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Dedication
To Rebecca, Natasha, and Hannah for the love and for being there. — J. B.
To Kaui, Pono, Koa, and Kai for all the love and laughter. — P. D.
To Hayden, my parents, my family and friends for all the love, support, encouragement, and
motivation. — D. S.
xii Contents
12.3 THE MARKET RISK PREMIUM 437 Excessive Trading and Overconfidence 475
■ Interview With Jonathan Clements 477
12.4 BETA ESTIMATION 439
Individual Behaviour and Market Prices 478
Using Historical Returns 439
Identifying the Characteristic Line 441 13.4 SYSTEMATIC TRADING BIASES 478
Using Linear Regression 442 Hanging on to Losers and the Disposition
■ Why Not Estimate Expected Returns Effect 478
Directly? 444 ■ Nobel Prize: Prospect Theory, Mental
Accounting, and Nudges 479
12.5 THE DEBT COST OF CAPITAL 444
Investor Attention, Mood, and Experience 479
Debt Yields Versus Returns 444 Herd Behaviour 480
Debt Betas 445 Implications of Behavioural Biases 481
■ Common Mistake: Using the Debt Yield as
Its Cost of Capital 447 13.5 THE EFFICIENCY OF THE MARKET
PORTFOLIO 481
12.6 A PROJECT’S COST OF CAPITAL 447
Trading on News or Recommendations 481
All-Equity Comparables 448 The Performance of Fund Managers 483
Levered Firms as Comparables 448 The Winners and Losers 485
The Unlevered Cost of Capital 448
■ Nobel Prize: The 2013 Prize:
Industry Asset Betas 451 An Enigma? 486
12.7 PROJECT RISK CHARACTERISTICS ■ Interview With John Bogle 487

AND FINANCING 453
13.6 STYLE-BASED TECHNIQUES
Differences in Project Risk 453 AND THE MARKET EFFICIENCY
Project Financing and the Weighted Average DEBATE 488
Cost of Capital 454 Size Effects 488
■ Common Mistake: Adjusting for Execution Momentum 491
Risk 454
Implications of Positive-Alpha Trading
■ Common Mistake: Using a Single Cost of Strategies 492
Capital in Multidivisional Firms 455
■ Market Efficiency and the Efficiency of the
12.8 FINAL THOUGHTS ON USING THE Market Portfolio 493
CAPM 457
13.7 MULTIFACTOR MODELS OF
SUMMARY 458 KEY TERMS 459 PROBLEMS 459 RISK 494
CHAPTER 12 APPENDIX: Using Factor Portfolios 494
PRACTICAL CONSIDERATIONS WHEN Smart Beta 495
FORECASTING BETA 465
For the Data Case that accompanies this chapter and this
Long–Short Portfolios 495
chapter’s appendix, go to MyLab Finance. Selecting the Portfolios 496
The Cost of Capital With Fama-French-Carhart
Factor Specification 497
Chapter 13 Investor Behaviour and Capital
Market Efficiency 469 13.8 METHODS USED IN PRACTICE 499
Financial Managers 499
13.1 COMPETITION AND CAPITAL
MARKETS 470 Investors 499
Identifying a Stock’s Alpha 470 SUMMARY 501 KEY TERMS 502 PROBLEMS 503
Profiting From Non-Zero Alpha Stocks 472 CHAPTER 13 APPENDIX:

BUILDING A MULTIFACTOR MODEL 508
13.2 INFORMATION AND RATIONAL
EXPECTATIONS 472
Informed Versus Uninformed Investors 472 PART 5 OPTIONS 509
Rational Expectations 473
Chapter 14 Financial Options 510
13.3 THE BEHAVIOUR OF INDIVIDUAL
INVESTORS 474 14.1 OPTION BASICS 511
Underdiversification and Portfolio Biases 474 Understanding Option Contracts 511
Contents xiii
Interpreting Stock Option Quotations 511 Implications of the Risk-Neutral World 565
Options on Other Financial Securities 513 Risk-Neutral Probabilities and Option Pricing 566
14.2 OPTION PAYOFFS AT 15.4 RISK AND RETURN OF AN
EXPIRATION 514 OPTION 568
Long Position in an Option Contract 514 15.5 CORPORATE APPLICATIONS 570
Short Position in an Option Contract 516
Beta of Risky Debt 570
Profits for Holding an Option to Expiration 517
Debt Overhang 572
Returns for Holding an Option to Expiration 517
■ Nobel Prize: The 1997 Nobel Prize in
Combinations of Options 520
Economics 573
14.3 PUT–CALL PARITY 523 SUMMARY 574 KEY TERMS 575 PROBLEMS 575
14.4 FACTORS AFFECTING OPTION

Chapter 16 Real Options 579
PRICES 525
Strike Price and Stock Price 525 16.1 REAL VERSUS FINANCIAL
Arbitrage Bounds on Option Prices 526 OPTIONS 580
Option Prices and the Expiration Date 526 16.2 DECISION TREE ANALYSIS 580
Option Prices and Volatility 527
Representing Uncertainty 581
14.5 EXERCISING OPTIONS EARLY 528 Real Options 582
Non-Dividend-Paying Stocks 528 Solving Decision Trees 583
Dividend-Paying Stocks 530 16.3 THE OPTION TO DELAY:
14.6 OPTIONS AND CORPORATE INVESTMENT AS A CALL
FINANCE 533 OPTION 583
Equity as a Call Option 533 An Investment Option 583
Debt as an Option Portfolio 533 ■ Why Are There Empty Lots in Built-Up
Areas of Big Cities? 586
■ Global Financial Crisis: Credit Default
Swaps 535 Factors Affecting the Timing of
Investment 586
Credit Default Swaps 535
Investment Options and Firm Risk 588
Pricing Risky Debt 535
■ Global Financial Crisis: Uncertainty,
SUMMARY 537 KEY TERMS 538 PROBLEMS 539 Investment, and the Option to
For the Data Case that accompanies this chapter, go to
Delay 589
MyLab Finance.
16.4 GROWTH AND ABANDONMENT
Chapter 15 Option Valuation 544 OPTIONS 590
15.1 THE BINOMIAL OPTION PRICING Valuing Growth Potential 590
MODEL 545 The Option to Expand 592
A Two-State Single-Period Model 545 ■ Interview With Scott Mathews 593
The Binomial Pricing Formula 547 The Option to Abandon 594
A Multiperiod Model 549 16.5 INVESTMENTS WITH DIFFERENT
Making the Model Realistic 552 LIVES 596
15.2 THE BLACK-SCHOLES OPTION ■ Equivalent Annual Benefit Method 598
PRICING MODEL 553
16.6 OPTIMALLY STAGING
The Black-Scholes Formula 553 INVESTMENTS 599
Implied Volatility 559
The Replicating Portfolio 560 16.7 RULES OF THUMB 602
■ Global Financial Crisis: The VIX Index 560 The Profitability Index Rule 602
The Hurdle Rate Rule 602
■ Interview With Myron S. Scholes 563
■ The Option to Repay a Mortgage 604
■ Common Mistake: Valuing Employee Stock
Options 564 16.8 KEY INSIGHTS FROM REAL
15.3 RISK-NEUTRAL PROBABILITIES 565 OPTIONS 605
A Risk-Neutral Two-State Model 565 SUMMARY 606 KEY TERMS 607 PROBLEMS 607
xiv Contents
■ Pizza and Taxes 650

PART 6 CAPITAL STRUCTURE AND
The Weighted Average Cost of Capital (WACC)
DIVIDEND POLICY 613 With Taxes 650
Chapter 17 Capital Structure in a Perfect The Interest Tax Shield With a Target
Debt–Equity Ratio 652
Market 614
18.3 RECAPITALIZING TO CAPTURE THE
17.1 EQUITY VERSUS DEBT TAX SHIELD 653
FINANCING 615
The Tax Benefit 653
Financing a Firm With Equity 615 The Share Repurchase 653
Financing a Firm With Debt and Equity 616 No Arbitrage Pricing 654
The Effect of Leverage on Risk and Return 617 Analyzing the Recap: The Market Value Balance
Sheet 655
17.2 MODIGLIANI-MILLER I: LEVERAGE,
ARBITRAGE, AND FIRM VALUE 619 18.4 PERSONAL TAXES 656
MM and the Law of One Price 619 Including Personal Taxes in the Interest Tax
Homemade Leverage 619 Shield 656
■ MM and the Real World 620 Valuing the Interest Tax Shield With Personal
Taxes 660
The Market Value Balance Sheet 622
Determining the Actual Tax Advantage of
Application: A Leveraged Recapitalization 623
Debt 660
17.3 MODIGLIANI-MILLER II: LEVERAGE, ■ Cutting Personal Taxes on Investment
RISK, AND THE COST OF Income 661
CAPITAL 624
18.5 OPTIMAL CAPITAL STRUCTURE
Leverage and the Equity Cost of Capital 624 WITH TAXES 661
Capital Budgeting and the Weighted Average Do Firms Prefer Debt? 662
Cost of Capital 626
Limits to the Tax Benefit of Debt 665
■ Common Mistake: Is Debt Better Than Growth and Debt 666
Equity? 627
Other Tax Shields 667
Computing the WACC With Multiple
Securities 628 The Low Leverage Puzzle 667
Levered and Unlevered Betas 629 SUMMARY 670 KEY TERM 670 PROBLEMS 671
Cash and the WACC 630 MyLab Finance.
■ Nobel Prize: Franco Modigliani and Merton
Miller 631 Chapter 19 Financial Distress, Managerial
17.4 CAPITAL STRUCTURE Incentives, and Information 675
FALLACIES 631
19.1 DEFAULT AND BANKRUPTCY IN A
Leverage and Earnings Per Share 631 PERFECT MARKET 676
Equity Issuances and Dilution 634 Armin Industries: Leverage and the Risk of
■ Global Financial Crisis: Bank Capital Regula- Default 676
tion and the ROE Fallacy 635 Bankruptcy and Capital Structure 678
17.5 MM: BEYOND THE 19.2 THE COSTS OF BANKRUPTCY AND
PROPOSITIONS 636 FINANCIAL DISTRESS 679
SUMMARY 637 KEY TERMS 638 PROBLEMS 638 Bankruptcy Law 679
MyLab Finance.
Direct Costs of Bankruptcy 680
Indirect Costs of Financial Distress 681
19.3 FINANCIAL DISTRESS COSTS AND
Chapter 18 Debt and Taxes 644 FIRM VALUE 684
18.1 THE INTEREST TAX Armin Industries: The Impact of Financial
DEDUCTION 645 Distress Costs 684
Who Pays for Financial Distress Costs? 684
18.2 VALUING THE INTEREST TAX
SHIELD 647 19.4 OPTIMAL CAPITAL STRUCTURE:
The Interest Tax Shield and Firm Value 647 THE TRADEOFF THEORY 686
The Interest Tax Shield With Permanent The Present Value of Financial Distress Costs 686
Debt 649 Optimal Leverage 687
Contents xv
19.5 EXPLOITING DEBT HOLDERS: ■ Common Mistake: Repurchases and the

THE AGENCY COSTS OF Supply of Shares 730
DEBT 689 Modigliani-Miller and Dividend Policy
Irrelevance 730
Excessive Risk-Taking and Asset
Substitution 689 ■ Common Mistake: The Bird in the Hand
Fallacy 731
Debt Overhang and Under-Investment 690
Cashing Out 691 Dividend Policy With Perfect Capital
Markets 731
■ Global Financial Crisis: Bailouts, Distress
Costs, and Debt Overhang 692 20.3 THE TAX DISADVANTAGE OF
Agency Costs of Debt and the Value of DIVIDENDS 732
Leverage 692 Taxes on Dividends and Capital Gains 732
The Leverage Ratchet Effect 693 Optimal Dividend Policy With Taxes 733
■ Why Do Firms Go Bankrupt? 695
20.4 DIVIDEND CAPTURE AND TAX
Debt Maturity and Covenants 695
CLIENTELES 735
19.6 MOTIVATING MANAGERS: THE The Effective Dividend Tax Rate 735
AGENCY BENEFITS OF DEBT 696
Tax Differences Across Investors 736
Concentration of Ownership 696 Clientele Effects 737
Reduction of Wasteful Investment 697
20.5 PAYOUT VERSUS RETENTION OF
■ Excessive Perks and Corporate Scandals 697 CASH 739
■ Global Financial Crisis: Moral Hazard,
Retaining Cash With Perfect Capital
Government Bailouts, and the Appeal of
Leverage 698 Markets 740
Leverage and Commitment 699 Taxes and Cash Retention 741
Adjusting for Investor Taxes 742
19.7 AGENCY COSTS AND THE
Issuance and Distress Costs 743
TRADEOFF THEORY 700
Agency Costs of Retaining Cash 744
The Optimal Debt Level 700
Debt Levels in Practice 701 20.6 SIGNALLING WITH PAYOUT
POLICY 745
19.8 ASYMMETRIC INFORMATION AND
Dividend Smoothing 746
CAPITAL STRUCTURE 702
Dividend Signalling 747
Leverage as a Credible Signal 702
■ Royal & SunAlliance’s Dividend Cut 748
Issuing Equity and Adverse Selection 704
Signalling and Share Repurchases 748
■ Nobel Prize: The 2001 Nobel Prize in
Economics 704 20.7 STOCK DIVIDENDS, SPLITS, AND
Implications for Equity Issuance 706 SPIN-OFFS 750
Implications for Capital Structure 708 Stock Dividends and Splits 750
■ Interview With Paul Jewer 710 ■ Interview With John Connors 751
19.9 CAPITAL STRUCTURE: THE ■ Berkshire Hathaway’s A & B Shares 753
BOTTOM LINE 711 Spin-Offs 753
SUMMARY 712 KEY TERMS 714 PROBLEMS 714 SUMMARY 755 KEY TERMS 756 PROBLEMS 757
MyLab Finance.
Chapter 20 Payout Policy 722
20.1 DISTRIBUTIONS TO
SHAREHOLDERS 723 PART 7 ADVANCED VALUATION 763
Dividends 723
Share Repurchases 725
Chapter 21 Capital Budgeting and Valuation
With Leverage 764
20.2 COMPARISON OF DIVIDENDS AND
SHARE REPURCHASES 726 21.1 OVERVIEW 765
Alternative Policy 1: Pay Dividend With Excess Assumptions in Valuation Example 765
Cash 726 Recap: Key Valuation Concepts 766
Alternative Policy 2: Share Repurchase (No
Dividend) 728 21.2 THE WEIGHTED AVERAGE COST
OF CAPITAL METHOD 766
Alternative Policy 3: High Dividend
(Equity Issue) 729 Using the WACC to Value a Project 767
xvi Contents
Summary of the WACC Method 768 22.2 THE BUSINESS PLAN 819
Implementing a Constant Debt–Equity Operational Improvements 819
Ratio 769
Capital Expenditures: A Needed Expansion 820
21.3 THE ADJUSTED PRESENT VALUE Working Capital Management 821
METHOD 771 Capital Structure Changes: Levering Up 821
The Unlevered Value of the Project 771 22.3 BUILDING THE FINANCIAL
Valuing the Interest Tax Shield 772 MODEL 823
Summary of the APV Method 774
Forecasting Earnings 823
21.4 THE FLOW-TO-EQUITY Working Capital Requirements 824
METHOD 776 ■ Interview With Joseph L. Rice, III 825
Calculating the Free Cash Flow to Equity 776 Forecasting Free Cash Flow 827
Valuing Equity Cash Flows 777 The Balance Sheet and Statement of Cash Flows
Summary of the Flow-To-Equity Method 778 (Optional) 830
■ What Counts as “Debt”? 779 22.4 ESTIMATING THE COST OF
21.5 PROJECT-BASED COSTS OF CAPITAL 832
CAPITAL 780 CAPM-Based Estimation 833
Estimating the Unlevered Cost of Capital 780 Unlevering Beta 833
Project Leverage and the Equity Cost of Ideko’s Unlevered Cost of Capital 834
Capital 780 22.5 VALUING THE INVESTMENT 835
Determining the Incremental Leverage of a
Project 782 The Multiples Approach to Continuation
Value 836
■ Common Mistake: Relevering the
The Discounted Cash Flow Approach to
WACC 782
Continuation Value 837
21.6 APV WITH OTHER LEVERAGE ■ Common Mistake: Continuation Values and
POLICIES 784 Long-Run Growth 838
Constant Interest Coverage Ratio 784 APV Valuation of Ideko Equity 839
Predetermined Debt Levels 786 A Reality Check 840
A Comparison of Methods 787 ■ Common Mistake: Missing Assets or
Liabilities 841
21.7 OTHER EFFECTS OF
FINANCING 787 IRR and Cash Multiples 841
Issuance and Other Financing Costs 788 22.6 SENSITIVITY ANALYSIS 842
Security Mispricing 788 SUMMARY 843 KEY TERMS 844 PROBLEMS 844
■ Global Financial Crisis: Government Loan CHAPTER 22 APPENDIX:
Guarantees 790 COMPENSATING MANAGEMENT 847
Financial Distress and Agency Costs 790
21.8 ADVANCED TOPICS IN CAPITAL PART 8 LONG-TERM FINANCING 849
BUDGETING 791
Periodically Adjusted Debt 791 Chapter 23 Raising Equity Capital 850
Leverage and the Cost of Capital 794 23.1 EQUITY FINANCING FOR PRIVATE
The WACC or FTE Method With Changing COMPANIES 851
Leverage 795
Sources of Funding 851
Personal Taxes 797
■ Crowdfunding: The Wave of the Future? 852
SUMMARY 799 KEY TERMS 801 PROBLEMS 801
Venture Capital Investing 856
CHAPTER 21 APPENDIX: Venture Capital Financing Terms 857
FOUNDATIONS AND FURTHER DETAILS 809
For the Data Case that accompanies this chapter, go to ■ Common Mistake: Misinterpreting Start-Up
MyLab Finance. Valuations 858
Exiting an Investment in a Private Company 859
Chapter 22 Valuation and Financial ■ From Launch to Liquidity 860
Modelling: A Case Study 816 23.2 THE INITIAL PUBLIC OFFERING 862
22.1 VALUATION USING Advantages and Disadvantages of Going Public 862
COMPARABLES 817 Types of Offerings 863
Contents xvii
■ Google’s IPO 865 25.3 THE LEASING DECISION 918

The Mechanics of an IPO 865 Cash Flows for a True Tax Lease 919
IPO Puzzles 870 Lease Versus Buy (An Unfair Comparison) 920
Cyclicality and Recent Trends 873 Lease Versus Borrow (The Right
Cost of an IPO 874 Comparison) 921
■ Global Financial Crisis: IPO Deals in Evaluating a True Tax Lease 923
2008–2009 875 Evaluating a Non-Tax Lease 924
Long-Run Underperformance 876
25.4 REASONS FOR LEASING 925
23.3 THE SEASONED EQUITY Valid Arguments for Leasing 925
OFFERING 876
Suspect Arguments for Leasing 929
The Mechanics of an SEO 877
Price Reaction 878
Issuance Costs 879
PART 9 SHORT-TERM
For the Data Case that accompanies this chapter go to FINANCING 933
MyLab Finance
Chapter 26 Working Capital
Chapter 24 Debt Financing 885 Management 934
24.1 CORPORATE DEBT 886 26.1 OVERVIEW OF WORKING
Public Debt 886 CAPITAL 935
Private Debt 890 The Cash Cycle 935
24.2 OTHER TYPES OF DEBT 892 Firm Value and Working Capital 936
Sovereign Debt 892 26.2 TRADE CREDIT 939

Agency Securities 893 Trade Credit Terms 939
Provincial and Municipal Bonds 894 Trade Credit and Market Frictions 939
■ Global Financial Crisis: Subprime Managing Float 941
Mortgage-Backed Securities 895
26.3 RECEIVABLES MANAGEMENT 942
24.3 BOND COVENANTS 895 Determining the Credit Policy 942
24.4 REPAYMENT PROVISIONS 896 Monitoring Accounts Receivable 943
Call Provisions 896 26.4 PAYABLES MANAGEMENT 945
■ New York City Calls Its Municipal Bonds 897 Determining Accounts Payable Days
Sinking Funds 901 Outstanding 945
Convertible Provisions 901 Stretching Accounts Payable 946
SUMMARY 903 KEY TERMS 905 PROBLEMS 905 26.5 INVENTORY MANAGEMENT 946
MyLab Finance.
Benefits of Holding Inventory 947
Costs of Holding Inventory 947
Chapter 25 Leasing 907 26.6 CASH MANAGEMENT 948
25.1 THE BASICS OF LEASING 908 Motivation for Holding Cash 948
Examples of Lease Transactions 908 Alternative Investments 949
Lease Payments and Residual Values 909 ■ Hoarding Cash 951
Leases Versus Loans 910 SUMMARY 951 KEY TERMS 952 PROBLEMS 952
End-of-Term Lease Options 911 For the Data Case that accompanies this chapter, go to
MyLab Finance.
■ Calculating Auto Lease Payments 912
Other Lease Provisions 912 Chapter 27 Short-Term Financial
25.2 ACCOUNTING, TAX, AND LEGAL Planning 956
CONSEQUENCES OF LEASING 914 27.1 FORECASTING SHORT-TERM
Lease Accounting 914 FINANCING NEEDS 957
The Tax Treatment of Leases 916 Seasonalities 957
Leases and Bankruptcy 917 Negative Cash Flow Shocks 960
■ Synthetic Leases 918 Positive Cash Flow Shocks 961
xviii Contents
27.2 THE MATCHING PRINCIPLE 962 28.5 TAKEOVER DEFENCES 995

Permanent Working Capital 962 Poison Pills 995
Temporary Working Capital 962 Staggered Boards 997
Financing Policy Choices 963 White Knights 997
27.3 SHORT-TERM FINANCING WITH Golden Parachutes 998
BANK LOANS 964 Recapitalization 998
Other Defensive Strategies 998
Single, End-of-Period-Payment Loan 964
Regulatory Approval 999
Line of Credit 964
Bridge Loan 965 ■ Weyerhaeuser’s Hostile BID for Willamette
Industries 1000
Common Loan Stipulations and Fees 965
27.4 SHORT-TERM FINANCING WITH 28.6 WHO GETS THE VALUE ADDED
COMMERCIAL PAPER 967 FROM A TAKEOVER? 1000
The Free-Rider Problem 1000
■ Global Financial Crisis: Short-Term
Financing in Fall 2008 968 Toeholds 1001
The Leveraged Buyout 1002
27.5 SHORT-TERM FINANCING WITH
SECURED FINANCING 969 ■ The Leveraged Buyout of RJR Nabisco By
KKR 1003
Accounts Receivable as Collateral 969 The Freezeout Merger 1005
■ A Seventeenth-Century Financing Competition 1005
Solution 970
Inventory as Collateral 970
Chapter 29 Corporate Governance 1010
29.1 CORPORATE GOVERNANCE AND
PART 10 SPECIAL TOPICS 977 AGENCY COSTS 1011
Chapter 28 Mergers and Acquisitions 978 29.2 MONITORING BY THE

BOARD OF DIRECTORS AND
28.1 BACKGROUND AND HISTORICAL OTHERS 1012
TRENDS 979
Types of Directors 1012
Merger Waves 980 Board Independence 1013
Types of Mergers 981 Board Size and Performance 1014
28.2 MARKET REACTION TO A ■ Common Mistake: “Celebrity”
TAKEOVER 981 Boards 1014
Other Monitors 1015
28.3 REASONS TO ACQUIRE 983
Economies of Scale and Scope 983 29.3 COMPENSATION POLICIES 1015
Vertical Integration 983 Stock and Options 1015
Expertise 984 Pay and Performance Sensitivity 1016
Monopoly Gains 984
29.4 MANAGING AGENCY
Efficiency Gains 985
CONFLICT 1017
Tax Savings From Operating Losses 985
Direct Action by Shareholders 1018
Diversification 986
Earnings Growth 987 ■ Shareholder Activism at The New York
Times 1020
Managerial Motives to Merge 989
Management Entrenchment 1020
Conflicts of Interest 989
The Threat of Takeover 1021
Overconfidence 989
29.5 REGULATION 1021
28.4 VALUATION AND THE TAKEOVER
PROCESS 990 The Sarbanes-Oxley Act 1022
Valuation 990 ■ Interview With Lawrence E. Harris 1022
The Offer 991 The Cadbury Commission 1024
Merger “Arbitrage” 992 Dodd-Frank Act 1025
Tax and Accounting Issues 994 Insider Trading 1025
Board and Shareholder Approval 994 ■ Martha Stewart and ImClone 1026
Contents xix
29.6 CORPORATE GOVERNANCE ■ Global Financial Crisis: Arbitrage in

AROUND THE WORLD 1027 Currency Markets? 1064
Protection of Shareholder Rights 1027 30.4 INTEREST RATE RISK 1068

Controlling Owners and Pyramids 1027 Interest Rate Risk Measurement: Duration 1068
The Stakeholder Model 1030 Duration-Based Hedging 1070
Cross-Holdings 1030 ■ The Savings and Loan Crisis 1073
29.7 THE TRADEOFF OF CORPORATE Swap-Based Hedging 1074
GOVERNANCE 1031 SUMMARY 1078 KEY TERMS 1080 PROBLEMS 1080

Chapter 31 International Corporate
Finance 1087
Chapter 30 Risk Management 1035
31.1 INTERNATIONALLY INTEGRATED
30.1 INSURANCE 1036 CAPITAL MARKETS 1088
The Role of Insurance: A Simplified
31.2 VALUATION OF FOREIGN
Example 1036
CURRENCY CASH FLOWS 1090
Insurance Pricing in a Perfect Market 1037
WACC Valuation Method in Domestic
The Value of Insurance 1038
Currency 1090
The Costs of Insurance 1041
Using the Law of One Price as a Robustness
The Insurance Decision 1042 Check 1093
30.2 COMMODITY PRICE RISK 1043 31.3 VALUATION AND INTERNATIONAL
Hedging With Vertical Integration and TAXATION 1094
Storage 1043 Single Foreign Project With Immediate
Hedging With Long-Term Contracts 1044 Repatriation of Earnings 1094
■ Hedging Strategy Leads to Multiple Foreign Projects and Deferral of
Promotion . . . Sometimes 1046 Earnings Repatriation 1095
Hedging With Futures Contracts 1047 31.4 INTERNATIONALLY SEGMENTED
Hedging With Options Contracts 1050 CAPITAL MARKETS 1096
Comparing Futures Hedging With Options Differential Access to Markets 1096
Hedging 1051 Macro-Level Distortions 1097
Deciding to Hedge Commodity Price Risk 1054 Implications 1098
■ Differing Hedging Strategies at
U.S. Airlines 1054 31.5 CAPITAL BUDGETING WITH
EXCHANGE RISK 1099
■ Common Mistake: Hedging Risk 1055
■ Interview With Bill Barrett 1100
30.3 EXCHANGE RATE RISK 1056
Exchange Rate Fluctuations 1056 For the Data Case that accompanies this chapter, go to
MyLab Finance.
Hedging With Forward Contracts 1058
Cash-and-Carry and the Pricing of Currency GLOSSARY G-1
Forwards 1059 INDEX I-1
Hedging With Options 1063 CREDITS C-1
Preface
Approach
The first Canadian edition of this text was written just as the financial crisis of 2008–
2009 was unfolding. That financial crisis, and the continuing crises that followed, rein-
forced the need to understand finance to ensure that good financial decisions are made.
As we said in the first edition, understanding finance is important and is the purpose of
this book:
In our over 60 years of combined teaching experience, we have found that leaving out core material
deemed “too hard” actually makes the subject matter less accessible. The core concepts in finance are
simple and intuitive. What makes the subject challenging is that it is often difficult for a novice to dis-
tinguish between these core ideas and other intuitively appealing approaches that, if used in financial
decision making, will lead to incorrect decisions. De-emphasizing the core concepts that underlie finance
strips students of the essential intellectual tools they need to differentiate between good and bad decision
making. Therefore, our primary motivation for writing this book was to equip students with a solid
grounding in the core financial concepts and tools needed to make good decisions.
There is little doubt that one of the most important contributing factors to the 2008–
2009 financial crisis was that many practitioners who should have known better did not
understand, or chose to ignore, the core concepts that underlie finance in general (and
the pedagogy in this book in particular), leading them to make many very bad decisions.
We present corporate finance as an application of a set of simple, powerful ideas.
At the heart is the principle of the absence of arbitrage opportunities, or Law of One
Price: In life, you don’t get something for nothing. This simple concept is a powerful
and important tool in financial decision making. By relying on it, and the other core
principles in this book, financial decision makers can avoid the bad decisions brought to
light by the financial crisis. We use the Law of One Price as a compass; it keeps financial
decision makers on the right track and is the backbone of the entire book. We introduce
the Law of One Price concept as the basis for net present value and the time value of
money in Chapter 3, Arbitrage and Financial Decision Making. In the opening of each part,
and as pertinent throughout the remaining chapters, we relate major concepts to the
Law of One Price, creating a framework to ground the student and connect theory to
practice.
Canadian Content and Context

A Canadian text should reflect Canadian realities and show how they fit into the big-
ger picture. The Canadian tax system, for example, differs significantly from that of
the United States regarding dividends, capital gains, capital cost allowance, leasing, and
foreign subsidiary income and its taxation in the parent company. We use the relevant
Canadian tax code to make the examples more realistic to students and to give them
exposure to how Canadian taxation works. There are many institutional and market
differences between Canada and the United States. We have incorporated information
on both countries’ institutions and markets and often include comparisons with other
countries. We feel it is important that students understand Canada’s relative position on
a number of issues related to markets, the financial crisis, corporate governance, and
Preface xxi
corporate finance. To this end, we have selected Canadian examples, when appropriate,
for use in the text. Many of the companies we use as examples are familiar to Canadian
students—they are companies that have had interesting successes or failures. We feel
that, in addition to learning corporate finance, students should have familiarity with
Canadian business and its rich history.
What’s New
We have updated all text discussions and figures, tables, and facts to accurately reflect
developments in the field in the last three years. Given the success of the first four edi-
tions, we focused substantive changes on areas where there was clear evidence that such
change would be beneficial. Specific highlights include the following:
• Chapter 1 has been renamed from The Corporation to The Corporation and Financial Mar-
kets as financial markets have taken a larger role in the chapter. Several enhancements
have been made, including additional discussion of the firm and society to com-
plement the discussion of stakeholder satisfaction, corporate social responsibility,
and how these connect to the goal of shareholder wealth maximization. The section
on stock markets has been expanded to include dark pools and added discussion
on limit orders and high-frequency traders. A new section on fintech has also been
added. While students may think fintech is a new phenomenon, we highlight how
the Toronto Stock Exchange was a fintech pioneer in 1977 when it introduced the
first fully automated trading system and how that system was adopted around the
world by many other exchanges. Reflective of these changes, four new end-of-chap-
ter problems have been added. Some professors like to dig into the details of taxation
as it relates to different business forms and investor accounts, so we improved the
accessibility of the online appendix that addresses types of payouts of the different
business forms and the type of investor account into which the payouts flow. This
tax appendix is quite detailed and reflects the latest Canada Revenue Agency rules.
• In Part 2, Tools (Chapters 3, 4, and 5), we updated data and discussions related to
the material on arbitrage, financial decision making, time value, and interest rates.
The section “Using Primitive Securities to Solve for a Security’s Price” in the online
appendix for Chapter 3 has been revised so that it may be read independently of the
prior section. A new data case was added to Chapter 3 examining arbitrage strategies
in the context of bitcoin. While the use of financial functions is still shown in the
context of Excel, better references to the financial calculator appendix of Chapter 4
are also now included within the body of the text.
• Part 3, Basic Valuation (Chapters 6 to 9), has been updated and several new features
have been added. In Chapter 6, Valuing Bonds, we added a new online case study on
the Greek default and debt restructuring. Chapter 7, Valuing Stocks, includes a new
box on cryptocurrencies and price bubbles, and an enhancement of the introduction
to free cash flow. In Chapters 8 and 9, we provide references to Canadian studies by
Kent Baker, Shantanu Dutta, and Samir Saadi that shed light on the use of different
investment decision rules and risk analysis techniques. When discussing project exter-
nalities in Chapter 9, we add a formal definition for complementary products and
show how this can be a positive externality.
• Part 4, Risk and Return (Chapters 10 to 13), has many revisions including an updated
Nobel Prize box, revised end-of-chapter problems and solutions, and an additional
xxii Preface
Data Case. We included discussion of a global pandemic as a systematic risk in

Chapter 10. A comprehensive interview with a pension-fund manager, Jeff Norton,
is added in Chapter 11 and gives great insight into the market portfolio for Canadian
investors and the tradeoffs between investing in equities and alternative assets and to
what extent Canadian versus foreign investments should be included in the risky part
of an investor’s portfolio. Our discussion in Chapter 12 of the market risk premium
now allows for the fact that the risk premium can change depending on the level of
risk aversion among investors; this concept is related to the potentially higher level
of risk aversion during the COVID-19 virus pandemic. Chapter 13 has updated cov-
erage to reflect recent developments in asset pricing and behavioural finance, and a
new section on smart beta was added.
• Part 5, Options (Chapters 14 to 16), has several updates including a major revision
to the presentation of put–call parity for dividend paying stocks in Chapter 14. In
Chapter 15, the figure showing the VIX Index through time has been updated to
show the record high implied volatility (surpassing the global financial crisis) reached
early on in the COVID-19 pandemic. In Chapter 16, where real options are discussed,
we include a reference to another Canadian study by Baker, Dutta, and Saadi that
indicates the use of real options analysis by managers.
• Part 6, Capital Structure and Dividend Policy (Chapters 17 to 20) incorporates various
updates including revised current tax information across Canadian provinces/
territories for corporate and personal taxes (in Chapter 18), a new Data Case for
Chapter 20, revised information on ex-dividend dates and correspondingly revised
end-of-chapter problems in Chapter 20.
• In Part 8, Long-Term Financing (Chapters 23 to 25), we improved the explanations in
the Global Financial Crisis boxes and updated the material to reflect the unfolding
COVID-19 pandemic (current at the time of writing). In addition, a new example on
mitigating debt overhang was added to Chapter 25.
• In Part 9, Short-Term Financing (Chapters 26 and 27), Chapter 26, Working Capital Man-
agement, now includes an enhanced discussion of inventory management with ref-
erences to just-in-time management and the occurrence of stock-outs during the
COVID-19 pandemic. We have updated and added more detailed information on
Canadian tax law with respect to foreign income and contrasts between the Canadian
and U.S. tax laws, which differ from each other significantly.
• In Part 10, Special Topics (Chapters 28 to 31), Chapter 29, Corporate Governance, includes
several new or revised elements. A new box on celebrity boards and their effectiveness
in monitoring was added. Updated and expanded discussion on say-on-pay votes, the
Dodd-Frank Act, and Canadian requirements was incorporated. A new subsection on
how activist funds can influence managers to adopt better corporate strategies was
added and discussion on whether cross-ownership by mutual funds raises anti-com-
petitive concerns was included. Finally, two new end-of-chapter questions were added.
Part-by-Part Overview
Parts 1 and 2 lay the foundation for our study of corporate finance. Chapter 1 intro-
duces the corporation and other business forms. An expanded discussion on taxation of
business forms for Canadian investors is found in the online appendix to Chapter 1. We
also examine the roles of the financial manager and financial markets, as well as conflicts
surrounding ownership and control of corporations. Chapter 2 reviews basic corporate
Preface xxiii
accounting principles and financial statements. It includes ratios and ratio analysis and
the DuPont identity.
Part 2 presents the basic tools that are the cornerstones of corporate finance. As we
have already pointed out, Chapter 3 introduces the Law of One Price and net present
value as the basis of the unifying framework that will guide the student through the
course. A brief introduction to risk is included so students begin to understand how
risk affects asset pricing. An appendix is available online for instructors who want to get
into the mathematics of replicating portfolios or want to introduce primitive securities
for valuing other securities. Chapter 4 introduces the time value of money and describes
methods for estimating the timing of cash flows and computing the net present value of
various types of cash flow patterns. An online appendix on using a financial calculator
has been provided for this chapter. Chapter 5, Interest Rates, provides an extensive over-
view of issues that arise in estimating the appropriate discount rate.
Part 3 opens with bond valuation in Chapter 6 and is an excellent way to show a
direct application of the time value and interest rate material from Chapters 4 and 5.
The appendix to Chapter 6 introduces forward rates and theories of the term structure
of interest rates. Chapter 7 includes stock valuation and material on market efficiency.
It is another good application of the time value material from Chapter 4 and the market
efficiency section reinforces the separation principles from Chapter 3. Chapter 8 begins
the coverage on capital budgeting and we present and critique alternatives to net present
value for evaluating projects. We explain the basics of valuation for capital projects in
Chapter 9 and provide a clear and systematic presentation of the difference between
earnings and free cash flow and give a solid introduction to Canadian tax effects from
capital cost allowance (CCA).
The flexible structure of Part 4 allows professors to tailor coverage of risk and return
to their needs—be it for a theory- or practice-heavy approach. Chapter 10, Capital
Markets and the Pricing of Risk, provides the keys to understanding risk and return. The
chapter also explains the distinction between diversifiable and systematic risk. After this
comprehensive yet succinct treatment, professors may choose to continue to the theory
coverage, now centralized in Chapter 11, Optimal Portfolio Choice and the Capital Asset Pric-
ing Model, which presents the CAPM and examines the details of mean–variance portfo-
lio optimization. Alternatively, professors can proceed directly to Chapter 12, Estimating
the Cost of Capital, which presents a practical discussion of the cost of capital. Chapter
13 examines the role of behavioural finance and ties investor behaviour to the topic of
market efficiency and alternative models of risk and return. Some professors may want
to supplement the market efficiency material in Chapter 7 with Sections 13.1 to 13.6.
Part 5 focuses on the role of options in investing and financing decisions. Chapter 14
introduces financial options, their payoffs and profits, and put–call parity. Chapter 15
presents commonly used techniques for pricing options. Chapter 16 highlights the
role of real options in capital budgeting and features a section on ordering multi-stage
investments.
Part 6 addresses how a firm should raise the funds it needs to undertake its invest-
ments and the firm’s resulting capital structure. We focus on examining how the choice
of capital structure affects the value of the firm in a perfect world in Chapter 17, and
with frictions such as taxes and agency issues in Chapters 18 and 19. Chapter 19 features
coverage of the asset substitution problem and debt overhang and relates these items
to options concepts covered in Chapter 14. We focus on payout policy in Chapter 20.
In Part 7, we return to the capital budgeting decision with the complexities of the
real world. Chapter 21 introduces the three main methods for capital budgeting with
xxiv Preface
leverage and market imperfections: the weighted average cost of capital (WACC)
method, the adjusted present value (APV) method, and the flow-to-equity (FTE)
method. We present these traditionally difficult but important ideas by emphasizing the
underlying assumptions and core principles behind them, moving through progressively
more complex ideas. This organization allows professors to delve as deeply into these
techniques as is appropriate for their needs. Chapter 22 presents a capstone case for the
first six parts of the book that applies the techniques developed up to this point to build
a valuation model for a firm, Ideko Corp., using Excel.
In Part 8, we explain the institutional details associated with alternative long-term
financing sources. Chapter 23 describes the process a company goes through when it
raises equity capital. In Chapter 24, we review how firms can use the debt markets to
raise capital and the role of asset-backed securities, collateralized debt obligations, and
mortgage-backed securities in the financial crisis of 2008–2009. Chapter 25 introduces
leasing as an alternative and in the lease analysis treats the CCA tax shields in a manner
consistent with their presentation in Chapter 9.
In Part 9, we turn to the details of running the financial side of a corporation on a
day-to-day basis. In Chapter 26, we discuss how firms manage their working capital. In
Chapter 27, we explain how firms manage their short-term cash needs.
Part 10 addresses special topics. Chapter 28 discusses mergers and acquisitions, and
Chapter 29 provides an overview of corporate governance. In Chapter 30, we consider
corporations’ use of insurance and financial derivatives to manage risk. We compare and
contrast the different risk management techniques and present several new examples on
practical risk management. Chapter 31 introduces the issues a firm faces when making
a foreign investment and addresses the valuation of foreign projects and the tax effects
on the Canadian parent company.
Customize Your Approach

Corporate Finance offers coverage of the major topical areas for introductory-level MBA
students, as well as the depth required in a reference textbook for upper-level courses.
Most professors customize their classes by selecting a subset of chapters reflecting the
subject matter they consider most important. We designed this book from the outset
with this need for flexibility in mind. Parts 2 through 6 are the core chapters in the book.
We envision that most MBA programs will cover this material—yet even within these
core chapters instructors can pick and choose what they wish to cover. Some possible
approaches include:
• Single-quarter course: Cover Chapters 1 and 3–12. If time allows, or if students are
previously familiar with the time value of money, add Chapters 17–19.
• Semester-long course: Incorporate chapters from Part 5, Options, and Part 10, Special
Topics, as desired.
• Single mini-semester: Assign Chapters 1, 3–10, 17, and 18 if time allows.
Features
Teaching Students to Think Finance
With consistent presentation and an innovative set of learning aids, Corporate Finance, Fifth
Canadian Edition, simultaneously meets the needs of future managers in both financial
and non-financial roles. This textbook truly shows every student how to “think finance.”
Preface xxv
Bridging Theory and Practice

The Law of One Price framework reflects the modern idea that the absence of arbitrage
is the unifying concept of valuation. This critical insight is introduced in Chapter 3,
revisited in each Part Opener, and integrated throughout the text—motivating all major
concepts and connecting theory to practice.
To be successful, students need to master the core concepts and learn to identify and
solve problems that today’s practitioners face.
• Worked Examples accompany every important concept using a step-by-step proce-
dure that illustrates both the Problem and its Solution. Clear labels make them easy
to find for help with homework or studying.
• Common Mistake boxes alert students to frequently made mistakes stemming
from misunderstanding core concepts and calculations, as well as mistakes made in
practice.
• Global Financial Crisis boxes reflect the reality of recent financial crises and the
ongoing sovereign debt crisis, noting lessons learned.
Applications That Reflect Real Practice

Corporate Finance, Fifth Canadian Edition, features actual companies and leaders in the
field.
• Interviews with notable practitioners highlight leaders in the field and address the
effects of the financial crisis.
• General Interest boxes highlight timely material from financial publications that
sheds light on business problems and real-company practices.
Simplified Presentation of Mathematics

One of the hardest parts of learning finance is mastering the jargon, math, and non-
standardized notation. Corporate Finance, Fifth Canadian Edition, systematically uses:
• Notation Boxes: Each chapter begins with a Notation box that defines the vari-
ables and the acronyms used in the chapter and serves as a “legend” for students’
reference.
• Numbered and Labelled Equations: The first time a full equation is given in notation
form it is numbered. Key equations are titled and revisited in the chapter summary and
the end papers.
• Using Excel Boxes: When appropriate, hands-on instruction for Excel techniques
is provided, including screenshots to help guide students.
• Spreadsheet Tables: Select tables are available on Pearson MyLab Finance as Excel
files, enabling students to change inputs and manipulate the underlying calculations.
Practise Finance to Learn Finance

Working problems is the proven way to cement and demonstrate an understanding of
finance.
• Concept Check questions at the end of each section enable students to test their
understanding and target areas in which they need further review.
xxvi Preface
• End-of-chapter problems written personally by Jonathan Berk, Peter

DeMarzo, and David Stangeland offer instructors the opportunity to assign first-
rate materials to students for homework and practice with the confidence that the
problems are consistent with the chapter content. Both the problems and solutions,
which were also written by the authors, have been class-tested and accuracy checked
to ensure quality. Selected end-of-chapter problems are also accompanied by Excel
spreadsheets with different icons indicating what the spreadsheets are for, and where
they can be found:
Selected end-of-chapter problems are also accompanied by an Excel Solution and/or
an Auto-Graded Excel Project. This is indicated in bold text at the beginning of the
question.
• Excel Solutions are available in the Instructor’s Solutions Manual.
• Auto-Graded Excel Projects are available on Pearson’s MyLab Finance. Using
proven, field-tested technology, these new auto-graded Excel Projects allow instruc-
tors to seamlessly integrate Excel content into their course.
• Data Cases present in-depth scenarios in a business setting with questions designed
to guide students’ analysis. Many questions involve the use of Internet resources and
Excel techniques.
Available in MyLab Finance

Pearson Canada’s online resource, MyLab Finance, offers instructors and students all of the
resources in one place. With MyLab Finance, you will be able to enliven your lectures with
a variety of materials. Your students will be able to prepare and perform better on assign-
ments and exams with customized study plans. MyLab Finance is available to instructors
by going to pearsonmylabandmastering.com and following the instructions on the opening
screen. Students receive access to MyLab Finance when they purchase their new text.
• Pearson eText. The Pearson eText gives students access to their textbook anytime,
anywhere. In addition to note taking, highlighting, and bookmarking, the Pearson
eText offers interactive and sharing features. Instructors can share their comments
or highlights, and students can add their own, creating a tight community of learners
within the class.
• Auto-graded Excel Projects. Using proven, field-tested technology, auto-graded
Excel Projects allow instructors to seamlessly integrate Excel content into their
course without having to manually grade spreadsheets. Students have the opportunity
to practise important finance skills in Microsoft Excel, helping them to master key
concepts and gain proficiency with Excel. Students simply download a spreadsheet,
work live on a finance problem in Excel, and then upload that file back into MyLab
Finance, where they receive reports on their work that provide personalized, detailed
feedback to pinpoint where they went wrong on any step of the problem. These
reports generate within minutes of submission.
• Question Help. MyLab Finance homework and practice questions are correlated to the
textbook, and generate algorithmically to give students unlimited opportunity for mastery
of concepts. If students get stuck, Learning Aids including Help Me Solve This, View an
Example, eText Pages, and a Financial Calculator walk them through the problem and
identify helpful info in the text, giving them assistance when they need it most.
Preface xxvii
• Financial Calculator. Students have access to a fully functional financial calculator

inside MyLab Finance and a financial calculator app that they can download to their
iPhone®, iPad®, or Android device.
• Video Series. Conceptual videos on several topics that can be challenging for stu-
dents to grasp, including Default Risk, Market Efficiency, Diversification, Mutual
Fund Performance, and more are available for instructors to assign in the assignment
manager, or for student self-study in the multimedia library.
• Personalized Learning. Not every student learns the same way or at the same rate.
With the growing need for acceleration through many courses, it’s more important
than ever to meet students where they learn. Personalized learning in MyLab Finance
gives you the flexibility to incorporate the approach that best suits your course and
your students.
• The Study Plan acts as a tutor, providing personalized recommendations for
each of your students based on their ability to master the learning objectives in
your course. This allows students to focus their study time by pinpointing the
precise areas they need to review, and allowing them to use customized practice
and learning aids—such as videos, eText, tutorials, and more—to get them back
on track. Using the report available in the Gradebook, you can then tailor course
lectures to prioritize the content where students need the most support—offering
you better insight into classroom and individual performance.
• Dynamic Study Modules help students study effectively on their own by con-
tinuously assessing their activity and performance in real time. Here’s how it
works: students complete a set of questions with a unique answer format that also
asks them to indicate their confidence level. Questions repeat until the student
can answer them all correctly and confidently. Once completed, Dynamic Study
Modules explain the concept using materials from the text. These are available
as graded assignments prior to class, and accessible on smartphones, tablets, and
computers. NEW! Instructors can now remove questions from Dynamic Study
Modules to better fit their course.
• Reporting Dashboard. View, analyze, and report learning outcomes clearly and eas-
ily, and get the information you need to keep your students on track throughout the
course, with the new Reporting Dashboard. Available via the Gradebook and fully
mobile-ready, the Reporting Dashboard presents student performance data at the
class, section, and program levels in an accessible, visual manner.
• Easily scalable and shareable content. MyLab Finance enables you to manage
multiple class sections, and lets other instructors copy your settings so a standardized
syllabus can be maintained across your department. Should you want to use the same
MyLab Finance course next semester, with the same customized settings, you can
copy your existing course exactly—and even share it with other faculty members.
Learning Solutions Managers. Pearson’s Learning Solutions Managers work

with faculty and campus course designers to ensure that Pearson technology products,
assessment tools, and online course materials are tailored to meet your specific needs.
This highly qualified team is dedicated to helping schools take full advantage of a wide
range of educational resources by assisting in the integration of a variety of instruc-
tional materials and media formats. Your local Pearson Canada sales representative can
provide you with more details on this service program.
xxviii Preface
Acknowledgments
Now that we have explained what is in this book, we can turn to thanking the people
who made it happen. As any textbook writer will tell you, you cannot write a textbook of
this scope without a substantial amount of help. First, we thank Amie Plourde, editorial
director, and Keara Emmett, executive portfolio manager, for their vision of a high-quality
corporate finance text for the Canadian market which continues to inspire our writing.
Kamilah Reid-Burrell’s knowledge, experience, leadership, and patience kept the various
aspects of the project moving along smoothly. Toni Chahley needs special thanks for
her hard work, encouragement, and understanding in her role as senior developmental
editor—she is a true pleasure to work with. Her focus on getting the chapters written and
moved through the developmental process was amazing. We also thank Sarah Gallagher
and Jessica Hellen, as project managers, and Suzanne Simpson Millar, as production editor,
who managed the production stages of the book with skill. Laurel Sparrow provided
excellent copy editing, and we thank her for making the chapters more readable and
grammatical. Therese Trainor, the technical checker, also gets our thanks for her keen
eye to detail and the ability to catch and correct any error before the final printing. We are
also thankful to Nicole Mellow for her skillful oversight of the Pearson MyLab Finance
project—a formidable undertaking in its own right. Of course, we also thank Darcey
Pepper for leading the successful marketing of the text in the Canadian market. Finally, we
would like to thank our MyLab Finance content developmental author, Therese Trainor.
Therese also undertook the task of technical checking the entire book as well as its online
files—for this we owe many thanks.
Updating a textbook like ours requires a lot of painstaking work, and there are many
who have provided insights and input along the way. We would especially like to call out
Jared Stanfield for his important contributions and suggestions throughout. We are also
appreciative of Marlene Bellamy’s work conducting the lively interviews that provide a
critically important perspective, and to the interviewees who graciously provided their
time and insights.
Of course, this fifth edition text is built upon the shoulders of the first four, and we
have many to thank for helping us make those early versions a reality. We remain forever
grateful for Jennifer Koski’s critical insights, belief in this project, and tireless effort, all of
which were critical to the first edition. Many of the later, non-core chapters required specific
detailed knowledge. Nigel Barradale, Reid Click, Jarrad Harford, and Marianne Plunkert
ensured that this knowledge was effectively communicated. Joseph Vu and Vance P. Lesseig
contributed their talents to the Concept Check questions and Data Cases, respectively.
Mark Rubinstein inspired us with his passion to get the history of finance right by
correctly attributing the important ideas to the people who first enunciated them. Inspi-
ration is one thing; actually undertaking the task is another. His book, A History of the
Theory of Investments: My Annotated Bibliography, was indispensable—it provided the only
available reference of the history of finance. As will be obvious to any reader, we have
used it extensively in this text and we, as well as the profession as a whole, owe him a
debt of gratitude for taking the time to write it all down.
We could not have written this text if we were not once ourselves students of finance.
As any student knows, the key to success is having a great teacher. In our case we are
lucky to have been taught and advised by the people who helped create modern finance:
Ken Arrow, Darrell Duffie, Mordecai Kurz, Randall Morck, Richard Roll, and Stephen
Ross. It was from them that we learned the importance of the core principles of finance,
including the Law of One Price, on which this book is based. The learning process does
not end at graduation and like most people we have had especially influential colleagues
Preface xxix
and mentors from which we learned a great deal during our careers and we would like to
recognize them explicitly here: Mike Fishman, Richard Green, Vasant Naik, Art Raviv,
Mark Rubinstein, Joe Williams, and Jeff Zwiebel. We continue to learn from all of our
colleagues and we are grateful to all of them. Finally, we would like to thank those with
whom we have taught finance classes over the years: Anat Admati, Jerrod Falk, Ming
Huang, Gady Jacoby, Dirk Jenter, Robert Korajczyk, Paul Pfleiderer, Sergio Rebelo,
Richard Stanton, and Raman Uppal. Their ideas and teaching strategies have without a
doubt influenced our own sense of pedagogy and found their way into this text.
Jonathan Berk
Peter DeMarzo
David Stangeland
Contributors
The original U.S. editions of this text involved the contributions of over 200 manuscript
reviewers, class testers, and focus group participants. We strove to incorporate every
contributor’s input and are truly grateful for the time each individual took to provide
comments and suggestions. Their work helped to prepare the strong foundation on
which the Canadian editions are built.
We also owe a great debt of thanks to the discerning and conscientious reviewers of
the manuscript, whose names are listed below.
Fifth Canadian Edition

Paul Calluzzo, Queen’s University
Tanya Kirsch, University of Toronto, Mississauga
Sujata Madan, McGill University
Fourth Canadian Edition

Lobna Bouslimi, Concordia University
Tom Cottrell, University of Calgary
Anna Dodonova, University of Ottawa
Isaac Otchere, Carleton University
Eloisa Perez, MacEwan University
Mikhail Simutin, University of Toronto
Ken Vetzal, University of Waterloo
Wei Wang, Queen’s University
Third Canadian Edition

Vadim di Pietro, McGill University
Alfred Lehar, University of Calgary
Andras Marosi, University of Alberta
Andrey Pavlov, Simon Fraser University
Blake Phillips, University of Waterloo
Gabriel J. Power, Laval University
Julie Slater, Concordia University
Jun Zhou, Dalhousie University
Another random document with
no related content on Scribd:
green, splashed with deeper green; bloom thin; stem medium in
length; cavity large; flesh greenish, juicy, sweet, rich; very good;
semi-clinging.
Kester Yellow Gage. Domestica. 1. Downing Fr. Trees Am. 926.
1869.
Kester’s Yellow Gage 1.
Of the same origin as Kester Green Gage. Tree vigorous, upright
with smooth branches; fruit medium in size, roundish-oval; suture
broad and shallow; light yellow overspread with thick bloom; stem
medium; cavity small; flesh greenish-yellow, juicy, sweet, rich; very
good; semi-clinging.
Kicab. Species? 1. U. S. D. A. Pom. Rpt. 45. 1895. 2. Am. Pom.
Soc. Rpt. 46. 1897.
A seedling grown by Benjamin Buckman, Farmingdale, Illinois.
Fruit medium, roundish-oval; skin thick, crimson with dark purplish
stripes, covered with thick bloom; dots numerous, variable; flesh
yellow, tender, melting, juicy, mild subacid; good to very good; stone
large, oval, clinging; early.
Kickapoo. Americana. 1. Penn. Hort. Soc. Rpt. 52. 1892. 2. Cornell
Sta. Bul. 38:39, 86. 1892. 3. Ohio Sta. Bul. 162:256, 257.
1905.
Tree an open, straggling grower, very productive; fruit of medium
size, oblong to oval; cavity medium; stem short to medium, stout;
suture faint; dull red mottled with deeper shades; bloom heavy; flesh
yellow, firm; good; stone of medium size, clinging; mid-season;
recommended for market.
King. Munsoniana. 1. Am. Jour. Hort. 5:148. 1869.
King of Plums 1.
A seedling of the Wild Goose which it closely resembles.
Kingston. Domestica. 1. Ellwanger & Barry Cat. 1888-1894. 2.
Waugh Plum Cult. 112. 1901.
Smith’s Prune 1.
Kingston closely resembles Diamond; its origin in Ontario,
Canada, is about all that distinguishes it.
Kleine Blaue Frühzwetsche. Domestica? Mentioned in Mathieu
Nom. Pom. 437. 1889.
Kleine Gelbe Eierpflaume. Domestica. Listed in Mathieu Nom.
Pom. 437. 1889.
Kleine Kirschpflaume. Cerasifera. Mentioned in Mathieu Nom.
Pom. 437. 1889.
Prunus Cerasifera Fructu Minore.
Kleine Rosspauke. Species? 1. Mathieu Nom. Pom. 437. 1889.
Mathieu records this variety as mentioned in Wiener Garten-
Zeitung 288. 1884.
Klondike. Americana. 1. Wis. Sta. Bul. 63:44. 1897. 2. Ill. Hort. Soc.
Rpt. 242. 1898. 3. Ia. Sta. Bul. 46:277. 1900.
Klondyke 2, 3.
Grown by John Wragg & Sons, Waukee, Iowa, from seed of De
Soto; introduced in 1897 by W. F. Heikes, Huntsville, Alabama. Tree
productive; fruit medium to small, roundish-oval; cavity narrow, deep;
suture a broad line; skin thin, bright yellow shading into red; bloom
thin; dots numerous, small; flesh yellowish, sweetish, watery; quality
fair; stone small, clinging; early.
Knudson. Americana. 1. Am. Pom. Soc. Rpt. 162. 1891. 2. N. Dak.
Sta. Bul. 2:18. 1891. 3. Wis. Sta. Bul. 63:44. 1897.
Kniedsen’s Peach 1. Knudson’s Peach 3. Peach 2.
Grown by H. Knudson, Springfield, Minnesota. Tree unproductive;
fruit drops before ripe; of medium size, roundish, purplish-red; flesh
sweet; clingstone; mid-season. Subject to plum-pocket.
Koa. Domestica. Mentioned in Forsyth Treat. Fr. Trees 21. 1803.
Koa’s Imperial.
Kober. Americana. 1. Ia. Hort. Soc. Rpt. 228. 1909.
Kober originated with N. K. Fluke, Davenport, Iowa. Fruit large,
mottled and blushed with red; bloom rather thick; flesh moderately
firm, sweetish; fair in quality; clingstone; mid-season.
Koch Königspflaume. Species? Mentioned in Mathieu Nom. Pom.
437. 1889.
Karl Koch’s Königs Pflaume. Royale de Koch. Royale du Dr. Koch.
Koch Späte Damascene. Domestica. 1. Mas Pom. Gen. 2:161.
1873. 2. Oberdieck Deut. Obst. Sort. 403. 1881. 3. Mathieu
Nom. Pom. 437. 1889.
Damas Jaune Tardif de Koch 3. Damas Tardif de Kock 1. Koch’s
Gelbe Spät Damascene 3. Koch’s Späte Aprikosen 3. Koch’s Späte
Damascene 2. Koch’s Späte Damascene 3.
Liegel grew this variety from seed of Bricette and dedicated it to
Koch, secretary of a horticultural society at Gotha. Tree medium,
round-topped; fruit below medium, roundish-oval; suture a line;
cavity shallow; stem short, slender, glabrous; skin free, yellow
spotted with red on the sunny side; flesh yellow, fine, firm, juicy,
sweet, rich; freestone; late.
Koepher. Species? 1. Gard. Mon. 10:18. 1868.
Noted as productive and free from curculio.
Kohlenkamp. Domestica. 1. Gard. Mon. 2:313. 1860. 2. Am. Pom.
Soc. Rpt. 122. 1860.
Kohlen Kamp 1.
A seedling raised by W. Kohlenkamp, Philadelphia, Pennsylvania.
Tree vigorous, very productive; fruit borne in clusters, large, oval;
stem short; cavity deep; reddish; bloom thin; flesh yellow, firm, dry;
good; freestone; late.
Kopp. Americana. 1. U. S. D. A. Rpt. 441. 1889. 2. Colo. Sta. Bul.
50:39. 1898. 3. Waugh Plum Cult. 155. 1901.
Introduced by O. M. Lord, Minnesota City, Minnesota. Tree
vigorous, productive; fruit large, round; skin thick; purplish-red; flesh
firm, sweet; clingstone; mid-season.
Korai. Domestica. 1. U. S. D. A. Pom. Rpt. 26. 1894. 2. Am. Pom.
Soc. Rpt. 176. 1895.
Quetsche 1, 2.
Received from Hungary by the United States Department of
Agriculture in 1893. Tree vigorous; fruit below medium, oblong-ovate;
sides unequal; skin thick, tough; purple with numerous small, brown
dots; flesh yellowish-green, coarse, melting; subacid; good; stone of
medium size, narrow, pointed, clinging; mid-season.
Kroos-Pruim. Species? 1. Knoop Fructologie 2:58. 1761.
Originated in Holland. Fruit of varying colors and sizes, round;
insipid, watery. Propagated by pits. Useful only as a stock.
Kume. Triflora. 1. Am. Gard. 12:449. 1891.
An early variety.
Lachine. Domestica. 1. Can. Exp. Farm Bul. 43:38. 1903.
Similar to Yellow Egg; hardy; productive; good; clingstone.
Lady. Insititia. 1. Cultivator 3:20. 1855.
Lady Plum 1.
A seedling of Mirabelle from Isaac Denniston, Albany, New York.
Tree slender, vigorous, productive; fruit small, oval; stem short, stout;
light yellow, with red spots; stone small, free; mid-season.
Lakeside No. 1 and No. 2. Hortulana. Letter from Kerr.
Two seedlings from Theodore Williams, Benson, Nebraska.
Lallinger Königspflaume. Domestica. Listed in Mathieu Nom. Pom.
438. 1889.
Lambert. Americana. 1. Kerr Cat. 1897. 2. Can. Exp. Farm Bul. 2d
Ser. 3:53. 1900.
Labert 1. Labert’s Red 1. Lambert’s Red 2.
A seedling from Ontario, Canada. Tree weak; foliage poor; fruit
small, heart-shaped; stem short; cavity lacking; suture a line;
reddish; bloom thin; flesh reddish-orange, juicy; poor; stone large,
clinging; mid-season.
Lammas. Domestica. 1. Ray Hist. Plant. 2:1529. 1688. 2. Lond.
Hort. Soc. Cat. 149. 1831.
Mentioned by Ray as being one of the best sorts of his time.
Lancaster. Munsoniana × Hortulana mineri? 1. Waugh Plum Cult.
186. 1901.
Grown by Charles B. Camp of Cheney, Nebraska, from a seed of
Wild Goose supposed to have been crossed with Miner.
Lang. Americana. 1. S. Dak. Sta. Bul. 93:21. 1905.
Rang 1.
Sent to the South Dakota Station by C. W. H. Heideman of
Minnesota. Tree vigorous, straggling in growth; fruit large, yellowish;
skin thin; flesh sweet, juicy; good; stone small; keeps well; mid-
season.
Langdon. Domestic. 1. Mag. Hort. 19:461 fig. 36. 1853. 2. Downing
Fr. Trees Am. 386. 1857. 3. Ibid. 927. 1869.
Langdon’s Seedling 2. Langdon’s Seedling 3.
Originated with Reuben Langdon of Hartford, Connecticut;
believed to be a seedling of Washington. Tree vigorous, spreading;
shoots strong, smooth; leaves large; fruit large, roundish-oval; suture
a line; purplish-red to light green in the shade with some mottling;
bloom thick; dots small; stem of medium length, stout, hairy; cavity
deep; flesh yellow, melting, juicy, sweet, acid next to the skin; semi-
clinging; early.
Lange Violette Damascene. Species? Mentioned in Mathieu Nom.
Pom. 438. 1889.
Blaue Damascenerin. Damas Violet?. Damas Violet Allonge.
Damas Violet Longuet. Das Blaue Auge. Langliche Blaue
Damascene?. The Great Damask Plum.
Langsdon. Hortulana mineri. 1. Am. Jour. Hort. 5:144. 1869. 2.
Barry Fr. Garden 418. 1883. 3. Cornell Sta. Bul. 38:56. 1892.
Illinois Plum 1. Langdon 2.
Grown in Illinois previous to 1869. Tree medium in vigor; leaves
obovate or elliptic-obovate, pointed, with small glands; fruit small,
roundish-oblong, light red; bloom thin; skin thick; flesh firm; quality
fair; stone clinging, small, nearly smooth, turgid, short, pointed; mid-
season or later.
Lannix. Triflora × Munsoniana. 1. U. S. D. A. Pom. Rpt. 45. 1895. 2.
Vt. Sta. Bul. 67:15. 1898.
Supposed to have been produced from Abundance crossed with
Wild Goose. Leaves large, oval, pointed, leathery; petiole short,
stout, usually glandless; fruit oval, of medium size, coppery-red;
bloom light; skin thin, tough, bitter; flesh yellowish, translucent,
tender, juicy, slightly fibrous, mild subacid, rich, slightly bitter at the
center; good; stone large, oval, clinging.
La Prairie. Americana. 1. Wis. Sta. Bul. 63:44. 1897. 2. Waugh Plum
Cult. 155. 1901.
Taken from the woods about 1844 at Shopiere, Wisconsin; brought
to notice by B. H. Smith. Tree productive; fruit large, golden, slightly
astringent.
Large English Damson. Insititia. Mentioned in Can. Exp. Farm Bul.
2d Ser. 3:51. 1900.
Large Golden Prolific. Domestica. 1. Can. Exp. Farm Bul. 2d Ser.
3:53. 1900. 2. Albertson & Hobbs Cat. 1904. 3. Stone &
Wellington Cat. 1907.
Vail’s Seedling 3.
Originated in Canada; a seedling of Yellow Egg. Tree vigorous,
spreading; fruit above medium size, oblong, golden-yellow; flesh
yellow, juicy, sweet, pleasant; early.
Large Green Drying. Domestica. 1. Lond. Hort. Soc. Cat. 149.
1831. 2. Mag. Hort. 6:94. 1840. 3. Thompson Gard. Ass’t 518.
1859. 4. Downing Fr. Trees Am. 927. 1869. 5. Mas. Pom.
Gen. 2:191. 1873. 6. Guide Prat. 163, 366. 1895.
Grosse à sécher de Knight 6. Knight’s Green Drying 5, 6. Knight’s
Large Drying 4, 6. Knight’s Large Green Drying 3. Large Green
Drying 6. Verte à Secher de Knight 5, 6.
Raised by Thomas Knight; first fruited in 1838. Fruit large, round;
suture shallow; greenish-yellow; bloom thin; flesh yellowish, firm,
medium juicy, sweet and well flavored; excellent for dessert;
clingstone; mid-season.
Large Queen. Domestica. 1. U. S. D. A. Pom. Rpt. 26. 1894. 2. Am.
Pom. Soc. Rpt. 176. 1895.
Imported from Hungary by the United States Department of
Agriculture in 1893 and fruited by E. C. Hoskins of Springbrook,
Oregon. Fruit of medium size, roundish-oblate, dark wine color;
bloom light; dots many, conspicuous; skin thick; flesh greenish-
yellow, coarse, mild subacid; good; clingstone; mid-season.
Large Sugar Prune. Domestica. 1. Koch Deut. Obst. 572. 1876. 2.
Lange Allgem. Garten. 2:421. 1879. 3. Oberdieck Deut. Obst.
Sort. 440. 1881. 4. Mathieu Nom. Pom. 434. 1889.
Ananas Zwetsche 4 incor. Bely Zwetsche 4. Blaue Eier Pflaume 4.
Dörell’s Grosse Ungarische Pflaume 4. Grosse Zuckerzwetsche 3, 4.
Herrenhäuser Blaue Eier Pflaume 4. Jacobi Zwetsche 4. Kladrauer
Pflaume 4. Quetsche Sucree 4.
An early German prune used for table, market and drying. Tree
large, broad-headed, productive; shoots pubescent, straight, dark
brown; fruit large, oval, sometimes ovate; suture shallow; sides
unequal; stem long, glabrous; skin free, sour, bluish-black; bloom
thick; flesh yellow, firm, juicy, rich, sweet; freestone.
Large White Damson. Insititia. 1. Duhamel Trait. Arb. Fr. 2:72, Pl. 3
fig. 2. 1768. 2. Prince Pom. Man. 2:88. 1832. 3. Downing Fr.
Trees Am. 952. 1869. 4. Hogg Fruit Man. 709. 1884. 5. Guide
Prat. 161, 357. 1895.
Damas Blanc 3, 4. Damas Blanc Gros 2, 3. Damas Blanc Hâtif
Gros 3, 4. Damas Blanc Tres Hâtif 4. Damas Gros Blanc 5. Gros
Damas Blanc 2, 4. Gros Damas Blanc 1, 5. Large White Damask 4.
Large White Damask 2. White Damask 3.
Probably of French origin; resembles the Small White Damson
closely but is larger and longer. Branches smooth; fruit below
medium, roundish-oval, greenish-yellow; bloom thin; flesh medium in
sweetness and flavor; adapted for cooking; freestone; late.
Late Black Damson. Insititia. 1. Quintinye Com. Gard. 70. 1699. 2.
Duhamel Trait. Arb. Fr. 2:73. 1768. 3. Prince Pom. Man. 2:89.
1832. 4. Noisette Man. Comp. Jard. 2:495. 1860.
Black Damson 3. Damas Noir 3. Damas Noir Tardif 2, 4. Damas
Noir Tardif 3. Late Damask? 1.
Fruit small, elongated, purplish-black; cavity shallow; suture a line;
flesh yellowish-green, acid until thoroughly ripe; nearly freestone.
Late Blood. Triflora. 1. Cornell Sta. Bul. 62:23. 1894. 2. Ibid. 106:56.
1896.
Burbank No. 3 1, 2. Hale 2. Hale 1.
Luther Burbank imported this variety in 1885; Bailey named it Hale
in 1894 but changed it to Late Blood two years later. Similar to
Satsuma; later, blooms earlier, is less pointed and differs in leaf-
characters.
Late Bolmer. Domestica. 1. Downing Fr. Trees Am. 404. 1857. 2.
Mathieu Nom. Pom. 439. 1889.
Winter Bolmar 2.
Fruit of medium size, roundish, yellow, mottled with red in the sun;
flesh yellow, firm, sweet but not rich; freestone; mid-season.
Late Chalons. Domestica. 1. Prince Pom. Man. 2:99. 1832. 2.
Tardif de Chalons 1. Tardive de Chalons 1, 2. Späte von Chalons
2.
Fruit of medium size, oval, light yellow with red blush, deepening
to violet; flesh yellowish, melting, juicy, sweet; stone rough, clinging;
very late.
Late Conical. Triflora × Simonii. 1. Vt. Sta. Bul. 67:16 fig. 1898.
Originated by Burbank; named in 1898. Tree of rapid growth;
leaves medium to large, broadly oval, abruptly pointed, tapering at
the base, rather stiff, margins coarsely double-crenulate; petiole
large, set with glands; fruit strongly conical, large; cavity shallow,
abrupt; stem short; suture shallow; yellow overlaid with purple and
red; dots numerous, large; bloom heavy; skin medium in thickness;
flesh yellow, firm, sweet and agreeable; very good; stone of medium
size, flattened, pointed, free.
Late Goose. Munsoniana. 1. Stark Bros. Cat. 1909.
From Theodore Williams of Nebraska. Fruit very large; handsome.
Late Orange. Domestica. 1. Gard. Chron. 12:593. 1892. 2. Garden
64:262. 1903. 3. Can. Exp. Farms Rpt. 423. 1903.
Late Orange originated with Thomas Rivers, Sawbridgeworth,
England, first fruiting in 1888; introduced by the originator in 1897.
Tree vigorous; fruit similar to Reine Claude in size and appearance;
flesh yellow, juicy, sweet; very good; season very late.
Late Prolific. Domestica. 1. Fish Hardy Fr. Bk. 2:56. 1882. 2. Rivers
Cat. 35. 1898-99. 3. Can. Exp. Farms Rpt. 423. 1903.
River’s Late Prolific 1.
A seedling of Early Prolific. Tree vigorous; fruit below medium size,
round; suture shallow; stem of medium size; cavity lacking; dark
purple; bloom heavy; flesh greenish-yellow, juicy; flavor pleasant;
stone small; early to mid-season.
Late Red Damask. Domestica. 1. Prince Pom. Man. 2:85. 1832. 2.
Kenrick Am. Orch. 261. 1832. 3. Poiteau Pom. Franc. 1. 1846.
Damas rouge tardif 1. Gros Damas rouge tardif 1. Gros Damas
Rouge Tardif 2, 3. Large Late Red Damask 2. Late Red Damson 1.
According to Kenrick and Prince this variety was described in the
1825 edition of Duhamel’s Traité des Arbres Fruitiers. Its description
resembles that of Orleans very closely but its season is evidently
later. Tree vigorous, productive; fruit large, oval; skin thick, adherent
to the flesh, light purple; flesh yellow, melting, slightly coarse, juicy,
sweet; good; late.
Late Reine Claude. Domestica. 1. Lond. Hort. Soc. Cat. 148. 1831.
2. Horticulturist 2:479. 1847. 3. Downing Fr. Trees Am. 395.
1857. 4. Ibid. 935. 1869. 5. Guide Prat. 162, 364. 1895.
Late Gage 4. Late Green Gage 1. Late Green Gage 4. October
Green Gage ?2. October Green Gage 4. Reine-Claude d’Octobre ?
2, 4. Reine-Claude d’October 3. Reine-Claude Tardive 4. Reine-
Claude Tardive 2, 4.
First mentioned in the London Horticultural Society catalog in
1831. Origin unknown. Tree vigorous; shoots smooth, stout, short-
jointed; fruit small, roundish; apex dimpled; skin greenish-yellow,
mottled with red on the sunny side; bloom thin; flesh green, juicy,
rich, sugary; good; freestone; late.
Late Rivers. Domestica. 1. Hogg Fruit Man. 369. 1866. 2. Nicholson
Dict. Gard. 3:166. 3. Thompson Gard. Ass’t 4:158. 1901. 4.
Tardive de Rivers 4.
A seedling from Thomas Rivers of Sawbridgeworth, England; first
fruited in 1865. Branches smooth; fruit of medium size, round; suture
shallow; stem long, slender; dark purple; flesh yellow, rich, sweet,
sugary; flavor pleasant; clingstone; very late.
Late Rollingstone. Americana. 1. Cornell Sta. Bul. 38:39, 42. 1892.
2. Colo. Sta. Bul. 50:39. 1898. 3. Waugh Plum Cult. 155.
1901.
A seedling of Rollingstone, grown by O. M. Lord of Minnesota.
Tree medium in vigor, with a round, compact head; leaves obovate-
oblong, short-acuminate, irregularly crenate; shoots red, smooth,
glossy; petioles glandular, pubescent; fruit medium in size, roundish-
oblate; cavity shallow; suture faint; yellow background overlaid with
red; stem of medium length; dots numerous, yellow; bloom thick;
skin thick; flesh yellow, firm; fair to good; stone of medium size,
broad-oval, smooth, flattened; late.
Late Transparent. Domestica. 1. Nicholson Dict. Gard. 3:167. 2.
Cornell Sta. Bul. 131:188. 1897. 3. Thompson Gard. Ass’t
4:158. 1901.
Late Transparent Gage 1.
A seedling of Transparent from Thomas Rivers of Sawbridgeworth,
England. Tree dwarf, hardy, productive; fruit large, round, greenish-
yellow, with purplish blush in the sun; flesh yellowish, firm, tender,
juicy, sweet; high quality; stone very small; season ten days later
than its parent.
Laubinger Sugar Prune. Domestica. 1. Oberdieck Deut. Obst. Sort.
441. 1881. 2. Mathieu Nom. Pom. 439. 1889.
Laubinger’s Catharinen Pflaume 2. Laubinger’s Zuckerzwetsche 1,
2.
From Germany. A true prune of value for table, compotes and
drying. Tree vigorous, productive; shoots glabrous, violet-brown; fruit
large, long-oval; suture shallow or lacking, divides the plum equally;
stem not hairy; skin free, sourish; violet-brown to bluish-black; bloom
thin; flesh yellow, firm, rather juicy, slightly tart; mid-season.
Laura. Species? 1. Vt. Sta. An. Rpt. 14:271. 1901.
From Theodore Williams, Nebraska; said to be a cross between
Quackenboss and Red Glass. Tree apparently a pure Americana
according to Mr. Williams.
Lawrence Early. Domestica. 1. Lond. Hort. Soc. Cat. 149. 1831. 2.
Downing Fr. Trees Am. 928. 1869. 3. Mathieu Nom. Pom.
439. 1889.
Lawrence 1. Lawrence’s Early 1. Lawrence’s Early 2, 3.
Lawrence’s Früh Rote Pflaume 3.
This plum differs from the well-known American variety, Lawrence,
in that it is smaller, of poorer quality, purple and earlier.
Lawson. Domestica. 1. McIntosh Bk. Gard. 2:531. 1855. 2. Downing
Fr. Trees Am. 928. 1869. 3. Mas Le Verger 6:141. 1866-73. 4.
Lange Allgem. Garten. 421. 1879. 5. Hogg Fruit Man. 710.
1884.
Anna Lawson 3. Anna Lawson 4. Damas Lawson 2, 5. Dorée de
Lawson 3. Golden Gage Lawson 2. Lawson’s Golden 1, 5. Lawson’s
Golden 3. Lawson’s Golden Gage 1.
A seedling of Reine Claude pollinated with Golden Drop, grown in
1842 by Archibald Gorrie of Annat Gardens, Errol, Perthshire,
Scotland; named in honor of Charles Lawson a nurseryman of
Edinburgh. Tree hardier than either parent; fruit of medium size, oval;
suture a line; cavity small; yellow with dull reddish blush; bloom thin;
flesh yellow, sweet, juicy; good; clingstone; mid-season.
Le Duc. Americana. 1. Am. Pom. Soc. Rpt. 134. 1887. 2. Waugh
Plum Cult. 156. 1901. 3. Ohio Sta. Bul. 162:256, 257. 1905.
La Duc 1.
Le Duc was found growing wild at Hasting, Minnesota; introduced
by W. G. Le Duc. Fruit of medium size, roundish; suture faint; cavity
small; bright red; bloom thin; flesh yellow, sweet, pleasant; quality
fair; stone large, semi-clinging; mid-season.
Legal Tender. Americana. 1. Ia. Sta. Bul. 46:277. 1900.
Originated under cultivation with H. A. Terry, Crescent, Iowa in
1896; first fruited in 1899; parentage unknown. Tree vigorous,
productive; fruit large, round, golden-yellow blotched with dark red;
skin thin; fine quality; semi-clinging; mid-season.
Leib Sour. Simonii × Triflora. 1. Vt. Sta. An. Rpt. 14:272. 1901.
One of Burbank’s hybrids; of the type of Wickson. Fruit large,
round or slightly oblate; stem strong; cavity wide; suture shallow;
apex slightly depressed; light red with thin bloom; dots many,
prominent; flesh yellow, firm, meaty; flavor peculiar, aromatic,
subacid; good to very good; stone medium, oval, flattened, clinging.
Leonard. Americana. 1. Montreal Hort. Soc. Rpt. 90. 1885. 2. Colo.
Sta. Bul. 50:40. 1898. 3. Waugh Plum Cult. 156. 1901.
Originated with Charles Gibb, Montreal, Canada, in 1873 from a
wild plum root obtained from Wisconsin. Fruit medium, round; cavity
shallow; stem slender; dull dark red, mottled; dots small; flesh yellow,
not firm, acid; quality fair; stone small, round-oval, smooth, semi-
clinging; mid-season.
Leopard. Triflora ×? 1. Vt. Sta. An. Rpt. 14:272. 1901.
From Theodore Williams, of Nebraska, from a “Botan pit pollinated
with Red Glass.” Fruit large, round-oval; stem medium long, set in a
shallow cavity; skin thick; light rich red; flesh yellow, firm; flavor
Miner-like, rich and sweet; good to very good.
Lepine. Insititia. 1. Koch Deut. Obst. 570. 1876. 2. Lange Allgem.
Garten. 2:420. 1879.
A variety of the Damson type raised by Lepine in Belgium;
probably not known in this country; very similar to Norbet and by
some said to be the same. Tree large, productive; fruit of medium
size, round, somewhat compressed; suture shallow; skin removable,
not sourish; dark blue; flesh greenish-yellow, firm, sweet, wine-like;
stone free; late.
Leptune. Hortulana. 1. Cornell Sta. Bul. 38:56, 86. 1892. 2. Bailey
Ev. Nat. Fr. 203, 206, 208. 1898. 3. Vt. Sta. An. Rpt. 11:284.
1898.
Introduced by J. D. Morrow & Sons of Arkansas. Leaves elliptic-
ovate to elliptic-obovate, very long-pointed and coarsely serrate;
stalks either glandless or glandular; fruit of medium size, round; skin
thick, dark red; dots yellow; flesh yellow, meaty; stone medium,
nearly smooth, short-pointed, clinging.
Letta. Species? 1. Am. Pom. Soc. Rpt. 133. 1891.
Found in Buchanan County, Iowa; introduced by J. Wragg & Son
of Waukee, Iowa. Fruit as large as Hawkeye.
Lewis. Domestica. 1. U. S. D. A. Pom. Rpt. 46. 1895.
Received by the United States Department of Agriculture from H.
C. Cook, White Salmon, Washington. Fruit large, roundish-oval; stem
short, set in a moderately deep, abrupt cavity; red, a little darker than
Lombard; bloom thin; dots numerous; flesh pale yellow; good to very
good; stone large, oval, free; late.
Lewiston Egg. Domestica. 1. Downing Fr. Trees Am. 404. 1857. 2.
Am. Pom. Soc. Cat. 222, 244. 1858.
Lewiston’s Egg 2.
According to Downing, from Lewiston, New York. Tree vigorous,
productive; fruit medium, oval, pale yellow; flesh yellow, not very
sweet; flavor medium; clingstone; mid-season. Rejected by the
American Pomological Society in 1858.
Lex Plum. Domestica. 1. Kenrick Am. Orch. 263. 1832.
Noted as a large blue plum with rich, sweet, yellow flesh; very
productive.
Liegel Rote Damascene. Species? Mentioned in Mathieu Nom.
Pom. 439. 1889.
Runde Rote Damascene.
Liegel Apricot. Domestica. 1. Hogg Fruit Man. 369. 1866. 2.
Mathieu Nom. Pom. 439. 1889. 3. Guide Prat. 163, 351. 1895.
Abricotée de Braunau Nouvelle 1, 2. Abricotée de Liegel 3. New
Apricot of Braunau 2.
Liegel Apricot was grown by Dr. Liegel of Braunau, Germany. Fruit
of medium size, roundish; suture deep; yellowish; bloom thin; flesh
greenish-yellow, melting, juicy, sprightly; good; freestone; late.
Liegel Gage. Domestica. 1. Mathieu Nom. Pom. 439. 1889. 2. Guide
Prat. 161, 359. 1895.
A variety said to have been imported into France from England.
Fruit of medium size, roundish, greenish; bloom thin; flesh yellow,
juicy, rich; very good; late.
Liegel Unvergleichliche. Domestica? 1. Mathieu Nom. Pom. 439.
1889. 2. Guide Prat. 162, 359. 1895.
Received in France from Bohemia.
Lillian Augusta. Domestica. 1. Ont. Fr. Gr. Assoc. Rpt. 72. 1894. 2.
Can. Exp. Farms Rpt. 136. 1894.
Grown by Richard Trotter, Owen Sound, Ontario. Tree hardy,
productive; fruit large, egg-shaped; cavity small and shallow; stem
nearly long; suture a line; greenish-yellow with a few broken stripes
of deeper shade; flesh light yellow, firm, meaty, juicy, slightly acid;
good to very good; stone medium to small, oval, turgid, roughened,
partly free.
Lillie. Americana. 1. Ia. Hort. Soc. Rpt. 276. 1893. 2. Waugh Plum
Cult. 156. 1901.
A seedling of Hawkeye, grown by H. A. Terry, Crescent, Iowa; first
fruited in 1893. Tree vigorous and upright; fruit of medium size,
round sometimes conical; cavity broad, shallow; stem slender; apex
rounded; yellow overspread with mottled light and dark red; dots
numerous; bloom thick; flesh sweet, melting; quality best; stone
pointed, free; mid-season.
Lindow’sche Frühe Werder’sche Pflaume. Species? Mentioned in
Lindsay. Species? 1. Can. Hort. 27:22. 1904.
Lindsay’s Seedling 1.
Reported as a new plum from Guelph, Canada; large; good.
Little. Americana. 1. Cornell Sta. Bul. 38:39. 1892. 2. Wis. Sta. Bul.
63:45. 1897.
Little Seedling 1, 2.
Introduced by Charles Leudloff, Carver, Minnesota, but discarded
by him on account of its size. Fruit small, red; stone small, rough,
cherry-like.
Livland. Domestica. 1. Am. Pom. Soc. Rpt. 61. 1887.
Livlandscher bierpflaume 1.
A Russian variety imported by the Iowa Agricultural College in
1882.
Lizzie. Americana. 1. Meneray Cat.
A seedling of Harrison, grown by H. A. Terry; introduced by F. W.
Meneray of Council Bluffs, Iowa. Tree vigorous, spreading; fruit
large, pale yellow, with a red blush; flesh yellow, rich, no acidity;
good; semi-clinging.
Lockey. Americana. 1. Kerr Cat. 1894.
Tree dwarfish, lacks in adaptability, blights badly, short-lived; fruit
of medium size, greenish-yellow overlaid with red; good; clingstone.
Lone Star. Angustifolia varians. 1. Am. Pom. Soc. Rpt. 154. 1883. 2.
Cornell Sta. Bul. 38:63, 86. 1892. 3. Waugh Plum Cult. 196.
1901.
Grown by E. W. Kilpatrick, Texas, from wild seed produced in
eastern Texas. Fruit of medium size, oval; cavity broad, shallow;
stem slender; suture lacking; red; bloom thin; dots numerous, white;
skin thin; flesh soft, yellow, sweet; good; stone oval, clinging; early.
Mentioned in the American Pomological Society catalog in 1897.
Long Blue. Domestica. 1. Ia. Hort. Soc. Rpt. 86. 1890. 2. Mich. Sta.
Bul. 118:54. 1895. 3. Wis. Sta. An. Rpt. 13:214. 1896. 4. Kan.
Sta. Bul. 101:121. 1901.
Orel No. 20 2, 3. Orel No. 20 1.
One of the Russian varieties imported by J. L. Budd about 1882.
Tree hardy, vigorous, unproductive; fruit medium to large, oblong-
oval; purplish-red with light bloom; dots numerous, small; flesh
yellow, juicy, subacid, pleasant; quality fair; stone rough and strongly
margined, semi-clinging.
Long Leaf Wonderful. Domestica. 1. N. Y. Sta. An. Rpt. 12:611.
1893.
Long Leaf Wonderful was sent out in 1893 by Luther Burbank; no
description is available and the variety is probably extinct.
Long Red. Domestica. 1. Ia. Hort. Soc. Rpt. 86. 1890. 2. Can. Exp.
Farms Rpt. 401. 1898. 3. Kan. Sta. Bul. 101:119, 122 fig.
1901.
Orel No. 19 2, 3. Orel 19 1.
Introduced from Russia by J. L. Budd of Iowa about 1882. Tree
hardy, vigorous; fruit medium to large, roundish-oblong, purplish-red;
flesh greenish-yellow, juicy, sweet, pleasant; excellent for culinary
use; stone semi-clinging.
Long Scarlet. Domestica. 1. Mag. Hort. 1:365. 1835. 2. Downing Fr.
Trees Am. 303. 1845. 3. Am. Pom. Soc. Cat. 36. 1875.
Red Gage (incorrectly of some) 2. Scarlet Gage 2, 3. Scarlet Gage
1, 2.
Downing states that the original tree was first noted in the vicinity
of Newburgh about 1823 and that the variety was disseminated by
him. Tree very hardy, an abundant bearer; shoots downy; fruit
medium, oblong-obovate; cavity narrow, very shallow; stem three-
fourths of an inch long; bright red or purplish-crimson on the sunny
side, pale yellowish-red on the shaded side; flesh deep yellow, juicy,
becoming rich and sweet if allowed to hang; clingstone; mid-season.
Listed in the catalog of the American Pomological Society in 1875,
but dropped in 1897.
Long Violet Damascene. Domestica. 1. Oberdieck Deut. Obst. Sort.
444. 1881.
Unproductive on dry soil as tested in Jeinsen, Germany.
Longworth. Domestica. 1. U. S. D. A. Rpt. 392. 1891. 2. Am. Pom.
Soc. Rpt. 74. 1895.
Said to have originated many years ago with Nicholas Longworth,
Cincinnati, Ohio. Resembles Lombard and is better in quality. Fruit of
medium size, roundish-oval, purplish-red; flesh yellow, sweet,
pleasant; mid-season to late.
Lot d’Ente. Domestica. 1. Wickson Cal. Fruits 356 fig. 1891.
D’Ente 1.
This variety is of the same type if not the same as the Agen.
Lottie. Americana mollis. 1. Terry Cat. 1900. 2. Can. Exp. Farms
Rpt. 120. 1904. 3. Ill. Hort. Soc. Rpt. 424. 1905.
Lotta 3.
Originated with H. A. Terry, Crescent, Iowa, from seed of Van
Buren. Fruit large, white or pale yellow; good; freestone.
Louisa. Americana. 1. Downing Fr. Trees Am. 930. 1869. 2. Am.
Pom. Soc. Cat. 37. 1899. 3. Waugh Plum Cult. 156. 1901.
Found growing wild in Missouri about 1860; introduced by Samuel
Miller, Bluffton, Missouri. Fruit of medium size, roundish; suture a
line; cavity small; stem short; dull red; bloom thick; dots numerous;
flesh firm, yellow; quality fair; stone large, flat, clinging; mid-season.
Louise-Brune. Insititia? 1. Mas Pom. Gen. 2:71. 1873. 2. Mathieu
Nom. Pom. 439. 1889.
Louise Brune 2. Louisen’s Braune Damascene 2.
Raised by M. de Maraise, a Belgian pomologist. Tree vigorous,
productive; fruit round-oval; suture narrow and very shallow; skin
purple; bloom thick; flesh yellowish-green, firm, rather sweet; good;
stone oval, thick, free; type of the Damsons.
Louisiana. Triflora ×? 1. Cornell Sta. Bul. 139:43. 1897. 2. Waugh
Plum Cult. 217. 1901.
Normand No. 15 1.
One of the several seedlings sent out by J. L. Normand,
Marksville, Louisiana, who states that it is the offspring of a Triflora
variety crossed with a native; named by Bailey in 1897. Tree
spreading, weak and slender in habit; fruit of medium size, heart-
shaped; suture faint; cavity shallow; greenish with dull blush; dots
many, whitish; flesh yellow, fibrous, sprightly subacid; quality fair;
clingstone; fruit drops before ripe.
Lovett. Domestica. 1. Gard. Mon. 29:47. 1887.
A seedling of Reine Claude from York County, Pennsylvania,
about 1867. Tree very vigorous and productive; fruit very large,
roundish; suture slight; cavity shallow; dark red; dots minute, yellow;
flesh yellow, firm, sweet; semi-clinging; very early.
Lovett. Triflora. 1. Lovett Cat. 1898.
Fourth of July 1.
A chance seedling from the Lovett homestead in Pennsylvania;
introduced in 1898 by J. T. Lovett, Little Silver, New Jersey. Fruit of
medium size, roundish; suture indistinct; bright red; bloom light; flesh
yellow, firm, rich, sweet, vinous, highly aromatic; good; freestone;
very early.
Lovett Late. Domestica. 1. Cole Am. Fr. Book 218. 1849.
Lovett’s Late Long Red 1.
An excellent long-keeping variety mentioned by Cole in 1849.
Lowry. Domestica. 1. Smith Cat. 1899.
Lowry’s Gage 1.
A chance seedling found growing in a fence corner at St. Davids,
Ontario; introduced by E. D. Smith in 1899. Fruit of medium size,
yellow; good; early.
Lucas Königspflaume. Domestica. 1. Oberdieck Deut. Obst. Sort.
421. 1881. 2. Mathieu Nom. Pom. 439. 1889.
Royale de Lucas 2.
A table and market variety in Germany. Tree vigorous, productive
in moist soils; fruit large, oval; suture shallow, divided unequally; skin
somewhat sourish, easily removed, bluish-red to dark blue on the
sunny side; dots fine, yellowish, numerous; flesh soft, golden-yellow,
sweet, highly flavored; stone not always free; ripens before the
Reine Claude.
Luedloff. Americana. 1. Wis. Sta. Bul. 63:46. 1897. 2. Ibid. 87:14.
1901.
Luedloff’s Seedling 1, 2.
From Charles Luedloff, Cologne, Minnesota. Fruit medium in size,
oblong; suture distinct; yellow overspread with bright red; dots small,
numerous; quality hardly fair; stone oval, sharply pointed, nearly
free.
Luedloff Green. Americana. 1. Cornell Sta. Bul. 38:40. 1892. 2. Wis.
Sta. Bul. 63:46. 1897.
Luedloff’s Green 1, 2.
From Charles Luedloff, Cologne, Minnesota, about 1889;
discarded by him later. Tree regular and abundant in bearing; fruit
medium to small, oblong, flattened; skin thick, mottled with deep red;
flesh firm, sweet; fair quality; stone small, nearly free; medium late.
Luedloff Red. Americana. 1. Cornell Sta. Bul. 38:40. 1892. 2. Wis.
Sta. Bul. 63:46. 1897.
Luedloff’s Red 1, 2.
Much like Luedloff Green but red in color. Tree moderately
productive; fruit very good; medium season. Good for culinary
purposes.
Lunn. Domestica. 1. Can. Exp. Farm Bul. 43:35. 1903. 2. Quebec
Pom. Soc. Rpt. 9. 1905.
Montreal No. 60 1.
From W. W. Dunlop, Outremont, Quebec. Fruit large, oval; cavity
shallow; suture a distinct line; dark purple; dots indistinct, brownish;
skin tough; flesh yellowish-green, firm, juicy, sweet, rich; very good;
clingstone; mid-season.
Luscombe. Domestica. Mentioned in Lond. Hort. Soc. Cat. 149.
1831.
Luscombe’s Seedling.
Lutts. Triflora. 1. Cornell Sta. Bul. 175:131 fig., 132. 1899. 2. Mass.
Hort. Soc. Rpt. 1:106. 1900. 3. Ga. Sta. Bul. 68:5 fig., 31.
1904.
Wasse-Botankio 1, 2, 3.
Sent out under the name Wasse-Botankio but renamed in 1899 by
Bailey after Henry Lutts of Youngstown, New York. Tree vigorous,
productive; fruit small, roundish, dark red with numerous fine,

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