horse stumbled in a hole ahead
and, becoming frightened, started to run.
First Polly felt herself being thrown violently forward, then tilted
to one side, then backward and forward again. However, she had no
idea of being frightened and, although her saddle girth was broken,
she still held on. Really, the first thought flashing through her
consciousness was the recollection of her sister Mollie’s parting
words:
“Do please remember, Polly, that you are not young as you used to
be. I don’t approve of this horseback riding for women of yours and
Betty’s age. And I always feel more nervous about your getting into
trouble than I do my own children.”
Then her own reply: “Nonsense, Mollie; you always were a ‘’fraid
cat.’ I expect to ride a bucking broncho for the next year, so I
certainly ought to be able to manage one of William’s quiet steeds.”
However, Polly Burton was becoming unable to manage one of
“William’s quiet steeds.”
Although, by a firmer clutch on the reins, she had been able to
keep herself in the saddle without its slipping off, yet her horse kept
pounding ahead, paying not the least attention to her exhortations or
her pulling.
A difficulty was that the horse was often used for driving and had a
less sensitive mouth than those to which its rider had been
accustomed.
However, the experience might be exhilarating if the saddle did
not slip off entirely, as the road lay straight ahead. The horse would
stop when he grew tired. There was only one trouble to be
particularly feared and that was the loss of one’s breath from a pain
in the side which the hard awkward riding might bring on.
The other horse had straightway been outdistanced. After one cry
from Betty, Polly heard no other sound from her.
But now the pain was coming which was the trial of her life, and a
sense of dizziness followed.
Fortunately a little ahead, on a path that ran alongside the road, a
boy and a girl were walking. Polly believed she called to them,
although they must have heard the noise of the runaway first.
For Billy Webster moved only a few steps and then stood waiting
for the horse to come opposite him. When it did he made an upward
leap. Seizing the bridle he continued holding on to it until the horse,
after running a few yards more, peacefully stopped as if this had been
his intention all along.
However, before this instant, looking down upon her nephew, it
seemed to Mrs. Burton that he was very inadequate to the task ahead
of him, although she never had seen any one so calmly determined.
When the horse ceased running Billy must also have lifted her
down. The next thing she was conscious of was hearing him say:
“I don’t think you need be frightened, Vera; she has not really
fainted.”
Billy Gave an Upward Leap
Then Mrs. Burton discovered that she was seated on the ground
with her back against a tree, and with her riding hat dangling
rakishly over one eye. Above her a girl whom she had never seen
before was anxiously bending.
Without making an effort to speak until the pain in her side grew
less severe and her breathing more natural, Polly at once tried to
straighten her hat.
But Billy continued to talk as if nothing unusual had occurred and
as if his aunt could give him her undivided attention.
“I have been thinking the matter over, Tante, and I want to explain
something to you,” he said as he made a slight movement with his
hand toward the girl. “This is Vera Lageloff, a friend of mine. I took
your money before you had a chance to give it to me because Vera’s
people needed it and I knew it would be useless to ask father. I hope
you will pardon me. I suppose it was not square. Vera’s father is one
of my father’s farmers, who has been working a part of our land on
shares. He has not been straight or industrious and father has asked
him to go. Of course, he had to find some other place to go, but he
had no money and there are several other children. Vera told me that
he had a chance, if he could only get the money for a railroad ticket,
but had to have it at once. I had been to their house the night I met
you. I did not tell them at home, because father does not like my
interfering with his working people. And he does not trust Vera’s
father. I don’t trust him, either, but I don’t wish his children to
suffer. Do you?”
Billy had at last concluded his speech.
While he was talking it occurred to his aunt, who was accustomed
to having a good deal of attention paid to her health, and indeed to
all her concerns, that her nephew was but little interested in her
accident. But then he was never interested in anything which he
considered unessential. Nevertheless, there was something about
this youthful Billy Webster, which made him difficult to answer
readily. If he was not going to become a socialist or an anarchist, at
any rate he was a law unto himself.
Yet his aunt did not clearly understand what point he was trying to
make at the present moment. In reply she murmured something
about being sorry; but this was not the time for such a discussion. In
any case, his father must, of course, know best.
Then, struggling to get on her feet again and finding the girl beside
her trying to help, Mrs. Burton for the first time acknowledged their
introduction. She scarcely looked at the girl, because Billy again took
up the conversation and was more amazing this time than before.
“I do hope you will take Vera to camp with you, Tante. She is a
member of mother’s Camp Fire club and mother likes her. Besides,
she ought to get away from her family.”
Billy’s effrontery or his belief in his own judgment affected his
aunt curiously. She had never known anything like it before.
However, she had seen but little of Billy in the last few years, and
before now he had appeared only as a shy, delicate boy.
Fortunately, before having to reply one way or the other to his
latest demand, Mrs. Burton observed Betty Graham riding up the
road toward her as rapidly as her horse could travel. Betty’s concern
over her friend’s experience and its possible unfortunate
consequences was in striking contrast to the coldness and lack of
interest of the younger generation.
Afterwards, returning home a little later on an entirely subdued
animal, Mrs. Burton regretted that she had not looked at Billy’s
friend more carefully. At present she believed she would hardly
recognize the girl if they chanced to meet again. And undoubtedly the
Russian girl and her nephew must be devoted friends.
CHAPTER V
Observation
Two girls were standing on the rear platform of a big observation car
that had left Chicago a number of hours before.
They were charmingly dressed for travel—one in a brown corduroy
coat and skirt, a cream-colored blouse and a soft brown felt hat, with
a single cream-colored wing in it, and the other in blue. The first was
a small, dark girl with a brilliant color, scarlet lips and black eyes.
But little in the swiftly passing landscape seemed to escape her
interest.
The other girl was perhaps a year older and had light golden-
brown hair. Her eyes were sometimes gray, sometimes blue and now
and then faintly green, should she chance to be standing under a
group of trees or surrounded with any green foliage. Her dress was
like that of her companion except for the difference in color. Her
expression was less animated; her vision appeared to be not only an
outward but an inward one. She saw the landscape before her with
pleasure and yet had even greater pleasure in the reflections it
brought to her mind.
Finally, the train gave an unexpected lurch in making a wide curve,
and she slipped her arm through her companion’s.
“Isn’t it heavenly, Peggy?” she demanded. And then. “I know I am
selfish, so please don’t reproach me; but sometimes I have wished
that just you and I were going to camp with Tante. We have not been
away very long, but we seem to be an odd combination.”
The other girl laughed.
“Traveling with a group of girls Tante has chosen, did you expect
anything else? The oddness of our party has probably only begun,
Bettina. You know Tante has a curious fashion of liking or disliking
an individual for what he or she happens to be, without any reference
to their circumstances. And she has selected her Camp Fire club in
this way. I suppose when you become as famous as she is you can
afford to do as you like,” Peggy Webster concluded.
In spite of the difference in their natures the two girls were
devoted friends.
Bettina now looked a little wistful.
“Tante does not like me much, does she, Peggy? Oh, I don’t mean
that she is not fond of me, because I am my mother’s daughter and,
for old associations, and she would do any kindness for me. But one
knows when a person is attracted toward one without being told.
Tante is much more interested in that queer Russian girl, Vera, and
in the girl she brought with her from Chicago.”
For a moment Peggy Webster continued to watch the landscape
apparently sailing by. Then she answered.
“I think we had better go back to the others, Bettina, as it is nearly
tea time. Yes, I agree with you that it does seem unfortunate that we
girls start out by appearing to be so uncongenial. But perhaps our
Camp Fire club life together will alter us. At least we will understand
each other better after a few months of living together anyhow.
Mother says that is one of the most important influences of the Camp
Fire. You know it is supposed to teach us to put aside the
conventional society idea and learn to care for each other as men
sometimes do. We are all girls and, whatever our circumstances,
have pretty much the same needs and ideals.”
Then feeling her cheeks crimson because she feared that her words
held a suggestion of preaching, Peggy turned and started to lead the
way back into the observation car. Bettina, however, did not at once
follow her.
The rear half of the observation train was occupied by the new
Sunrise Hill Camp Fire club. Mrs. Polly Burton, the new Camp Fire
guardian, sat by one of the windows, glancing out at the great grain
fields through which their train was cutting its way like a mammoth
thrashing machine.
She was elegantly dressed in a tailored suit of dark blue cloth; and
behind her hung a fur coat for use in case the weather should turn
suddenly cold. Her bags and all her appurtenances of travel showed
wealth and luxury, and yet, in spite of all this and of her
distinguished reputation, the great lady herself looked fragile and
subdued. Indeed, she bore a striking resemblance to the very Polly
O’Neill who so often used to start out on a task in a sudden burst of
enthusiasm, only to find later that she had scarcely the ability or
strength to go on.
Not alone did Bettina believe that the new club was an oddly
assorted group!
Only in Chicago had they actually begun their journey to the West
together.
Some time before, Mrs. Burton had left her sister’s home in New
Hampshire and in Chicago joined her husband, who was playing
there during the late spring season. A few days before, Mr. and Mrs.
Webster had come on from their home to Chicago in order to
chaperon the new group of Camp Fire girls that far along the way.
There they had been joined by Mrs. Burton and one other new club
member besides Polly’s French maid, Marie.
Marie had traveled with Polly everywhere since her marriage,
having charge of her clothes—both her stage and personal ones—and
striving, though vainly, to turn her mistress into the fashionable,
conventional character it was impossible for her ever to be.
At present Marie was hovering about, paying Polly small attentions
which annoyed her, and which she felt were not good for the
intimacy she hoped to establish with her Camp Fire girls.
Personally she wished to forget her usual style of life—the fatigue,
the excitement, even her own success—and to have the girls forget it.
But Marie was a constant and persistent reminder of all these things.
Yet when she had suggested to Marie that she remain behind, as she
would dislike a western camp, Marie had burst into such French
tears and such French protestations that Mrs. Burton, who was never
very firm where her affections were concerned, had given in.
Now Marie was really the most trying member of the ill-assorted
party.
“Do please go back to your own place and leave me alone, Marie,”
Mrs. Burton finally said, unable longer to conceal her irritation. “I
am not a hopeless invalid and, even if I were, I should not wish you
to be constantly pushing cushions behind my back.”
Then, as Marie flounced off in a temper, Mrs. Burton laughed and
sighed.
Although accustomed to having thousands of eyes fixed upon her
while she was acting, Polly had become embarrassed by the critical
survey of two pair which were at present across from her. They
belonged to her own Camp Fire group—Esther’s and Dick Ashton’s
older daughter Alice, and Ellen Deal, the young woman Sylvia
Wharton had more or less thrust upon the party.
Ellen was from a small town in Pennsylvania, but with her small,
neat figure, high color and sandy hair, she might have come from a
real English village in Yorkshire or Lancashire. She was older than
the other girls and had already showed a decided fancy for Alice
Ashton. Mrs. Burton fancied that she disapproved of her and would
not try to conceal her point of view. She might really be too blunt to
make for happiness in a Camp Fire club.
Alice Ashton was a typical Boston girl. She was like her mother in
appearance, except that her hair was a darker red, and she was
handsomer than her mother had ever been. She wore glasses and was
a graduate of Wellesley College. In accepting the Camp Fire
invitation Alice had frankly stated that she wished to make an
especial study of Arizona Indian customs for her English work the
following year.
But she had not seen her mother’s old friend since she was a little
girl and, in Alice’s case, Polly also felt she had proved a
disappointment.
It was natural that Alice should expect a famous actress to be
impressive in manner and appearance, and Polly Burton was neither
—of which she was well aware. She was very slight and vivid and not
always sure of herself or her moods. Really Alice gave her the feeling
that she should resign at once as Camp Fire guardian and let Alice
reign in her place. She would probably fill it far better.
But Sally Ashton was different, and Mrs. Burton felt that one
might get amusement if not edification out of Sally. The very name of
Sally was an encouragement to do or say something saucy. And this
Sally had large, soft brown eyes and wavy hair and little white, even
teeth. If her expression was at present demure, one could see
possibilities behind the demureness.
In order not to think of herself as under a critical survey, Mrs.
Burton continued studying her new group of girls.
Sally was at the moment talking to the girl whom she had invited
and who had joined the party with her at Chicago. If Gerry Williams’
history was so unusual that it might be best not to confide her story
to the Camp Fire girls until they knew each other better, at least Mrs.
Burton was happy in the choice of her. She was so pretty and
charming and seemed to have so many possibilities if only she could
have the proper influences.
Gerry was about sixteen and slender, with lovely light hair, blue
eyes, and with almost too much color in her cheeks. Fortunately she
had once been a member of a Camp Fire club in Chicago and so knew
of their methods and ideals.
There was no suggestion then that Gerry would be a problem in
the new club. Already she seemed to be making friends with most of
the other girls.
Vera—Billy’s adored friend—might be the trial. The girl had been
born in Russia and brought to the United States about six or eight
years ago. She spoke English perfectly and did not seem to be ill at
ease, although she talked very little. However, Vera’s heavy dark face,
with her low brow and long dark eyes, was an interesting one.
Curiously, she was also a friend of Mrs. Webster’s—it was Mollie who
had added her plea to Billy’s that the Russian girl be a Camp Fire
guest.
“Yet, after all, what understanding had she of girls? And how little
she had seen of them since her own girlhood!” Mrs. Burton
concluded.
Then, just as she was again becoming depressed, she saw her
adored niece coming down the aisle.
Peggy always brought an atmosphere of relief and reasonableness.
In fact, she discovered at once that her aunt was feeling frightened
and unequal to the plan ahead. Of course, it was a great undertaking
for a woman who had been spoiled—as Polly O’Neill Burton had been
—by husband, family, friends and an admiring public—and not in
good health—to suddenly become guide, philosopher, mother and
friend to a number of strange girls.
In spite of their audience, Peggy leaned over and kissed her.

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Principles of Managerial Finance 16th

Edition Chad J Zutter Scott B Smart

Principles of managerial finance. Fifteenth Edition,

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Pearson Education Limited

and Associated Companies throughout the world

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PART 1 Introduction to Managerial PART 6 Long-Term Financial

PART 2 Financial Tools 123 PART 7 Short-Term Financial

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About the Authors 29

PART 1 Introduction to Managerial Finance 45

1 1.1 Finance and the Firm 48 FOCUS ON PEOPLE, PLANET/

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2 2.1 Financial Institutions 89 2.4 The Securities Issuing

2.2 Financial Markets 91 2.5 Financial Markets in

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PART 2 Financial Tools 123

3 3.1 Mandatory Financial

3.5 Debt Ratios 147

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4 4.1 The Financial Planning

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5 5.1 The Role of Time Value in

5.5 Compounding Interest More

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PART 3 Valuation of Securities 307

6 6.1 Interest Rates and Required

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7 7.1 Differences Between Debt

▲ Creativeneko/Shutterstock 7.2 Common and Preferred 7.4 Decision Making and

➔ REVIEW QUESTIONS 372 Summary 389

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PART 4 Risk and the Required Rate of Return 403

8 8.1 Risk and Return

8.3 Risk of a Portfolio 419

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9 9.1 Overview of the Cost of

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PART 5 Long-Term Investment Decisions 499

10 10.1 Overview of Capital

10.4 Internal Rate of Return

MATTER OF FACT Matter of Fact boxes provide interesting empirical