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Contents
Long-Term Solvency Measures 82 Investing for a Single Period 147

Asset Management, or Turnover, Measures 84 Investing for More than One Period 147
Profitability Measures 86 A Note on Compound Growth 153
Market Value Measures 87
5.2 Present Value and Discounting 154
3.4 The DuPont Identity 90 The Single-Period Case 154
Present Values for Multiple Periods 155
3.5 Using Financial Statement Information 93
Why Evaluate Financial Statements? 93 5.3 More on Present and
Choosing a Benchmark 94 Future Values 157
Problems with Financial Statement Analysis 95 Present versus Future Value 157
Determining the Discount Rate 158
Summary and Conclusions96
Finding the Number of Periods 161
Summary and Conclusions 163
CHAPTER 4
Long-Term Financial Planning and
Corporate Growth 110 CHAPTER 6
Discounted Cash Flow Valuation 170
4.1 What Is Financial Planning? 111
6.1 Future and Present Values of Multiple
Growth as a Financial Management Goal 112
Cash Flows 171
Dimensions of Financial Planning 112
Future Value with Multiple Cash
What Can Planning Accomplish? 113
Flows 171
4.2 Financial Planning Models: A First Look 114 Present Value with Multiple Cash Flows 173
A Financial Planning Model: The Ingredients 115 A Note on Cash Flow Timing 176
A Simple Financial Planning Model 116
6.2 Valuing Annuities and Perpetuities 178
4.3 The Percentage of Sales Approach 118 Present Value for Annuity Cash Flows 178
An Illustration of the Percentage of Future Value for Annuities 183
Sales Approach 118 A Note on Annuities Due 185
4.4 External Financing and Growth 124 Perpetuities 185
External Financing Needed and Growth 124 Growing Perpetuities 187
Internal Growth Rate 127 Formula for Present Value of Growing
Financial Policy and Growth 128 Perpetuity 188
Determinants of Growth 130 Growing Annuity 189
A Note on Sustainable Growth Rate Formula for Present Value of Growing
Calculations 131 Annuity 189
4.5 Some Caveats on Financial Planning Models 133 6.3 Comparing Rates: The Effect of
Compounding 190
Summary and Conclusions133 Effective Annual Rates and Compounding 190
Appendix 4A: A Financial Planning Model For the Calculating and Comparing Effective
Hoffman Company (Available on Annual Rates 191
Connect) Mortgages 193
EARs and APRs 194
Appendix 4B: Derivation of the Sustainable Growth
Taking It to the Limit: A Note on Continuous
Formula (Available on Connect)
Compounding 195
6.4 Loan Types and Loan Amortization 196
PART 3 Pure Discount Loans 196
Valuation of Future Cash Flows 146 Interest-Only Loans 196
Amortized Loans 197
CHAPTER 5
Introduction to Valuation: The Time Summary and Conclusions201
Value of Money 146 Appendix 6A: Proof of Annuity Present Value
5.1 Future Value and Compounding 147 Formula219
vii
Contents
CHAPTER 7 Dividends 275

Interest Rates and Bond Valuation 221 Classes of Stock 276
7.1 Bonds and Bond Valuation 222 8.3 Preferred Stock Features 277
Bond Features and Prices 222 Stated Value 277
Bond Values and Yields 223 Cumulative and Non-Cumulative Dividends 278
Interest Rate Risk 226 Is Preferred Stock Really Debt? 278
Finding the Yield to Maturity 228 Preferred Stock and Taxes 279
Beyond Taxes 280
7.2 More on Bond Features 231
Is It Debt or Equity? 231 8.4 Stock Market Reporting 281
Long-Term Debt: The Basics 231 Growth Opportunities 282
The Indenture 232 Application: The Price–Earnings Ratio 282
7.3 Bond Ratings 235 Summary and Conclusions 284
7.4 Some Different Types of Bonds 237 Appendix 8A: Corporate Voting 293
Financial Engineering 237
Stripped Bonds 239 PART 4
Floating-Rate Bonds 240 Capital Budgeting 296
Other Types of Bonds 240
7.5 Bond Markets 242
CHAPTER 9
How Bonds Are Bought and Sold 242
Net Present Value and Other
Bond Price Reporting 242
Investment Criteria 296
A Note on Bond Price Quotes 244 9.1 Net Present Value 297
Bond Funds 244 The Basic Idea 297
Bonds and Restructuring 244 Estimating Net Present Value 298
7.6 Inflation and Interest Rates 245 9.2 The Payback Rule 302
Real versus Nominal Rates 245 Defining the Rule 302
The Fisher Effect 246 Analyzing the Payback Period Rule 303
Inflation and Present Values 247 Redeeming Qualities 304
Summary of the Rule 304
7.7 Determinants of Bond Yields 248
The Discounted Payback Rule 305
The Term Structure of Interest Rates 248
Bond Yields and the Yield Curve: Putting 9.3 The Average Accounting Return 306
It All Together 249 Analyzing the Average Accounting Return
Conclusion 251 Method 308
Summary and Conclusions 252 9.4 The Internal Rate of Return 308
Problems with the IRR 313
Appendix 7A: Managing Interest Rate Risk 260 Redeeming Qualities of the IRR 318
Appendix 7B: Callable Bonds and Bond Refunding 9.5 The Profitability Index 319
(available on Connect)
9.6 The Practice of Capital Budgeting 320
CHAPTER 8 9.7 Capital Rationing 323
Stock Valuation 263
8.1 Common Stock Valuation 264
Appendix 9A: The Modified Internal Rate of Return 336
Common Stock Cash Flows 264
Common Stock Valuation: Some Special CHAPTER 10
Cases 265 Making Capital Investment
Changing the Growth Rate 271 Decisions 339
Components of the Required Return 272
10.1 Project Cash Flows: A First Look 340
8.2 Common Stock Features 274 Relevant Cash Flows 340
Shareholders’ Rights 274 The Stand-Alone Principle 340
viii
Contents
10.2 Incremental Cash Flows 341 CHAPTER 11

Sunk Costs 341 Project Analysis and Evaluation 393
Opportunity Costs 341
11.1 Evaluating NPV Estimates 394
Side Effects 342
The Basic Problem 394
Net Working Capital 343
Projected versus Actual Cash Flows 394
Financing Costs 343
Forecasting Risk 395
Inflation 343
Sources of Value 395
Capital Budgeting and Business Taxes
in Canada 344 11.2 Scenario and Other What-If Analyses 396
Other Issues 344 Getting Started 396
Scenario Analysis 397
10.3 Pro Forma Financial Statements and
Sensitivity Analysis 400
Project Cash Flows 344
Simulation Analysis 401
Getting Started: Pro Forma Financial
Statements 344 11.3 Break-Even Analysis 403
Project Cash Flows 346 Fixed and Variable Costs 403
Project Total Cash Flow and Value 347 Accounting Break-Even 405
Accounting Break-Even: A Closer Look 407
10.4 More on Project Cash Flow 348
Uses for the Accounting Break-Even 407
A Closer Look at Net Working Capital 348
Depreciation and Capital Cost 11.4 Operating Cash Flow, Sales Volume, and
Allowance 350 Break-Even 408
An Example: The Majestic Mulch Accounting Break-Even and Cash Flow 408
and Compost Company (MMCC) 350 Cash Flow and Financial Break-Even
Points 410
10.5 Alternative Definitions of Operating
Cash Flow 354 11.5 Operating Leverage 413
The Bottom-up Approach 355 The Basic Idea 414
The Top-down Approach 356 Implications of Operating Leverage 414
The Tax Shield Approach 356 Measuring Operating Leverage 414
Conclusion 357 Operating Leverage and Break-Even 416
10.6 Applying the Tax Shield Approach to the 11.6 Managerial Options 417
Majestic Mulch and Compost Company Summary and Conclusions 420
Project 357
Present Value of the Tax Shield
on CCA 359 PART 5
Salvage Value versus UCC 359 Risk and Return 431
10.7 Some Special Cases of Discounted
Cash Flow Analysis 361 CHAPTER 12
Evaluating Cost-Cutting Proposals 361 Lessons from Capital Market
Replacing an Asset 363 History 431
Evaluating Equipment with Different 12.1 Returns 432
Lives 366 Dollar Returns 432
Setting the Bid Price 368 Percentage Returns 434
Summary and Conclusions 370 12.2 The Historical Record 436
A First Look 439
Appendix 10A: More on Inflation and Capital
A Closer Look 440
Budgeting 388
12.3 Average Returns: The First Lesson 440
Appendix 10B: Capital Budgeting with
Calculating Average Returns 441
Spreadsheets 389
Average Returns: The Historical Record 441
Appendix 10C: Deriving the Tax Shield on CCA Risk Premiums 442
Formula 391 The First Lesson 442
ix
Contents
12.4 The Variability of Returns: The Second The Principle of Diversification 486
Lesson 443 Diversification and Unsystematic Risk 487
Frequency Distributions and Variability 443 Diversification and Systematic Risk 488
The Historical Variance and Standard Risk and the Sensible Investor 488
Deviation 444
13.6 Systematic Risk and Beta 490
The Historical Record 446
The Systematic Risk Principle 490
Normal Distribution 446
Measuring Systematic Risk 490
Value at Risk 447
Portfolio Betas 491
The Second Lesson 449
2008: The Bear Growled and Investors 13.7 The Security Market Line 493
Howled 449 Beta and the Risk Premium 493
Using Capital Market History 449 Calculating Beta 498
The Security Market Line 501
12.5 More on Average Returns 451
Arithmetic versus Geometric Averages 451 13.8 Arbitrage Pricing Theory and Empirical
Calculating Geometric Average Returns 451 Models 505
Arithmetic Average Return or Geometric Summary and Conclusions 507
Average Return? 453
Appendix 13A: Derivation of the Capital Asset
12.6 Capital Market Efficiency 454 Pricing Model 518
Price Behaviour in an Efficient Market 454
The Efficient Markets Hypothesis 455
Market Efficiency—Forms and Evidence 457 PART 6
Cost of Capital and Long-Term
Financial Policy 521
CHAPTER 13
Return, Risk, and the Security CHAPTER 14
Market Line 467 Cost of Capital 521
13.1 Expected Returns and Variances 468 14.1 The Cost of Capital: Some Preliminaries 522
Expected Return 468 Required Return versus Cost of Capital 522
Calculating the Variance 470 Financial Policy and Cost of Capital 523
13.2 Portfolios 472 14.2 The Cost of Equity 523

Portfolio Weights 472 The Dividend Growth Model Approach 523
Portfolio Expected Returns 473 The SML Approach 526
Portfolio Variance 474 The Cost of Equity in Rate Hearings 527
Portfolio Standard Deviation and 14.3 The Costs of Debt and Preferred Stock 529
Diversification 475 The Cost of Debt 529
The Efficient Set 478 The Cost of Preferred Stock 529
Correlations in the Financial Crisis of
2007–2009 481 14.4 The Weighted Average Cost of Capital 530
The Capital Structure Weights 531
13.3 Announcements, Surprises, and Expected Taxes and the Weighted Average Cost
Returns 481 of Capital 531
Expected and Unexpected Returns 482
Solving the Warehouse Problem and
Announcements and News 482 Similar Capital Budgeting Problems 533
13.4 Risk: Systematic and Unsystematic 483 Performance Evaluation: Another Use
Systematic and Unsystematic Risk 484 of the WACC 535
Systematic and Unsystematic Components of 14.5 Divisional and Project Costs of Capital 535
Return 484 The SML and the WACC 536
13.5 Diversification and Portfolio Risk 485 Divisional Cost of Capital 538
The Effect of Diversification: Another The Pure Play Approach 538
Lesson from Market History 485 The Subjective Approach 539
x
Contents
14.6 Company Valuation with the WACC 540 15.6 New Equity Sales and the Value of
the Firm 592
14.7 Flotation Costs and the Weighted
Average Cost of Capital 543 15.7 The Cost of Issuing Securities 594
The Basic Approach 543 IPOs in Practice: The Case of Seven
Flotation Costs and NPV 544 Generations Energy 596
Internal Equity and Flotation Costs 545
15.8 Rights 597
14.8 Calculating WACC for Loblaw 547 The Mechanics of a Rights Offering 597
Estimating Financing Proportions 547 Number of Rights Needed to Purchase
Market Value Weights for Loblaw 547 a Share 598
Cost of Debt 548 The Value of a Right 599
Cost of Preferred Shares 549 Theoretical Value of a Right 601
Cost of Common Stock 550 Ex Rights 601
CAPM 550 Value of Rights after Ex-Rights Date 602
Dividend Valuation Model Growth Rate 551 The Underwriting Arrangements 602
Loblaw’s WACC 551 Effects on Shareholders 603
Summary and Conclusions 552 Cost of Rights Offerings 604
Appendix 14A: Adjusted Present Value 564 15.9 Dilution 605

Dilution of Proportionate Ownership 605
Appendix 14B: Economic Value Added and the Dilution of Value: Book versus Market
Measurement of Financial Values 605
Performance 570
15.10 Issuing Long-Term Debt 607
CHAPTER 15 Summary and Conclusions 609
Raising Capital 575
15.1 The Financing Life Cycle of a Firm: CHAPTER 16
Early-Stage Financing and Venture
Financial Leverage and Capital
Capital 576 Structure Policy 617
Venture Capital 576
Some Venture Capital Realities 577 16.1 The Capital Structure Question 618
Choosing a Venture Capitalist 577 Firm Value and Stock Value: An Example 618
Conclusion 578 Capital Structure and the Cost of Capital 620
15.2 The Public Issue 578 16.2 The Effect of Financial Leverage 620
The Basics of Financial Leverage 620
15.3 The Basic Procedure for a New Issue 579
Corporate Borrowing and Homemade
Securities Registration 580
Leverage 625
Exempt Securities and Crowdfunding 580
Alternative Issue Methods 581 16.3 Capital Structure and the Cost of Equity
Capital 627
15.4 The Cash Offer 582
M&M Proposition I: The Pie Model 627
Types of Underwriting 583
The Cost of Equity and Financial Leverage:
Bought Deal 583
M&M Proposition II 628
Dutch Auction Underwriting 583
Business and Financial Risk 629
The Selling Period 584
The Overallotment Option 585 16.4 M&M Propositions I and II with Corporate
Lockup Agreements 585 Taxes 632
The Quiet Periods 585 The Interest Tax Shield 633
The Investment Dealers 586 Taxes and M&M Proposition I 633
Taxes, the WACC, and Proposition II 635
15.5 IPOs and Underpricing 587
IPO Underpricing: The 1999–2000 16.5 Bankruptcy Costs 637
Experience 587 Direct Bankruptcy Costs 638
Evidence on Underpricing 587 Indirect Bankruptcy Costs 638
Why Does Underpricing Exist? 589 Agency Costs of Equity 639
xi
Contents
16.6 Optimal Capital Structure 640 17.5 A Resolution of Real-World Factors? 680
The Static Theory of Capital Structure 640 Information Content of Dividends 680
Optimal Capital Structure and the Cost of Dividend Signalling in Practice 681
Capital 641 The Clientele Effect 682
Optimal Capital Structure: A Recap 642
17.6 Establishing a Dividend Policy 683
Capital Structure: Some Managerial
Residual Dividend Approach 684
Recommendations 644
Dividend Stability 687
16.7 The Pie Again 645 A Compromise Dividend Policy 688
The Extended Pie Model 645 Some Survey Evidence on Dividends 688
Marketed Claims versus Non-Marketed
17.7 Stock Repurchase: An Alternative to Cash
Claims 646
Dividends 690
16.8 The Pecking-Order Theory 647 Cash Dividends versus Repurchase 691
Internal Financing and the Pecking Real-World Considerations in a Repurchase 692
Order 647 Share Repurchase and EPS 692
Implications of the Pecking Order 647
17.8 Stock Dividends and Stock Splits 693
16.9 Observed Capital Structures 648 Some Details on Stock Splits and Stock
16.10 Long-Term Financing under Financial Distress Dividends 693
and Bankruptcy 650 Value of Stock Splits and Stock Dividends 694
Liquidation and Reorganization 650 Reverse Splits 695
Agreements to Avoid Bankruptcy 652 Summary and Conclusions 696
Appendix 16A: Capital Structure and Personal PART 7
Taxes 663 Short-Term Financial Planning
Appendix 16B: Derivation of Proposition II and Management 705
(Equation 16.4) 666
CHAPTER 18
CHAPTER 17 Short-Term Finance and Planning 705
Dividends and Dividend Policy 667
18.1 Tracing Cash and Net Working Capital 706
17.1 Cash Dividends and Dividend Payment 668
Cash Dividends 669 18.2 The Operating Cycle and the Cash
Standard Method of Cash Dividend Cycle 708
Payment 669 Defining the Operating and Cash Cycles 709
Dividend Payment: A Chronology 669 Calculating the Operating and Cash
More on the Ex-Dividend Date 670 Cycles 711
Interpreting the Cash Cycle 714
17.2 Does Dividend Policy Matter? 672
An Illustration of the Irrelevance of 18.3 Some Aspects of Short-Term Financial Policy 715
Dividend Policy 672 The Size of the Firm’s Investment in Current
Assets 716
17.3 Real-World Factors Favouring a Low Payout 674 Alternative Financing Policies for Current
Taxes 675 Assets 717
Some Evidence on Dividends and Taxes in Which Financing Policy Is Best? 721
Canada 677 Current Assets and Liabilities in Practice 722
Flotation Costs 677
Dividend Restrictions 678 18.4 The Cash Budget 724
Sales and Cash Collections 724
17.4 Real-World Factors Favouring a High Payout 678 Cash Outflows 725
Desire for Current Income 678 The Cash Balance 726
Uncertainty Resolution 679
Tax and Legal Benefits from High Dividends 679 18.5 A Short-Term Financial Plan 727
Conclusion 680 Short-Term Planning and Risk 728
xii
Contents
18.6 Short-Term Borrowing 729 The Credit Period 783

Operating Loans 729 Cash Discounts 784
Letters of Credit 731 Credit Instruments 786
Secured Loans 731
20.3 Analyzing Credit Policy 787
Factoring 733
Credit Policy Effects 787
Securitized Receivables—A Financial
Evaluating a Proposed Credit Policy 787
Innovation 734
Inventory Loans 734 20.4 Optimal Credit Policy 790
Trade Credit 735 The Total Credit Cost Curve 790
Money Market Financing 737 Organizing the Credit Function 791
Summary and Conclusions 739 20.5 Credit Analysis 792

When Should Credit Be Granted? 792
CHAPTER 19 Credit Information 795
Cash and Liquidity Management 753 Credit Evaluation and Scoring 795
19.1 Reasons for Holding Cash 754 20.6 Collection Policy 800
Speculative and Precautionary Motives 755 Monitoring Receivables 800
The Transaction Motive 755 Collection Effort 800
Costs of Holding Cash 755 Credit Management in Practice 801
Cash Management versus Liquidity
20.7 Inventory Management 802
Management 756
The Financial Manager and Inventory Policy 802
19.2 Determining the Target Cash Balance 756 Inventory Types 802
The Basic Idea 757 Inventory Costs 803
Other Factors Influencing the Target Cash
20.8 Inventory Management Techniques 804
Balance 758
The ABC Approach 804
19.3 Understanding Float 759 The Economic Order Quantity (EOQ)
Disbursement Float 759 Model 805
Collection Float and Net Float 759 Extensions to the EOQ Model 808
Float Management 760 Managing Derived-Demand Inventories 811
Accelerating Collections 763 Materials Requirements Planning (MRP) 811
Over-the-Counter Collections 765 Just-In-Time Inventory 811
Controlling Disbursements 767
19.4 Investing Idle Cash 769
Appendix 20A: More on Credit Policy Analysis
Temporary Cash Surpluses 769
(Available on Connect)
Characteristics of Short-Term Securities 770
Some Different Types of Money Market
Securities 772 PART 8
Summary and Conclusions 773 Topics in Corporate Finance 822
Appendix 19A: Cash Management Models CHAPTER 21
(Available on Connect)
International Corporate Finance 822
CHAPTER 20 21.1 Terminology 823
Credit and Inventory Management 779 21.2 Foreign Exchange Markets and Exchange
20.1 Credit and Receivables 780 Rates 824
Components of Credit Policy 780 Exchange Rates 826
The Cash Flows from Granting Credit 780 Types of Transactions 828
The Investment in Receivables 781 21.3 Purchasing Power Parity 830
20.2 Terms of the Sale 781 Absolute Purchasing Power Parity 830
Why Trade Credit Exists 782 Relative Purchasing Power Parity 832
The Basic Form 782 Currency Appreciation and Depreciation 833
xiii
Contents
21.4 Interest Rate Parity, Unbiased Forward Rates, Bad Reasons for Leasing 878
and the Generalized Fisher Effect 833 Other Reasons for Leasing 879
Covered Interest Arbitrage 834 Leasing Decisions in Practice 879
Interest Rate Parity (IRP) 835
Forward Rates and Future Spot Rates 836
Putting It All Together 836 CHAPTER 23
21.5 International Capital Budgeting 838 Mergers and Acquisitions 887
Method 1: The Home Currency Approach 839 23.1 The Legal Forms of Acquisitions 888
Method 2: The Foreign Currency Merger or Consolidation 888
Approach 840 Acquisition of Stock 889
Unremitted Cash Flows 840 Acquisition of Assets 890
21.6 Financing International Projects 841 Acquisition Classifications 890
The Cost of Capital for International A Note on Takeovers 890
Firms 841 Alternatives to Merger 892
International Diversification and Investors 841 23.2 Taxes and Acquisitions 892
Sources of Short- and Intermediate-Term Determinants of Tax Status 892
Financing 842 Taxable versus Tax-Free Acquisitions 893
21.7 Exchange Rate Risk 843 23.3 Accounting for Acquisitions 893
Transaction Exposure 843
23.4 Gains from Acquisition 895
Economic Exposure 845
Synergy 895
Translation Exposure 846
Revenue Enhancement 896
Managing Exchange Rate Risk 847
Cost Reductions 897
21.8 Political and Governance Risks 848 Tax Gains 898
Corporate Governance Risk 849 Changing Capital Requirements 900
Summary and Conclusions 850 Avoiding Mistakes 900
A Note on Inefficient Management and
Opportunistic Takeover Offers 900
CHAPTER 22 The Negative Side of Takeovers 901
Leasing 859
23.5 Some Financial Side-Effects of Acquisitions 902
22.1 Leases and Lease Types 860 Earnings Per Share (EPS) Growth 902
Leasing versus Buying 860 Diversification 903
Operating Leases 861
23.6 The Cost of an Acquisition 903
Financial Leases 861
Case I: Cash Acquisition 904
22.2 Accounting and Leasing 863 Case II: Stock Acquisition 905
22.3 Taxes, Canada Revenue Agency (CRA), Cash versus Common Stock 905
and Leases 865 23.7 Defensive Tactics 906
22.4 The Cash Flows from Leasing 866 The Control Block and the Corporate
The Incremental Cash Flows 866 Charter 906
Repurchase ∕ Standstill Agreements 908
22.5 Lease or Buy? 868
Exclusionary Offers and Dual-Class Stock 908
A Preliminary Analysis 868
Share Rights Plans 909
NPV Analysis 870
Going Private and Leveraged Buyouts 910
A Misconception 870
LBOs to Date: The Record 911
Asset Pool and Salvage Value 871
Other Defensive Devices and Jargon of
22.6 A Leasing Paradox 872 Corporate Takeovers 911
Resolving the Paradox 873
23.8 Some Evidence on Acquisitions 914
Leasing and Capital Budgeting 875
23.9 Divestitures and Restructurings 917
22.7 Reasons for Leasing 877
Good Reasons for Leasing 878 Summary and Conclusions 918
xiv
Contents
PART 9 Option Payoffs 965

Put Payoffs 965
Derivative Securities and
Long-Term Options 966
Corporate Finance 928
25.2 Fundamentals of Option Valuation 966
Value of a Call Option at Expiration 966
CHAPTER 24 The Upper and Lower Bounds on a
Enterprise Risk Management 928 Call Option’s Value 967
24.1 Insurance 929 A Simple Model: Part I 969
24.2 Managing Financial Risk 930 Four Factors Determining Option Values 970
The Impact of Financial Risk: The Credit 25.3 Valuing a Call Option 971
Crisis of 2007–09 931 A Simple Model: Part II 971
The Risk Profile 931 The Fifth Factor 973
Reducing Risk Exposure 932 A Closer Look 973
Hedging Short-Term Exposure 933
25.4 Employee Stock Options 975
Cash Flow Hedging: A Cautionary Note 934
ESO Features 976
Hedging Long-Term Exposure 934
ESO Repricing 977
Conclusion 934
25.5 Equity as a Call Option on the Firm’s Assets 978
24.3 Hedging with Forward Contracts 935
Case I: The Debt Is Risk-Free 978
Forward Contracts: The Basics 935
Case II: The Debt Is Risky 979
The Payoff Profile 935
Hedging with Forwards 936 25.6 Warrants 981
The Difference between Warrants and Call
24.4 Hedging with Futures Contracts 939
Options 982
Trading in Futures 939
Warrants and the Value of the Firm 982
Futures Exchanges 940
Hedging with Futures 940 25.7 Convertible Bonds 985
Features of a Convertible Bond 985
24.5 Hedging with Swap Contracts 944
Value of a Convertible Bond 986
Currency Swaps 944
Interest Rate Swaps 944 25.8 Reasons for Issuing Warrants and
Commodity Swaps 945 Convertibles 988
The Swap Dealer 945 The Free Lunch Story 989
Interest Rate Swaps: An Example 946 The Expensive Lunch Story 989
Credit Default Swaps (CDS) 947 A Reconciliation 989
24.6 Hedging with Option Contracts 947 25.9 Other Options 990
Option Terminology 948 The Call Provision on a Bond 990
Options versus Forwards 948 Put Bonds 990
Option Payoff Profiles 948 The Overallotment Option 991
Option Hedging 949 Insurance and Loan Guarantees 991
Hedging Commodity Price Risk with Managerial Options 992
Options 949 Summary and Conclusions 995
Hedging Exchange Rate Risk with Options 952
Appendix 25A: The Black–Scholes Option
Hedging Interest Rate Risk with Options 952
Pricing Model 1006
Actual Use of Derivatives 953
Summary and Conclusions 954 CHAPTER 26
Behavioural Finance: Implications
CHAPTER 25 for Financial Management 1012
Options and Corporate Securities 962 26.1 Introduction to Behavioural Finance 1013
25.1 Options: The Basics 963
26.2 Biases 1013
Puts and Calls 963
Overconfidence 1013
Stock Option Quotations 964
xv
Contents
Overoptimism 1014 GlossaryGL-1

Confirmation Bias 1014
Appendix A: Mathematical Tables (Available on
26.3 Framing Effects 1015 Connect)
Loss Aversion 1016
Appendix B: Answers to Selected End-of-Chapter
House Money 1017
Problems (Available on Connect)
26.4 Heuristics 1019
The Affect Heuristic 1019
Subject Index IN-1
The Representativeness Heuristic 1019
Representativeness and Randomness 1019
The Gambler’s Fallacy 1020 Equation Index IN-22
26.5 Behavioural Finance and Market Efficiency 1022
Limits to Arbitrage 1022
Bubbles and Crashes 1024
26.6 Market Efficiency and the Performance of
Professional Money Managers 1031
xvi
PREFACE
Fundamentals of Corporate Finance continues its tradition of excellence that has earned the status of
market leader. The rapid and extensive changes in financial markets and instruments have placed new
burdens on the teaching of corporate finance in Canada. As a result, every chapter has been updated to
provide the most current examples that reflect corporate finance in today’s world. This best-selling text
is written with one strongly held principle—that corporate finance should be developed and taught in
terms of a few integrated, powerful ideas: emphasis on intuition, unified valuation approach, and
managerial focus.
An Emphasis on Intuition We are always careful to separate and explain the principles at
work on an intuitive level before launching into any specifics. The underlying ideas are discussed, first
in very general terms and then by way of examples that illustrate in more concrete terms how a financial
manager might proceed in a given situation.
A Unified Valuation Approach We treat net present value (NPV) as the basic concept
underlying corporate finance. Many texts stop well short of consistently integrating this important
principle. The most basic notion—that NPV represents the excess of market value over cost—tends to
get lost in an overly mechanical approach to NPV that emphasizes computation at the expense of
understanding. Every subject covered in Fundamentals of Corporate Finance is firmly rooted in
valuation, and care is taken throughout the text to explain how particular decisions have valuation
effects.
A Managerial Focus Students will not lose sight of the fact that financial management
concerns management. Throughout the text, the role of the financial manager as decision maker is
emphasized, and the need for managerial input and judgment is stressed. “Black box” approaches to
finance are consciously avoided.
These three themes work together to provide a sound foundation, and a practical and workable
understanding of how to evaluate and make financial decisions.
New to This Edition In addition to retaining the coverage that has characterized
Fundamentals of Corporate Finance from the very beginning, the Tenth Canadian Edition features
increased Canadian content on current issues. With a brand new Canadian author team, led by J. Ari
Pandes and Thomas Holloway, this edition offers an impressive mix of practical and real-world
experience. Having an author team that has taught both at the “junior” and “senior” levels in corporate
finance courses provides a good balance between application and theory. The Tenth Canadian Edition
text is current, practical, and builds upon the foundations laid out by this impressive market leader.
xvii
COVERAGE
The Tenth Canadian Edition of Fundamentals of Corporate Finance was designed and developed
explicitly for a first course in business or corporate finance, for both finance majors and non-majors
alike. In terms of background or prerequisites, the book is nearly self-contained, assuming some
familiarity with basic algebra and accounting concepts, while still reviewing important accounting
principles very early on. The organization of this text has been developed to offer instructors the
flexibility in the range of topics covered.
To better outline the breadth of coverage in the Tenth Canadian Edition, the following grid presents
some of the most significant features and chapter highlights for each chapter. In every chapter, opening
vignettes, boxed features, illustrated examples using real companies, and end-of-chapter materials have
been thoroughly updated as well.
Chapters Selected Topics of Interest Benefits to You

PART ONE: OVERVIEW OF CORPORATE FINANCE
Chapter 1 • Revised: Web Links and Summary Tables • Brings in real-world issues concerning conflicts of
Introduction to Corporate Finance • Goal of the firm and agency problems interest and current controversies surrounding
• Co-operatives and income trusts as alternatives ethical conduct and management pay.
• Stresses value creation as the most fundamental
aspect of management and describes agency
issues that can arise.
Chapter 2 • Focus on cash flows from assets vs. statement • Links to current practice.
Financial Statements, Cash Flow, and of cash flows
Taxes • Cash flow vs. earnings • Defines cash flow and the differences between
cash flow and earnings.
• Market values vs. book values • Emphasizes the relevance of market values over
book values.
PART TWO: FINANCIAL STATEMENTS AND LONG-TERM FINANCIAL PLANNING

Chapter 3 • Using financial statement information • Discusses the advantages and disadvantages of
Working with Financial Statements using financial statements.
Chapter 4 • Explanation of alternative formulas for • Explanation of growth rate formulas clears up a
Long-Term Financial Planning and sustainable and internal growth rates common misunderstanding about these formulas
Corporate Growth and the circumstances under which alternative
formulas are correct.
• Thorough coverage of sustainable growth as a • Provides a vehicle for examining the
planning tool with new and revised real-world interrelationships among operations, financing, and
examples growth.
PART THREE: VALUATION OF FUTURE CASH FLOWS

Chapter 5 • First of two chapters on time value of money • Relatively short chapter introduces the basic
Introduction to Valuation: The Time ideas on time value of money to get students
Value of Money started on this traditionally difficult topic.
Chapter 6 • Second of two chapters on time value of money • Covers more advanced time value topics with
Discounted Cash Flow Valuation • Revised Calculator Hints for improved clarity numerous examples, calculator tips, and Excel
spreadsheet exhibits. Contains many new real-
world examples.
Chapter 7 • “Clean” vs. “dirty” bond prices and accrued • Clears up the pricing of bonds between coupon
Interest Rates and Bond Valuation interest payment dates and also bond market quoting
conventions.
• Bond ratings • Up-to-date discussion of bond rating agencies
and ratings given to debt. Includes the latest
descriptions of ratings used by DBRS.
Chapter 8 • Updates on shareholder activism and “say • Expands governance coverage and links chapter
Stock Valuation on pay” material to current events.
• Stock valuation using a variety of models • Broadens coverage of valuation techniques.
xviii
Coverage
PART FOUR: CAPITAL BUDGETING

Chapter 9 • Detailed discussion of multiple IRRs and • Clarifies properties of IRR.
Net Present Value and Other modified IRR
Investment Criteria
• Practice of capital budgeting in Canada • Current Canadian material demonstrates
relevance of techniques presented.
• Discussion of capital rationing moved to this • A better fit for this material.
chapter
• First of three chapters on capital budgeting • Relatively short chapter introduces key ideas on
an intuitive level to help students with this
traditionally difficult topic.
• NPV, IRR, payback, discounted payback, and • Consistent, balanced examination of advantages
accounting rate of return and disadvantages of various criteria.
Chapter 10 • Project cash flow • Thorough coverage of project cash flows and the
Making Capital Investment Decisions relevant numbers for a project analysis.
• Alternative cash flow definitions • Emphasizes the equivalence of various formulas,
thereby removing common misunderstandings.
• Special cases of DCF analysis • Considers important applications of chapter tools.
Chapter 11 • Sources of value • Stresses the need to understand the economic
Project Analysis and Evaluation basis for value creation in a project.
• Scenario and sensitivity “what-if” analyses • Illustrates how to apply and interpret these tools
in a project analysis.
• Break-even analysis • Covers cash, accounting, and financial break-
even levels.
PART FIVE: RISK AND RETURN

Chapter 12 • Capital market history updated through 2017 • Extensively covers historical returns, volatilities,
Lessons from Capital Market History and risk premiums.
• Geometric vs. arithmetic returns • Discusses calculation and interpretation of
geometric returns. Clarifies common
misconceptions regarding appropriate use of
arithmetic vs. geometric average returns.
• Market efficiency • Discusses efficient markets hypothesis along with
common misconceptions.
Chapter 13 • Diversification, systematic, and unsystematic • Illustrates basics of risk and return in
Return, Risk, and the Security Market risk straightforward fashion.
Line • Beta and the security market line • Develops the security market line with an intuitive
approach that bypasses much of the usual portfolio
theory and statistics.
PART SIX: COST OF CAPITAL AND LONG-TERM FINANCIAL POLICY

Chapter 14 • Section on company valuation with WACC • Expands application of WACC.
Cost of Capital
• Discussion of flotation costs and internal equity • Broadens coverage of flotation costs.
• Cost of capital estimation • Contains a complete step-by-step illustration of
cost of capital for publicly traded Loblaw
Companies.
Chapter 15 • Discussion of exempt securities and crowd • Addresses current trends.
Raising Capital funding
• Dutch-auction IPOs • Explains uniform price auctions using Google IPO
as an example.
• IPO “quiet periods” • Explains the OSC’s and SEC’s quiet-period rules.
• Lockup agreements • Briefly discusses the importance of lockup
agreements.
• IPOs in practice • Takes in-depth look at IPOs of Facebook, Twitter,
Weibo, and Canadian IPO of Seven Generations
Energy.
• Current material on IPOs around the world.
xix
Coverage
Chapter 16 • Basics of financial leverage • Illustrates the effect of leverage on risk and
Financial Leverage and Capital return.
Structure Policy • Optimal capital structure • Describes the basic trade-offs leading to an
optimal capital structure.
• Financial distress and bankruptcy • Briefly surveys the bankruptcy process.
Chapter 17 • Examples of different types of cash dividends • Current examples.
Dividends and Dividend Policy and the mechanics of dividend payment
• Dividends and dividend policy • Describes dividend payments and the factors
favouring higher and lower payout policies.
PART SEVEN: SHORT-TERM FINANCIAL PLANNING AND MANAGEMENT

Chapter 18 • Examples of cash management and trends in • Relates to current trends.
Short-Term Finance and Planning short-term financing by Canadian firms
• Operating and cash cycles • Stresses the importance of cash flow timing.
• Short-term financial planning • Illustrates creation of cash budgets and potential
need for financing.
Chapter 19 • Updates on electronic data interchange • Updates reflect changing technologies in
Cash and Liquidity Management payments and growth of e-commerce.
• Expanded discussion on mobile wallets • Addresses student resistance to this topic.
• Float management discussion related to current • Covers float management thoroughly.
practice
• Cash collection and disbursement • Examines systems that firms use to handle cash
inflows and outflows.
Chapter 20 • Credit management • Analysis of credit policy and implementation.
Credit and Inventory Management • Inventory management • Briefly surveys important inventory concepts.
PART EIGHT: TOPICS IN CORPORATE FINANCE

Chapter 21 • Discussion of differences in corporate • Expanded discussion of research on international
International Corporate Finance governance and culture across countries and practices.
their impact on international capital budgeting
• Exchange rate, political, and governance risks • Discusses hedging and issues surrounding
sovereign and governance risks.
• Foreign exchange • Covers essentials of exchange rates and their
determination.
• International capital budgeting • Shows how to adapt basic DCF approach to
handle exchange rates.
Chapter 22 • Expanded discussion of IFRS rule for financial • More in-depth coverage of IFRS and leasing.
Leasing leases
• Synthetic leases • Discusses controversial practice of financing off
the statement of financial position (also referred to
as off–balance sheet financing).
• Leases and lease valuation • Discusses essentials of leasing.
Chapter 23 • Discussion of dual-class stock, investor activism, • Presents topical issues with Canadian examples.
Mergers and Acquisitions and ownership and control
• Alternatives to mergers and acquisitions • Covers strategic alliances and joint ventures, and
explains why they are important alternatives.
• Divestitures and restructurings • Examines important actions, such as equity carve-
outs, spins-offs, and split-ups.
• Mergers and acquisitions • Develops essentials of M&A analysis, including
financial, tax, and accounting issues.
• Canadian national interests and foreign • More-detailed accounting coverage.
takeovers
• Discussion of merger accounting under IFRS • Adds coverage of topical social issue related to
mergers.
PART NINE: DERIVATIVE SECURITIES AND CORPORATE FINANCE

Chapter 24 • Enterprise risk management framework and • Illustrates need to manage risk and some of the
Enterprise Risk Management insurance most important types of risk.
• Hedging with forwards, futures, swaps, and • Shows how many risks can be managed with
options financial derivatives. Includes current examples of
hedging by Canadian and U.S. companies.
xx
Learning Solutions
Chapter 25 • Put-call parity and Black–Scholes • Develops modern option valuation and factors
Options and Corporate Securities influencing option values.
• Options and corporate finance • Applies option valuation to a variety of corporate
issues, including mergers and capital budgeting.
• Convertible debt issue • Provides in-depth, exam-level problem on
convertibles.
Chapter 26 • Introduction to behavioural finance • Introduces biases, framing effects, and heuristics.
Behavioural Finance: Implications for • Behavioural finance and market efficiency • Explains limits to arbitrage and discusses bubbles
Financial Management and crashes, including the Crash of 2008.
• Market efficiency and the performance of • Expands on efficient markets discussion in
professional money managers Chapter 12 and relates it to behavioural finance.
• Performance of professional money managers • Updated example of overall market efficiency.
PART 2 Financial Statements and Long-Term Financial Planning
LEARNING SOLUTIONS see some differences because of accounting-related complications. Additionally, if you use the average of beginning
and ending equity (as some advocate), yet another formula is needed. Note: all of our comments here apply to the
internal growth rate as well.
One more point is important to note: for the sustainable growth calculations to work, assets must increase at
In addition to illustrating pertinent concepts and presenting
the same rate as sales asup-to-date coverage,
shown in Equation the do
4.6. If any items Tenth Canadian
not change at the same rate, the formulas will not
work properly.
Edition of Fundamentals of Corporate Finance strives to present material in a way that is logical and
easy to understand. To meet the varied needs of the intended audience, our text is rich in valuable
learning tools and support. Concept Questions
1. What are the determinants of growth?

Real Financial Decisions 2. How is a firm’s sustainable growth related to its accounting return on equity (ROE)?
Key features are included to help students connect chapter3.concepts to how decision makers use this
What does it mean if a firm’s sustainable growth rate is negative?
material in the real world.
In Their Own Words Boxes A unique IN THEIR OWN WORDS…

series of brief essays written by
distinguished scholars and Canadian Robert C. Higgins on Sustainable Growth
practitioners on key topics in the text. Most financial officers know intuitively that it takes money to make money. Rapid sales
growth requires increased assets in the form of accounts receivable, inventory, and
fixed plant, which, in turn, require money to pay for assets. They also know that if their
company does not have the money when needed, it can literally “grow broke.” The
Enhanced Real-World Examples sustainable growth equation states these intuitive truths explicitly.
Many current examples are integrated Sustainable growth is often used by bankers and other external analysts to assess
a company’s creditworthiness. They are aided in this exercise by several sophisti-
throughout the text, tying chapter concepts cated computer software packages that provide detailed analyses of the company’s
to real life through illustration and past financial performance, including its annual sustainable growth rate.
Bankers use this information in several ways. Quick comparison of a company’s
reinforcing the relevance of the material. actual growth rate to its sustainable rate tells the banker what issues will be at the top
of management’s financial agenda. If actual growth consistently exceeds sustainable growth, management’s problem will
For added reinforcement, some examples tie be where to get the cash to finance growth. The banker thus can anticipate interest in loan products. Conversely, if sus-
into the chapter-opening vignettes. tainable growth consistently exceeds actual, the banker had best be prepared to talk about investment products, because
management’s problem will be what to do with all the cash that keeps piling up in the till.
Bankers also find the sustainable growth equation useful for explaining to financially inexperienced small business
owners and overly optimistic entrepreneurs that, for the long-run viability of their business, it is necessary to keep growth
Web Links Web URLs have been added and updated to direct students to online materials that tie
and profitability in proper balance.
into the chapter material. Finally, comparison of actual to sustainable growth rates helps a bankerCHAPTER 2 aFinancial
understand why Statements,
loan applicant needs money Cash Flow, and Taxes
and for how long the need might continue. In one instance, a loan applicant requested $100,000 to pay off several insistent
suppliers and promised to repay in a few months when he collected some accounts receivable that were coming due. A
Integrative Mini Cases These longer

sustainable growth analysis revealed that the firm had been growing at four to six times its sustainable growth rate and
that this pattern was likely to continue in the foreseeable future. This alerted the banker that impatient suppliers were only
MINI CASE
problems integrate a number of topics from a symptom of the much more fundamental disease of overly rapid growth, and that a $100,000 loan would likely prove to
be only the down payment on a much larger, multiyear commitment.
within the chapter. The Mini Cases allow Nepean Boards
Robert C. Higgins is aEmeritus
is Professor small company
of Finance thatReimers
and Marguerite manufactures andatsells
Endowed Faculty Fellow snowboards
the University in Ottawa.
of Washington, Michael Scott
G. Foster School of
students to test and challenge their abilities Business. He pioneered the use of sustainable growth as a tool for financial analysis. Text and photo used with permission from Robert C. Higgins.
Redknapp, the founder of the company, is in charge of the design and sale of the snowboards,
but he is not from a business background. As a result, the company’s financial records are not well
to solve real-life situations for each of the maintained.
key sections of the text material. 132
The initial investment in Nepean Boards was provided by Scott and his friends and family. Because
the initial investment was relatively small, and the company has made snowboards only for its own
store, the investors have not required detailed financial statements from Scott. But thanks to word of
mouth among professional boarders, sales have picked up recently, and Scott is considering a major
expansion. His plans include opening another snowboard store in Calgary, as well as supplying his
“sticks” (boarder lingo for boards) to other sellers.
Scott’s expansion plans require a significant investment, which he plans to finance with a combi-
nation of additional funds from outsiders plus some money borrowed from the banks. Naturally,
xxi
the new investors and creditors require more organized and detailed financial statements than
Scott previously prepared. At the urging of his investors, Scott has hired financial analyst Jennifer
Bradshaw to evaluate the performance of the company over the past year.
After rooting through old bank statements, sales receipts, tax returns, and other records, Jennifer
Learning Solutions
PART 1 Overview of Corporate Finance
1. The distinction between capital investment Internet Application Questions

PART 3and Valuation of Future
current expenditure Cash Flows INTERNET APPLICATION QUESTIONS
is somewhat Questions relevant to the topic discussed in
CHAPTER 6 Discounted Cash Flow Valuation
arbitrary. Nevertheless, from the tax each chapter are presented for students to
viewpoint, a distinction must be made to calculate depreciation and its associated
taxweshield. The before,
following link provides
explore using the Internet. Students will find
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set $500
of pointers
annuitytois distinguish
then: whether an
expenditure is consideredThe effect
capital of compounding
in nature, is not
or whether it is a current great over short direct
expense. time periods,
links to but it really
websites starts
in the to text,
print add upas
Annuity present value = $500 × 2.48685 = $1,243.43
as the horizon grows. To take an extreme case, suppose
canada.ca/en/revenue-agency/services/tax/businesses/topics/rental-income/current wellone
as the eBook.
of your more frugal ancestors had
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assumptions
the power of compound interest!
to make answer the above questions?
2. CCA is not the only tax shelter available to Canadian firms. In some cases, notably
cultural industries, there are both federal and provincial tax credits to offset a portion
of the production costs involved in content development. The following website Calculator
TABLE 6.1
at Hints This feature introduces students
Calculator HINTS
AnnuityCRA
present valuetheinterest
describes Video Production Tax Credit (FTC), which is availableto
Film or factors to problem-solving with the assistance of a financial
qualified producers.
Interest Rate
calculator. Sample keystrokes are provided for
Using a Financial
Periods
Calculator
cra-arc.gc.ca/tx/nnrsdnts/flm/ftc-cip/menu-eng.html
5% 10% 15% 20% illustrative purposes, although individual calculators
For a company
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Although there are the various ways of calculating future val-
will
size of the federal FTC? vary.
you still have to understand the problem; the calculator just
3. The Canadian 2 Institute
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ues, as we have
standards and described
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thatpolicies. Click
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After
this site change from time to time.
a few extra features. In particular, it knows some of the most mistakes people make when they start using financial calcu-
4. The home page for Air Canada can be found at aircanada.ca. Locate the most recent
commonly used financial formulas, so it can directly compute
Spreadsheet Strategies This feature
lators. Note that the actual keystrokes vary from calculator
annual report, which contains a statement of financial position for the company. What
thingsislike future values.
either introduces students to Excel® or helps
Spreadsheet STRATEGIES
the book value of equity for Air Canada? The market value of a company istothecalculator, so the following examples are for illustrative
number ofcalculators them brush up on their Excel® spreadsheet
Present shares
Financial
Annuity Valuesof stockhaveoutstanding times the price
the advantage that perthey
share.handle
This informationpurposes
can only.
be found at ca.finance.yahoo.com using the ticker symbol for Air Canada (AC.TO).
a lot of the computation, but that is really all. In other words,
skills, particularly as they relate to corporate
What is the market value of equity? Which number is more relevant for shareholders?
Using a spreadsheet to find annuity present values goes like this:
finance. This feature appears in self-
1
A B C D E F G
contained sections and shows students how
How to Calculate
2
Future Values with a Financial Calculator to set up spreadsheets to analyze common
Using a spreadsheet to find annuity present values
financial problems—a vital part of every

3
4 What is the present value of $500 per year for 3 years if the discount rate is 10 percent?
business student’s education.

We need to solve for the unknown present value, so we use the formula PV(rate, nper, pmt, fv).
Examining a56 typical financial calculator, you will find five keys Now we have entered all of the relevant information. To
Payment amount per period: $500
of particular78 interest. They usually look
Number of payments: 3
like this: solve for the future value, we need to ask the calculator what
Discount rate: 0.1
9
10
the FV is. Depending on your calculator, you either press the
11 Annuity present value: $1,243.43
button labelled “CPT” (for compute) and then press ,
For now, we
12
need to focus on four of these. The keys
The formula entered in cell B11 is =PV(B9, B8, –B7, 0); notice that fv is zero and that
13
or else you just press . Either way, you should get
labelled and
pmt has
14 a negative sign onare
it. Alsojust
notice what
that rate isyou would
entered guess,
as a decimal, not a percentage.
15 161.05. If you don’t (and you probably won’t if this is the first
present value and future value, respectively. The key labelled
16
68 17 time you have used a financial calculator!), we will offer some
refers to the number of periods, which is what we
help in our next section.
have been calling t. Finally, stands for the interest
Before we explain the kinds of problems that you are
rate, which we have called r.* 179
Excel® Spreadsheet Templates Selected questions within thetoend-of-chapter
likely material,
run into, we want identified
to establish by the following
a standard format
If we have the financial calculator set up right (see our
icon, , can be solved using the Excel® Spreadsheet Templates foravailable on our
showing you howConnect
to use a site. These
financial Excel®Using
calculator. templates
the
next section), then calculating a future value is very simple.
are a valuable extension of the Spreadsheet Strategies feature. example we just looked at, in the future, we will illustrate such
Take a look back at our question involving the future value of
problems like this:
$100 at 10% for five years. We have seen that the answer is
Study Aids
$161.05. The exact keystrokes will differ depending on what Enter 5 10 −100
type of calculator you use, but here is basically all you do:
We want students to get the most from this resource and their course and know that students have different learning styles
Solve for 161.05
and study needs. A number of study features are featured to appeal to a wide range of students.
1. Enter 100 followed by the key. Press the
key. (The negative sign is explained below.) If all else fails, you can read the manual that came with
2. Enter 10. Press the key. (Notice that we entered the calculator.
10, not .10; see below.)
3. Enter 5. Press the key.
2 Jeremy Siegel, The Future for Investors (Crown Business, 2005), with updates to 2016.
xxii
*Note: The reason financial calculators use N and I/Y is that the most common use for these calculators is determining loan payments. In this
context, N is the number of payments and I/Y is the interest rate on the loan. But, as we will see, there are many other uses of financial calculators
that don’t involve loan payments and interest rates.
year, hence its P/E ratio would not be meaningful. However, the company was still trading at $8.34. At that time, the
typical stock on the S&P/TSX 60 Index was trading at a P/E of 17, or 17 times earnings, as they say on Bay Street.
Price–earnings comparisons are examples of financial ratios. As we will see in this chapter, there is a wide
variety of financial ratios, all designed to summarize specific aspects of a firm’s financial position. In addition
to discussing how to analyze financial statements and compute financial ratios, weLearning
will have quiteSolutions
a bit to say
about who uses this information and why.
Chapter Learning Objectives This

feature maps out the topics and learning LEARNING OBJECTIVES
After studying this chapter, you should understand:
goals in each chapter. Each end-of-chapter
problem is linked to a learning objective to LO1 The sources and uses of a firm’s cash flows.
help students organize their study time LO2 How to standardize financial statements for comparison purposes.
appropriately. LO3 How to compute and, more importantly, interpret some common ratios.
LO4 The determinants of a firm’s profitability.
LO5 Some of the problems and pitfalls in financial statement analysis.
69
Concept Building Chapter sections are intentionally kept short to promote a step-by-step,
building-block approach to learning. Each section is then followed by a series of short-concept questions
that highlight the key ideas just presented. Students use these questions to ensure they can identify and
understand the most important concepts as they read.
Numbered Examples Separate numbered and titled examples are extensively integrated into the
chapters. These examples provide detailed applications and illustrations of the text material in a step-
by-step format. Each example is completely self-contained so students don’t have to search for additional
information. These examples are among the most useful learning aids because they provide both detail
and explanation.
Key Terms Within each chapter, key terms are highlighted in boldface the first time they appear in
the text. Key terms are defined within the running text and the glossary for easy reference.
Summary Tables These tables succinctly restate key principles, results, and equations to
CHAPTER 2 Financial Statements, Cash Flow, and Taxes
emphasize and summarize a group of related concepts.

Finally, dividends paid were $250. To get net new equity, we have to do some extra
Key Equations These are called out in the text and calculating.
identifiedTotal
byequity
equation number.
was found An the
by balancing Equation
statement of financial position.
During 2018, equity increased by $6,739 − 5,440 = $1,299. Of this increase, $186
Index and Formula Sheet can be found in the endmatter on Connect.
was from additions to retained earnings, so $1,113 in new equity was raised during the
year. Cash flow to shareholders was thus:
Chapter Summary and Conclusion These paragraphs review the chapter’s key points
B.C. RESOURCES LTD. and
provide closure to the chapter. 2018 Cash Flow to Shareholders
Dividends paid $ 250
− Net new equity 1,113
Chapter Review Problems and Self-Test Appearing after the Summary and Conclusions and Cash flow to shareholders -$ 863
Key Terms, these questions and answers allow students to As atest their
check, noticeabilities in solving
that cash flow key
from assets, problems
$354, does equal cash flow to creditors
plus cash flow to shareholders ($1,217 − 863 = $354).
related to the chapter content and provide instant reinforcement.
Concepts Review and Critical

Thinking Questions This section Concepts Review
facilitates students’ knowledge of key
principles, and their intuitive understanding of
and Critical Thinking Questions
chapter concepts. A number of the questions 1. Liquidity (LO1) What does liquidity measure? Explain the trade-off a firm faces
relate to the chapter-opening vignette— between high liquidity and low liquidity levels.
reinforcing critical-thinking skills and 2. Accounting and Cash Flows (LO2) Why might the revenue and cost of figures shown
comprehension of the chapter material. on a standard statement of comprehensive income not be representative of the actual
inflows and outflows that occurred during a period?
3. Book Values versus Market Values (LO1) In preparing a statement of financial
Questions and Problems We have position, why do you think standard accounting practice focuses on historical cost
found that many students learn better when rather than market value?
they have plenty of opportunity to practise; 4. Operating Cash Flow (LO3) In comparing accounting net income and operating cash
therefore, we provide extensive end-of-chapter flow, name two items you typically find in the net income that are not in operating cash
questions and problems. These are labelled by flow. Explain what each is and why it is excluded on operating cash flow.
topic and separated into three learning levels: 5. Book Values versus Market Values (LO1) Under standard accounting rules, it is
possible for a company’s liabilities to exceed its assets. When this occurs, the owners’
Basic, Intermediate, and Challenge. Throughout the text, we have worked to supply interesting problems
equity is negative. Can this happen with market values? Why or why not?
that illustrate real-world applications of chapter material.
6. Cash Flow for Assets (LO3) Suppose a company’s cash flow from assets is negative
for a particular period. Is this necessarily a good sign or a bad sign?
7. Operating Cash Flow (LO3) Suppose a company’s operating cash flow has been xxiii
negative for several years running. Is this necessarily a good sign or a bad sign?
8. Net Working Capital and Capital Spending (LO3) Could a company’s change in
NWC be negative in a given year? Explain how this might come about. What about
net capital spending?
MARKET LEADING TECHNOLOGY
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xxiv
Another random document with
no related content on Scribd:
CHAPTER XIX.
A REVELATION.
WHEN they lifted Gus from the ground they found that
he had broken his thigh, and it was feared that he might
have sustained still more serious injuries. Mr. Mouncey
helped to carry him to the vicarage, which was nearer than
the cottage in which he lived, and the village surgeon was
soon in attendance on him.
Philip Darnell, too, was made welcome to the vicarage,

and to all he stood in need of that Mr. Mouncey could
supply. He was unnerved by the sudden shock and the
narrow escape he had experienced, but otherwise
uninjured.
Meanwhile, the best efforts that could be made with the

one small engine were powerless to check the progress of
the fire. After a while two fire-engines from neighbouring
districts arrived on the scene; but by that time the fire had
gained such a hold that it was impossible to save any
portion of the house. It burned on till midday, and when
evening fell the ruins were still smouldering. On the
morrow, little save the outer shell of the house remained.
The fire which destroyed the Mill House was a never-to-be-
forgotten event in the annals of Rayleigh.
A thorough investigation was made, but the origin of

the fire could not be traced. No one appeared to have
known anything about it till Gus gave the alarm. Yet Philip
Darnell was convinced that it was the work of an incendiary;
and though Sebastian Mouncey would fain have believed
otherwise, he thought it only too probable that this was the
case. He had heard many a muttered threat of revenge.
What more likely than that some of the most lawless of

the strikers, finding themselves baffled at every turn, and
powerless to win an advantage by any overt act, should
have chosen this way to strike a blow at their oppressor?
But though detectives came from London to search out the
matter, nothing transpired that could lead to the conviction
of the criminal and his confederates, if such there were. The
affair remained a mystery.
For Sebastian Mouncey, Gus formed the most absorbing

interest of the next few days. The lad's injuries were so
great that at first it seemed almost impossible that he could
recover. Whilst he lay unconscious, Mr. Mouncey was
constantly beside his bed, sharing the watch of the skilled
nurse, and manifesting the devotion of a father towards the
orphan lad. All the village there appeared to share his
anxiety. In almost every home were those who were hoping
and praying that Gus' life might be saved.
And yet, perhaps, none desired his recovery more than

did Philip Darnell. He felt that if Gus died, his face would
haunt him to the end of his days, like that of an accusing
angel with eyes full of reproach. Was it a frenzied fancy,
born of his terror and anguish, or had the boy indeed
uttered that name as they stood on the window-sill, the
name of the man whom he would never willingly recall, yet
could not banish from his memory? Ah, he would give
anything now to be able to forget the man whom he had
pushed down in the world's mire, and over whose prostrate
form he had then stepped to his own advancement!
"Be good enough to let me know every day how the boy
is," he said to the clergyman, ere quitting Rayleigh for
London; "and draw upon my purse for whatever he wants.
If you think it well, I will send down a surgeon from London.
I cannot forget that he has saved my life."
"Thank you," said Mr. Mouncey. "I will see to it that Gus
wants for nothing. He has many friends who will be only too
happy to do everything in their power for him."
"Who is he?" asked Mr. Darnell quickly. "I mean, what

do you know of his history before he came to Rayleigh?"
"Nothing," said Mr. Mouncey, "except that his father was

an educated man, who had sunk into the lowest depths of
poverty."
"Ah," said Darnell, his colour deepening as he spoke;

"was, you say; then his father is dead?"
"Yes," replied Mr. Mouncey; and no more was said about

Gus.
That night, the high fever, which had been one of the
gravest symptoms of Gus' condition, began to subside, and
in the morning he was conscious. But he was very weak,
and at first could remember little of what had happened.
The awful fire, his gallant rescue of Philip Darnell, and the
danger he had shared with him, seemed all part of the
delirium through which he had been passing. But gradually
things became clearer to him.
"There was a fire, was there not?" he said to Mr.

Mouncey as he sat beside him. "I did not dream it?"
"No," said his friend; "there was indeed a fire. The Mill
House was completely burned; there is nothing left of it but
the walls."
"Ah, then it is as I think," said Gus; "there was a fire,
and I got in at the window and I woke him—and then
afterwards I fell, and that was how my leg was broken. But
he did not fall, did he?"
"You mean Mr. Darnell? He was brought safely to the

ground. He owes his life to you, Gus, for if you had not
gone to him, he must have perished."
"I am so glad," said Gus fervently, and tears came into

his eyes.
He lay still, too weak to ask more questions, and

Sebastian Mouncey avoided speaking about the fire, for he
feared to excite him.
From that day Gus began to improve, and though his

progress was very slow, it went on steadily. One day the
good woman with whom he had lived, and who had been a
kind friend to him ever since he entered her home, came to
see him. He asked her to let him have some of his
possessions that were at the cottage, amongst other things
his Bible. She promised to send one of the boys to the
vicarage with them as soon as she reached home.
So it happened that when Mr. Mouncey returned from

his afternoon's round of visits, and looked into the sick-
room to ascertain how Gus was getting on, he saw the old
Bible lying on the counterpane by his side. The large thick
book, with its unusual style of binding, at once attracted his
attention.
"Why, what have you here, Gus?" he asked, laying his

hand on it.
"My father's Bible, sir," was the reply. "I thought I

should like to read a bit, but my arms ache so when I try to
hold it."
Mr. Mouncey looked at the Bible with interest. He took it

up, and examined curiously the thick leather covers, with
their lining of watered silk. He noted, with the keen eyes of
a connoisseur, the strong yet flexible binding and the
exquisitely clear type in which the paragraphs were printed.
"This is a beautiful Bible, Gus," he said; "old, yet in

excellent preservation. I see it was printed in 1828."
He was standing at the window, holding the book up to

the light as he spoke. The next moment a slip of paper
fluttered from it to the ground.
"What is this?" asked Mr. Mouncey, as he picked it up.

"Oh!" exclaimed Gus, in a tone of pleasure. "That is the
paper father put inside with my name upon it. The silk must
have come ungummed. He wrote my real name upon the
paper, and slipped it inside the lining to keep it safe."
"Your real name!" said Sebastian Mouncey. "Are you not

then Gus Rew?" He looked at the paper he held in his hand,
and read in tones of astonishment, "'Augustus Devereux
Carruthers.' Is that your real name?"
"Yes, that is my name," replied Gus; "father said so; he

wrote it down that I might know it. I remember I thought it
was a very long one."
Sebastian Mouncey was startled. He stood silent, lost in

thought. He had heard something of the story of Colonel
Carruthers' unhappy son. He knew that he had brought
shame on his father, and had been cast off and disowned by
him in consequence.
"Gus," he said presently, "do you know that your name

is the same as the colonel's?"
"I thought it was," said Gus, "but I could not be sure. I

had almost forgotten the name. Does it make any
difference?"
"It might make a good deal of difference," said Mr.

Mouncey gravely; "or, on the other hand, it may be only a
coincidence. But it is nothing to trouble about, Gus," he
added, seeing an uneasy look on the boy's face; "don't
think any more of it now."
But whether Gus thought more of it or not, the

possibility suggested by the discovery he had made was not
to be banished from Mr. Mouncey's mind, and he could not
rest till he had despatched a letter to the colonel by the
night's mail.
CHAPTER XX.
NO LONGER A HUMAN WAIF.
GUS was too weak, and suffering too much pain in his
broken limb, to think long of the words that had passed
between him and Mr. Mouncey. When the pain and
weariness became more than he could bear, the medical
man would give him a strong sedative, under the influence
of which he would sleep for hours. But for the relief thus
gained, he could hardly have borne the strain of constant
pain.
One afternoon, after sleeping for several hours, he woke

to find a lady seated by his side. She was not young; her
form was full and matronly, and her countenance was a
pleasant one to look upon. She was knitting, and her
expression was rather sad; but when she looked up and met
Gus' gaze she smiled brightly on him. Her sweet smile and
the look of her blue eyes seemed familiar to Gus; yet he felt
sure he had not seen her before.
"So you are awake at last," she said, bending over him,
and laying her hand tenderly on his curly hair; "and how do
you feel now, Gus?"
There was a strange thrill in her voice, as of feeling
resolutely restrained.
"Better," he replied, smiling back at her; "much better."
"That is right," she said brightly. "And now for the beef-
tea. I must not forget nurse's instructions. Please do not
begin to talk till you have had some beef-tea."
She turned quickly to the fireplace, where, keeping

warm on the hob, was the beef-tea.
Gus was not particularly fond of this strengthening

beverage; but somehow it looked more inviting than usual
as the lady poured it out, and brought it to him on a little
tray, with some tiny chips of toast daintily arranged on a
plate.
"Has nurse gone away?" he asked, when he had

emptied the cup.
"Yes, she was called to another, a more urgent case,

and we felt obliged to let her go. I am here to take care of
you, if you will let me."
"You are very kind," said Gus, regarding her with some
wonder. "Are you a nurse, then?"
"Not professionally; but I have had much experience of

nursing," replied the lady gently. "I believe I can take
proper care of you."
"Oh, I am sure of that," said Gus quickly. "Will you tell

me what your name is, please?"
"My name is Durrant," she replied; "I am Edith's

mother."
"Miss Edith's mother!" said Gus looking very pleased.
"Ah, to be sure! I remember hearing that you had come
home from India."
"That was some time ago," said Mrs. Durrant. "Gus, will
you be very much surprised if I tell you that I am not only
Edith's mother, but also your aunt?"
"My aunt!" repeated Gus, in astonishment. "But how

can that be? I have not an aunt."
"You did not know that you had one," said Mrs. Durrant,
trying to smile, but with tears rising in her eyes. "Gus, from
what Mr. Mouncey has told me, and from seeing that Bible,
which I recognise as one which formerly belonged to my
mother, I am convinced that your father was my only
brother—the brother left so early to my care, and dearer to
me than words can tell; but who—alas!—wandered into evil
ways, and was lost to us whilst yet he lived."
Here, in spite of every effort to control herself, she

broke down and sobbed. Gus began to sob too, for he was
still very weak. Seeing his emotion, Mrs. Durrant tried hard
to check her own.
"Gus," she asked presently, "did your father never

speak to you about his sister Edith?"
"No," said Gus; "he never said a word about his past
life, till a few weeks before he died. Then he told me what
my right name was, and that he was a gentleman by birth,
although he was so poor and miserable. And he made me
promise that I would try to be a real gentleman. Are you
sure he was your brother?"
"I have not a doubt of it, Gus. My father has gone to

make what inquiries he can at the place where you lived;
but he, too, I am sure, is convinced in his own mind. If I
had doubted before, I should have known the truth as soon
as I saw you, for you are so like what your father was at
your age. Yes, Gus, I am indeed your aunt, for you are the
child of my own dear, but most unhappy brother. Oh, how I
love you for his sake!"
"I am so glad," said Gus, as she bent down and kissed

him; "I thought I belonged to no one."
Then he said no more, for he saw that his aunt was

overpowered by painful memories. He lay still, musing on
the wonderful fact he had learned. Edith Durrant was his
cousin, the colonel was his grandfather. How strange it was
to think of it! He was glad, and yet there was sorrow in his
heart. To think of what his father's early home must have
been, of his father and his sister, and then to recall the
misery and squalor and sin in which his days had ended!
Oh, the pity of it! Gus felt that he could never cease to be
conscious of that.
The same thought was wringing with anguish the heart

of his grandfather. As he recalled every incident of the past,
Colonel Carruthers could no longer refuse to see that he
himself had been greatly to blame. He had been too fond,
too indulgent a parent in his son's childhood, and too hard,
too unrelenting when his son, in later life, chose to cross his
will.
Why had he been so angry with his son because he had

taken his wife from a social circle which he, the military
man of fashion, considered inferior to his own? She was
good and gentle, he had been told, and yet he had despised
her. There had been no shame, no wrongdoing then. Why
had he suffered the fact of his son's making a mésalliance,
as he had deemed it, to alienate them so entirely? Perhaps,
had he stifled his pride, and received the low-born bride
with kindness, his son would never have made his swift
descent into shame and misery. Ah, how bitter it was now
to see, as he did so clearly, that his son's future might have
been entirely different had he acted another part from that
which, in his pride and resentment, he had so stiffly
maintained!
It was late in the evening. Gus had had another sleep,

from which he awoke refreshed. He was lying still, watching
with languid enjoyment the shapely white hands of his aunt
as they plied the knitting-needles, when Colonel Carruthers
entered the room.
There was nothing in the least like a scene. The colonel

was not one to give way to emotion under any
circumstances. Whatever he felt as he gazed on the fair,
open face of the boy, and saw again the strong likeness to
his own son, which had struck him so forcibly when first he
looked on Gus, his countenance retained its usual quiet,
inflexible demeanour.
His tone was constrained and almost cold as he said,

"How are you now, my boy?" At the same time extending
his hand in a formal fashion.
"Much better, thank you, sir," Gus replied, timidly

grasping the outstretched hand.
"That is well," said the colonel. Then observing an

eager, wistful look in Gus' eyes, he said, turning to his
daughter, "Have you told him, Edith?"
"Yes, father."
The colonel made no rejoinder. He seated himself in

such a position that Gus could only see his side face, and
sat gazing into the fire.
Thinking they would get on better alone, Mrs. Durrant

quitted the room.
But still the colonel sat silently gazing into the fire, and
Gus, as he watched him, grew nervously anxious for him to
speak. At last, when Gus felt his endurance strained to the
utmost, the colonel broke the silence.
"Gus," he said, "they tell me you saved the life of Philip

Darnell."
This remark seemed to require no reply, and Gus was

silent, waiting for more.
"It is a strange thing," continued the colonel after a

pause, speaking in a low, bitter tone. "You could not know
it, but that man was your father's worst enemy. He was the
cause of your father's ruin. I had long suspected him of
playing a double part, but I did not learn the truth till a few
years ago, when I learned it from one of your father's
former companions, who, unknown to Philip Darnell, had
been in the whole secret. He was dying when he told me
how Darnell had enticed and ensnared my son into the
crime for which he was afterwards the first to denounce
him. Yes, he revealed to me the whole conspiracy. I could
confront Darnell with it, but what would be the good? He
has done nothing that the law can punish, and it is all too
late as far as your father is concerned. Would to God it were
possible to undo the errors of the past!"
There was a wail of pain in the colonel's tone. He was

silent for a few moments, and when he spoke again it was
in a colder, quieter manner.
"It is useless to talk of the past," he said; "but, Gus, if
you had known what I know of that man, you would not
have rushed so eagerly to his rescue."
"But I did know," said Gus in a low tone; "my father told
me."
"Eh, what?" exclaimed the colonel, turning quickly to

look at him. "What did your father tell you?"
"We saw Mr. Darnell once. He was driving in a carriage,"

said Gus, "and my father pointed him out to me, and told
me to remember that he was his and my worst enemy. And
he bade me have my revenge on him, if ever it was in my
power. I can never forget what father said, for it was only
the day before he died."
"You knew that? He told you that?" said the colonel in a

tone of extreme surprise. "And yet you risked your life to
save that man! How could you?"
"I only wanted the more to save him because of that,"

replied Gus, speaking with an effort. "Don't you see, it was
my revenge?"
For a few moments his grandfather was, from sheer

amazement, unable to reply. He stared at Gus like one
astounded. Then his eyes fell, his head drooped, and he sat
silently pondering the boy's words.
"Gus," he said at last, in low, unsteady tones, "you are

a gentleman."
Gus' face glowed with pleasure, but he made no reply.
There was a long pause.

The colonel was bending forward, gazing into the fire.
Then he spoke again.
"Gus," he said slowly, "you are more than a gentleman;

you are a Christian." And with that, he rose and went
hastily from the room.
CHAPTER XXI.
DEEDS AND THEIR FRUIT.
"GUS, I have good news for you," said Mr. Mouncey, as

he entered the pleasant morning-room at the Retreat, when
Gus was resting on a sofa, whilst his Cousin Edith sat near,
busied in giving the last touches to a little water-colour
drawing.
The colonel had again taken up his abode in his house

at Rayleigh, and thither had Gus been conveyed as soon as
he was strong enough to bear the removal. His aunt had
been obliged to return to her home at Southampton, but
Edith had come to make a long stay with her grandfather,
that she might be her cousin's companion.
"Good news!" repeated Gus, looking eagerly into his

friend's face. "Oh, please tell me what it is!"
"The strike is over," said Mr. Mouncey, his countenance

radiant with satisfaction. "Mr. Darnell has at length decided
to take back all the old hands, except a few whom he
considers past work, and to give them the extra pay they
asked."
"You do not mean it!" cried Gus delightedly. "Why, it

hardly seems possible that it can be true. I never thought
Mr. Darnell would give in."
"To tell you the truth, Gus, I think your influence has
had some weight in the matter."
"Mine?" said Gus. "How could it? I never said a word to

Mr. Darnell about the strike."
"Ah, but he knows which side has your sympathy. And

once, when he spoke to me of your having saved his life,
and said how he wished he could do something for you, I
ventured to hint that he could not please you more than by
helping those poor starving families in the cottages. I
scarcely expected my words to have any effect, but it
seems they had."
"I am so glad," said Gus, earnestly. "Oh, Mr. Mouncey, it

is indeed good news!"
For a few moments Mr. Mouncey did not reply. He was

thinking how such a noble deed as Gus had done enriches
our human life, and how far its elevating influence may
extend.
"You remember old Mike Newman?" he said presently. "I

fear he will never work again; he is very ill with rheumatic
fever. He has a great wish to see you, Gus. Could you get so
far, do you think? There is something weighing on the poor
old man's mind. Perhaps he will tell his trouble to you; I
cannot draw it from him."
"I can drive you there in the pony chaise this afternoon
if you like, Gus," said Edith.
And Gus willingly fell in with the suggestion. Several

weeks had passed since the night of the fire, and he had
made fair progress. He was now able to get about a little
with the aid of crutches. It was feared that his cure would
be so far imperfect that he would always walk with a slight
limp. The thought of this was a trouble to his grandfather,
but Gus would not let it trouble him.
When Gus entered Mike's cottage on his crutches, he

found the poor old man even worse than he had been led to
expect. But, though in great pain, Mike was conscious, and
presently, as they talked together, it seemed to Gus that his
anguish was as much that of the mind as of the body. At
first his words appeared so wild and incoherent that Gus
fancied he must be wandering; but gradually he found a
clue to their meaning.
"Eh, Master Gus," he said, "the pain is just like a fire in

my bones—a fire burning me whilst I live. And sure, if ever
man deserved to be burned I'm that man. The very pains of
hell have got hold on me, and it's to hell I'm going!"
"Don't say that, Mike; you need not go to hell."
"I must, lad, I must! For a man that's sinned as I have

there can be no mercy. I'm as bad as a murderer, that's
what I am."
"And if you are, Mike, there's mercy even for such.

Don't you remember how Jesus Christ prayed for His
murderers?—'Father, forgive them, for they know not what
they do!'"
"Ah, but I knew what I was doing. I knew it was a crime
for which I might be hanged; but I didn't care. If I'd seen
what it would all lead to! I never thought, Gus, that you
would suffer! To see you come limping in, so mild and
patient, was almost more than I could bear. And yet it
would have been worse if he had died. You've saved me
from the guilt of blood."
"Mike, what do you mean? Of what are you thinking?"
"Can't ye guess, Gus?"
"Are you thinking of the fire, Mike? Do you know more

about it than I?"
"I know more about it than any one else, lad. Oh, if I
dared to tell you! Maybe you wouldn't be so hard on me as
some. Oh, this fire, this fire in my bones! I shall not rest in
my grave, I'm thinking, if I don't confess the truth."
"If there's anything on your conscience, Mike, you'd

better confess it to God, not to me."
"I can't, I can't!" groaned the old man. "Besides, God

knows. Isn't He punishing me for it now?"
"Mike," said Gus gravely, "do you know how the fire
began?"
"Do I know?" muttered Mike. "Who should know if I do

not?" Then, suddenly turning his eyes on Gus, he asked in
shrill, sharp tones—
"Lad, do you think that fire was kindled without hands?"
"Mike!" exclaimed Gus, with consternation in his voice.

"You don't mean to say that any one was wicked enough to
set fire to the house on purpose?"
"Ah, truly," was the reply, in broken, quavering tones;

"there was one wicked enough, and that was Mike Newman.
You are horrified, Gus; but it made me mad to feel that I
was ground down and trampled on by a man no better than
myself, just because he was rich and I was poor.
"The strike brought more trouble into my home than

into any other in the village. My daughter, poor soul, when
her husband's wages ceased, made a brave struggle to live
on almost nothing. How she managed I cannot tell. She
grew to be mere skin and bone, for many a meal she would
go without for the sake of her children. But then they
sickened, and Willie—you remember our brave, bonny little
Willie—was the first to go. The twins followed, and she,
poor soul, could not bear up after the loss of her babes. She
was soon laid beside them. They're all four sleeping under
the old elm in the churchyard.
"Do you wonder I felt wild with Darnell? How could I

bear to think of his living in ease and plenty, his wife and
children wanting nothing, and ours starved like that! I said
there was no such thing as justice in heaven or earth. God
was against us too. He was the God of the rich, not of the
poor. I thirsted for revenge. I longed to do something with
this weak old arm that should make Darnell smart. I used to
long for a gun, that I might take a shot at him some night
after dark. But I knew my aim would be unsteady, and that
I should miss my mark. Then the thought struck me that I
would set fire to his house. That was not easy; but when
the devil tempts a man to sin, he opens up the way for him.
"I was hanging about that night near Darnell's house. It

was midnight. I had been to the Rising Sun. A man from
London had been there speaking to us chaps, and when
he'd said his say, he treated us to a glass all round. His
words had stirred my blood, and mayhap the liquor was too
strong for me, for I had tasted scarce a morsel that day. I
was passing the door leading into the court at the back of
the house, when a sudden gust of wind blew it open. No
one is afeard of thieves at Rayleigh, and Brown and his wife
had forgotten to make it fast before they went to bed.
"Something said within me, 'Now's your time.' I went in

and looked about. The lights was all out; every one in the
house was abed. There are no shutters to the kitchen
window. I broke a pane, and opened it with little trouble. I
climbed in, found a box of matches, and then went down to
the cellar. I knew my way, for I'd had a job of cutting and
piling wood there once. There was wood stored there then,
and on the other side of the cellar stood a barrel of paraffin
oil. I carried the wood over, an armful at a time, and piled it
about the barrel; I found some straw, and added that, and
then I set fire to the heap. I only waited to see that it would
burn, and then I hurried away. No one saw me, and the fire
destroyed all traces of my having entered the house. I went
home and to bed, but I could not sleep; and before morning
the rheumatics had seized on me so that I could not move.
The pain has never left me since."
"Oh, Mike! How could you do such a thing?" cried Gus

aghast. "How did you feel when you knew the house was
burning away, and nothing could check the flames?"
"Feel! I felt like a fiend that night. I chuckled to myself,
and thought how cleverly I had done it. I hoped Darnell
would be burned. But afterwards—ah, lad, afterwards, it
was as if there were a fire burning within me. I knew I had
done the devil's work. And when they told me how you had
risked your life to save Darnell—you whom he had
misjudged and struck, to whom he had been no better than
to me and mine—oh, Gus, I felt real bad then! Your conduct
showed me the blackness of mine. I was thankful Darnell
was saved; but I knew that all the same I was as bad as a
murderer."
"Thank God I got to him in time!" cried Gus, much

moved. "Oh, Mike, I might have done as you did, for I felt
very bad towards him at one time, only I remembered—I
had learned the best way of being revenged."
"What is that?" asked Mike.
"'If thine enemy hunger, feed him; if he thirst, give him

drink; for in so doing thou shalt heap coals of fire on his
head,'" repeated Gus.

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(eBook PDF) Fundamentals of

Corporate Finance, 10th Canadian

(eBook PDF) Fundamentals of Corporate Finance 2nd

(eBook PDF) Fundamentals of Corporate Finance 8th

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(eBook PDF) Fundamentals of Corporate Finance 9th

(eBook PDF) Fundamentals of Corporate Finance 5th

(eBook PDF) Fundamentals of Corporate Finance, Third

(eBook PDF) Fundamentals of Corporate Finance 10th

(eBook PDF) Fundamentals of Corporate Finance 13th

Long-Term Solvency Measures 82 Investing for a Single Period 147

CHAPTER 7 Dividends 275

7.3 Bond Ratings 235 Summary and Conclusions 284

10.2 Incremental Cash Flows 341 CHAPTER 11

13.2 Portfolios 472 14.2 The Cost of Equity 523

Appendix 14A: Adjusted Present Value 564 15.9 Dilution 605

18.6 Short-Term Borrowing 729 The Credit Period 783

Summary and Conclusions 739 20.5 Credit Analysis 792

PART 9 Option Payoffs 965

Overoptimism 1014 GlossaryGL-1

Chapters Selected Topics of Interest Benefits to You

PART TWO: FINANCIAL STATEMENTS AND LONG-TERM FINANCIAL PLANNING

PART THREE: VALUATION OF FUTURE CASH FLOWS

PART FOUR: CAPITAL BUDGETING

PART FIVE: RISK AND RETURN

PART SIX: COST OF CAPITAL AND LONG-TERM FINANCIAL POLICY

PART SEVEN: SHORT-TERM FINANCIAL PLANNING AND MANAGEMENT

PART EIGHT: TOPICS IN CORPORATE FINANCE

PART NINE: DERIVATIVE SECURITIES AND CORPORATE FINANCE

PART 2 Financial Statements and Long-Term Financial Planning

1. What are the determinants of growth?

material in the real world.

In Their Own Words Boxes A unique IN THEIR OWN WORDS…

Integrative Mini Cases These longer

1. The distinction between capital investment Internet Application Questions

financial problems—a vital part of every

business student’s education.

Chapter Learning Objectives This

emphasize and summarize a group of related concepts.

Concepts Review and Critical

Learn without Limits

Connect Key Features

Philip Darnell, too, was made welcome to the vicarage,

Meanwhile, the best efforts that could be made with the

A thorough investigation was made, but the origin of

What more likely than that some of the most lawless of

For Sebastian Mouncey, Gus formed the most absorbing

And yet, perhaps, none desired his recovery more than

"Who is he?" asked Mr. Darnell quickly. "I mean, what

"Nothing," said Mr. Mouncey, "except that his father was

"Ah," said Darnell, his colour deepening as he spoke;

"Yes," replied Mr. Mouncey; and no more was said about

"There was a fire, was there not?" he said to Mr.

"You mean Mr. Darnell? He was brought safely to the

"I am so glad," said Gus fervently, and tears came into

He lay still, too weak to ask more questions, and

From that day Gus began to improve, and though his

So it happened that when Mr. Mouncey returned from

"Why, what have you here, Gus?" he asked, laying his

Overoptimism 1014 GlossaryGL-1