Full Download PDF of (Ebook PDF) Fundamentals of Corporate Finance 5th Canadian Edition All Chapter

(eBook PDF) Fundamentals of
Corporate Finance 5th Canadian

Edition
Go to download the full and correct content document:
https://ebooksecure.com/product/ebook-pdf-fundamentals-of-corporate-finance-5th-ca
nadian-edition/
More products digital (pdf, epub, mobi) instant
download maybe you interests ...
(eBook PDF) Fundamentals of Corporate Finance 2nd

Canadian
http://ebooksecure.com/product/ebook-pdf-fundamentals-of-
corporate-finance-2nd-canadian/
(eBook PDF) Fundamentals of Corporate Finance 8th

Canadian
corporate-finance-8th-canadian-2/

Canadian
corporate-finance-8th-canadian/
(eBook PDF) Fundamentals of Corporate Finance, 10th

Canadian Edition
corporate-finance-10th-canadian-edition/
Canadian Edition
(Original PDF) Fundamentals of Corporate Finance 6th

Canadian Edition
http://ebooksecure.com/product/original-pdf-fundamentals-of-
(eBook PDF) Fundamentals of Corporate Finance, Third

Canadian 3rd Edition
corporate-finance-third-canadian-3rd-edition/

Edition by Jonathan Berk
corporate-finance-5th-edition-by-jonathan-berk/
Fundamentals of Corporate Finance, 5th Global Edition

Jonathan Berk - eBook PDF
https://ebooksecure.com/download/fundamentals-of-corporate-
finance-5th-global-edition-ebook-pdf/
For more Ebook's - Test Bank - Solution Manual Please visit our website : http://www.needbooks1.com
or contact us at needbooks1@hotmail.com
Table of Contents vii
4.9 The Role of Financial Ratios—and a Final Note Expectations Theory 201
on Transparency 121 Interest Rate Risk and the Liquidity Premium 202
Transparency 122
6.6 Corporate Bonds and the Risk of Default 203
4.10 Summary 123 Variations in Corporate Bonds 206
6.7 Summary 209
PART TWO
Appendix 6A: A More Detailed Look at the Yield
VALUE 131 Curve 216
Appendix 6B: Duration: Measuring the Life of a Bond
CHAPTER 5
(available on Connect)
The Time Value of Money 131
5.1 Future Values and Compound Interest 132 CHAPTER 7

Valuing Stocks 219
5.2 Present Values 136
Finding the Interest Rate 140 7.1 Stocks and Stock Markets 220
Finding the Investment Period 141 Reading Stock Market Listings 222
5.3 Multiple Cash Flows 142 7.2 Market Values, Book Values, and Liquidation
Future Value of Multiple Cash Flows 142 Values 225
Present Value of Multiple Cash Flows 145
7.3 Valuing Common Stocks 228
5.4 Level Cash Flows: Perpetuities and Annuities 147 Valuation by Comparables 228
How to Value Perpetuities 147 Price and Intrinsic Value 229
How to Value Annuities 149 The Dividend Discount Model 231
Annuities Due 153
Future Value of an Annuity 155 7.4 Simplifying the Dividend Discount Model 234
Cash Flows Growing at a Constant Rate—Variations The Dividend Discount Model with No Growth 234
on Perpetuities and Annuities 158 The Constant-Growth Dividend Discount Model 235
Estimating Expected Rates of Return 237
5.5 Inflation and the Time Value of Money 160 Non-Constant Growth 238
Real versus Nominal Cash Flows 160
Inflation and Interest Rates 162 7.5 Growth Stocks and Income Stocks 240
Valuing Real Cash Payments 164 7.6 There are No Free Lunches on Bay Street 243
Real or Nominal? 165 Method 1: Technical Analysis 244
5.6 Effective Annual Interest Rates 165 Method 2: Fundamental Analysis 247
A Theory to Fit the Facts 248
5.7 Summary 168
7.7 Market Anomalies and Behavioural Finance 249
CHAPTER 6 Market Anomalies 249
Valuing Bonds 182 Behavioural Finance 250
7.8 Summary 251
6.1 Bonds and the Bond Market 184
Bond Market Data 184
CHAPTER 8
6.2 Interest Rates and Bond Prices 186 Net Present Value and Other Investment
How Bond Prices Vary with Interest Rates 188 Criteria 262
6.3 Current Yield and Yield to Maturity 190
8.1 Net Present Value 264
6.4 Bond Rates of Return 192 A Comment on Risk and Present Value 265
Taxes and Rates of Return 196 Valuing Long-Lived Projects 265
Multiperiod Rates of Return 197 Using the NPV Rule to Choose Among Projects 269
6.5 The Yield Curve 198 8.2 Other Investment Criteria 269
Nominal and Real Rates of Interest 199 Payback 270
The Determinants of the Yield Curve 201 Discounted Payback 271
viii Table of Contents
Internal Rate of Return 272 CHAPTER 10

A Closer Look at the Rate of Return Rule 274 Project Analysis 333
Calculating the Rate of Return for Long-Lived
Projects 274 10.1 How Firms Organize the Investment
A Word of Caution 277 Process 334
Some Pitfalls of the IRR Rule 277 Stage 1: The Capital Budget 335
Stage 2: Project Authorizations 335
8.3 More Examples of Mutually Exclusive Problems and Some Solutions 336
Projects 281
Investment Timing 282 10.2 Some “What If” Questions 337
Long-versus Short-Lived Equipment 283 Sensitivity Analysis 337
Replacing an Old Machine 285 Scenario Analysis 340
8.4 Capital Rationing 286 10.3 Break-Even Analysis 341
Soft Rationing 286 Accounting Break-Even Analysis 341
Hard Rationing 286 NPV Break-Even Analysis 343
Pitfalls of the Profitability Index 288 Operating Leverage 346
8.5 A Last Look 288 10.4 Real Options and the Value of Flexibility 348
8.6 Summary 289 The Option to Expand 348
A Second Real Option: The Option to
CHAPTER 9 Abandon 350
Using Discounted Cash Flow Analysis to Make A Third Real Option: The Timing Option 351
Investment Decisions 299 A Fourth Real Option: Flexible Production
Facilities 352
9.1 Identifying Cash Flows 301
10.5 Summary 352
Discount Cash Flows, Not Profits 301
Discount Incremental Cash Flows 303
Include All Indirect Effects 303 PART THREE
Forget Sunk Costs 303
Include Opportunity Costs 304
RISK 360
Recognize the Investment in Working Capital 304
Remember Shutdown Cash Flows 305 CHAPTER 11
Beware of Allocated Overhead Costs 305 Introduction to Risk, Return, and the
Discount Nominal Cash Flows by the Nominal Cost Opportunity Cost of Capital 360
of Capital 306
Separate Investment and Financing Decisions 307 11.1 Rates of Return: A Review 361
9.2 Calculating Cash Flows 307 11.2 Eighty-Five Years of Capital Market
Capital Investment 308 History 363
Investment in Working Capital 308 Market Indexes 363
Operating Cash Flow 309 The Historical Record 364
Using Historical Evidence to Estimate Today’s Cost
9.3 Business Taxes in Canada and the Capital
of Capital 367
Budgeting Decision 311
Depreciation and Capital Cost Allowance 311 11.3 Measuring Risk 369
The Asset Class System 312 Variance and Standard Deviation 369
Sale of Assets 314 A Note on Calculating Variance 372
Termination of Asset Pool 314 Measuring the Variation in Stock Returns 372
Present Values of CCA Tax Shields 315
11.4 Risk and Diversification 374
9.4 Example: Blooper Industries 317 Diversification 374
Calculating Blooper’s Project Cash Flows 318 Asset versus Portfolio Risk 375
Calculating the NPV of Blooper’s Project 320 Covariance and Correlation 378
Further Notes and Wrinkles Arising from Blooper’s Correlation and Portfolio Diversification 379
Project 321 Market Risk versus Unique Risk 382
9.5 Summary 324 11.5 Thinking About Risk 383
Appendix 9A: Deriving the CCA Tax Shield Message 1: Some Risks Look Big and Dangerous but
(available on Connect) Really are Diversifiable 383
Table of Contents ix
Message 2: Market Risks are Macro Risks 384 How Changing Capital Structure Affects WACC
Message 3: Risk Can be Measured 385 When the Corporate Tax Rate is Zero 436
How Changing Capital Structure Affects Debt and
11.6 Summary 385
Equity when the Corporate Tax Rate is Zero 437
What Happens if Capital Structure Changes and the
CHAPTER 12 Corporate Tax Rate is Not Zero? 438
Risk, Return, and Capital Budgeting 392 Revisiting the Project Cost of Capital 440
12.1 Measuring Market Risk 393 13.7 Valuing Entire Businesses 440
Measuring Beta 394 Calculating the Value of the Concatenator
Betas for Cameco and Royal Bank 397 Business 442
Total Risk and Market Risk 398 13.8 Summary 443
Portfolio Betas 399
12.2 Risk and Return and Capital Asset Pricing PART FOUR
Model, CAPM 400
Why the CAPM Makes Sense 403 FINANCING 451
The Security Market Line 404
How Well Does the CAPM Work? 405 CHAPTER 14
Using the CAPM to Estimate Expected Returns 408 Introduction to Corporate Financing and
Governance 451
12.3 Capital Budgeting and Project Risk 408
Company Risk versus Project Risk 409 14.1 Creating Value with Financing Decisions 453
Determinants of Project Risk 410
Don’t Add Fudge Factors to Discount Rates 411 14.2 Common Stock 454
Book Value versus Market Value 455
12.4 Summary 412
Dividends 456
Ownership of the Corporation 456
CHAPTER 13 Voting Procedures 456
The Weighted-Average Cost of Capital and Classes of Stock 457
Company Valuation 420 Corporate Governance in Canada and
Elsewhere 458
13.1 Geothermal’s Cost of Capital 421
14.3 Preferred Stock 461
13.2 The Weighted-Average Cost of Capital 423
Calculating Company Cost of Capital as a Weighted 14.4 Corporate Debt 463
Average 424 Debt Comes in Many Forms 463
Use Market Weights, Not Book Weights 426 Innovation in the Debt Market 468
Taxes and the Weighted-Average Cost 14.5 Convertible Securities 472
of Capital 427
What If There are Three (or More) Sources 14.6 Patterns of Corporate Financing 473
of Financing? 428 Do Firms Rely Too Heavily on Internal Funds? 474
Wrapping Up Geothermal 428 External Sources of Capital 474
Checking Our Logic 429 14.7 Summary 476
13.3 Measuring Capital Structure 430 Appendix 14A: The Bond Refunding Decision 481
13.4 Calculating Required Rates of Return 432
The Expected Return on Bonds 432 CHAPTER 15
The Expected Return on Common Stock 432 Venture Capital, IPOs, and Seasoned
The Expected Return on Preferred Stock 434 Offerings 488
13.5 Calculating the Weighted-Average Cost
15.1 Venture Capital 490
of Capital 434
Venture Capital Companies 491
Real Company WACC 435
15.2 The Initial Public Offering 492
13.6 Interpreting the Weighted-Average Cost
Arranging a Public Issue 493
of Capital 435
When You Can and Can’t Use WACC 435 15.3 The Underwriters 497
Some Common Mistakes 436 Who are the Underwriters? 498
x Table of Contents
15.4 Listing on the Stock Market 500 CHAPTER 17

15.5 Rights Issues and General Cash Offers by Public
Leasing 560
Companies 501
17.1 What is a Lease? 561
Rights Issues 501
Leasing Industry 562
General Cash Offers 503
Costs of the General Cash Offer 504 17.2 Why Lease? 563
Market Reaction to Stock Issues 504 Sensible Reasons for Leasing 563
Some Dubious Reasons for Leasing 564
15.6 The Private Placement 505
17.3 Valuing Leases 567
15.7 Summary 506
Operating Leases 567
Appendix 15A: The Financing of New and Small Financial Leases 568
Enterprises 512 Cash Flows of a Financial Lease 568
Who Really Owns the Leased Asset? 570
Other Sources of Small Business Financing 517
Leasing and the Canada Revenue Agency (CRA) 571
Appendix 15B: Hotch Pot’s New Issue Prospectus 519 First Pass at Valuing a Financial Lease Contract 571
Financial Lease Evaluation 574
PART FIVE Using Formulas to Evaluate Financial Leases 574
DEBT AND PAYOUT POLICY 523 17.4 When Do Financial Leases Pay? 576
17.5 Summary 577
CHAPTER 16
Debt Policy 523 CHAPTER 18
Payout Policy 584
16.1 How Borrowing Affects Value in a Tax-Free
Economy 525
18.1 How Dividends are Paid 585
MM’s Argument 526
Cash Dividends 585
How Borrowing Affects Earnings per Share 526
Some Legal Limitations on Dividends 587
How Borrowing Affects Risk and Return 529
Stock Dividends, Stock Splits, and Reverse
Debt and the Cost of Equity 530
Splits 587
16.2 Capital Structure and Corporate Taxes 533 Dividend Reinvestment Plans and Share Purchase
Debt and Taxes at River Cruises 533 Plans 588
How Interest Tax Shields Contribute to the Value
18.2 Share Repurchase 588
of Shareholders’ Equity 535
Why Repurchases are Like Dividends 589
Corporate Taxes and the Weighted-Average Cost
Repurchases and Share Valuation 590
of Capital 535
The Implications of Corporate Taxes for Capital 18.3 How Do Companies Decide on How Much to
Structure 536 Pay Out? 591
The Role of Share Repurchase Decisions 592
16.3 Costs of Financial Distress 537
The Information Content of Dividends and
Bankruptcy Costs 538
Repurchases 592
Evidence on Bankruptcy Costs 539
Direct versus Indirect Costs of Bankruptcy 540 18.4 Why Payout Policy Should Not Matter 594
Financial Distress without Bankruptcy 540 Payout Policy is Irrelevant in Efficient Financial
Costs of Distress Vary with Type of Asset 542 Markets 595
The Assumptions Behind Dividend-Irrelevance 597
16.4 Explaining Financing Choices 544
The Trade-Off Theory 544 18.5 Why Dividends May Increase Firm Value 597
A Pecking-Order Theory 544 Market Imperfections 597
The Two Faces of Financial Slack 545
18.6 Why Dividends May Reduce Firm Value 598
16.5 Bankruptcy Procedures 548 Why Pay Any Dividends at All? 599
The Choice Between Liquidation and Dividends versus Capital Gains 599
Reorganization 551 Dividend Clientele Effects 600
16.6 Summary 552 18.7 Summary 600
Table of Contents xi
PART SIX PART SEVEN

FINANCIAL PLANNING 608 SHORT-TERM FINANCIAL
DECISIONS 673
CHAPTER 19
Long-Term Financial Planning 608 CHAPTER 21
Cash and Inventory Management 673
19.1 What is Financial Planning? 609
Financial Planning Focuses on the Big Picture 610 21.1 Cash Collection, Disbursement, and Float 675
Why Build Financial Plans? 610 Float 675
19.2 Financial Planning Models 611 Valuing Float 676
Components of a Financial Planning Model 612 21.2 The Payment System and the Float 677
Percentage-of-Sales Models 613
21.3 Managing Float 680
An Improved Model 615
Speeding Up Cheque Collections 680
19.3 Tips for Planners 620 Controlling Cheque Disbursements 681
Pitfalls in Model Design 620 Electronic Funds Transfer 682
The Assumption in Percentage-of-Sales Models 620
21.4 Managing Inventories and Cash Balances 684
Forecasting Interest Expense 622
Inventory Management Models 684
The Role of Financial Planning Models 623
Just-in-Time Inventory Management 687
19.4 External Financing and Growth 623 Managing Inventories of Cash 687
19.5 Summary 627 Uncertain Cash Flows 689
Cash Management in Large Domestic and
CHAPTER 20 International Corporations 691
Short-Term Financial Planning 635 21.5 Investing Idle Cash: The Money Market 692
20.1 Links Between Long-Term and Short-Term 21.6 Summary 695

Financing 637
CHAPTER 22
20.2 Working Capital 640 Credit Management and Collection 701
The Components of Working Capital 641
Net Working Capital, Operating Cycle, and the Cash 22.1 Terms of Sale 703
Conversion Cycle 642
22.2 Credit Agreements 705
The Working Capital Trade-Off 645
22.3 Credit Analysis 706
20.3 Tracing Changes in Cash and Working
Financial Ratio Analysis 706
Capital 647
Numerical Credit Scoring 706
20.4 Cash Budgeting 649 When to Stop Looking for Clues 708
Forecast Sources of Cash 649
22.4 The Credit Decision 708
Forecast Uses of Cash 651
Credit Decisions with Repeat Orders 710
The Cash Balance 651
Evaluating a Credit Policy Switch 712
20.5 A Short-Term Financing Plan 653 Some General Principles 712
Dynamic Mattress’s Financing Plan 654
22.5 Collection Policy 713
Evaluating the Plan 655
22.6 Summary 714
20.6 Sources of Short-Term Financing 655
Bank Loans 656
PART EIGHT
Secured Loans 657
Commercial Paper 658 SPECIAL TOPICS 722
Banker’s Acceptance 660
CHAPTER 23
20.7 The Cost of Bank Loans 660
Mergers, Acquisitions, and Corporate
Simple Interest 660
Control 722
Discount Interest 661
Interest with Compensating Balances 661 23.1 Sensible Motives for Mergers 724
20.8 Summary 662 Increased Revenues 727
xii Table of Contents
Economies of Scale 727 24.4 International Capital Budgeting 770

Economies of Vertical Integration 727 Net Present Value Analysis 770
Combining Complementary Resources 728 The Cost of Capital for Foreign Investment 771
Merging to Reduce Taxes 728 Political Risk 772
Mergers as a Use for Surplus Funds 728 Avoiding Fudge Factors 776
23.2 Dubious Reasons for Mergers 729 24.5 Summary 776
Diversification 729
The Bootstrap Game 729 CHAPTER 25
23.3 The Mechanics of a Merger 730 Options 784
The Form of Acquisition 730
Mergers, Antitrust Law, and Popular Opposition 732 25.1 Calls and Puts 785
Selling Calls and Puts 788
23.4 Evaluating Mergers 733 Payoff Diagrams are Not Profit Diagrams 789
Mergers Financed by Cash 733 Financial Alchemy with Options 790
Mergers Financed by Stock 735 Some More Option Magic 790
Some Tax Issues 736
A Warning 736 25.2 What Determines Option Values? 792
Another Warning 736 Upper and Lower Limits on Option Values 792
The Determinants of Option Value 793
23.5 The Market for Corporate Control 737 Option-Valuation Models 795
Ownership Structure and the Effectiveness of the
25.3 Spotting the Option 797
Market for Corporate Control 737
Options on Real Assets 797
23.6 Method 1: Proxy Contests 738 Options on Financial Assets 799
23.7 Method 2: Takeover Bids 739 25.4 Summary 802
Takeover Bid Tactics 740 Appendix 25A: The Black-Scholes Option Valuation
23.8 Method 3: Leveraged Buyouts 741 Model (available on Connect)
Barbarians at the Gate? 743
Recent LBO Activity 744 CHAPTER 26
23.9 Method 4: Divestitures, Spin-Offs, and Equity Risk Management 809
Carve-Outs 746
26.1 Why Hedge? 810
23.10 The Benefits and Costs of Mergers 747 The Evidence on Risk Management 812
23.11 Summary 748 26.2 Reducing Risk with Options 812
26.3 Futures Contracts 813
CHAPTER 24 The Mechanics of Futures Trading 817
International Financial Management 754 Commodity and Financial Futures 818
24.1 Foreign Exchange Markets 755 26.4 Forward Contracts 819

Spot Exchange Rates 756 26.5 Swaps 819
Forward Exchange Rates 758
26.6 Innovation in the Derivatives Market 822
24.2 Some Basic Relationships 760
26.7 Is “Derivative” a Four-Letter Word? 822
Exchange Rates and Inflation 760
Inflation and Interest Rates 763 26.8 Summary 824
Interest Rates and Exchange Rates 764 Appendix A: Present Value Tables 829
The Forward Rate and the Expected Spot Rate 766
Some Implications 767 Appendix B: Answers to Selected End-of-Chapter
Problems 837
24.3 Hedging Exchange Rate Risk 768
Transaction Risk 768 Glossary 845
Economic Risk 769 Index 850
Preface
This book is about corporate finance. It focuses on how com- Modern financial management is not “rocket science.” It is
panies invest in real assets and how they raise the money to a set of ideas that can be made clear by words, graphs, and
pay for these investments. It also provides a broad introduction numerical examples. The ideas provide the “why” behind the
to the financial landscape, discussing, for example, the major tools that good financial managers use to make investment
players in financial markets, the role of financial institutions and financing decisions.
in the economy, and how securities are traded and valued by
investors. The book offers a framework for systematically WHY USE OUR BOOK
thinking about most of the important financial problems that
We wrote this book to make financial management clear,
both firms and individuals are likely to confront.
useful, interesting, and fun for the beginning student. We set
Financial management is important, interesting, and chal-
out to show that modern finance and good financial practice
lenging. It is important because today’s capital investment deci-
go together—even for the financial novice. The key to this is
sions may determine the businesses that the firm is in 10, 20, or
a thorough understanding of the principles and mechanics of
more years ahead. Also, a firm’s success or failure depends in
the time value of money. This material underlies almost all of
large part on its ability to find the capital that it needs.
this text, and we spend a lengthy Chapter 5 providing exten-
Finance is interesting for several reasons. Financial deci-
sive practice with this key concept.
sions often involve huge sums of money. Large investment
The second component of our approach is the extensive use
projects or acquisitions may involve billions of dollars. Also,
of numerical examples. Each chapter presents detailed numeri-
the financial community is international and fast-moving,
cal examples to help the reader become familiar and comfort-
with colourful heroes and a sprinkling of unpleasant villains.
able with the material. We have peppered the book with real-life
Finance is challenging. Financial decisions are rarely cut
illustrations of the chapters’ topics. Some of these are excerpts
and dried, and the financial markets in which companies oper-
from the financial press found in Finance in Action boxes;
ate are changing rapidly. Good managers can cope with rou-
others are built into the text as examples. By connecting con-
tine problems, but only the best managers can respond to
cepts with practice, we strive to give students a working ability
change. To handle new problems, you need more than rules of
to make financial decisions.
thumb; you need to understand why companies and financial
We have streamlined the treatment of most topics to avoid
markets behave as they do and when common practice may
getting bogged down in unnecessary detail that can over-
not be best practice. Once you have a consistent framework for
whelm a beginner. We don’t assume users will have a lot of
making financial decisions, complex problems become more
background knowledge.
manageable.
We have written the book in a relaxed and informal writing
This book provides that framework. It is not an encyclope-
style. We use mathematical notation only where necessary.
dia of finance. It focuses instead on setting out the basic prin-
Even when we present an equation, we usually write it in
ciples of financial management and applying them to the main
words before using symbols. This approach has two advan-
decisions faced by the financial manager. It explains why the
tages: it is less intimidating and it focuses attention on the
firm’s owners would like the manager to increase firm value
underlying concept rather than just the formula.
and shows how managers choose between investments that
may pay off at different points of time or have different degrees
of risk. It also describes the main features of financial markets WAYS TO USE OUR BOOK
and discusses why companies may prefer a particular source of There are about as many effective ways to organize a course in
finance. corporate finance as there are teachers. For this reason, we have
Some texts shy away from modern finance, sticking instead ensured that the text is modular, so that topics can be intro-
with more traditional, procedural, or institutional approaches. duced in different sequences. Nonetheless, in this edition we
These are supposed to be easier or more practical. We disagree have changed the sequencing of chapters to improve the logical
emphatically. The concepts of modern finance, properly flow of topics. For instance, the chapter on financial statement
explained, make the subject simpler, not more difficult. They analysis has been moved ahead and is now Chapter 4 (Measuring
are also more practical. The tools of financial management are Corporate Performance) as we recognize that many instructors
easier to grasp and use effectively when presented in a consis- will prefer to go directly to this topic after covering Chapter 3
tent conceptual framework. Modern finance provides that (Accounting and Finance), as a gentler transition from a typical
framework. prerequisite accounting course. Also, recognizing that firms
xiv Preface
have the choice of making investment decisions by either in Action article on prediction markets. Coverage of financial
taking on debt in order to purchase assets or by leasing those intermediaries has expanded coverage of exchange traded
assets, the chapter on leasing has been moved forward as funds (EFTs) and hedge funds. A non-technical introduction
Chapter 17 and now follows the one on debt policy (Chapter 16). to the idea of the opportunity cost of capital provides context
We have made sure that Part Six (Financial Planning) can for the later discussion of present value.
easily follow Part One (Introduction). Similarly, we discuss Chapter 3 (Accounting and Finance) includes a discussion
working capital after the basic principles of valuation and of new Canadian accounting standards for public companies,
financing, but we recognize that many instructors prefer to which are the International Financial Reporting Standards
reverse that order. There should be no difficulty in using Part (IFRS). The discussion of profits versus cash flow includes
Seven (Short-Term Financial Decisions) out of order. When more examples of how accrual accounting impacts cash flow.
we discuss project valuation in Part Two (Value), we stress The tax rates have also been updated.
that the opportunity cost of capital depends on project risk. Chapter 4 (Measuring Corporate Performance—formerly
But we do not discuss how to measure risk or how return and titled Financial Statement Analysis) was previously Chapter 17
risk are linked until Part Three (Risk). This ordering can of the text. In response to user comments, we have moved this
easily be modified. For example, the chapters on risk and chapter to Part One to accompany the previous chapter on
return can be introduced before, after, or midway through the accounting and finance. We also have extensively rewritten
material on project valuation. the chapter with a sharper focus on how financial data can be
used to measure contributions to firm value.
CHANGES IN THE FIFTH CANADIAN Chapter 5 (The Time Value of Money) has been updated
EDITION and rearranged to improve logical flow. The chapter includes
This fifth Canadian edition of Fundamentals includes many new spreadsheet applications.
updates. We have enhanced the analytical tools used with the Chapter 6 (Valuing Bonds) has been updated. The discus-
book: more spreadsheet boxes are integrated into the chapters; sion of the risk of default has been extended to include pos-
end-of-chapter problems include exercises that ask students to sible default of European governments’ debt.
use a variety of Internet resources to solve financial problems Chapter 7 (Valuing Stocks) starts with a review of stock
and integrative mini cases. The location of some chapters in the markets and trading procedures and motivates stock valuation
book has been altered to improve the logical flow of topics. In with an example of an investor considering whether to pur-
addition, we have rewritten, rearranged, and added material to chase a particular stock, RIM. We begin this discussion with
improve readability and update coverage across chapters. The valuation by comparables and the distinction between price
following are some examples of the changes that we have made. and intrinsic value. Then the details of dividend discount
Chapter 1 (Goals and Governance of the Firm) has been model are discussed. The chapter ends with a discussion of
largely rewritten to improve readability and interest. This market efficiency.
chapter and Chapter 2 include the real-life case of Research Chapter 8 (Net Present Value and Other Investment
In Motion and its founder Mike Lazaridis, illustrating how Criteria) has been streamlined and reorganized. The chapter
financial markets help infant firms grow into healthy adults. includes a new discussion, “Modified Internal Rate of Return.”
The section on business organizations has new material on Chapter 9 (Using Discounted Cash Flow Analysis to Make
private corporations and the pros and cons of being a public Investment Decisions) has been updated and the discussion of
corporation. Examples of investment and financial decisions project cash flow has been reworked to more carefully show
of well-known companies are used to illustrate the main how each of its components can be estimated. The chapter
activities of financial managers, the role of financial mar- works through a realistic comprehensive example of capital
kets, and the goals of a corporation. Keeping in mind the budgeting analysis and includes updated information on capi-
currency of certain themes, the chapter includes new discus- tal cost allowance (CCA). An appendix showing how the CCA
sion on the global financial crisis, big government bailouts, tax shield is derived is available to the reader on Connect.
credit default swaps, and the subprime mortgage crisis. New Chapter 10 (Project Analysis). The updated chapter includes
content on the ethical issues that confront managers includes revised coverage of NPV breakeven analysis. New Finance in
a Finance in Action article on the value of ethical dealings to Action material includes an article on the uncertainty associ-
maintain reputation in the context of the recent global finan- ated with development costs in the mining industry.
cial crisis. Chapter 11 (Introduction to Risk, Return, and the Oppor-
Chapter 2 (Financial Markets and Institutions) opens with tunity Cost of Capital) starts with a historical survey of returns
the history of Research In Motion. It includes new coverage of on bonds and stocks and goes on to distinguish between the
agency problems and corporate governance and a new Finance unique risk and market risk of individual stocks.
Preface xv
Chapter 12 (Risk, Return, and Capital Budgeting) market Chapter 21 (Cash and Inventory Management) has an
data has been updated and shows how to measure market risk updated table of payments methods in different countries
and discusses the relationship between risk and expected around the world. The discussion of just-in-time inventory
return. management has been extended to talk about the risk of not
Chapter 13 (The Weighted-Average Cost of Capital and holding inventory. The Finance in Action article deals with the
Company Valuation) market data has been updated. A new impact of environment disasters, such as Iceland’s volcano ash
discussion of the choice of the risk-free security, Treasury bill, and Japan’s earthquake and tsunami, on the access to supplies.
or long-term government bond when implementing CAPM The discussion of the various types of short-term investments
has been added. includes asset-backed commercial paper. A new Finance in
Chapter 14 (Introduction to Corporate Financing and Action article deals with the asset-backed commercial paper
Governance) has been extensively updated, and includes new crisis and how it was resolved.
discussion on the recent subprime crisis in the United States Chapter 22 (Credit Management and Collection) empha-
and its impact on credit markets and economic activity in sizes that buying goods on credit is in effect a loan from the
countries around the world, including Canada. Two new supplier. The equation for calculating the effective annual inter-
Finance in Action boxes discuss the fallout from the crisis and est rate when using trade credit has been revised to show vari-
another examines the bounce back of corporate financing ous ways to assess the impact of forgoing the cash discount.
activity in Canada, in which debt markets have played an Chapter 23 (Mergers, Acquisitions, and Corporate Control)
important role. has been fully reorganized, and now begins with an overview
Chapter 15 (Venture Capital, IPOs, and Seasoned Offer- of why mergers and other forms of reorganization may make
ings). The chapter has updated material on developments in the sense. Next are the mechanics of acquisitions and barriers to
IPO market. An appendix to the chapter discussing the financ- mergers, including antitrust law, political and public opposi-
ing of new and small enterprises has been rewritten to reflect tion, and merger evaluation. Then we progress to the market
changes in the venture capital industry and other sources of for corporate control and discuss various methods for achiev-
small business financing in Canada. ing corporate control: proxy contests, takeovers, leveraged
Chapter 16 (Debt Policy) has been updated with Canadian buyouts and then divestitures, equity spin-offs, and carve-
examples and statistics in the discussions on costs of financial outs. The chapter has many new examples and data.
distress and explaining financing choices. Chapter 24 (International Financial Management) has new
Chapter 17 (Leasing) has been moved forward and discussion on the global financial crisis including two Finance
included with the other two chapters on financing decisions, in Action articles on the effects of the crisis on Greece and on
namely debt policy and payout policy. The chapter has been other Eurozone countries. Another new Finance in Action box
updated to include two new Finance in Action boxes assessing discusses the implications of a strengthening Canadian dollar
the impact of accounting under IFRS on the retail and trans- and the possibility of it being overvalued.
portation industries. Chapter 25 (Options) has updated market and institutional
Chapter 18 (Payout Policy) has been extensively updated information. A new subsection, Payoff Diagrams Are Not
and revised to reflect its broader focus on share repurchases Profit Diagrams, provides new drawings of call and option
along with dividend policy. A new Finance in Action box dis- payoffs with the costs of the call and option subtracted from
cusses George Weston’s special dividend payout. the payoff. This shows the net payoff from the option. Also a
Chapter 19 (Long-Term Financial Planning—formerly new subsection on executive and employee stock options has
titled Financial Planning). The concept of net operating work- been added. The discussion includes option backdating issues
ing capital (5 operating current assets – operating current lia- and an example of a company that had its shareholders approve
bilities) has been added. All interest-bearing liabilities, including a stock option exchange program for its employees.
operating lines of credit, are classified as sources of financing, Chapter 26 (Risk Management) includes updated discus-
not included in the operating current liabilities. The discussion sion on different ways to manage risk. The chapter includes new
of forecasting interest expense explains the implications of cal- writeup on derivative instruments such as credit default swaps
culating the current year’s interest expense on the basis of the in the context of the global financial crisis. Two new Finance in
assumption of when the new debt is acquired. Action articles provide further context. The first examines the
Chapter 20 (Short-Term Financial Planning) has been role of Goldman Sachs in their dealings with mortgage-related
updated with new examples of short-term financing. A new instruments and with AIG, the giant insurer. The second exam-
Finance in Action has been added that deals with the impor- ines Goldman’s role in the financial crisis through some of its
tance of working capital management for coping with the speculative activities with derivative products.
financial crisis.
xvi Preface
PEDAGOGY WALK-
18
PART 5
THROUGH Debt and
Payout CHAPTER
To provide guidance and insights Policy return on their investment. Some long-established
companies have never yet paid a cash dividend.
Sooner or later, however, most corporations do pay
throughout the text, we include a 16 Debt Policy

17 Leasing
out cash to their shareholders. They pay dividends,
or they use cash to buy back previously issued shares.
18 Payout Policy How much should a company pay out in a given
number of proven pedagogical aids: 18.1 How Dividends Are Paid

18.2 Share Repurchase
year? Should the payout come as dividends or
share repurchases? The answers to these two ques-
tions are the corporation’s payout policy.
18.3 How Do Companies This investor is obviously delighted with his extra cash, but can
Decide on How Much companies increase share value simply by increasing their We start the chapter with a discussion of how
Payout Policy
to Pay Out? dividend payout?
dividends are paid. We then show that in an ideal
18.4 Why Payout Policy Everett Collection.
world, the value of a firm would be independent
Should Not Matter
of its dividend policy. This demonstration is in the
18.5 Why Dividends May
Increase Firm Value
In this chapter we explain how companies set their same spirit as the Modigliani and Miller debt-
18.6 Why Dividends May
payout policy, and discuss the controversial ques- irrelevance proposition of Chapter 16.
Reduce Firm Value tion of how dividend policy affects value. That leads us to look at the real-world complica-
18.7 Summary Shareholders invest in the company when they tions that might favour one dividend policy over
buy newly issued shares and when the company another. These complications include transaction
reinvests earnings on the shareholders’ behalf. The costs, taxes, and the signals that investors might
shareholders do not usually demand a prompt cash read into the firm’s payout announcement.
CHAPTER OPENING LEARNING OBJECTIVES

After studying this chapter, you should be able to:
Each chapter begins with numbered LO1
LO2
Describe how dividends are paid and how companies decide on
dividend payments.
Explain how share repurchases are used to distribute cash to
LO1 18.1 HOW DIVIDENDS ARE PAID
shareholders. CASH DIVIDENDS
learning objectives (LOs) included to LO3 Explain why dividend increases and repurchases are good news
for investors and why dividend cuts are bad news. Explain why
cash dividend Payment of cash
by the firm to its shareholders.
On February 23, 2011, Maple Leaf Foods Inc. (MFI) announced a regular quarterly cash
dividend of $.04 per share, making a total payment of $.16 for the year; soon after, its board of
directors met and approved the decision. The term regular indicates that MFI expected to main-
payout policy would not affect firm value in an ideal world.
provide a quick introduction to the LO4 Show how differences in the tax treatment of dividends and capital
gains might affect dividend policy.
tain the payment in the future. If it did not want to give that kind of assurance, it could have
declared both a regular and an extra dividend. In July 2004, Microsoft did just that. The cash-rich
software giant declared a whopping US$32 billion special dividend, because it could not find any
LO5 Explain why dividends may be used by management to signal the other way to spend its sizeable cash flows. The company also declared a US$3.5 billion regular
material students will learn and should prospects of the firm. quarterly dividend and still had $20 billion cash on hand. Investors realize that extra dividends
are less likely to be repeated.1 The nearby Finance in Action box discusses the aftermath of a
special dividend declared by another cash-rich company, George Weston.
Who receives the MFI dividend? That may seem an obvious question, but because shares
understand fully before moving to the trade constantly, the firm’s records of who owns its shares can never be fully up to date. So MFI
announced that it would send a dividend cheque to all shareholders recorded in its books on
March 10, 2011. This is known as the record date.
next chapter. This is followed by a nar- 1 Companies also use the term “special dividend” for payments that are unlikely to be repeated.
rative to set the tone for what follows.
NUMBERED EXAMPLES
Numbered and titled examples are extensively integrated into the chapters to provide detailed applica-
tions and illustrations of the text material.
FINANCE IN ACTION BOXES

Almost every chapter includes at least one Finance Finance in Action
in Action box. These are excerpts, usually from the Banks and Brokerages Agree to Pay
financial press, providing real-life illustrations of Hefty Penalties
the chapter’s topics such as in the growth of lever- Canadian Imperial Bank of Commerce, National Bank of Canada and e-mailed statement. The bank is “taking additional measures to pre-
brokerages agreed to pay a total of $134 million in fines and penal- vent this from happening again.”
aged buyouts. ties to settle regulators’ claims they improperly sold asset-backed Securities regulators in Ontario, Québec, and B.C. have been
commercial paper in Canada just before the market collapsed in collaborating on a probe with the Investment Industry Regulatory
2007. Organization of Canada, OSC spokeswoman Carolyn Shaw-Rimmington
National Bank was fined $70 million by Québec regulators said in July. The investigation focused on the actions of firms selling the
and will pay $1 million for the cost of the investigation, while debt after Coventree Inc., Canada’s biggest commercial paper adminis-
CIBC, Canada’s fifth-biggest bank, was fined by Ontario regulators trator at the time, warned bank-owned dealers of ties to risky U.S. loans.
$21.7 million and will pay $300,000 in costs. The OSC also approved a settlement with HSBC Bank of Canada
Bank of Nova Scotia’s Scotia Capital unit will pay a total of under which the bank agreed to pay a fine of $5.925 million and
$29.3 million, according to an agreement approved by the Invest- $75,000 in costs. Canaccord Financial Ltd., a brokerage based in
ment Industry Regulatory Organization of Canada. Laurentian Bank Vancouver, agreed to pay IIROC a fine and costs of $3.1 million and
will pay $3.2 million. Credential Securities Inc. will pay $200,000 in fines and costs.
The banks agreed to settle for their roles in selling commercial In a July 2007 e-mail, Coventree alerted the dealers that some of
paper in late July and early August of 2007, before the market col- its debt funds had ties to U.S. subprime mortgages, according to
lapsed on concern about ties to U.S. subprime mortgages. About court filings. The market collapsed three weeks late. CIBC kept sell-
$32 billion of the debt became insolvent, leading to a court-ordered ing the paper until Aug. 3, when it became concerned over its
plan in which the short term debt was swapped for longer term notes liquidity according to the settlement
INTERNATIONAL ICON
An international icon appears where the authors discuss global issues.
ETHICS ICON
An ethics icon appears where the authors discuss ethical issues or the
implications of unethical practices.
The value of a stock
is the present value
of the dividends it
will pay over the
KEY POINTS investor’s horizon
These marginal boxes, identified with a key icon, summarize plus the present
the importance of the adjoining material, at the same time value of the expected
helping students focus on the most critical content. stock price at the
end of that horizon.
Preface xvii
CHECK POINT QUESTIONS Check Point 3.6 Would the following activities increase or decrease the firm’s cash balances?
Numbered Check Point boxes with questions are provided in a.
b.
Inventories are increased.
The firm reduces its trade payables.
each chapter to enable students to check their understanding c.
d.
The firm issues additional common stock.
The firm buys new equipment.
as they read. Both conceptual and calculation-type questions
have been included in this edition. Answers are provided at the
end of each chapter.
KEY FORMULAS
Key mathematical formulas, identified by a number, are called out in the text. A sum-
mary of these key formulas can be found by visiting Connect.
KEY TERMS
Key terms, when introduced, appear in colour and bold in the main text and are
defined in the margin. A glossary made up of all these definitions is also available at
the back of the book and on Connect.
CALCULATOR BOXES AND

EXERCISES financial calculator
In a continued effort to help students grasp the Using Financial Calculators to Find NPV and IRR
critical concept of time value of money, many peda-
gogical tools have been added throughout the text. We saw in Chapter 5 that the formulas for the present and future To calculate project NPV, the procedure is similar. You need to
values of level annuities and one-time cash flows are built into enter the discount rate in addition to the project cash flows, and then
Financial Calculator boxes provide examples of financial calculators. However, as the example of the office block
illustrates, most investment projects entail multiple cash flows
simply press the NPV key. Here is the specific sequence of keystrokes,
assuming that the opportunity cost of capital is 7 percent:
solving a variety of problems with directions for that cannot be expected to remain level over time. Fortunately,
many calculators are equipped to handle problems involving a Hewlett-Packard Sharp Texas Instruments
sequence of uneven cash flows. In general, the procedure is quite
the three most popular financial calculators. simple. You enter the cash flows one by one into the calculator,
HP-10B
CFj
EL-738C
CFi
BA II Plus
CF
and then you press the IRR key to find the project’s internal rate 2350,000 2350,000
of return. The first cash flow you enter is interpreted as coming 16,000 CFj 16,000 CFi 2nd {CLR WORK}
immediately, the next cash flow is interpreted as coming at the end 16,000 CFj 16,000 CFi 2350,000 ENTER ↓
of one period, and so on. We can illustrate using the office block 466,000 CFj 466,000 CFi 16,000 ENTER ↓
as an example. To find the project IRR, you would use the following 7 I/YR 7 i 16,000 ENTER ↓
sequence of keystrokes:
466,000 ENTER ↓
{NPV} NPV NPV

Hewlett-Packard Sharp Texas Instruments
7 ENTER
HP-10B EL-738C BA II Plus
↓ CPT
EXCEL SPREADSHEETS & EXHIBITS

Excel Spreadsheet boxes are integrated into many excel spreadsheet
chapters and provide the student with detailed Calculating Risk
examples of how to use spreadsheets in applying
financial concepts. They give students a valuable A B C D
introduction to financial modelling. We show how 1

2 Month
Returns, Percent
TSX CAMECO
Formulas Used in
Column C
3 May 2010 23.48 2.84
spreadsheets can be used in time-value-of-money 4
5
June 2010
July 2010
23.71
3.96
211.81
15.64
and security valuation problems, in capital budget- 6

7
August 2010
September 2010
1.90
4.09
20.61
10.18
8 October 2010 2.71 10.31
ing, and in long- and short-term planning applica- 9
10
November 2010
December 2010
2.37
4.09
17.78
18.64
tions. Questions that apply to the spreadsheet are 11
12 Standard deviation (monthly) 3.25 9.58 5STDEV(C3:C10)
13 Standard deviation, annualized 11.25 33.19
included. These spreadsheets are also available on
5C10*SQRT(12)
14 Beta, using SLOPE 2.21 5SLOPE(C3:C10,B3:B10)
15 Correlation 0.748 5CORREL(B3:B10,C3:C10)
Connect. Selected Exhibits are set as Excel Excel and most other spreadsheet programs provide built-in functions 5 Row 15 In Chapter 11 we discussed the correlation coefficient
Spreadsheets.
xviii Preface
END-OF-CHAPTER MATERIAL Questions and Problems

The end-of-chapter features offered to support the Practise and learn online with Connect. Questions with online
Excel templates or datasets are marked with .
concepts presented are Summary, Related Web *Answers in Appendix B
Links, Key Terms, Questions and Problems, Solu- BASIC 8. Financial Targets. Managers sometimes state a target
tions to Check Points, and Mini Cases. To help 1. Financial Planning. True or false? Explain. (LO1)
a. Financial planning should attempt to minimize risk.
growth rate for sales or earnings per share. Do you think
that either one makes sense as a corporate goal? If not,
students achieve the stated learning objectives, the b. The primary aim of financial planning is to obtain
better forecasts of future cash flows and earnings.
why do you think that managers focus on them? (LO1)
LO numbers are included in the chapter Summaries c. Financial planning is necessary because financing
and investment decisions interact and should not be
INTERMEDIATE
*9. Percentage-of-Sales Models. Here are the abbreviated
and the Questions and Problems. The Questions made independently.
d. Firms’ planning horizons rarely exceed three years.
financial statements for Planners Peanuts:
and Problems incorporate Internet questions, ques-

tions with guided steps, integrative questions,
CHALLENGE
qualitative/conceptual questions, and questions that 27. Capacity Use and External Financing. Now suppose
breach the bank’s requirement that the company’s
debt ratio not exceed 60 percent?
require the use of Excel or an equivalent spread- that the long-term assets of Growth Industries (from the
previous problem) are operating at only 75 percent of
b. Same scenario as (a), except that the interest rate on
debt is 15 percent.
sheet to solve. Questions are grouped according to capacity. What is required external financing over the
next year? (LO4)
c. Same scenario as (a), except that Yummy Food
keeps its debt ratio at 40 percent.
level of difficulty; those whose answers are pro- 28. Capacity Use and External Financing. If Growth
d. Same scenario as (a), except that cost of goods sold
is 95 percent of sales each year.
Industries from problem 26 is operating at only 75 percent
vided in Appendix B are identified by an asterisk e Same scenario as (a) except each year’s interest
on the question number.
INTERNET PROBLEMS
Many problems are provided that are meant to be solved using the wealth of material available on the
Internet.
EXCEL QUESTIONS
Excel questions are incorporated into the end-of-chapter Questions and Problems, and are identified
by the icon in the margin. These templates are available for download on Connect.
MINI CASES
Integrative mini cases end many chapters. These allow students to apply their knowledge to relatively
complex, practical situations. Several new such cases have been added for this edition.
COMPREHENSIVE TEACHING AND LEARNING PACKAGE

CONNECT™
McGraw-Hill Connect™ is a web-based assignment and assessment platform that gives students the means to better connect
with their coursework, with their instructors, and with the important concepts that they will need to know for success now and
in the future. With Connect, instructors can deliver assignments, quizzes and tests easily online. Students can practice important
skills at their own pace and on their own schedule. With Connect, students also get 24/7 online access to an eBook—an online
edition of the text—to aid them in successfully completing their work, wherever and whenever they choose.
Key Features
Simple Assignment Management With Connect, creating assignments is easier than ever, so you can spend more time teaching
and less time managing.
• Create and deliver assignments easily with new banks of homework questions and test bank material to assign online
• Streamline lesson planning, student progress reporting, and assignment grading to make classroom management more efficient
than ever
• Go paperless with the eBook and online submission and grading of student assignments
Smart Grading When it comes to studying, time is precious. Connect helps students learn more efficiently by providing feed-
back and practice material when they need it, where they need it.
• Automatically score assignments, giving students immediate feedback on their work and side-by-side comparisons with correct
answers
• Access and review each response; manually change grades or leave comments for students to review
• Reinforce classroom concepts with practice tests and instant quizzes
Instructor Library The Connect Instructor Library is your course creation hub. It provides all the critical resources you’ll need
to build your course, just how you want to teach it.
Preface xix
Instructor’s Manual
This supplement was completed by our authors, and includes a descriptive preface containing alternative course formats and case
teaching methods, a chapter overview and outline, key terms and concepts. Complete solutions to all end-of-chapter problems
are included.
Computerized Test Bank

For the computerized test bank, Sepand Jazzi of Kwantlen Polytechnic University has adapted test questions that consist of true/
false, multiple choice, and short answer questions. Questions are identified by level of difficulty and complete answers are
provided for all questions and problems, along with reference to the relevant chapter Learning Objective(s).
Microsoft® PowerPoint® Slides

These visually stimulating slides have been fully updated, by Helen Prankie of Humber College, with colourful graphs, charts,
and lists. The slides can be edited or manipulated to fit the needs of a particular course.
Image Gallery
The complete set of figures from the text can be downloaded from the image gallery on Connect and easily embedded into
instructors’ PowerPoint slides.
• Assign eBook readings and draw from a rich collection of textbook-specific assignments
• Access instructor resources, including ready-made PowerPoint presentations and media to use in your lectures
• View assignments and resources created for past sections
• Post your own resources for students to use
eBook Connect reinvents the textbook learning experience for the modern student. Every Connect subject area is seamlessly
integrated with Connect eBooks, which are designed to keep students focused on the concepts key to their success.
• Provide students with a Connect eBook, allowing for anytime, anywhere access to the textbook
• Merge media, animation, and assessments with the text’s narrative to engage students and improve learning and retention
• Pinpoint and connect key concepts in a snap using the powerful eBook search engine
• Manage notes, highlights, and bookmarks in one place for simple, comprehensive review
SUPERIOR SERVICE
Service takes on a whole new meaning with McGraw-Hill Ryerson and Fundamentals of Corporate Finance. More than just
bringing you the textbook, we have consistently raised the bar in terms of innovation and educational research. These invest-
ments in learning and the education community have helped us to understand the needs of students and educators across the
country, and allowed us to foster the growth of truly innovative, integrated learning.
INTEGRATED LEARNING
Your Integrated iLearning Sales Specialist is a McGraw-Hill Ryerson representative who has the experience, product knowledge,
training, and support to help you assess and integrate any of our products, technology, and services into your course for optimal
teaching and learning performance. Whether it’s helping your students improve their grades, or putting your entire course online,
your iLearning Sales Specialist is there to help you do it. Contact your iLearning Sales Specialist today to learn how to maximize
all of McGraw-Hill Ryerson’s resources!
COURSE MANAGEMENT
McGraw-Hill Ryerson offers a range of flexible integration solutions for Blackboard, WebCT, Desire2Learn, Moodle, and other
leading learning management platforms. Please contact your local McGraw-Hill Ryerson iLearning Sales Specialist for details.
TEGRITY
Tegrity is a service that makes class time available all the time by automatically capturing every lecture in a searchable format
for students to review when they study and complete assignments. With a simple one-click start-and-stop process, you capture
all computer screens and corresponding audio. Students can replay any part of any class with easy-to-use browser-based viewing
on a PC or Mac. Educators know that the more students can see, hear, and experience class resources, the better they learn.
Fourth Pass
xx Preface
ADDITIONAL TECHNOLOGY AND LEARNING SOLUTIONS

To see the latest technology and Learning Solutions offered by McGraw-Hill Ryerson and its partners, please visit us online.
www.mcgrawhill.ca/he/solutions
ACKNOWLEDGMENTS
We take this opportunity to thank all of the individuals who helped us prepare this fifth edition. We want to express our apprecia-
tion to those instructors whose insightful comments and suggestions were invaluable to us during this revision.
Ben Amoako-Adu, Wilfrid Laurier University Andras Marosi, University of Alberta

Larry Bauer, Memorial University Diana Mok, University of Western Ontario
David Birkett, University of Guelph Martin Moy, Cape Breton University
Keith Cheung, University of Windsor Howard Nemiroff, Carleton University
Larbi Hammami, McGill University Ian Rakita, Concordia University
Shahriar Hasan, Thompson Rivers University Shahbaz Sheikh, University of Western Ontario
Hui Huang, University of Waterloo Francis Tapon, University of Guelph
Andy Lin, Vancouver Island University Lachlan Whatley, Trinity Western University
Ildebrando Lucas, Algonquin College Semih Yildrim, York University
Usman Malik, Humber College
We owe much to our colleagues at the University of New Brunswick and the Schulich School of Business, York University.
We extend much gratitude to professors Dr. Tom Beechy, Ingrid McLeod-Dick and Elizabeth Farrell, accounting experts at the
Schulich School of Business, York University, who provided tremendous assistance regarding the treatment of IFRS in this text.
Thanks go to Professors Gopalan Srinivasan, Eben Otuteye and Muhammad Rashid, University of New Brunswick, for useful
suggestions, and also to the Faculty of Business Administration, University of New Brunswick, for some research support on this
project.
We would like to express our appreciation to Navid Kheradmand and Drew Cameron, University of New Brunswick, for adept
research and computational assistance and to Danielle LeBlanc, University of New Brunswick for calculator work on some end-
of-chapter problem solutions. Thanks to Andy Thi, David Jiang and Becky Zhou, Schulich undergraduate students, who did
editing and calculator work. Thanks to David Birkett, University of Guelph, for the technical review of the text. In addition, we
would like to thank our supplement authors William Lim, Helen Prankie and Sepand Jazzi. Their efforts will help students and
instructors alike.
We are also grateful to the talented staff at McGraw-Hill Ryerson, especially Kimberley Veevers, Sponsoring Editor; Daphne
Scriabin, Developmental Editor; and Graeme Powell, Supervising Editor. We want to thank copy editor Rodney Rawlings for his
energetic attention to the details.
Finally, we cannot overstate our indebtedness to our spouses, Bruce Rhodes and Koumari Mitra, and to David Rhodes, Elizabeth’s
son, and Anusha Mitra, Devashis’ daughter. They supported us and forgave us when we were very absorbed in the project.
bre0089X_fm_i-xx.indd xx 3/8/12 2:01 PM

1
PART 1
Introduction CHAPTER
1 Goals and Governance

of the Firm
1.1 Investment and Financing

Decisions
1.2 What Is a Corporation?
1.3 Other Forms of Business
Organization
1.4 Who Is the Financial
Goals and
Manager?
1.5 Goals of the Corporation
1.6 Careers in Finance
Governance
2
1.7 Topics Covered in This Book
1.8 Summary
Financial Markets and

of the Firm
Institutions
3 Accounting and Finance
4 Measuring Corporate
Performance
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
LO1 Give examples of the investment and financing decisions that
financial managers make.
LO2 Distinguish between real and financial assets.
LO3 Cite some of the advantages and disadvantages of organizing
a business as a corporation.
LO4 Describe the responsibilities of the CFO, the treasurer, and the
controller.
LO5 Explain why maximizing market value is the logical financial goal
of the corporation.
LO6 Explain why value maximization is usually consistent with ethical
behaviour.
LO7 Explain how corporations mitigate conflicts and encourage coop-
erative behaviour.
LO8 Give examples of career paths in finance.
corporation’s investments. Therefore we start this

chapter with examples of recent investment and
financing decisions by major Canadian and foreign
corporations. We also review what a corporation is
and describe the special roles of a corporation’s
top financial managers, including the chief finan-
cial officer (CFO), treasurer, and controller. Later in
the chapter we will review several possible career
paths in finance.
A meeting of the corporation’s directors. Next we turn to the financial goals of the corpo-
© Susan Moore. ration. Should it maximize value, or is surviving and
avoiding bankruptcy enough? Should it strive to
be a good corporate citizen? If the firm maximizes
Corporate finance boils down to the investment value for its stockholders, can it also be a good
and financing decisions made by corporations. corporate citizen? We also consider the conflicts of
Financial managers in corporations work with other interest that arise in large corporations, and review
managers to identify investment opportunities, to the mechanisms that align the interests of the firm’s
analyze and value the opportunities, and to decide managers with the interests of stockholders. Finally,
whether and how much to invest. Financial man- we look ahead to the rest of this book and back to
agers also have to raise the money to finance the some entertaining snippets of financial history.
LO1, 2 1.1 INVESTMENT AND FINANCING DECISIONS

Mike Lazaridis is best known today as one of the founders of Research In Motion (RIM), the
rapidly growing Canadian technology company known for its BlackBerry brand of handheld
smart phones. But just over 25 years ago, Lazaridis had dropped out from University of Waterloo
to operate Research In Motion with his childhood friend and business partner, Doug Fregin, in
their small office in downtown Waterloo. In the early years, the duo secured minor contracts
from large corporations such as General Motors, Kodak, and Ericsson that helped legitimize the
business. For General Motors, the company created networked display terminals that could dis-
play messages to the assembly line on big LED screens. Kodak accepted RIM’s bid to develop
the first “DigiSync Film Barcode Reader,” which revolutionized the way movies were edited in
Hollywood. RIM even won an Oscar in technical achievement for the “DigiSync” innovation.
Ericsson hired Lazaridis and Fregin to develop software for one of its new projects that would
later be known as the “Viking Express.” The software that RIM developed would prove to be the
critical missing piece to the commercial wireless e-mail puzzle. Lazaridis and Fregin had expe-
rienced their first taste of the wireless e-mail dream that would come to define the entire com-
pany some years later.
Eight years in, the company was surviving, but it was still far from being the Research In
Motion we know today. It had added 14 employees and was operating four different business
lines providing yearly revenue of around $500,000. With a strong engineering and computer
Chapter One Goals and Governance of the Firm 3
networking foundation in place, Lazaridis brought in Jim Balsillie in 1992 as co-CEO to navigate
the company with sound business practices. With Balsillie came his personal investment of
$250,000. From that point on, through a series of personal and business connections, the com-
pany was able to secure major technological research and development funding from myriad
sources, including loan and assistance programs from federal and provincial governments and
private organizations. This period also saw RIM’s initial public offering (IPO); it was the first
time the firm allowed the general public to buy shares. The new shareholders became part own-
ers of the company in proportion to the number of shares they purchased, and the company used
the funds raised for its investment outlays. RIM was able to focus on its core business.
Following years of successes and failures developing software and less-popular mobile
handhelds, Research In Motion eventually found its way in 1997. The RIM Inter@ctive Pager
950 Wireless Handheld would come to be known as the company’s first BlackBerry. The 950
was a compact device that supported a 31-key PC-style keyboard and a 1,000-entry address
book. Its key feature, however, was the ease and reliability of its portable e-mail functionality.
The response time for receiving an e-mail was an amazing 20 seconds. The device would alert
the user that an e-mail had been received without his or her having to click the “get mail” but-
ton other devices required. RIM was tasked by IBM to outfit its North American field workers
with the devices. Other large companies such as Bellsouth signed on to buy hundreds of thou-
sands of the product. Needless to say, this was RIM’s first real taste of major commercial
success.
In the 12 years since the first BlackBerry, Research In Motion has become one of Canada’s
biggest corporate success stories in recent history. According to The Globe and Mail, RIM is
currently the fourth-most-profitable company in Canada, behind only three of the largest banks
in the country. With annual sales of $15 billion, and a stock market value of over $30 billion, the
company employs almost 14,000 full-time workers. There are currently 10 different BlackBerry
models available, all of which have come a long way since the RIM 950. The newest BlackBerrys
are equipped with wireless and 3G network Internet, e-mail and text messaging, a phone, GPS,
a camera, an MP3 player, and countless other features.
In retrospect, Research In Motion’s success was hardly a sure thing. Mike Lazaridis, Doug
Fregin, and Jim Balsillie’s ideas were inspired, but their implementation was complex and dif-
ficult. It took time and considerable effort to build a customer base. Beyond the challenges posed
by its product innovation, the firm also needed to be good at finance. It had the good fortune to
get a long head start from potential competitors, but a series of bad financial decisions would
have sunk the company.
Research In Motion had to make good investment decisions. In the beginning, these decisions
were constrained. Contracts had to be carefully vetted for their chances of working out favour-
ably. Given the company’s scarce resources, every new contract it decided to undertake might
have led to the demise of the entire firm if it had failed. As the company grew, RIM’s investment
decisions became more complex. Should it incorporate a phone into the device? When should it
expand into Europe and Asia? How many unique devices should it develop? Which companies
should it acquire as it expanded its range of services and devices?
Research In Motion also had to make good financing decisions. For example, how should it
raise the money it needed for investment? In the beginning, these choices were also constrained.
Available sources of financing were limited to family money, and bank loans. As the company
grew, its range of choices expanded. Every new software contract the company received attracted
more and more attention from the Canadian Government who were attempting to establish
Canada as a worldwide technology leader in the 1990s. According to Innovation Strategy
Canada, federal and provincial governments lent or simply gave the company close to $50 mil-
lion during its “make-or-break” period in the mid and late 1990s. Jim Balsillie had some major
decisions to make when deciding how the company would finance its operations.
The initial public offering was one of those trying times. For example, how many shares
should the company try to sell? At what price? As the company grew, it periodically raised more
4 Part One Introduction
TABLE 1.1 Examples of recent investment and financing decisions by major corporations. Unless otherwise stated, revenues,
investment costs, and financing proceeds are in Canadian dollars.
Company (2009 revenues in Recent Investment (Capital Budgeting)

$ millions) Decision Recent Financing Decision
Nokia ($59,972)—Finnish, world’s In 2007, agreed to buy Navteq Corp. for Will finance half the acquisition with its
leading mobile phone supplier $8.1 billion to gain digital maps of 69 own cash, and use borrowed money for
countries. the rest.
Royal Bank of Canada (38,143)— Acquired the fund manager Phillips Hagar Offered Phillips Hagarand North
Canada’s largest bank and North for $1.4 billion in May 2008. shareholders 27 million common shares
for the company.
EnCana Corporation ($11,335)— Purchased Deep Bossier natural gas assets Completed a public offering in the
Canadian oil and gas producer and land interests in East Texas for US$2.55 United States of senior unsecured notes
billion in 2007. in the aggregate principal amount of
US$500 million in May 2009.
Research In Motion ($15,252; Spent $148 million in March 2009 to acquire In November 2009, the company
20101)—Canadian, world-leading Certicom Corp. and Torch Mobile Inc., established an $800 million common
designer, manufacturer and marketer whose technologies will be incorporated share repurchase program.
of mobile communication devices into future RIM mobile devices.
(BlackBerry)
Shaw Communications ($3,148)— In February 2009, acquired the Campbell Issued $600 million 6.5% senior notes
Canadian cable company River cable system in British Columbia for in March 2009.
$46.3 million and the Mountain Cable
system in Ontario for $300 million just
8 months later.
Diageo ($15,687)—British, world Purchased the exclusive perpetual In 2008, issued $1.5 billion 5-year and
leading beverage company distribution rights to Ketel One Vodka 1.27 billion 6-year bonds
products in June 2008 for $708 million.
Walmart ($416,337)—U.S., world’s Spent $100 million in 2010 to purchase Has set up a $15 billion share
largest retailer Vudu, an online movie service being built repurchase program in 2010.
into an increasing amount of Blu-ray players.
McCain Foods (N/A)—Canadian, Investing £10m ($20 million) to build three (No information provided, as this is a
privately owned world-leading wind turbines at the United Kingdom’s private corporation.)
frozen french fry processor largest french fry factory
TransCanada ($8,966)—Canadian Spent $3.9 billion in 2009 to extend two Issued 22 million preferred shares in
oil and gas pipeline operator oil pipelines from Alberta to the U.S. September 2009, resulting in gross
Midwest proceeds of $600 million.
funds by selling additional stock to the public, and it borrowed money from banks. At each point,
it needed to decide on the proper form and terms of financing as well as the amounts to be
raised.1
The particulars may differ, but all successful companies, such as Research In Motion, have to
make good investment and financing decisions. Also, as with RIM, those decisions range from
prosaic and obvious to difficult, complicated, and strategically crucial.
Table 1.1 lists nine corporations, of which six are Canadian. Three are foreign: Diageo’s
headquarters are in Britain, Nokia’s in Finland, and Walmart’s in the United States. We have
chosen large corporations that you may be familiar with. Earlier you learned about RIM’s
1 The following sources were helpful in writing this section: Claire Gagné, “Douglas Fregin—The Other RIM Guy,”
Canadian Business Online, December 5, 2005, www.canadianbusiness.com/after_hours/lifestyle_activities/article
.jsp?content520051205_72913_72913; Barrie McKenna, Paul Waldie, and Simon Avery, “Patently Absurd: The
Inside Story of RIM’s Wireless War,” The Globe and Mail, January 28, 2006, B4.
Another random document with
no related content on Scribd:
Christian. So do many that never came there. The soul of the
sluggard desireth and hath nothing.
Ignorance. Nay but I leave all for them.
Christian. I doubt that. Why dost thou think so?
Ignorance. My heart tells me so.
Christian. He that trusteth his own heart, is a fool.
Ignorance. Ay if his heart be evil; but mine is good.
Christian. How dost thou prove that?
Ignorance. Why I lead a good life.
Christian. Who told thee thou leadest a good life?
Ignorance. Who told me! My own heart.
Christian. Ask my fellow if I be a thief. Thy heart tells thee so!

Except the word of God bear witness in this matter, other testimony
is nothing worth.
Hast thou the peace of God? Hast thou joy in the Holy Ghost? Is
the love of God shed abroad in thy heart? Doth his Spirit witness
with thy spirit, that thou art a child of God? Hast thou redemption in
Christ’s blood, the forgiveness of thy sins? Art thou dead unto sin,
and alive unto God? Hast thou crucified the flesh, with its affections
and lusts? Hath the law of the spirit of life in Christ Jesus, made thee
free from the law of sin and death?
Ignorance. You talk too high for me? I am a poor sinner, and I
believe in Christ, and that is enough.
Christian. I fear, hell is full of such poor sinners as thou. But how
dost thou believe in Christ?
Ignorance. Why, I believe Christ died for sinners, and that my
sins will be forgiven, through God’s gracious acceptance of my
sincerity and best endeavours to obey his laws.
Christian. 1. Thou believest then with a fantastical faith; for this

faith is no where described in the word. 2. Thou believest with a false
faith; because thou takest justification from the blood and
righteousness of Christ, and appliest it to thy own. 3. This first
maketh Christ not a justifier ♦of thy person, but of thy actions; and of
thy person, for the sake of thy actions. Therefore this faith is utterly
deceitful, and will leave thee under wrath in the day of the Lord.
♦ “rf” replaced with “of”
True justifying faith puts the soul, as sensible of its lost condition
by the law, upon flying for refuge to the blood and righteousness of
Christ. And this righteousness of his is not an act of grace, by which
he maketh thy obedience acceptable to God for thy justification.
No, but Christ did and suffered what was required at our hands;
and for the sake of what he did and suffered, we are pardoned and
accepted of God.
Ignorance. And so you would have us do nothing! We may live as

we list; since we are justified by faith alone!
Christian. As thy name is, so art thou. Thou art ignorant of the
fruits of faith in the blood of Christ. He that believeth in Christ, loveth
God; and whosoever loveth him keepeth his commandments.
Hopeful. Was Christ ever revealed to you?
Ignorance. What, you are for new revelations! And receiving the
Holy Ghost, I suppose! I believe what both you and all the rest of you
say about these matters, is all whim and enthusiasm, the effects of
mere imagination, or a distempered brain.
Hopeful. Why, man, None knoweth the Son save he unto whom
the Father revealeth him: and no man calleth Jesus Lord, but by the
Holy Ghost.
Ignorance. That is your faith but it is not mine: yet mine, I doubt
not is as good as yours; though I have not my head filled with so
many whims and fancies.
Christian. Give me leave to put in a word: you ought not to speak

so slightly of this matter: for no man can know Jesus Christ, save he
to whom the Father revealeth him: and that faith whereby the soul
layeth hold on Christ, must be wrought by the exceeding greatness
of his mighty power. Of this faith I perceive thou art wholly ignorant.
Awake thou that sleepest. Know thyself. See thy own weakness. Fly
to the Lord Jesus, and by his righteousness thou shalt be delivered
from condemnation.
Ignorance. You walk so fast, I cannot keep pace with you; go on,
I must stay awhile behind.
Do you think, said Hopeful, that such men as these have never
any convictions of sin?
Christian. Without doubt they have, more or less, but they

desperately stifle them.
Hopeful. Nay, why should they stifle them?
Christian. 1. Because they think these fears are wrought by the

devil, which indeed are wrought of God. 2. They think also, they
have no reason thus to fear, and therefore harden themselves in
presumptuous confidence. 3. They see these fears would rob them
of their beloved self-righteousness, and therefore resist them with all
their might.
*Now I saw in my dream, that by this time they were got over the
inchanted ground, and entering into the country of Beulah, the way
lying directly over it. They were now far beyond the valley of the
♦ Shadow of Death, and also out of the reach of giant Despair;
neither could they, from this place, so much as see Doubting-castle.
In this country there is no darkness at all, the sun shining night and
day; there are no storms or tempests, but the air is always calm and
serene. Here the flowers all the year appear in the earth, throughout
the perpetual spring: and they continually heard the singing of birds,
and the voice of the turtle in the land. They were now within sight of
the city they were going to; and met with several of the inhabitants of
it. Yea, in this land their Lord himself commonly walked. It being on
the borders of heaven. In this land also the contract between the
bride and bridegroom was renewed: and as a bridegroom rejoiceth
over the bride, so did their God rejoice over them. Here they had no
want of corn or wine, but abundance of all things, being in a land that
flowed with milk and honey. Mean time they heard voices out of the
city, loud voices, saying, Say ye to the daughter of Zion, behold thy
salvation cometh: and all the inhabitants of the country called them,
the holy people, the redeemed of the Lord.
♦ “Shadom” replaced with “Shadow”
As they walked in this land, they rejoiced evermore; yea, with joy
unspeakable and full of glory. And drawing near to the city, they had
a more perfect view thereof. It was built of pearls and precious
stones, and the streets were paved with gold. So that Christian with
desire fell sick; nor indeed was Hopeful much better. Insomuch that
they were constrained to cry out, Feed me with apples, stay me with
flagons; for I am sick of love.
When they were strengthened a little, they went on their way, and
came nearer and nearer; where were orchards, vineyards and
gardens. The gardener stood in the way, and leading them into the
vineyard, bid them refresh themselves with the fruit. He also shewed
them here the King’s walks and arbours, where they delighted to be;
and here they tarried and slept.
So I saw that when they awoke, they addressed themselves to go

up to the city; but the reflection of the sun (for the city was pure gold)
was so extremely glorious, that they were not able to behold it with
open face; but only thro’ a glass. And as they went on there met
them two men in raiment shining like gold; also their faces shone as
the light.
These asked the pilgrims, Whence they came? Where they had
lodged? What difficulties ♦and dangers, and what comforts they had
found in the way? To all which they answered briefly. Then said they,
“You have but two difficulties more, and you enter into the city.”
♦ duplicate word “and” removed
Christian then and his companion asked them to go with them;

they said, “We will; but you must enter in by your own faith.” So I saw
in my dream that they went on together till they came in sight of the
gate.
Now I saw there was a deep river between them and the gate,
and there was no bridge over it: at the sight of this the pilgrims stopt;
but the men said, “You must go through or you cannot come to the
gate.”
*They enquired, if there were no other way to the gate: To which
they answered, “Yes; but there hath not any save two, Enoch and
Elijah, trod that path since the foundation of the world.” Then they
asked, if the waters were all of a depth? They said, “No: but we
cannot help you in this case; for you will find them either shallower or
deeper, according to your faith.”
Then they went in; but Christian began to sink, and cried out to
his friend, I sink in the deep waters: the billows go over my head, all
the waves go over me.
*Then said Hopeful, “Be of good cheer, my brother, I feel the

bottom, and it is good.” Oh, my friend, said Christian, The sorrows of
death have compassed me round about. I shall not see the land that
floweth with milk and honey. And with that a great darkness and
horror fell upon him, so that he could not see before him; also he lost
in a great measure, his senses, so that he could not remember any
of the refreshments or deliverances that he had met with before in
the way of his pilgrimage. But all the words that he spake, still
tended to discover the anguish of his spirit, and his fear that he
should die in the river, and never enter into the gate. Here also the
sins that he had committed, both before and after he was a pilgrim,
were brought all together to his remembrance, and terrified him
afresh. He was also troubled with the apparition of evil spirits, as if
they would have torn him in pieces; so that Hopeful here had much
ado to keep his brother’s head above water; yea, sometimes he
sunk; and then in awhile rose up again half dead: however, he still
endeavoured to comfort him, saying, “I see the gate, and men
standing to receive us.” “’Tis you, said Christian, whom they stand to
receive; I am as a dead man, out of mind. Surely, if I was right, he
would now arise to help me. But for my sins I am brought into this
snare, and now God hath forgotten me.” “Not so, said Hopeful; but
he trieth thy faith as with fire.”
Then I saw that Christian was in a muse, and immediately

Hopeful said, “Be of good cheer; thy faith hath saved thee. Jesus
Christ maketh thee whole.”
And with that Christian broke out with a loud voice, “I see him, I
see him again!” And he tells me, When thou passest through the
waters, I will be with thee, and through the rivers, they shall not
overflow thee. Then he presently found ground to stand on, and the
rest of the water was but shallow, till they came to land. Upon the
bank they saw the two shining men again, who there waited for
them; and as soon as they were come out of the water, they saluted
them saying, We are ministring spirits, sent forth to minister to the
heirs of salvation. Thus they went along towards the gate. Now the
city stood on a mighty hill, but the pilgrims went up the hill with ease,
having left their mortal garments behind them in the river. Though
therefore the foundation on which the city was built, was higher than
the clouds, they mounted up with speed, through the regions of the
air, flying as upon the wings of the wind.
The talk they had mean while with the shining ones was
concerning the glory of the place. There, said they, with the
innumerable company of angels, are the spirits of just men made
perfect. There is the paradise of God, wherein you will see the tree
of life, and eat of the fruits thereof. You shall be cloathed with light
and immortality as with a garment. All tears will be wiped from your
eyes, and you will know no more pain, or sorrow, or death; for the
former things are past away. You are now going to Abraham, Isaac,
and Jacob, to the patriarchs and prophets, to the righteous men of all
ages, whom God in their generations took away from the evil to
come; and that are now resting upon their beds, each one walking in
his righteousness.
They asked, and what are we to do when we are there? It was

answered, “You are there to receive the comforts of all your toils that
are past, and to have joy for all your sorrow. You are to reap what
you have sown, even the fruit of all your prayers and tears, and
works, and sufferings. And there you will enjoy the perpetual sight of
the Holy One; yea, you shall see him as he is: and shall love, and
praise, and serve him, and magnify his name all the days of eternity.”
“And when the Son of Man shall come in his glory, you shall
come with him in the clouds of heaven; you shall sit with him in the
seat of judgment, when he passeth sentence on all the workers of
iniquity. Also, when he shall return to the throne of his Majesty on
high, you shall go up too, with the sound of the trump, and drink of
those rivers of pleasure, which flow at his right-hand for evermore.”
Now, while they were thus drawing near the gate, behold a
company of the heavenly host came out to meet them; to whom their
conductors said, “These are the men that have loved our Lord while
they were in the world, and that have left all for his sake; and we
have brought them hither, that they may go and see their
Redeemer’s face with joy.” Then the heavenly host gave a great
shout, saying, Blessed are they that are called to the marriage-
supper of the Lamb.
They then compassed them round on every side, some having

trumpets in their hands, and continually sounding as they went, and
praising Him that liveth for ever and ever. In the mean time both their
looks and gestures shewed how welcome Christian and Hopeful
were.
Now when they were come up to the gate, they saw writ over it in
letters of gold, Blessed are they that do his commandments, that
they may have right to the tree of life, and enter in through the gates
into the city.
Then the shining ones called to them within the gate, saying,
“These are come from the city of Destruction, through the love they
bear to our King.” They then gave in their certificates, which they had
received at the beginning. These were carried to the King, who
immediately sent, and commanded to open the gate, that the
righteous nation, said he, that keepeth the truth, may enter in.
Now I saw in my dream, that these two men went in at the gate,
and lo! as they entered they were transfigured, and their raiment was
glittering, and white as snow. There were also given to them golden
harps, wherewith to praise him that sat upon the throne, and the
Lamb that liveth for evermore. It was then said to them, Well done,
good and faithful servants, enter ye into the joy of your Lord.
Just then Ignorance came to the river-side, and got over with little
difficulty: for one Vain-hope, a ferryman happening to be there,
carried him over in his boat. So he ascended the hill, and coming up
to the gate, immediately began to knock. He was asked by them that
were within, “Whence do you come? and what would you have?” He
answered, “I have eat and drank in the presence of the King, and he
hath taught in our streets.” They asked again,“Have you any
certificate?” But he answered never a word. So they told the King,
who commanded, and they bound him hand and foot, and took him
up and carried him through the air, to the door that I saw on the side
of the hill, and cast him in there. Then I saw that there was a way to
hell, even from the gates of heaven. So I awoke.
A Word of Advice to
S A I N T S and
S I N N E R S.
AWORD
*1. of advice to my own heart and thine. Thou partakest of
the ordinances of God. Thou dost well. But if thou hast not
the blood of Christ at the root of all, they will prove but
painted pageantry to go to hell in.
Try every day, on what bottom thy hope of glory is built, and
whether it was laid by the hand of Christ. If not it will never be able to
endure the storm that must come against it. Satan will throw it all
down, and great will be the fall thereof.
*Glorious professor! Thou shalt be winnowed; every vein of thy

profession will be tried to the purpose: ’tis terrible to have it all come
tumbling down, and to find nothing to bottom upon.
*Soaring professor! See to thy waxen wings betimes; they will

melt with the heat of temptations. What a misery is it, to trade much,
and break at length; and to have no stock, no foundation laid for
eternity!
*Gifted professor! Look there be not a worm at the root that will
spoil all thy fine gourd, and make it die about thee, in a day of
scorching: look over thy soul daily, and ask, Where is the blood of
Christ to be seen upon it? Many eminent professors have come at
length to cry out, Undone, undone to all eternity!
2. Consider the greatest sins may be hid under the greatest
duties. See the wound that sin hath made in thy soul be perfectly
cured by the blood of Christ; not skinned over with duties, humblings,
enlargements. Apply what thou wilt besides the blood of Christ, it will
poison the sore. Thou wilt find that sin was never mortified truly;
nothing can kill it but the beholding Christ’s righteousness.
Nature can afford no balsam fit for the cure of a soul. Healing
from duty, and not from Christ, is the most desperate disease. Poor
ragged nature, with all its highest improvements, can never spin a
garment fine enough to cover the soul’s nakedness. Nothing is fit for
that use, but Christ’s perfect righteousness.
Whatsoever is of nature’s putting on, Satan will come and

plunder it, and leave the soul naked and open to the wrath of God.
All that nature can do will never make up the least dram of grace that
can mortify sin, or look Christ in the face one day.
3. Thou goest on hearing, praying, and receiving, yet miserable

mayst thou be. Look about thee; didst thou ever see Christ to this
day in distinction from all other excellencies and righteousness in the
world, and all of them falling before the majesty of his love and
grace!
*If thou hast seen Christ truly, thou hast seen pure grace, pure
righteousness, far exceeding all sin and misery. If thou hast seen
Christ, thou wouldst not do a duty without him for ten thousand
worlds. If ever thou sawest Christ, thou sawest him a rock, higher
than Satan or sin; and this rock doth follow thee, and there will be a
continual dropping of honey and grace out of it to satisfy thee.
Examine, if ever thou hast beheld Christ as the only begotten of the
Father, full of grace and truth. Be sure thou art come to Christ, that
thou standest upon the rock of ages, hast answered to his call to thy
soul, hast closed with him for justification.
*4. Men talk bravely of believing; but few know it. Christ is the
mystery of the scripture. Grace the mystery of Christ. Believing is the
most wonderful thing in the world. Put any thing of thine own to it,
and thou spoilest it; Christ will not so much as look at it for believing.
When thou comest to Christ, thou must leave behind thee thy own
righteousness, and bring nothing but thy sin. (Oh that is hard!) Leave
behind all thy holiness, and bring nothing but thy wants and miseries,
else Christ is not fit for thee, nor thou for Christ. Christ will be a pure
Redeemer, and thou must be an undone sinner, or Christ and thou
will never agree. It’s the hardest thing in the world to take Christ
alone for righteousness: that’s to acknowledge him Christ. Join any
thing to him of thy own, and thou un-Christ’s him.
Whatever comes in when thou goest to God for acceptance,

(besides Christ) call it anti-christ; bid it be gone; make only Christ’s
righteousness triumphant; all besides that, is Babylon, which must
fall if Christ stand; and thou shalt rejoice in the day of the fall thereof.
Christ alone did tread the wine-press, and there was none with him.
If thou join any thing to Christ, Christ will trample upon it in fury and
anger, and stain his raiment with the blood thereof. Thou thinkest it
easy to believe: was ever thy faith tried with a thorough sight of sin?
Was it ever put to grapple with Satan, and the wrath of God lying
upon the conscience? When thou wast in the mouth of hell, then did
God shew thee Christ a ransom? If then thou couldst say, Oh I see
grace enough in Christ! Thou mayst say that which is the biggest
word in the world, thou believest; but untried faith is uncertain faith.
*5. To believing, there must go a clear conviction of sin, and the
merits of the blood of Christ, and of Christ’s willingness to save upon
this consideration merely, that thou art a sinner: things all harder
than to make a world. All the power in nature cannot get up so high,
in a storm of sin and guilt, as really to believe there is any willingness
in Christ to save. When Satan chargeth sin upon the conscience,
then to charge it upon Christ, that is gospel like. That is to make him
Christ, he serves for that use. To accept his blood alone for
salvation, that is the sum of the gospel. When the soul, in all duties
and distresses, can say, nothing but Christ for justification,
sanctification, redemption; not humblings, not duties, not graces, that
soul hath got above the reach of the billows.
All Satan’s advantages are laid in self-righteousness. God

pursueth this by setting Satan upon thee; this must be torn from
thee; this alone hinders Christ from coming in; and till Christ come in,
guilt will not go out; and where guilt is, there is hardness of heart.
6. When guilt is raised up, take heed of getting it allay’d any way
but by Christ’s blood. Make Christ thy peace, not thy duties, thy
tears: Christ thy righteousness, not thy graces. Look at Christ and do
as much as thou wilt. Stand with all thy weight upon Christ’s
righteousness; take heed of having one foot on thy own
righteousness, another on Christ’s. Till Christ come and sit on high
upon a throne of grace, there is nothing but guilt and terror, the soul
hanging between hope and fear, which is an un-gospel state.
He that fears to see the utmost hell of his own heart, suspects the
merit of Christ. Be thou never such a sinner, try Jesus Christ the
righteous. In all doubtings, fears, storms of conscience, look at Christ
continually. Do not argue with Satan (he desires no better) bid him
go to Christ, and he will answer him; it is his office to be our
advocate, his office to answer justice, and he is sworn to that office.
Put Christ upon it. If thou wilt do any thing thyself, as to satisfaction
for sin, thou renouncest Christ the righteous.
*7. Satan may alledge scripture, but he cannot answer scripture.
It is Christ’s word of mighty authority; Christ foiled Satan with it. In all
the scripture there is not an ill word against a poor sinner, stript of his
own righteousness. Nay, it plainly points out this man for the grace of
the gospel, and none else. Believe but Christ’s willingness, and that
will make thee willing. If thou find thou canst not believe; remember it
is Christ’s work to make thee believe. Put him upon it. He works to
will and to do. Mourn for thy unbelief, which is setting up guilt above
Christ; an undervaluing the merits of Christ, accounting his blood an
unholy, a common, and unsanctifying thing.
Thou complainest much of thyself. Doth thy sin make thee look
more at Christ; less at thyself? That is right; else complaining is but
hypocrisy. To be looking at duties and graces, when thou shouldest
be looking at Christ, that is pitiful: looking at them will but make thee
proud; looking at Christ will make thee humble. In all thy temptations,
be not discouraged. Those surges may be (not to break thee, but) to
heave thee off thyself, on the rock Christ.
Thou mayst be brought low, even to the brink of hell, ready to

tumble in; thou canst not be brought lower than the belly of hell, yet
there thou mayst look towards the holy temple. Into the old temple
none might enter but purified ones, and with an offering too. But now
Christ is our temple, to whom none must come but sinners, and that
without any offering, but his own blood once offered.
8. Thou thinkest, oh, what a monument of grace should I be!

There are many thousands as rich monuments as thou. The greatest
sinner did never pass the grace of Christ. When the clouds are
blackest, then look towards Christ, the standing pillar of the Father’s
love. His blood speaks reconciliation, redemption, liberty, nighness to
God. Not a drop of his blood shall be lost. Stand and hearken what
God will say, for he will speak peace to his people, that they return
no more to folly. He speaks grace, mercy, and peace. That is the
language of the Father and of Christ. Wait for Christ’s appearing, as
the morning star. He shall come as certain as the morning, as
refreshing as the rain.
*The sun may as well be hindered from rising, as Christ the Son
of righteousness. Look not a moment off Christ. Look not upon sin,
but look upon Christ also. In every duty look at Christ, before duty, to
pardon; in duty, to assist; after duty, to accept. Without this it is but
carnal, careless duty. Let sin break thy heart, but not thy hope in the
gospel.
9. If thou hast looked at works, duties, qualifications, more than at

the merits of Christ, it will cost thee dear. No wonder thou goest
complaining; graces may be evidences, but the merits of Christ must
be the foundation of thy hope.
When we come to God, we must bring nothing but Christ with us.
Any ingredients of our own, will poison faith. He that builds upon
duties or graces, knows not the merits of Christ. This makes
believing so hard, so far above nature; if thou believest, thou must
every day renounce thy obedience, thy sanctification, thy duties, thy
graces, and nothing but Christ must be held up. Thou must take from
God’s hand. Christ is the gift of God. Faith is the gift of God. Pardon
a free gift. Ah, how nature storms, frets, rageth at this, that all is of
gift, and it can purchase nothing with tears and duties; that all its
workings are excluded, and of no value in heaven!
Consider, didst thou ever yet see the merits of Christ, and the
infinite satisfaction made by his death? Didst thou see this when the
burthen of sin and the wrath of God lay heavy on thy conscience?
That is grace. The greatness of Christ’s merit is not known but to a
poor soul at the greatest loss. *Slight convictions will but have slight
prizings of Christ’s blood and merits.
*10. Despairing sinner! Thou lookest on thy right hand and on thy
left, saying, Who will shew us any good? Look at Christ and be
saved, all ye ends of the earth. There is none else. He is a Saviour,
and there is none besides him. Look any where else, and thou art
undone. God will look at nothing but Christ, and thou must look at
nothing else. Christ is lifted up on high (as the brazen serpent in the
wilderness) that sinners at the ends of the earth, at the greatest
distance may see him. The least sight of him will be saving, the least
touch healing to thee; and God intends thou shouldst look on him, for
he hath set him on a high throne of glory, in the open view of all poor
sinners. Thou hast infinite reason to look on him. For he will bear thy
burdens; he will forgive, not only till seven times, but seventy times
seven. It put the faith of the apostle to it to believe this, Luke xvii.
4, 5. because we are ♦hard to forgive, we think Christ is hard.
♦ “heard” replaced with “hard”

11. Hear what he said, I have found a ransom. In him I am well
pleased. God will have nothing else; nothing else will do thee good,
or satisfy conscience but Christ, who satisfied the Father. God doth
all upon the account of Christ. Thy deserts are hell, wrath, rejection.
Christ’s deserts are life and pardon. He will not only shew thee the
one, but he will give thee the other. It is Christ’s own glory and
happiness to pardon. Consider, while Christ was upon earth, he was
more among Publicans and Sinners than among Scribes and
Pharisees: and he hath the same love now in heaven; he is God and
changeth not. He went through all temptations, sorrows, desertions;
and hath drank the bitterest of the cup, and left thee the sweet; the
condemnation is out. Christ drank up all the Father’s wrath at one
draught; and nothing but salvation is left for thee. Thou sayst thou
canst not believe, thou canst not repent: fitter for Christ, if thou hast
nothing but sin and misery. Go to Christ with all thy impenitency and
unbelief, to get faith and repentance; that is glorious. Tell Christ,
Lord, I have brought no righteousness, no grace to be justified by; I
am come for thine, and must have it. We would be bringing to Christ,
and that must not be; not a penny of nature’s highest improvements
will pass in heaven.
12. To say in compliment, I am a sinner, is easy; but to pray with
the Publican indeed, Lord, be merciful to me a sinner, is the hardest
prayer in the world. It is easy to say, I believe in Christ; but not to see
him full of grace and truth, of whole fullness thou mayst receive
grace for grace. It is easy to profess Christ with the mouth; but to
confess him with the heart, that is above flesh and blood. Many call
Christ Saviour; few know him so. To see grace and salvation in
Christ is the greatest sight in the world; none can do that, but at the
same time they shall see that glory and salvation are theirs. I may be
ashamed to think that to this day I have known so little of the blood
of Christ, which is the main thing of the gospel. A christless, formal
profession is the blackest sight next to hell. Thou mayst have many
good things, and yet one thing may be wanting, that may make thee
go away sorrowful from Christ. Thou hast never sold all thou hast,
never parted with all thine own righteousness. Thou mayst be high in
duty, and yet a perfect adversary to Christ. In every prayer, in every
ordinance, labour after sanctification to thy utmost; but make not a
Christ of it to save thee; if so, it must come down one way or other.
Christ’s infinite satisfaction, not thy sanctification, must be
justification before God. When the Lord shall appear terrible out of
his holy place, fire shall consume that as hay and stubble. This will
be sound religion, only to bottom all upon the everlasting mountains
of God’s love and grace in Christ, to live continually in the sight of
Christ’s infinite merits (they are sanctifying, without them the heart is
carnal) and in those sights to see the full vileness of sin, and to see
all pardoned; in those sights to pray and hear, seeing all thy weak
performances accepted continually, to trample upon all thy own
righteousness, and be found continually in the righteousness of
Christ only. Without the blood of Christ on the conscience, all is dead
service.
13. Search the scriptures daily, as mines of gold, wherein the
heart of Christ is laid. Watch against constitutional sins; see them in
their vileness, and they shall never break out into act. Keep always
an humble, empty, broken frame of heart, sensible of any spiritual
miscarriage, observant of all inward workings, fit for the highest
communications. Keep not guilt in the conscience, but apply the
blood of Christ immediately. God chargeth sin and guilt upon thee, to
make thee look to Christ the brazen serpent.
Judge not Christ’s love by providence, but by promises. Bless

God for any way whereby he keeps the soul awakened and looking
after Christ: better sickness and temptations, than security and
slightness.
*A flighty spirit will turn a profane spirit, and will sin and pray too.
Slightness is the bane of profession. If it be not rooted out of the
heart by constant and serious dealings with, and beholdings of Christ
in duties, it will grow more strong and more deadly, by being under
church ordinances. Be serious and exact in duty, having the weight
of it upon thy heart; but be as much afraid of grounding thy comfort
on duties as on sins. Comfort from any hand but Christ is deadly. Be
much in prayer, or you will never keep up much communion with
God. As you are in closet prayer, so you will be in all other
ordinances.
14. Be true to truth, but not turbulent and scornful; restore such
as are fallen, with all the bowels of Christ. Set the broken disjointed
bones with the grace of the gospel! Despise not the weak; thou
mayst come to wish to be in the condition of the meanest of them.
Be faithful to others infirmities, but sensible of thine own. Visit sick
beds and deserted souls much; they are excellent scholars in
experience.

Full Download PDF of (Ebook PDF) Fundamentals of Corporate Finance 5th Canadian Edition All Chapter

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Full Download PDF of (Ebook PDF) Fundamentals of Corporate Finance 5th Canadian Edition All Chapter

Uploaded by

Copyright:

Available Formats

(eBook PDF) Fundamentals of

Corporate Finance 5th Canadian

(eBook PDF) Fundamentals of Corporate Finance 2nd

(eBook PDF) Fundamentals of Corporate Finance 8th

(eBook PDF) Fundamentals of Corporate Finance 8th

(eBook PDF) Fundamentals of Corporate Finance, 10th

(Original PDF) Fundamentals of Corporate Finance 6th

(eBook PDF) Fundamentals of Corporate Finance, Third

(eBook PDF) Fundamentals of Corporate Finance 5th

Fundamentals of Corporate Finance, 5th Global Edition

5.1 Future Values and Compound Interest 132 CHAPTER 7

Internal Rate of Return 272 CHAPTER 10

15.4 Listing on the Stock Market 500 CHAPTER 17

PART SIX PART SEVEN

20.1 Links Between Long-Term and Short-Term 21.6 Summary 695

Economies of Scale 727 24.4 International Capital Budgeting 770

24.1 Foreign Exchange Markets 755 26.4 Forward Contracts 819

throughout the text, we include a 16 Debt Policy

number of proven pedagogical aids: 18.1 How Dividends Are Paid

CHAPTER OPENING LEARNING OBJECTIVES

Each chapter begins with numbered LO1

rative to set the tone for what follows.

FINANCE IN ACTION BOXES

CALCULATOR BOXES AND

{NPV} NPV NPV

EXCEL SPREADSHEETS & EXHIBITS

introduction to financial modelling. We show how 1

and security valuation problems, in capital budget- 6

END-OF-CHAPTER MATERIAL Questions and Problems

concepts presented are Summary, Related Web *Answers in Appendix B

and Problems incorporate Internet questions, ques-

on the question number.

COMPREHENSIVE TEACHING AND LEARNING PACKAGE

Computerized Test Bank

Microsoft® PowerPoint® Slides

ADDITIONAL TECHNOLOGY AND LEARNING SOLUTIONS

Ben Amoako-Adu, Wilfrid Laurier University Andras Marosi, University of Alberta

bre0089X_fm_i-xx.indd xx 3/8/12 2:01 PM

1 Goals and Governance

1.1 Investment and Financing

Financial Markets and

3 Accounting and Finance

corporation’s investments. Therefore we start this

LO1, 2 1.1 INVESTMENT AND FINANCING DECISIONS

Company (2009 revenues in Recent Investment (Capital Budgeting)

Ignorance. Nay but I leave all for them.

Christian. I doubt that. Why dost thou think so?

Ignorance. My heart tells me so.

Christian. He that trusteth his own heart, is a fool.

Ignorance. Ay if his heart be evil; but mine is good.

Christian. How dost thou prove that?

Ignorance. Why I lead a good life.

Christian. Who told thee thou leadest a good life?

Ignorance. Who told me! My own heart.

Christian. Ask my fellow if I be a thief. Thy heart tells thee so!

Christian. 1. Thou believest then with a fantastical faith; for this

♦ “rf” replaced with “of”

Ignorance. And so you would have us do nothing! We may live as

Hopeful. Was Christ ever revealed to you?

Christian. Give me leave to put in a word: you ought not to speak

Christian. Without doubt they have, more or less, but they

Hopeful. Nay, why should they stifle them?

Christian. 1. Because they think these fears are wrought by the