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 Table of Contents vii

4.8 Interpreting Financial Ratios 114 6.6 Corporate Bonds and the Risk of Default 198
Variations in Corporate Bonds 200
4.9 The Role of Financial Ratios—And a Final
Note on Transparency 117 6.7 International Bond Market Variations—Sukuk 203
Besides Financial Ratios . . . 119
6.8 Summary 206
Transparency 119
Appendix 6A: A More Detailed Look at the Yield
4.10 Summary 120
Curve 212

PART 2 CHAPTER 7
VALUE 128 Valuing Stocks 215
7.1 Stocks and Stock Markets 216
CHAPTER 5
Reading Stock Market Listings 218
The Time Value of Money 128
7.2 Market Values, Book Values, and Liquidation
5.1 Future Values and Compound Interest 129
Values 221
5.2 Present Values 133
7.3 Valuing Common Stocks 224
Finding the Interest Rate 137
Valuation by Comparables 224
Finding the Investment Period 138
Price and Intrinsic Value 225
5.3 Multiple Cash Flows 140 The Dividend Discount Model 227
Future Value of Multiple Cash Flows 140
7.4 Simplifying the Dividend Discount Model 230
Present Value of Multiple Cash Flows 142
The Dividend Discount Model with No
5.4 Level Cash Flows: Perpetuities and Annuities 144 Growth 230
How to Value Perpetuities 144 The Constant-Growth Dividend Discount
How to Value Annuities 146 Model 231
Annuities Due 150 Estimating Expected Rates of Return 232
Future Value of an Annuity 152 Non-constant Growth 233
Cash Flows Growing at a Constant Rate—Variations
7.5 Growth Stocks and Income Stocks 235
on Perpetuities and Annuities 155
7.6 There Are No Free Lunches on Bay Street 238
5.5 Inflation and the Time Value of Money 157
Method 1: Technical Analysis 239
Real Versus Nominal Cash Flows 157
Method 2: Fundamental Analysis 242
Inflation and Interest Rates 159
A Theory to Fit the Facts 243
Valuing Real Cash Payments 161
Real or Nominal? 162 7.7 Market Anomalies and Behavioural Finance 244
5.6 Effective Annual Interest Rates 162 Market Anomalies 244
Behavioural Finance 245
5.7 Summary 165
7.8 Summary 246
CHAPTER 6
Valuing Bonds 178 CHAPTER 8
Net Present Value and Other
6.1 Bonds and the Bond Market 180
Investment Criteria 256
Bond Market Data 180
8.1 Net Present Value 258
6.2 Interest Rates and Bond Prices 182
A Comment on Risk and Present Value 259
How Bond Prices Vary with Interest Rates 184
Valuing Long-Lived Projects 259
6.3 Current Yield and Yield to Maturity 186 Using the NPV Rule to Choose Among Projects 263
6.4 Bond Rates of Return 187 8.2 Other Investment Criteria 264
Taxes and Rates of Return 191 Payback 264
Multiperiod Rates of Return 192 Discounted Payback 266
Internal Rate of Return 267
6.5 The Yield Curve 193
A Closer Look at the Rate of Return Rule 268
Nominal and Real Rates of Interest 194
Calculating the Rate of Return for Long-Lived
The Determinants of the Yield Curve 196 Projects 269
Expectations Theory 196 A Word of Caution 271
Interest Rate Risk and the Liquidity Premium 197 Some Pitfalls of the IRR Rule 271
viii Table of Contents

8.3 More Examples of Mutually Exclusive Projects 275 10.2 Some “What If” Questions 329
The Investment Timing Problem 276 Sensitivity Analysis 330
The Choice Between Long- and Short-Lived Scenario Analysis 332
Equipment 277
10.3 Break-Even Analysis 333
Replacing an Old Machine 278
Accounting Break-Even Analysis 333
8.4 Capital Rationing 280 NPV Break-Even Analysis 335
Soft Rationing 280 Operating Leverage 338
Hard Rationing 280
10.4 Real Options and the Value of Flexibility 340
Pitfalls of the Profitability Index 281
The Option to Expand 340
8.5 A Last Look 282 A Second Real Option: The Option to Abandon 342
A Third Real Option: The Timing Option 343
8.6 Summary 283
A Fourth Real Option: Flexible Production
CHAPTER 9 Facilities 344
Using Discounted Cash Flow Analysis to Make 10.5 Summary 344
Investment Decisions 292
9.1 Identifying Cash Flows 293
PART 3
Discount Cash Flows, Not Profits 293
Discount Incremental Cash Flows 295 RISK 352
Include All Indirect Effects 296
Forget Sunk Costs 296 CHAPTER 11
Include Opportunity Costs 296 Introduction to Risk, Return, and the
Recognize the Investment in Working Capital 297 Opportunity Cost of Capital 352
Remember Shutdown Cash Flows 298
11.1 Rates of Return: A Review 353
Beware of Allocated Overhead Costs 298
Discount Nominal Cash Flows by the Nominal 11.2 Ninety Years of Capital Market History 355
Cost of Capital 298 Market Indexes 355
Separate Investment and Financing Decisions 300 The Historical Record 356
Using Historical Evidence to Estimate Today’s
9.2 Calculating Cash Flows 300
Cost of Capital 359
Capital Investment 300
Investment in Working Capital 300 11.3 Measuring Risk 360
Operating Cash Flow 301 Variance and Standard Deviation 362
A Note on Calculating Variance 363
9.3 Business Taxes in Canada and the Capital
Measuring the Variation in Stock Returns 364
Budgeting Decision 304
Depreciation and Capital Cost Allowance 304 11.4 Risk and Diversification 366
The Asset Class System 304 Diversification 366
Sale of Assets 306 Asset Versus Portfolio Risk 367
Termination of Asset Pool 307 Covariance and Correlation 369
Present Values of CCA Tax Shields 308 Correlation and Portfolio Diversification 370
Market Risk Versus Unique Risk 375
9.4 Example: Blooper Industries 310
Calculating Blooper’s Project Cash Flows 311 11.5 Thinking About Risk 377
Calculating the NPV of Blooper’s Project 313 Message 1: Some Risks Look Big and Dangerous
Further Notes and Wrinkles Arising from but Really Are Diversifiable 377
Blooper’s Project 314 Message 2: Market Risks Are Macro Risks 378
Message 3: Risk Can Be Measured 379
9.5 Summary 317
11.6 Summary 379
CHAPTER 10
Project Analysis 325 CHAPTER 12
10.1 How Firms Organize the Investment Process 326
Risk, Return, and Capital Budgeting 385
Stage 1: The Capital Budget 326 12.1 Measuring Market Risk 386
Stage 2: Project Authorizations 327 Measuring Beta 387
Problems and Some Solutions 327 Betas for Cameco and Royal Bank 390
 Table of Contents ix

Total Risk and Market Risk 390 PART 4

Portfolio Betas 392
FINANCING 444
12.2 Risk and Return and Capital Asset Pricing Model,
CAPM 393 CHAPTER 14
Why the CAPM Makes Sense 396 Introduction to Corporate Financing
The Security Market Line 397
and Governance 444
How Well Does the CAPM Work? 398
Using the CAPM to Estimate Expected Returns 401 14.1 Creating Value with Financing Decisions 446
12.3 Capital Budgeting and Project Risk 401 14.2 Common Stock 446
Company Risk Versus Project Risk 402 Book Value Versus Market Value 448
Determinants of Project Risk 403 Dividends 448
Don’t Add Fudge Factors to Discount Rates 404 Ownership of the Corporation 448
Voting Procedures 449
12.4 Summary 405
Classes of Stock 450
CHAPTER 13 Corporate Governance in Canada and
The Weighted-Average Cost of Capital Elsewhere 451
and Company Valuation 413 14.3 Preferred Stock 454
13.1 Geothermal’s Cost of Capital 414 14.4 Corporate Debt 456
Debt Comes in Many Forms 457
13.2 The Weighted-Average Cost of Capital 416
Innovation in the Debt Market 461
Calculating Company Cost of Capital as a
Weighted Average 416 14.5 Convertible Securities 464
Use Market Weights, Not Book Weights 419 14.6 Patterns of Corporate Financing 464
Taxes and the Weighted-Average Cost of Capital 419 Do Firms Rely Too Heavily on Internal Funds? 465
What If There Are Three (or More) Sources of External Sources of Capital 466
Financing? 421
Wrapping Up Geothermal 421 14.7 Summary 468
Checking Our Logic 421 Appendix 14A: The Bond Refunding Decision 472
13.3 Measuring Capital Structure 422
CHAPTER 15
13.4 Calculating Required Rates of Return 424 Venture Capital, IPOs, and Seasoned
The Expected Return on Bonds 424 Offerings 479
The Expected Return on Common Stock 425
The Expected Return on Preferred Stock 426 15.1 Venture Capital 481
Venture Capital Companies 482
13.5 Calculating the Weighted-Average
Cost of Capital 427 15.2 The Initial Public Offering 483
Real Company WACC 427 Arranging a Public Issue 484
13.6 Interpreting the Weighted-Average Cost of 15.3 The Underwriters 489
Capital 428 Who Are the Underwriters? 489
When You Can and Can’t Use WACC 428 15.4 Listing on the Stock Market 492
Some Common Mistakes 428
How Changing Capital Structure Affects WACC 15.5 Rights Issues and General Cash Offers
When the Corporate Tax Rate Is Zero 429 by Public Companies 492
How Changing Capital Structure Affects Debt Rights Issues 493
and Equity When the Corporate Tax Rate Is General Cash Offers 494
Zero 430 Costs of the General Cash Offer 495
What Happens If Capital Structure Changes Market Reaction to Stock Issues 496
and the Corporate Tax Rate Is Not Zero? 431 15.6 The Private Placement 496
Revisiting the Project Cost of Capital 432
15.7 Summary 497
13.7 Valuing Entire Businesses 433
Calculating the Value of the Concatenator Appendix 15A: The Financing of New and Small
Business 434 Enterprises 503
13.8 Summary 436 Appendix 15B: Hotch Pot’s New Issue Prospectus 510
x Table of Contents

PART 5 17.4 When Do Financial Leases Pay? 564

DEBT AND PAYOUT POLICY 514 17.5 Summary 565

CHAPTER 16 CHAPTER 18
Debt Policy 514 Payout Policy 571
16.1 How Borrowing Affects Value in a Tax-Free 18.1 How Dividends Are Paid 572
Economy 515 Cash Dividends 572
MM’s Argument 516 Some Legal Limitations on Dividends 573
How Borrowing Affects Earnings per Share 517 Stock Dividends, Stock Splits, and Reverse
How Borrowing Affects Risk and Return 519 Splits 574
Debt and the Cost of Equity 521 Dividend Reinvestment Plans and Share
Purchase Plans 575
16.2 Capital Structure and Corporate Taxes 523
Debt and Taxes at River Cruises 523 18.2 Share Repurchase 575
How Interest Tax Shields Contribute to the Value of Why Repurchases Are Like Dividends 576
Shareholders’ Equity 525 Repurchases and Share Valuation 577
Corporate Taxes and the Weighted-Average Cost of 18.3 How Do Companies Decide on How Much to Pay
Capital 526 Out? 577
The Implications of Corporate Taxes for Capital The Role of Share Repurchase Decisions 578
Structure 527 The Information Content of Dividends and
16.3 Costs of Financial Distress 527 Repurchases 579
Bankruptcy Costs 528 18.4 Why Payout Policy Should Not Matter 581
Evidence on Bankruptcy Costs 529 Payout Policy Is Irrelevant in Efficient Financial
Direct Versus Indirect Costs of Bankruptcy 530 Markets 581
Financial Distress Without Bankruptcy 530 The Assumptions Behind Dividend-
Costs of Distress Vary with Type of Asset 532 Irrelevance 582
16.4 Explaining Financing Choices 533 18.5 Why Dividends May Increase Firm Value 584
The Trade-Off Theory 533 Market Imperfections 584
A Pecking-Order Theory 534
18.6 Why Dividends May Reduce Firm Value 585
The Two Faces of Financial Slack 535
Why Pay Any Dividends at All? 586
16.5 Bankruptcy Procedures 537 Dividends Versus Capital Gains 586
The Choice Between Liquidation and Dividend Clientele Effects 587
Reorganization 540
18.7 Summary 587
16.6 Summary 541
PART 6
CHAPTER 17
Leasing 549 FINANCIAL PLANNING 595
17.1 What Is a Lease? 550
CHAPTER 19
Leasing Industry 551
Long-Term Financial Planning 595
17.2 Why Lease? 552
19.1 What Is Financial Planning? 596
Sensible Reasons for Leasing 552
Financial Planning Focuses on the Big Picture 596
Some Dubious Reasons for Leasing 553
Why Build Financial Plans? 597
17.3 Valuing Leases 555
19.2 Financial Planning Models 598
Operating Leases 555
Components of a Financial Planning Model 598
Financial Leases 556
Percentage-of-Sales Models 599
Cash Flows of a Financial Lease 557
An Improved Financial Planning Model 601
Who Really Owns the Leased Asset? 558
Leasing and the Canada Revenue Agency (CRA) 559 19.3 Tips for Planners 607
First Pass at Valuing a Financial Lease Contract 559 Pitfalls in Model Design 607
Financial Lease Evaluation 562 The Assumption in Percentage-of-Sales
Using Formulas to Evaluate Financial Leases 562 Models 607
 Table of Contents xi

Forecasting Interest Expense 609 21.3 Managing Inventories of Cash 670

The Role of Financial Planning Models 610 Uncertain Cash Flows 671
19.4 External Financing and Growth 610 Cash Management in Practice—Now and Then 673

19.5 Summary 614 21.4 Investing Idle Cash: The Money Market 674
Yields on Money Market Investments 677
CHAPTER 20 21.5 The International Money Market 677
Short-Term Financial Planning 622
21.6 Summary 678
20.1 Links Between Long-Term and Short-Term
Financing 624 CHAPTER 22
20.2 Working Capital 626 Credit Management and Collection 682
The Components of Working Capital 627 22.1 Terms of Sale 683
Net Working Capital, Operating Cycle, and the Cash
Conversion Cycle 629 22.2 Credit Agreements 686
The Working Capital Trade-Off 632 22.3 Credit Analysis 686
20.3 Tracing Changes in Cash and Working Capital 633 Financial Ratio Analysis 687
Numerical Credit Scoring 687
20.4 Cash Budgeting 635 When to Stop Looking for Clues 690
Forecast Sources of Cash 635
Forecast Uses of Cash 637 22.4 The Credit Decision and Revisiting the Terms
The Cash Balance 637 of Sale 691
Credit Decisions with Repeat Orders 692
20.5 A Short-Term Financing Plan 640 Evaluating a Credit Policy Switch 694
Dynamic Mattress’s Financing Plan 640
Some General Principles for the Credit
Evaluating the Plan 641
Decision and Credit Terms 694
20.6 Sources of Short-Term Financing 642 22.5 Collection Policy 696
Bank Loans 642
Secured Loans 642 22.6 Summary 697
Factoring 644
Commercial Paper 645 PART 8
Banker’s Acceptance 646
SPECIAL TOPICS 704
20.7 The Cost of Bank Loans 646
Simple Interest 646
CHAPTER 23
Discount Interest 646
Mergers, Acquisitions, and Corporate
Interest with Compensating Balances 647
Control 704
20.8 Summary 648
23.1 Sensible Motives for Mergers 706
Increased Revenues 708
PART 7 Economies of Scale 709
SHORT-TERM FINANCIAL Economies of Vertical Integration 709
DECISIONS 657 Combining Complementary Resources 709
Merging to Reduce Taxes 710
Mergers as a Use for Surplus Funds 710
CHAPTER 21
Cash and Inventory Management 657 23.2 Dubious Reasons for Mergers 710
Diversification 710
21.1 Managing Cash Balances 658
The Bootstrap Game 711
Cheque Handling and Float 659
Other Payment Systems 662 23.3 The Mechanics of a Merger 712
Electronic Funds Transfer 663 The Form of Acquisition 712
International Cash Management 664 Mergers, Antitrust Law, and Popular
Opposition 714
21.2 Managing Inventories 665
Inventory Management Models 665 23.4 Evaluating Mergers 715
Just-in-Time Inventory Management 668 Mergers Financed by Cash 715
Radio Frequency Identification (RFID) 668 Mergers Financed by Stock 717
xii Table of Contents

Some Tax Issues 718 CHAPTER 25

A Warning 718 Options 763
Another Warning 718
25.1 Calls and Puts 765
23.5 The Market for Corporate Control 719 Selling Calls and Puts 767
Ownership Structure and the Effectiveness of the Payoff Diagrams Are Not Profit Diagrams 768
Market for Corporate Control 719 Financial Alchemy with Options 769
23.6 Method 1: Proxy Contests 720 Some More Option Magic 770

23.7 Method 2: Takeover Bids 721 25.2 What Determines Option Values? 771
Takeover Bid Tactics 721 Upper and Lower Limits on Option Values 771
The Determinants of Option Value 772
23.8 Method 3: Leveraged Buyouts 723 Option-Valuation Models 773
Barbarians at the Gate? 724
Recent LBO Activity 726 25.3 Spotting the Option 776
Options on Real Assets 776
23.9 Method 4: Divestitures, Spin-Offs, and Equity Options on Financial Assets 777
Carve-Outs 727
25.4 Summary 781
23.10 The Benefits and Costs of Mergers 729
23.11 Summary 731
CHAPTER 26
CHAPTER 24 Risk Management 787
International Financial Management 736 26.1 Why Hedge? 788
24.1 Foreign Exchange Markets 737 The Evidence on Risk Management 790
Spot Exchange Rates 737 26.2 Reducing Risk with Options 790
Forward Exchange Rates 740
26.3 Futures Contracts 791
24.2 Some Basic Relationships 741 The Mechanics of Futures Trading 794
Exchange Rates and Inflation 742 Commodity and Financial Futures 795
Inflation and Interest Rates 743
Interest Rates and Exchange Rates 745 26.4 Forward Contracts 796
The Forward Rate and the Expected Spot Rate 746 26.5 Swaps 797
Some Implications 747
26.6 Innovation in the Derivatives Market 800
24.3 Hedging Exchange Rate Risk 748
26.7 Is “Derivative” a Four-Letter Word? 800
Transaction Risk 748
Economic Risk 748 26.8 Summary 801
24.4 International Capital Budgeting 749 Appendix A: Present Value Tables A-1
Net Present Value Analysis 749
Glossary GL-1
The Cost of Capital for Foreign Investment 751
Political Risk 751 Index IN-1
Avoiding Fudge Factors 754
24.5 Summary 756
 PREFACE
This book is about corporate finance. It focuses on how com-
panies invest in real assets and how they raise the money to
pay for these investments. It also provides a broad introduc-
tion to the financial landscape, discussing, for example, the
major players in financial markets, the role of financial insti-
tutions in the economy, and how securities are traded and
valued by investors. It offers a framework for systematically
thinking about most of the important financial problems
that both firms and individuals are likely to confront.
Financial management is important, interesting, and
challenging. It is important because today’s capital invest-
ment decisions may determine the businesses that the firm
is in 10, 20, or more years ahead. Also, a firm’s success or
failure depends in large part on its ability to find the capital
that it needs.
Finance is interesting for several reasons. Financial deci-
sions often involve huge sums of money. Large investment
projects or acquisitions may involve billions of dollars. Also,
the financial community is international and fast-moving,
with colourful heroes and a sprinkling of unpleasant villains.
Finance is challenging. Financial decisions are rarely cut
and dried, and the financial markets in which companies
operate are changing rapidly. Good managers can cope with
routine problems, but only the best managers can respond
to change. To handle new problems, you need more than
rules of thumb; you need to understand why companies
and financial markets behave as they do and when common
practice may not be best practice. Once you have a con-
sistent framework for making financial decisions, complex
problems become more manageable.
This book provides that framework. It is not an ency-
clopedia of finance. It focuses instead on setting out the
basic principles of financial management and applying them
to the main decisions faced by the financial manager. It
explains why the firm’s owners would like the manager
to increase firm value and shows how managers choose
between investments that may pay off at different points of
time or have different degrees of risk. It also describes the
main features of financial markets and discusses why com-
panies may prefer a particular source of finance.
We organize the book around the key concepts of mod-
ern finance. These concepts, properly explained, make the
subject simpler, not more difficult. They are also more
practical. The tools of financial management are easier
to grasp and use effectively when presented in a consis-
tent conceptual framework. Modern finance provides that
framework.
Modern financial management is not “rocket science.” It
is a set of ideas that can be made clear by words, graphs,
and numerical examples. The ideas provide the “why”
behind the tools that good financial managers use to make
investment and financing decisions.
WHY USE OUR BOOK
We wrote this book to make financial management clear,
useful, interesting, and fun for the beginning student. We
set out to show that modern finance and good financial
practice go together—even for the financial novice. The key
to this is a thorough understanding of the principles and
mechanics of the time value of money. This material under-
lies almost all of this text, and we spend a lengthy Chapter 5
providing extensive practice with this key concept.
The second component of our approach is the extensive
use of numerical examples. Each chapter presents detailed
numerical examples to help the reader become familiar and
comfortable with the material. We have peppered the book
with real-life illustrations of the chapters’ topics. Some of
these are excerpts from the financial press found in Finance
in Action boxes; others are built into the text as examples.
By connecting concepts with practice, we strive to give
students a working ability to make financial decisions.
We have streamlined the treatment of most topics to
avoid getting bogged down in unnecessary detail that can
overwhelm a beginner. We don’t assume users will have a
lot of background knowledge.
We have written the book in a relaxed and informal
writing style. We use mathematical notation only where
necessary. Even when we present an equation, we usu-
ally write it in words before using symbols. This approach
has two advantages: it is less intimidating and it focuses
attention on the underlying concept rather than just the
formula.
WAYS TO USE OUR BOOK
Because there are about as many effective ways to orga-
nize a course in corporate finance as there are teachers,
we have ensured that many topics can be introduced in
different orders. For example, (1) we have made sure that
Part Six (Financial Planning) can easily follow Part One
(Introduction); (2) although we discuss working capital
after the basic principles of valuation and financing, we
have made it possible for instructors to reverse that order
(as many prefer to do); and (3) although the opportunity
cost of capital depends on project risk, the chapters on
project valuation and those on risk and return are written
in such a way that the two groups can be presented in
any order.
xiv Preface
CHANGES IN THE SIXTH CANADIAN EDITION
This sixth Canadian edition of Fundamentals includes many
updates. We have enhanced the analytical tools used with
the book: more spreadsheet boxes are integrated into the
chapters; end-of-chapter problems include exercises that
ask students to use a variety of Internet resources to solve
financial problems and integrative mini cases. The location
of some chapters in the book has been altered to improve
the logical flow of topics. In addition, we have rewritten,
rearranged, and added material to improve readability and
update coverage across chapters. The following are some
examples of the changes that we have made.
Chapter 1 (Goals and Governance of the Firm) has
been largely rewritten to improve readability and inter-
est. This chapter includes the real-life case of Tim Hortons
and its founders Ron Joyce and Tim Horton, illustrating
how financial markets help infant enterprises grow into
healthy adults. The section on business organizations has
new material on private corporations and the pros and cons
of being a public corporation. Examples of investment and
financial decisions of well-known companies are used to
illustrate the main activities of financial managers, the role
of financial markets, and the goals of a corporation. Keep-
ing in mind the currency of certain themes, the chapter
includes expanded discussion of agency issues, including
additions on corporate raiders, creative accounting and tax
avoidance. There is also new content on the ethical issues
that confront managers and new discussion on the global
financial crisis.
Chapter 2 (Financial Markets and Institutions) opens
with the history of Apple Computer. The chapter has addi-
tional coverage on prediction markets and also includes
additional discussion of the financial crisis and its spillover
to the sovereign debt crisis in the eurozone.
Chapter 3 (Accounting and Finance) includes an
updated discussion of new Canadian accounting standards
for public companies, which are the International Financial
Reporting Standards (IFRS). IFRS financial statements of a
Canadian company have been included. The discussion of
profits versus cash flow includes examples of how accrual
accounting impacts cash flow. The tax rates have also been
updated.
Chapter 4 (Measuring Corporate Performance). This
chapter explains various formulas for measuring corporate
performance and provides clear definitions of various con-
cepts. NOPAT, ROA, and ROE are discussed. IFRS finan-
cial statements of another Canadian company in the same
industry have been included for comparison.
Chapter 5 (The Time Value of Money) has been
updated and rearranged to improve logical flow. The chap-
ter includes new spreadsheet applications.
Chapter 6 (Valuing Bonds). Updated market-based bond
data and institutional information. New material on interna-
tional bond market variations.
Chapter 7 (Valuing Stocks). Updated marked-based
data. New material on the value of future investment. New
Finance in Action box, “Facebook IPOs.”
Chapter 8 (Net Present Value and Other Investment
Criteria) has been streamlined and reorganized. The chapter
includes new discussion on calculating NPV using an exam-
ple for the Cape Wind Project including spreadsheet appli-
cations and problems. The chapter also has an enhanced
explanation of why mutually exclusive investments are
central to almost all real-life investment decisions and how
that affects the capital budgeting decision.
Chapter 9 (Using Discounted Cash Flow Analysis to
Make Investment Decisions) has been updated to include
new information on capital cost allowance (CCA). The
chapter works through a realistic comprehensive example
of capital budgeting analysis. An appendix showing how
the CCA tax shield is derived is available to the reader on
Connect.
Chapter 10 (Project Analysis). The updated chapter
includes revised coverage of real options and explains how
those options are integrated into a firm’s longer-term stra-
tegic considerations. Updated Finance in Action material
includes an article on FedEx’s use of options.
Chapter 11 (Introduction to Risk, Return, and the
Opportunity Cost of Capital) starts with an updated his-
torical survey of returns on bonds and stocks and goes on
to distinguish between the unique risk and market risk of
individual stocks using updated market-based data from
Yahoo Finance.
Chapter 12 (Risk, Return, and Capital Budgeting) shows
how to measure market risk and discusses the relationship
between risk and expected return, now uses updated mar-
ket data from Yahoo Finance.
Chapter 13 (The Weighted-Average Cost of Capital and
Company Valuation). Market data has been updated. There
is a discussion of the choice of the risk-free security, Trea-
sury bill, or long-term government bond when implement-
ing CAPM.
Chapter 14 (Introduction to Corporate Financing and
Governance) has been extensively updated, and features an
extended treatment of corporate governance. A new Finance
in Action box discusses the role of corporate governance
in the context of enhancing shareholder value. The chap-
ter includes new discussion pertaining to innovations in the
bond market, and a new Finance in Action box discusses
new regulatory proposals for Canadian commercial paper.
Chapter 15 (Venture Capital, IPOs, and Seasoned Offer-
ings). The chapter introduces alternative fundraising meth-
ods for startups such as crowdsourcing. The chapter also
has updated material on the IPO market and on underwrit-
ers. An appendix to the chapter discussing the financing
of new and small enterprises has been rewritten to reflect
changes in the venture capital industry and other sources
of small business financing in Canada.
 Preface
Chapter 16 (Debt Policy) has been updated with Cana-
dian examples and statistics in the discussions on costs of
financial distress and explaining financing choices.
Chapter 17 (Leasing) now has updated information on
the leasing industry.
Chapter 18 (Payout Policy) has been updated with a
revamped treatment of the trade-offs governing the use of
dividends versus share repurchases and includes additional
discussion on the role of share repurchase decisions. Two
new Finance in Action boxes have been added: one describ-
ing the special dividend of Bakery Canada Bread Co. and
the other discussing the effect on share prices of significant
dividend cuts by J.P. Morgan.
Chapter 19 (Long-Term Financial Planning). The finan-
cial planning model has been updated. A crucial aspect of
long-term planning is the use of Excel spreadsheets which
is an important part of this chapter.
Chapter 20 (Short-Term Financial Planning) has been
significantly updated with new examples of short-term
financing. A discussion of bank lending practices and the
importance of bank loans for small and mid-sized operations
is included.
Chapter 21 (Cash and Inventory Management). The
section on managing cash balances has been updated. New
section on radio frequency identification (RFID). More
information on yields on money market investments and
the international money market.
xv
Chapter 22 (Credit Management and Collection). New
material on numerical credit scoring. The general principles
for the credit decision updated with a discussion of the five
Cs that determine credit terms.
Chapter 23 (Mergers, Acquisitions, and Corporate Con-
trol). Updated to include three recent large merger deals
in Canada. Added an example of a private firm in mergers
and acquisitions, The Bagg Group. Added Montreal-based
Osisko Mining Corp. example. Added a proposal of new
rules on hostile takeover bids in Canada. Added examples
of leveraged buyouts, Gates Global and Informatica. Added
new analysis of global mergers and acquisitions market from
Boston Consulting Group. Added that the performance of
the Guggenheim Spin-Off exchange-traded fund has outper-
formed the S&P 500. More details about the success of the
equity carve-out of Tim Hortons.
Chapter 24 (International Financial Management) has
extensive updates and new discussion on the global financial
crisis, including two Finance in Action articles on the effects
of the crisis on Greece and Italy. Another new Finance in
Action box discusses the outlook for the Canadian dollar.
Chapter 25 (Options). Market option prices updated.
New Finance in Action box, “The Fear Index,” and new
Excel spreadsheet.
Chapter 26 (Risk Management) includes a new Finance
in Action box that illustrates the risks of excessive specula-
tion and how fortunes can be lost.
xvi
WALK-THROUGH
To provide guidance and insights
throughout the text, we include a
number of proven pedagogical aids:
CHAPTER OPENING
Each chapter begins with numbered
learning objectives (LOs) providing
a quick introduction to the mate-
rial students will learn and should
understand fully before moving to
the next chapter. This is followed by
a narrative to set the stage for what
follows.
NUMBERED EXAMPLES
Numbered and titled examples are extensively integrated into the chapters to provide detailed
applications and illustrations of the text material.
FINANCE IN ACTION BOXES
Almost every chapter includes at least one Finance
in Action box. The boxes present excerpts, usu-
ally from the financial press, providing real-life
illustrations of the chapter’s topics.
INTERNATIONAL ICON
A distinctive icon (shown here) appears where the authors discuss
global issues.
ETHICS ICON
A distinctive icon (shown here) appears where the authors discussThe book rate of return can increase even more dramatically, because the book value
ethical issues or the implications of unethical practices.
KEY POINTS
These marginal boxes, identified with the icon shown at
right, summarize the adjoining material, at the same time
helping students focus on the most critical content.
Preface FINANCE IN ACTION
Fourth Pass Fourth Pass
CHAPTER
15 Founder of Microcredit Movemen in 2004 at a price of $85 a share, putting a value on the
enterprise of $23 billion.
Mike Lazardis quit his studies in electrical engineering
at the University of Waterloo at 23.1 In 1984 he started
Research In Motion (RIM) with two friends. RIM went
public in 1997, offering 13.8 million common shares at $7.25
each on the Toronto Stock Exchange. RIM’s product, the
BlackBerry e-mail pager-cum-computer, was such a success
that by early 2000 its shares were trading at $260. Mike
VENTURE CAPITAL, IPOS, Lazardis became a billionaire and recently shared an
Bangladesh’s Muhammad Yunus and the bank he founded, Gr Academy Award for technical achievement with a co-
AND SEASONED OFFERINGS worker for designing a device that quickened the pace of
film editing. The name of the company was recently
Bank, which created a new category of banking by granting m
Tobi Lütke, Founder & Chief Executive Officer, Shopify Inc., joined by
members of Shopify’s leadership team and Lou Eccleston, Chief Executive
Officer, TMX Group, opens the market at Toronto Stock Exchange on May
changed from RIM to BlackBerry.
Such stories illustrate that the most important asset of
of small loans to poor people with no collateral—helping to es
26, 2015, to celebrate the company’s initial public offering (IPO). a new firm may be a good idea. But that is not all you need.
To take an idea from the drawing board to a prototype and
Bill Gates and Paul Allen founded Microsoft in 1975 when through to large-scale production requires ever-greater
Learning Objectives
the microcredit movement across the developing world—won the
they were both around 20. Eleven years later, Micro- amounts of capital.
After studying this chapter, you should be able to: soft shares were sold to the public for $21 a share and To get a new company off the ground, entrepreneurs
immediately zoomed to $35. The largest shareholder was may rely on their own savings and personal bank loans.
LO1 Explain how venture capital firms design successful deals.
LO2 Explain how firms make initial public offerings and the costs of such
offerings.
Nobel Peace Prize. The Norwegian Nobel Committee said on it
Bill Gates, whose shares in Microsoft then were worth
US$350 million.
But this is unlikely to be sufficient to build a successful
enterprise. Venture capital firms specialize in providing
In 1976 two college dropouts, Steve Jobs and Steve new equity capital to help firms over the awkward-adolescent
LO3
LO4
State what is involved when established firms make a general cash offer
or a private placement of securities.
Explain the role of the underwriter in an issue of securities.
site that it awarded the prize to Yunus and the Bank “for their eff
Wozniak, sold their most valuable possessions, a van and
a couple of calculators, and used the cash to start man-
period before they are large enough to “go public.” In
the first part of this chapter, we will explain how venture
ufacturing computers in a garage. In 1980 when Apple capital firms do this.
LO5 Discuss some of the significant questions that arise when established
create economic and social benefit from below.”
Computer went public, the shares were offered to inves- If the firm continues to be successful, there will likely
firms make a rights issue, a general cash offer, or a private placement of
securities.
tors at $22 and jumped to $36. At that point, the shares
owned by the company’s two founders were worth
come a time when it needs to tap a wider source of
capital. At this point it will make its first public issue of com-
The Grameen Bank lends small amounts of money to peop
US$414 million. mon stock. This is known as an initial public offering, or IPO.
In 1996 two Stanford computer science students, Larry In the second section of the chapter we will describe what is
would normally be refused loans by mainstream banks. Back i
Page and Sergey Brin, decided to collaborate to develop involved in an IPO.
a Web search engine. To help turn their idea into a com- A company’s initial public offering is seldom its last.
mercial product, the friends succeeded in raising almost
Yunus was struck by the plight of 22-year-old Sophia Khatoon,
$1 million from several wealthy investors (known as angels),
and this was later supplemented by funding from two ven-
In Chapter 14 we saw that internally generated cash is
not usually sufficient to satisfy the firm’s needs. Estab-
lished companies make up the deficit by issuing more
ture capital firms that specialized in helping young startup
gling to survive in a small Bangladeshi village called Jobra. She w
businesses. The company, now named Google, went public
equity or debt. The remainder of this chapter looks at
this process.
7 days a week making finely woven bamboo furniture. Becau
had no working capital, she was forced to buy her materials on
1 While it is true that some of these highly successful entrepreneurs dropped out of college or university, we do not want to give the impression that quitting
Yunus, then a professor of economics at a nearby university, calc
school had anything to do with their success.
480
bre24962_ch15_479-513.indd 479 12/08/15 03:37 PM
that she was paying 10% interest per day—more than 3,000% pe
bre24962_ch15_479-513.indd 480 12/08/15 03:37 PM
its financing is not ver
to financing was vital.
operate in a country w
requires
Third Pass a well-function
A modern financial
company’s age, its grow
FINANCE IN ACTION venture capital financi
Implications of IFRS for the Retail Industry markets. Still later, as t
the examples given in T
As their lenders, suppliers, customers and competitors switch to inter- pertaining to lease accounting. This will include reviewing thechannels
account- open to mode
national financial reporting standards, even privately-owned retailers ing treatment of pre-opening costs, rent-free periods, step rent, other
will be affected. David Bromley, partner at PricewaterhouseCoopers, lease incentives, contingent rental payments, as well as asset book,
retire- and new channe
discusses some of the special considerations for retailers, such as ment obligations. Under IFRS, the classification of leases is determined
leases and loyalty programs. using guidelines that are more qualitative in nature and requirea morerecent innovation kn
Q Who does IFRS apply to in the retail sector? professional judgment. In addition, a new IFRS standard on leases is
expected to be issued in the coming years, which may require of the world.
all leases
A IFRS is relevant to all publicly listed retail companies. But a Canadian
to be capitalized on the balance sheet. This could have a significant
retailer that is private could also be interested in IFRS. For fiscal years
impact on the financial statements of retail companies.
beginning on or after Jan. 1, 2011, retailers in the private sector will have
to choose either to adopt IFRS or Canadian GAAP for Private Enter- Q I’ve heard IFRS referred to as standing for, “I feel really stressed.”
prises. IFRS may be the best alternative if you are considering going Do you have a sense of how well prepared retailers are for this?
THE FLOW O
public in the future, have an exit strategy that could involve acquisition A PricewaterhouseCoopers LLP conducted a survey with the Canadian
by an IFRS reporter or private-equity interest, or have banking institu-
tions that require IFRS-compliant financial statements. LO1, 2 2.2
Financial Executives Research Foundation during April 2009 to gauge
the progress of Canadian companies in their conversion to IFRS. Of
the 147 public companies that were surveyed, 80% indicated they
Q Are there any aspects of IFRS that impact retailers differently from other
businesses or issues unique to retail that affect the transition in any way? remained short of the halfway mark in their overall conversion process.
The money that corpor
A Retail companies normally have a significant number of leased loca-
tions across the country. That means retailers are going to have to
Source: Excerpted from Hollie Shaw, “Rebalancing the Financials: Retail,” Financial
Post, September 24, 2009, FP14. Material reprinted with the express permission of
But there can be ma
focus on identifying differences between Canadian GAAP and IFRS National Post, a division of Postmedia Network Inc.
The road can pass thro
Leasing Affects Book Income Leasing can make the firm’s balance sheet and income
statement look better by increasing book income or decreasing book asset value, or both.
Let’s start with the s
In Motion (RIM) in its
A lease that qualifies as off-balance-sheet financing affects book income in only one way:
the lease payments are an expense. If the firm buys the asset instead and borrows to finance
The red arrows in Figu
it, both depreciation and interest expense are deducted. Leases are usually set up so that
payments in the early years are less than depreciation plus interest under the buy-and-borrow
investment
alternative. Consequently, leasing increases book income in the early years of an asset’s life.
in this sim
assets (the denominator in the book-rate-of-return calculation) is understated if the leased
of
(arrow 1) or it can rei
asset never appears on the firm’s balance sheet.
Cash retained and
Leasing’s impact on book income should in itself have no effect on firm value. In efficient
means
capital markets, investors will look through the firm’s accounting results to the true value of additional saving
the asset and the liability incurred to finance it.
reinvested in the out to those sharehold
LO2, 3 17.3 VALUING LEASES firm’s operations taking and spending th
is cash saved
Typically, any analysis of leasing an asset involves examining the costs and benefits of this
option relative to the alternative: buying the asset. In this section, we discuss how operating
Of course, this sma
and invested on loan, for example. The
and financial leases are valued.
OPERATING LEASES
behalf of the firm’s In this case investors’ s
Leases can be attractive for a variety of reasons. However, the decision to lease requires
Now consider a lar
shareholders.
careful calculation of the cash inflows and outflows from the lease. If you are considering
an operating lease, decide whether it is cheaper to lease the asset for the time that you need
it or to buy it. Figure out the equivalent annual cost of buying the asset and compare What’s
it to different? Scale, 6
6 Look back at Chapter 8 for a review of equivalent annual cost and an example of the analysis of an operating lease.
36 555
bre24962_ch17_549-570.indd 555 12/08/15 03:40 PM
 of dividend payment depends partly on how investors will interpret the decision
year’s dividend was only $50, investors might regard a dividend payment of $100 as a
Financial models a confident management; if last year’s dividend was $150, investors might not be so c
ensure consistency with a payment of $100. The alternative of paying $180 in dividends and making
between growth shortfall by issuing more debt leaves the company with a debt-equity ratio of 77%.
assumptions and unlikely to make your bankers edgy but you may worry about how long you can co
Preface financing plans, but
they do not identify
to finance expansion predominantly by borrowing.
Our example shows how experiments with a financial model, including changes
xvii
the best financing plan. model’s balancing item, can raise important financial questions. But the model do
answer these questions.

CHECK POINT QUESTIONS

Numbered Check Point boxes with questions are provided
in each chapter to enable students to check their under-
standing as they read. Both conceptual and calculation-type
questions have been included in this edition. Answers are
provided at the end of each chapter.
KEY FORMULAS
Key mathematical formulas, identified by a number, are called out in the
net operating text.
working
(NOWC) Operating current
A summary of these key formulas can be found by visiting Connect.
assets minus operating current
Check Point 19.1 Suppose that the firm decides to maintain its debt-equity ratio at 800/1,200 = 2/3. It is comm
to increasing assets by 10% to support the forecast increase in sales, and it strongly believe
a dividend payment of $180 is in the best interests of the firm. What must be the balancing i
What is the implication for the firm’s financing activities in the next year?
AN IMPROVED FINANCIAL PLANNING MODEL
Now that you have grasped the idea behind financial planning models, we can move
more sophisticated example.
Table 19.4 shows 2014 financial statements for Yummy Food Company, a fictiona
pany (all numbers shown with thousands dropped to save space). Revenue was $2,00
Its 2014 earnings before interest and taxes (EBIT), $200,000, were 10% of sales revenu
income was $96,000 after payment of taxes and 10% interest paid on $400,000 of lon
debt. The company paid out two-thirds of its net income as dividends.
capital The first entry on the balance sheet is net operating working capital (NOWC
ating current assets minus operating current liabilities. Operating current assets con
liabilities, excluding interest- current assets needed for the operation of the business, including trade receivables, p
bearing debt. expenses, inventory, and cash needed to operate the business. Non-operating current

KEY TERMS
Key terms, when introduced, appear in colour and bold in the main text and
are defined in the margin. A glossary made up of all these definitions is also
available at the back of the book and on Connect. bre24962_ch19_595-621.indd 601 12/22/15

Fourth Pass

CALCULATOR BOXES AND

EXERCISES
In a continued effort to help students grasp the
critical concept of time value of money, many
pedagogical tools have been added throughout
the text. Financial Calculator boxes provide
examples of solving a variety of problems with
FINANCIAL CALCULATOR
An Introduction to Financial Calculators
Financial calculators are designed with present value and future value Why does the minus sign appear? Most calculators treat cash flows
formulas already programmed. Therefore, you can readily solve many as either inflows (shown as positive numbers) or outflows (negative
problems simply by entering the inputs for the problem and punching
a key for the solution.
numbers). For example, if you borrow $100 today at an interest rate of
12%, you receive money now (a positive cash flow), but you will have to
The basic financial calculator uses five keys that correspond to the
inputs for common problems involving the time value of money.
pay back $112 in a year, a negative cash flow at that time. Therefore, the
calculator displays FV as a negative number. The following time line of

directions for the three most popular financial n i PV FV PMT

cash flows shows the reasoning employed. The final negative cash flow
of $112 has the same present value as the $100 borrowed today.

calculators. Each key represents the following input:

PV  $100

• n is the number of periods. (We have been using t to denote the
length of time, or number of periods. Most calculators use n for
the same concept.)
• i is the interest rate per period, expressed as a percentage (not
a decimal). For example, if the interest rate is 8%, you would
enter 8, not .08. On some calculators this key is written I/Y
or I/YR. (We have been using r to denote the interest rate or
discount rate.)
• PV is the present value.
• FV is the future value.
• PMT is the amount of any recurring payment (called an annuity).
In single cash-flow problems such as those we have considered so
far, PMT is zero.
Given any four of these inputs, the calculator will solve the fifth. We will
Year: 0 1
FV  $112
If, instead of borrowing, you were to invest $100 today to reap a
future benefit, you would enter PV as a negative number (first press
100, then press the +/− key to make the value negative, and finally
press PV to enter the value into the PV register). In this case, FV would
appear as a positive number, indicating that you will reap a cash inflow
when your investment comes to fruition.
Present Values
Suppose your savings goal is to accumulate $10,000 by the end of
Thirdto Pass
30 years. If the interest rate is 8%, how much would you need invest
today to achieve your goal? Again, there is no recurring payment

EXCEL SPREADSHEETS AND

illustrate with several examples.
involved, so PMT is zero. We therefore enter the following: n = 30;
Future Values i = 8; FV = 10,000; PMT = 0. Now compute PV, and you should get
an answer of −993.77. The answer is displayed as a negative number

EXHIBITS
Recall Example 5.1, where we calculated the future value of Peter
Minuit’s $24 investment. Enter 24 into the PV register. (You enter because you need to make a cash outflow (an investment) of $993.77
EXCEL
the value SPREADSHEET
by typing 24 and then pushing the PV key.) We assumed an now in order to enjoy a cash inflow of $10,000 in 30 years.
interest rate of 8%, so enter 8 into the i register. Because the $24 had
Excel Spreadsheet boxes are integrated into 380 years to compound, enter 380 into the n register. Enter 0 into
Finding the Interest Rate
The 47-year IOU from Puerto Rico in Example 5.3 sold at $94.40 and

many chapters and provide the student with
detailed examples of how to use spreadsheets in
applying financial concepts. They give students
Internal Rate of Return
the PMT register because there is no recurring payment involved in
the calculation. Now ask the calculator to compute FV. On some calcu-
promised a final payment of $1,000. We may obtain the market inter-
est rate by entering n = 47, FV = 1,000, PV = −94.40, and PMT = 0.
lators you simply press the FV key. On others you need to first press
Compute i and you will find that the interest rate is 5.15%. This is the
the “compute” key (which may be labelled COMP or CPT), and then
press FV. The exact sequence of keystrokes for three popular financial
value we computed directly (but with more work) in the “Finding
the Interest Rate” section of this chapter.
calculators is as follows:* A B C D E
How Long an Investment?
F

1 Calculating IRR byInUsing a Spreadsheet

a valuable introduction to financial modelling. Hewlett-Packard
HP-10B
Sharp
EL-738C
Texas Instruments
BA II Plus
Example 5.5, we consider how long it would take for an investment
to double in value. This sort of problem is easily solved using a cal-
2 culator. If the investment is to double, we enter FV = 2 and PV = −1.
We show how spreadsheets can be used in time- 24
380
PV
N
24
380
PV
n
24
380
PV
N
If the interest rate is 9%, enter i = 9 and PMT = 0. Compute n and you
will find that n = 8.04 Formula
years. If the interest rate is 9.05%, the doubling
83
value-of-money and security valuation problems, 8
0
I/YR
PMT 0
tYear
PMT
Cash Flow
8 I/Y
0 PMT
period falls to 8 years, as we found in the example.

in capital budgeting, and in long- and short-term FV COMP4 FV 0 2350,000

CPT FV IRR 5 *The BA
0.1296 5IRR(B4:B7)
II Plus calculator requires a little extra work to initialize. When you buy
the calculator, it is set to automatically interpret each period as a year and assumes
that interest compounds monthly. In our experience, it is best to change the com-
You should find after hitting
5 the1FV key that16,000
your calculator shows
planning applications. Questions that apply to a value of −120.5697 trillion, which, except for the minus sign, is the
pounding frequency to once per period. To do so, press 2nd {P/Y} 1 ENTER , then
press 1 ENTER and finally press 2nd {QUIT} to return to standard calculator
future value of the $24. mode. You should need to do this only once, even if the calculator is turned off.
the spreadsheet are included. These spreadsheets 6 2 16,000

are also available on Connect. Selected Exhibits 7 3 466,000

139
are set as Excel Spreadsheets. Calculating internal rate of return in Excel is as easy as listing the proj- (left), and then calculate IRR as we do in cell E4. As always, the interest
ect cash flows. For example, to calculate the IRR of the office-block rate is returned as a decimal.
project, you could simply type in its cash flows as in the spreadsheet

bre24962_ch05_128-177 139 12/08/15 03:23 PM

Check Point 8.3 Suppose the cash flow in year 3 is only $416,000. Redraw Figure 8.3. How would the IRR change?

Check Point 8.4 Suppose that a company invests $60,000 in a project. The project generates a cash inflow of
$30,000 a year for each of 3 years and nothing thereafter. For simplicity, we assume there are no
taxes.
Calculate the project’s internal rate of return. (If you do not have a financial calculator or spread-
sheet program, this will require a little trial and error.)
 Key Terms
annual percentage rates (APR) future value (FV) present value interest factor
annuity future value factor real interest rate
annuity due future value interest factor real value of $1
annuity factor growing annuity simple interest
compound interest growing perpetuity
xviii Preface discount factor
discount rate
inflation
nominal interest rate
effective annual interest perpetuity
rate (EAR) present value (PV)

END-OF-CHAPTER FEATURES Questions and Problems

Questions with online Excel templates or datasets are marked Third Pass
The end-of-chapter features offered to support with and can be found on Connect.

BASIC 5. Calculating Interest Rate. Find the interest rate

the concepts presented are Summary, Key Terms, 1. Present Values. Compute the present value of a implied by the following combinations of present
and future values: (LO4)
$100 cash flow for the following combinations of
Questions and Problems, Solutions to Check discount rates and times: (LO2) Present Value Years Future Value
a. r = 8%, t = 10 years Fourth Pass
Points, and Mini Cases. To help students achieve b. r = 8%, t = 20 years
c. r = 4%,
$400
$183
11
4
$684
$249
Chapter 22t = 10Credit
years Management and Collection 699
the stated learning objectives, the LO numbers d. r = 4%, t = 20 years $300 7 $300

2. Future Values. Compute the future value of a $100 6. Present Values. Would you rather receive $1,000
are included in both the Summary and theQuestions
Ques- and Problems cash flow for the same combinations of rates and
times
per year for 10 years or $800 per year for 15 years if
56 as in problem 1. (LO1) Part 1 Introduction a. the interest rate is 5%? (LO3)
tions and Problems. The Questions andQuestionsProb-with online Excel templates
3. Future Values. You deposit $1,000 into your bank
or datasets are marked
account. If the bank pays 4% simple interest, how
b. the interest rate is 20%? (LO3)
c. Why do your answers to parts (a) and (b) differ?
with and can be found on Connect. 21. Internet. Barclays Canada provides many of the CHALLENGE
lems incorporate questions requiring Internet much will you accumulate in your account after
exchange-traded funds listed on the TSX. Go to
10 years? If the bank pays compound interest, how
7. Present Values. What is the present value of
24. Internet. www.globefund.com,
Go tostream if the interest rate find
is “Fund
BASIC www.ishares.ca and explore 3 different ETFs. The the following cash flow
access, questions with guided steps, integrative much of your earnings will be interest on interest?
(LO1)
1. Trade Credit Rates. Company each X sells onouta the
1/20,
Filter” under “Inside Funds” in the middle of the
list is found on the home page under “Products.” For 5%? (LO3)page. Select an asset class that interests you. For
ETF, find name of the 5. Trade
market Credit Rates.
index that example,A firm
under currently
Years Cash Flow offers terms
the “Aggressive Growth” category,
questions, qualitative/conceptual questions, and Present the
net 60, basis. Customer 4.Y buys Values.
goods
If you earn
past5%
ETF isYou
with anwill
interest
returns, andon
require
replicating.
invoiceNote$700
your
fund funds,
fees.
in 5 top
the EFT’s years.
(LO2)how much
of5 sale
holdings,
of 3/20, net pick40.“Science
Whatand effect will theandfollow-
Technology,” click on “Get 1 $200
of $1,000. (LO2) ing actions have onResults.” Click on interest
the implicit each of the tabscharged
rate across the page 2 $400
questions requiring the use of Excel or an equiva-
a. How much can Y deduct
will you need to invest today in order to reach your
22. Internet. Go to www.theglobeandmail.com/
from
savings goal? the
(LO2)bill if it pays
globe-investor/funds-and-etfs/fund-lookup, to customers thatfunds.
and see what information is provided for the mutual
pass(LO3)
up the cash discount? State
3 $300

lent spreadsheet program. Questions are grouped on day 20?

b. How many extra days of credit
find “Fund Lookup.” Next, click on “Fund
cana Yfund
Select receive
whether
if itthen pick 3 funds
company,
Company.”the implicit
operated(LO2)
25. Internet.interest rateFund
Using the willFilter
increase or
from question 24,
decrease. find a mutual fund offering a similar investment
according to level of difficulty. passes up the cash discount? by the fund company and get the fund profiles for
each. Note the funds’ investment objectives, a. Thetop objective for each
terms are changed to 4/20, net 40. of the ETFs you found in
21. Compare the top 5 holdings, risks, past returns,
question
c. What is the effective annual 5rate of interest
holdings, risks, past if returns,
Y and fundb. fees.
The terms are and
Note changed to 3/30, net 40.of the07:43
bre24962_ch05_128-177 166 fund fees. Note the name11/16/15 index
PM chosen
pays on the due date rather than day of20?
the name the index chosen as the benchmark c. The for terms are as changed to 3/20,
the benchmark net 30. the mutual fund’s
for measuring
measuring the funds’ performances. (LO2)
Internet Problems 2. Terms of Sale. Complete the following passage by performances. (LO3)
23. Internet. We mentioned in Chapter 1 that large 26. Financial Markets. In most years, new issues of
selecting the appropriate terms banks fromhave thetheir
following
fingers in many INTERMEDIATE
pies. The Web sites stock are a tiny fraction of total stock market trading.
list (some terms may be used more of than once):
the very largest accep-banks are equally massive. The
Many problems are provided that are meant to be solved using the tance, open, commercial, trade, Royal Bank his
Canada, of Canadaor her 6. Trade Credit
(www.royalbank.com) and andIn other words, secondary market volume is much
Receivables. A firm offers terms
greater than primary market volume. Does the fact
Scotiabank (www.scotiabank.com) areof examples of
2/15, net 30. Currently, two-thirds of sell
all new
custom-
wealth of material available on the Internet. own, note, draft, account, promissory, bank, banker’s,
two of Canada’s largest banks with relatively straight-
that firms only
ers take advantage of the trade discount;
that the stock
occasionally
market
shares mean
the irrelevant
is largely remain- to the
the customer’s. (LO1) forward Web sites. Use these sites to find what financial manager? (LO2, LO3)
services banks provide to individuals, small busi- der pay bills at the due date. (LO5)
Most goods are sold on ____________________nesses, . In andthis case the a.LO4)
What will be the firm’s typical value for its trade
Excel Questions
large corporations. (LO2, LO3,
only evidence of the debt is a record in the seller’s receivables period? (See Section 20.2 for a review
books and a signed receipt. When the order is very of the trade receivables period.)
Excel questions, identified by an arrow icon in the margin, are avail- large, the customer may be asked Solutions
to signto Check
a(n) Points
____________________, b. What is the average investment in trade receivables
which is just a simple IOU. 2.1 An a.alternative
Corporationsissell forsecurities
the in the primary ifmarket. and invest savings. These financial institutions raise
annual salesmoneyare $20 million?
able for download on Connect. seller to arrange a(n) ____________________ ordering Thepayment
securities by
market.
are the later traded in the secondary
c. What would orlikely
in special ways, such as by accepting deposits
selling happen to the They
insurance policies. firm’s
not trade
only invest in
customer. In order to obtain the b.goods, the customer
The first public offering of shares by a corporation receivables period if itbut
securities changed
also lendits termstotobusinesses.
directly 3/15, They
must acknowledge this order and sign is itsthe document.
initial public offer. Any public offering of provide various other financial services as well.
Mini Cases This signed acknowledgment is known shares
asafter
a(n)that is a seasoned equity offer.
____________________.
c. The capital market is for long-term
net 30?
Terms the
7. financing,
2.4 Liquidity, risk reduction by investment in diversified
of Sale. Microbiotics currently sellsa all of itsfund, for
Sometimes the seller may also ask ____________________ bank to sign
money market for short-term financing.
portfolios of securities (through mutual
frozen dinners cash on delivery
informationbut believes it can
Integrative mini cases end many chapters. These allow students to the document. In this case it is known as a(n) ____________________.
d. The market for stocks versus the market for bonds
increase sales2.5
example),
by offering supermarkets
provided by trading.
oneavoid
month of
and other debt securities. Rhonda and Reggie need not high-dividend
3. Terms of Sale. Indicate which firm, of each pair,
apply their knowledge to relatively complex, practical situations. Sev- you would expect to grant shorter
2.2 Efficient diversification and professional management.
or longer credit
free credit. The price stocks.per They carton is $50the
can reinvest anddividends
the cost and keep
Pension funds offer an additional advantage, carton is $40.reinvesting
per because (LO5) until it’s time to pay the tuition bills.
eral new such cases have been added for this edition. periods: (LO4) investment returns are not taxed untila.withdrawn If unit sales will
(They will have to pay taxes on the dividends,
increase
however, whichfrom could1,000affectcartons to
their investment
a. One firm sells hardware; the from other thebread.
fund.
1,060 per month, should the firm offer
strategy. We discuss dividends andthe
taxescredit?
in Chapter 18.)
b. One firm’s customers have 2.3 anMutual funds are
inventory financial intermediaries that pool
turnover
and invest money raised from investors in The interest
portfo- 2.6 rate
It isisnot
1% apergoodmonth, and ifallthe
investment customers
opportunity cost
ratio of 10; the other’s a turnover of 15.
MARKET LEADING TECHNOLOGY c. One firm sells mainly to electric
lios of securities. Banks and insurance companies
are financial utilities;
institutions thethat do more than
will pay their ofbills.
b. just
What
capital is 15%. The investment offers only a 12%
pool if the interest
return. rate is 1.5% per month?
other mainly to fashion boutiques. c. What if the interest rate is 1.5% per month, but
4. Payment Lag. The lag between purchase date and the firm offers the credit only as a special deal to
the date at which payment is due is known as the new customers, while old customers continue to
terms lag. The lag between the due date and the date pay cash on delivery?
on which the buyer actually pays is termed the due 8. Credit Decision/Repeat Sales. Locust Software
lag, and the lag between the purchase and actual sells computer training packages to its business cus-
McGRAW-HILL CONNECT® payment dates is the pay lag. Thus
Pay lag = terms lag + due lag
tomers at a price of $101. The cost of production (in
present value terms) is $95. Locust sells its packages
McGraw-Hill Connect® is an award-winning digitalState howteaching andthelearning
you would expect platform
following events to that gives
on terms students
of net 30 and estimates the
that means
about 7% of toall better
affect each type of lag: (LO5) orders will be uncollectible. An order comes in for
connect with their coursework, with their instructors,
a. The company and with
imposes thecharge
a service important
on late concepts that
20 units. The they
rate iswill
1% perneed
bre24962_ch02_033-056.indd 56
interest to know for
month. (LO5)
10/09/15 10:15 PM

success now and in the future. With Connect, instructors can take advantage of McGraw-Hill’s
payers.
b. A recession causes customers to be short of cash.
trusted
a. Should the firm extend content
credit if this to seam-
is a one-time
order? The sale will not be made unless credit is
lessly deliver assignments, quizzes, and tests online. McGraw-Hill
c. The company Connect
changes its terms from net 10istoa learning platform that continually adapts to
extended.
net 20. b. What is the break-even probability of collection?
individual students, delivering precisely what they need, when they need it, so class time is more engaging and effective.
Connect makes teaching and learning personal, easy, and proven.

CONNECT KEY FEATURES

bre24962_ch22_682-703.indd 699 01/06/16 06:51 PM

SmartBook®
As the first and only adaptive reading experience, SmartBook is changing the way students read and learn. SmartBook
creates a personalized reading experience by highlighting the most important concepts a student needs to learn at that
moment in time. As a student engages with SmartBook, the reading experience adapts by highlighting content on the basis
of what he or she knows and doesn’t know. This ensures a focus on the content needed to close knowledge gaps, while
simultaneously promoting long-term learning.

Connect Insight®
Connect Insight is Connect’s new one-of-a-kind visual analytics dashboard—now available for instructors—that provides at-a-
glance information regarding student performance, which is immediately actionable. By presenting assignment, assessment,
 Preface xix

and topical performance results together with a time metric that is easily visible for aggregate or individual results, Connect
Insight gives instructors the ability to take a just-in-time approach to teaching and learning, which was never before avail-
able. Connect Insight presents data that helps instructors improve class performance in a way that is efficient and effective.

Simple Assignment Management

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ing. It allows you to
• Assign SmartBook learning modules
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INSTRUCTOR’S MANUAL
This supplement, completed by our authors, includes a descriptive preface containing alternative course formats and case
teaching methods, a chapter overview and outline, and key terms and concepts. Complete solutions to all end-of-chapter
problems are included.

COMPUTERIZED TEST BANK

For the computerized test bank, David Roberts of South Alberta Institute of Technology has adapted test questions that
consist of true/false, multiple-choice, and short-answer questions. Questions are identified by level of difficulty, and com-
plete answers are provided for all questions and problems, along with reference to the relevant chapter learning objective.

MICROSOFT® POWERPOINT® SLIDES

These visually stimulating slides—fully updated by Tanya Willis of Saint Mary’s University with colourful graphs, charts, and
lists—can be edited or manipulated to fit the needs of a particular course.

IMAGE GALLERY
The complete set of figures from the text can be downloaded from the image gallery on Connect and easily embedded into
instructors’ PowerPoint slides. They allow you to
• Assign eBook readings and draw from a rich collection of textbook-specific assignments
• Access instructor resources, including ready-made PowerPoint presentations and media to use in your lectures
• View assignments and resources created for past sections
• Post your own resources for students to use
xx Preface

eBOOK
Connect reinvents the textbook learning experience for the modern student. Every Connect subject area is seamlessly inte-
grated with Connect eBooks, which are designed to keep students focused on the concepts key to their success.
• Provide students with a Connect eBook, allowing for anytime, anywhere access to the textbook
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• Pinpoint and connect key concepts in a snap using the powerful eBook search engine
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SUPERIOR LEARNING SOLUTIONS AND SUPPORT

The McGraw-Hill Education team is ready to help instructors assess and integrate any of our products, technology, and
services into your course for optimal teaching and learning performance. Whether it’s helping your students improve their
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ing Solutions Consultant today to learn how to maximize all of McGraw-Hill Education’s resources.
For more information, please visit us online: www.mheducation.ca/he/solutions.

ACKNOWLEDGMENTS
We take this opportunity to thank all those who helped us prepare this edition. We want to express our appreciation to the
instructors whose insightful comments and suggestions were invaluable to us during this revision.
We also want to extend much gratitude to you, the student using this textbook. Your criticisms and comments have
made each subsequent edition so much better. William Lim was a third-year B.Com. student at the University of Alberta
in 1985–86 and used the first-ever Canadian edition of a Brealey/Myers textbook in his introductory finance course taught
by Professor Gordon Sick, the Brealey/Myers/Sick/Whaley text Principles of Corporate Finance. It is our hope that, one day
in the not-too-distant future, one or several of you will likewise be inspired to adapt a Brealey/Myers text for Canadian
students.
We owe much to our colleagues at the University of New Brunswick and the School of Administrative Studies, York
University.
Thanks go to Professors Gopalan Srinivasan, Eben Otuteye, and Muhammad Rashid, University of New Brunswick, for
useful suggestions, and also to the Faculty of Business Administration, University of New Brunswick, for some research sup-
port on this project.
Additional thanks to Professors Razvan Boconcios and Rui Wang Miller, York University, for sharing their expertise and
assistance regarding IFRS, financial ratios, bond and stock valuation, and mergers and acquisitions.
We would like to express our appreciation to Navid Kheradmand and Alexandre Deslongchamps, University of New
Brunswick, for adept research and computational assistance. Additional thanks go out to Alexandre Deslongchamps for
work on some end-of-chapter problem solutions.
Furthermore, we are grateful to the following recent York University BAS graduates for their research assistance
and work on the end-of-chapter problems: Mashal Alassaf, Michael Baggetta, Jie Dang, Sanah Hasan, and Shengyuan
Stanley Zhu.
Thanks to Mariana Ionescu for the technical review of the text. In addition, we would like to thank our supplement
authors David Roberts and Tanya Willis, whose efforts will help students and instructors alike.
We are also grateful to the talented staff at McGraw-Hill Ryerson, especially Alwynn Pinard, Product Manager; Daphne
Scriabin, Product Developer; and Joanne Limebeer, Supervising Editor. We want to thank copy editor Rodney Rawlings for
his energetic attention to the details.
Devashis Mitra would like to extend heartfelt thanks to Elizabeth Maynes, his co-author on the previous four Canadian
editions, for her dedication, strong commitment, and hard work. Elizabeth was instrumental in putting together the chapter
on leasing, which is one of the unique and distinguishing features of the Canadian adaptation.
William Lim would like to express his gratitude to Elizabeth Maynes for initiating the comprehensive revision plan for
this Canadian edition.
Finally, we cannot overstate our indebtedness to Koumari Mitra, to Anusha Mitra, Devashis’ daughter, and to Brenda
Siok Hoon Tay-Lim and Nicolas Lim, William’s son. They supported us and forgave us when we were very absorbed in the
project.
 Preface xxi

PRELIMINARY REVIEW PRE-WRITING REVIEW

Keith C.K. Cheung, Odette School of Business, Barb Bloemhof, McMaster University
University of Windsor Raad Jassim, McGill University
Bob Chow, Kwantlen Polytechnic University Keith Cheung, University of Windsor
Bill Dawson, University of Western Ontario Nancy Bower Martin, University of Guelph
Larbi Hammami, McGill University W. Fraser Wilson, MacEwan University
Dave Jailal, Seneca College
Audrey Lowrie, MacEwan University
H. Semih Yildirim, York University
Don Smith, Georgian College
PART 1
Introduction
CHAPTER
1
1 Goals and Governance
of the Firm GOALS AND GOVERNANCE
2 Financial Markets and
Institutions OF THE FIRM
3 Accounting and Finance
4 Measuring Corporate
Performance

Learning Objectives
After studying this chapter, you should be able to:
LO1 Give examples of the investment and financing decisions that financial
managers make.
LO2 Distinguish between real and financial assets.
LO3 Cite some of the advantages and disadvantages of organizing a busi-
ness as a corporation.
LO4 Describe the responsibilities of the CFO, the treasurer, and the
controller.
LO5 Explain why maximizing market value is the logical financial goal of the
corporation.
LO6 Explain why value maximization is usually consistent with ethical
behaviour.
LO7 Explain how corporations mitigate conflicts and encourage cooperative
behaviour.
LO8 Give examples of career paths in finance.

For an organization to grow from small beginnings to a major corporation,
good investment and financing decisions need to be made.
Frank Kovalcheck via Alaskan Dude/Flickr/CC BY 2.0
To carry on business, a corporation needs an almost endless
variety of assets. Some are tangible assets such as plant and
machinery, office buildings, and vehicles; others are intan-
gible assets such as brand names and patents. Corporations
finance these assets by borrowing, by reinvesting profits
back into the firm, and by selling additional shares to the
firm’s shareholders. Therefore, the firm’s financial managers
face two broad questions: First, what investments should
the corporation make? Second, how should it pay for those
investments? The investment decision involves spending
money; the financing decision involves raising it.
We start this chapter with examples of recent investment
and financing decisions by major U.S. and foreign corpora-
tions. We review what a corporation is and describe the roles
of its top financial managers. We then turn to the financial
goal of the corporation, which is usually expressed as maxi-
mizing value, or at least adding value. Financial managers
add value whenever the corporation can invest to earn a
higher return than its shareholders can earn for themselves.
But is maximizing value really a sound and realistic goal?
If a corporation maximizes value for its shareholders, can
it also be a good corporate citizen? If we ask managers to
increase firm value, won’t they be tempted to cut corners
and try dishonest tricks? Will the managers really focus
on increasing value, or will they pursue their own narrow,
selfish interests? We consider the conflicts of interest that
arise in large corporations and the mechanisms that help to
align the interests of managers and stockholders.
Finally, we look ahead to the rest of this book and look
back to some entertaining snippets of financial history.

LO1, 2 1.1 INVESTMENT AND FINANCING DECISIONS

The history of the Tim Hortons chain can be traced back to May 1964, when the first
Tim Hortons coffee and donut shop was opened in Hamilton, Ontario, by Tim Horton, a
National Hockey League All-Star defenceman. In 1967, Ron Joyce, who at that time operated
three Tim Hortons restaurants, partnered with Tim Hortons to open 37 restaurants over the
next seven years. After the passing of Horton in 1974, Joyce took over as sole owner and
continued the chain’s expansion within Canada and abroad. The chain’s focus on top quality,
fresh products, high service standards, and community leadership has enabled it to grow into
the largest quick-service restaurant chain in Canada specializing in always fresh coffee, baked
goods, and home-style lunches.
The first stores offered only coffee and two donut selections, the Apple Fritter and the
Dutchie. While these items were popular in the 1960s, with evolving consumer taste the
company introduced Timbits in 1976 (bite-sized pieces or “donut holes”)—available today
in 35 varieties—muffins and cookies (1981), croissants (1983), soups and chilli (1985), and
sandwiches (1993). Over the years, the company has come out with a variety of other food
and beverage items, catering to a wide range of tastes: healthy-choice meals such as chicken
salad wraps, yogurt and berries, a full slate of breakfast and lunch sandwiches, cinnamon
rolls, and a wide array of beverages including flavoured coffee, cappuccino, iced coffee, and
smoothies. To date, however, the chain’s biggest draw remains its legendary Tim Hortons coffee.
As of July 2011, the company had 3,189 restaurants across Canada and 622 restaurants
in the United States. In 2011, the company also signed a licence agreement with Apparel
Group FZCO of Dubai to open up to 120 restaurants under the Tim Hortons name over the
next five years in the United Arab Emirates, Qatar, Bahrain, Kuwait, and Oman. That year,
five locations were opened in the United Arab Emirates through this agreement. In addition,

2
Another random document with
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years of age, in the most approved method of saying “Turn Out.” So far
indeed has our zeal in this laudable undertaking carried us, that we have
actually communicated our ideas upon the subject to a lady, who, to quote
from her own advertisement, “enjoys the advantages of an excellent
education, an unblemished character, and an amiable disposition.” We are
happy to inform our friends and the public in general that Mrs. Simkins has
promised to devote her attention to this branch of female education. By the
end of next month she hopes to be quite competent to the instruction of
pupils in every mode of expressing “Turn Out”—the Distant Hint, the Silent
Bow, the Positive Cut, the Courteous Repulse, and the Absolute Rejection.
We trust that due encouragement will be given to a scheme of such general
utility.
In the meantime, until such academy, or seminary, or establishment shall
be opened, we invite our fair readers to the study of an excellent model in
the person of Caroline Mowbray. Caroline has now seven-and-twenty
lovers, all of whom have successively been in favour, and have been
successively turned out. Yet so skilfully has she modified her severity, that
in most cases she has destroyed hope without extinguishing love: the
victims of her caprice continue her slaves, and are proud of her hand in the
dance, although they despair of obtaining it at the altar. The twenty-seventh
name was added to the list of her admirers last week, and was (with the
most heartfelt regret we state it) no less a personage than the Hon. Gerard
Montgomery. Alas! unfortunate Gerard!

Quantâ laboras in Charybdi,

Digne puer meliore flammâ.

He had entertained us for some time with accounts of the preference with
which he was honoured by this miracle of obduracy, and at last, by dint of
long and earnest entreaty, prevailed upon us to be ourselves witness to the
power he had obtained over her affections. We set out therefore, not without
a considerable suspicion of the manner in which our expedition would
terminate, and inwardly anticipated the jests which “The King of Clubs”
would infallibly broach upon the subject of Gerard’s “Turn Out.”
Nothing occurred of any importance during our ride. Gerard talked much
of Cupids, and Hymen; but, inasmuch as we were not partakers of his
passion, we could not reasonably be expected to partake of his inspiration.
 Upon our arrival at Mowbray Lodge we were shown into a room so
crowded with company that we almost fancied we had been ushered into
the Earl’s levee instead of his daughter’s drawing-room. The eye of a lover,
however, was more keen. Gerard soon perceived the Goddess of the Shrine
receiving the incense of adulation from a crowd of votaries. Amongst these
he immediately enrolled himself, while we, apprehensive that our company
might be troublesome to him, hung back, and became imperceptibly
engaged in conversation with some gentlemen of our acquaintance. To
speak the truth, on our way to the Lodge these “Thoughts on Turn Out” had
been the subject of our reveries, and whatever expressions or opinions we
heard around us appeared to coincide with the cogitations with which we
were occupied. We first became much interested in the laments of an old
gentleman who was bewailing the “Turn Out” of a friend at the last election
for the county of——. Next we listened to an episode from a dandy, who
was discussing the extraordinary coat “turned out” by Mr. Michael Oakley
at the last county ball. Finally, we were engaged in a desperate argument
with a Wykehamist, upon the comparative degree of talent “turned out”
from each of the public schools during the last ten years. Of course we
proceeded to advocate the cause of our foster-mother against the
pretensions of our numerous and illustrious rivals. Alas! we felt our
unworthiness to stand forward as Etona’s panegyrist, but we made up in
enthusiasm what we wanted in ability. We ran over with volubility the
names of those thrice-honoured models, whose deserved success is
constantly the theme of applause and the life-spring of emulation among
their successors. We had just brought our catalogue down to the names of
our more immediate forerunners, and were dwelling with much
complacency on the abilities which have during the last few years so nobly
supported the fair fame of Eton at the Universities, when our eye was
caught by the countenance of our hon. friend, which at this moment wore an
appearance of such unusual despondence, that we hastened immediately to
investigate the cause. Upon inquiry, we learned that Montgomery was most
romantically displeased, because Caroline had refused to sing an air of
which he was passionately fond. We found we had just arrived in time for
the finale of the dispute. “And so you can’t sing this to oblige me?” said
Gerard. Caroline looked refusal. “I shall know better than to expect such a
condescension again,” said Gerard, with a low sigh. “Tant mieux!” said
Caroline, with a low curtsey. The audience were unanimous in an unfeeling
laugh, in the midst of which Gerard made a precipitate retreat, or, as
O’Connor expresses it, “ran away like mad,” and we followed him as well
as we could, though certainly not passibus æquis. As we moved to the door
we could hear sundry criticisms on the scene. “Articles of ejectment!” said
a limb of the law. “The favourite distanced!” cried a Newmarket squire. “I
did not think the breach practicable!” observed a gentleman in regimentals.
We overtook the unfortunate object of all these comments about a hundred
yards from the house. His wobegone countenance might well have stopped
our malicious disposition to jocularity; nevertheless we could not refrain
from whispering in his ear, “Gerard! a decided turn out!” “I beg your
pardon,” said the poor fellow, mingling a smile’ for his pun with a tear for
his disappointment, “I beg your pardon; I consider it a decided take in.”
 SOLITUDE IN A CROWD.

“This is to be alone; this, this is solitude.”—Byron.

Reader! Were you ever alone in a crowd? If not, thank your stars, and
bestow a grain of pity upon those who must return a different response to
the question. A crowded solitude, if we may use such a strange expression,
is, in sober sadness, as melancholy a sensation as human nature is capable
of enduring.
A crowded solitude! If you are young, thoughtless, and talkative, you
will be astonished at the idea; and there will be nothing extraordinary in
your surprise. The ancient poets—poor ignorant souls!—have given us a
very different description of being alone. They have defined various kinds
of solitude, suited to various descriptions of men; but all of them are alike
founded on mistaken notions and groundless prejudice. Were we to follow
their opinions, we should place the solitude of the lover in whispering
groves, purling rills, and moonlight; that of the sage in a library or an
observatory; that of the poet in a dish of vegetables and a Sabine farm; and
à fortiori, that of the Etonian in an uncarpeted domicile, with a fractured
window on the one side and a smoking fire on the other. Is this solitude?
Far from it! We must most strenuously contend that true solitude is to be
found in a multitude.
We are aware that the solitude we are now discussing is not that which is
generally understood by the term. Many persons have probably never heard
of any but a corporeal solitude; that which we are describing is mental. The
one is to be found in caves and Caucasus; the other in theatres and
Almack’s. The former delights in moonshine—the latter in candelabras; the
first sets a great value upon the silence and pure air of the country—the
second gives the preference to the noise and squeeze of the fashionable
world; and which of these is real solitude—the corporeal, which is removed
from the sight and hearing of all objects; or the mental, which both hears
and sees a variety of things, and is utterly unconscious that it does either?
We are distrustful of our powers of description, and will therefore
endeavour to illustrate our meaning by examples. We are provided with
plenty, for we have still in our recollection Lady Mordaunt’s last “At
Home.” All the world was there. Whist, music, dancing, and last, not least,
eating, were all going on in the usual style at the same time; the squeeze in
the rooms was beyond parallel in the annals of ton; and of course we found
more solitude in that evening than we had done throughout the whole
season. We made our entrée when her ladyship was in her highest glory: she
was bowing to one, smiling to another, and curtseying to a third, and
straining every nerve and feature to do the proper to all her guests: this,
however, was as impossible as the number of her satellites was
innumerable; the tumult was tremendous; and there was so much bowing,
and begging pardon, and getting out of the way, that it was quite
impracticable to advance or recede a step. Good breeding and bare elbows
were thrust in our faces alternately; we with difficulty preserved our toes
from the frequent attacks made on them by kid slippers, and with still
greater difficulty preserved our hearts from the sweet smiles that said “I beg
ten thousand pardons.” It was a vortex of delight, and we were hurried so
rapidly in its eddies, that much time elapsed ere we were able to collect our
editorial serenity, in order to make a few observations on the scene before
us.
The multitude at length began very slowly to diminish; and, having
lodged ourselves in an unperceived corner of the music-room, we
proceeded, according to our ancient custom, to speculate upon character.
Our attention was first attracted by a tall gentleman of a very noble
appearance, who was leaning against a pillar, in an attitude of profound
meditation. His dress was after the English fashion, but the cast of his
features, and his short curling hair, sufficiently denoted him to be a
foreigner. His eyes were fixed directly upon us, but we satisfied our
curiosity by an attentive survey, without fear of detection, as his mind was
evidently some furlongs distant. Upon inquiry we heard that he was an
Indian chieftain, by name Teioninhokarawn (we have doubts as to the
correctness of our orthography). He had done considerable services to the
British arms in the American war, and had now been invited by her ladyship
as the lion of the evening. He had been surrounded without intermission by
a tribe of quizzers, loungers, and laughers, but one glance was sufficient to
convince us that Teioninhokarawn was—alone.
We observed Lady Georgiana Wilmot standing at the other side of the
room, the very picture of fatigue. She had been singing much, and was
evidently quite exhausted. Λ young star of fashion was moving towards her
with a languishing step; and, as we had a strong curiosity to hear his
address, we changed our station for that purpose. “‘Pon my soul,” the
gentleman began with a bow, “you are divine to-night.” “Am I?” said the
lady, with a vacant gaze. “Never heard you in better voice,” returned her
assailant. Her ladyship knew it was the tone of flattery, so she smiled, but
she had neither spirits nor sense sufficient to attempt an answer. We
immediately decided that Lady Georgiana was—alone.
We next proceeded to the card-room. At first the din, and the disputing,
and the quarrelling was so loud, that we doubted whether we should find
any solitude there; but another look convinced us of our mistake. Lord
Mowbray was evidently—alone. He was walking up and down, deliberating
whether he should sacrifice his conscience or his place at to-morrow’s
division. Not less apparent was the solitude of the Duchess of Codille;
although her Grace was busily engaged at cassino with a select party of
right honourables. She had been for a long time alone in the contemplation
of her new brocade, and was recalled into company by the vociferation of
her partner, “Rat me if I ever saw your Grace play so ill!”
We were about to retire to the ball-room, when we remarked our noble
hostess reclining on an ottoman, seemingly quite exhausted with
fashionable fatigue. She was still, however, exerting herself to do the
agréable, and was talking with appalling rapidity to every one who
approached her, although utterly unconscious of what she heard or said. We
advanced to pay our respects, and were saluted with “Ah, my lord! what has
kept you away so long? And there’s Ellen, poor thing, dying to see you!
Ellen, love!” With some difficulty we explained to her ladyship that she was
mistaken as to our rank. “Eh! Mon Dieu! Sir Charles,” she exclaimed.
“Pardonnez—but I’m really dead with ennui.” We allowed ourselves to be
knighted without further explanation, and made a precipitate retreat, for we
perceived that her ladyship, after the labour of the evening, would be very
glad to be—alone.
The first survey we took of the ball-room presented us with nothing but
cheerful faces and laughing eyes; at the second, we discovered even here
much and melancholy loneliness. There were moralists without sense, and
country squires without acquaintance; beaux without a thought, and belles
without a partner. We hastened to make a closer study of the various
characters which presented themselves.
 We first addressed ourselves to Mr. Morris, a respectable Member of
Parliament, with whom we had become acquainted the year before in
Norfolk. “What! you’re not a dancer, Mr. Morris?” we began. “By the Lord,
sir,” he returned, “if this Bill passes——” We passed on, much vexed that
we had intruded on our worthy friend’s solitude.
We were hastening to accost Maria Kelly, a very interesting girl, whose
lover had lately left this country for Minorca, when we were attracted by a
conversation between an exquisite and our old acquaintance, General Brose.
“Ah! General,” said the dandy, “how long have you ceased to foot it?”
“Foot!” interrupted the General, “by Jupiter! their cavalry was ten thousand
strong.” The old man was decidedly—alone.
Before we could reach the recess in which Maria was sitting, she had
been assailed by an impertinent. “May I have the honour and felicity——”
he began. The poor girl started from her reverie with a sort of vacant gaze,
and replied, “He sailed last Tuesday, sir!” “Sola in siccâ,” said the
impertinent, and lounged on. We had not the barbarity to speak to her.
Old Tom Morley, the misanthrope, had been admiring a wax taper in an
unthinking sort of way ever since we entered the room. We went up,
prepared to be witty upon him; but we had hardly opened our mouth when
he cut us short with “For God’s sake leave me alone!” and we left him—
alone. We were proceeding in our observations, when we saw Ellen
Mordaunt, the beautiful daughter of our hostess, surrounded by a set of
dashing young officers, at the other end of the room. We had just began to
examine the features of one of them, who was somewhat smitten, and
appeared prodigiously alone, when the idol herself turned upon us that
bright and fascinating eye,

Which but to see is to admire,

And—oh! forgive the word—to love!

We had originally inserted here a rhapsody on Ellen’s glance, which would

have occupied, as our printer assures us, three pages and a half; but, in
mercy to our friends, we have erased this, and shall content ourselves with
stating that we were alone for at least ten minutes, before we recollected
that it was five o’clock, and that we ought to think of retiring from the
solitude of Lady Mordaunt’s “At Home.”
 POLITENESS AND POLITESSE.

“I cannot bear a French metropolis.”—Johnson.

We have headed our article with two words which are very often, and
certainly very improperly, confounded together. Nobody needs to be told
that the one is from the English, the other from the French vocabulary; but
there may perhaps be some who will be surprised to hear that the one
expresses an English, the other a French quality.
Frown if you will, Monsieur Duclos, we must maintain that the English
are the only people who have a true idea of politeness. If we are wrong, our
error may be excused for the feeling which prompts it; but we believe we
are right, and we will try to make our readers believe so.
The English are kind in their politeness—the French are officious in
their politesse; the politeness of the English is shown in actions—the
politesse of the French evaporates in sound; English politeness is always
disinterested—French politesse is too often prompted by selfishness.
When we consider the various forms of these qualities, we appear to be
discriminating between the rival merits of two contending beauties, who
reign with equal dominion, and divide the admiration of an adoring world.
There are many who prefer the ingenious delicacy of politeness, and we
congratulate them on their truly English feeling; there are perhaps more
who are attracted by the coquettish vivacity of politesse, and we do not
envy them their French taste.
A variety of instances of both these traits must have occurred to
everybody, but as everybody does not behold the shades of character
through the exact medium of an editorial microscope, we will endeavour to
bring out more distinctly those examples which seem to us to bear
immediately on the subject.
When you dine with old Tom Hardy, he gives you little more than a joint
of meat, a bottle of excellent port, and a hearty welcome; when Lord Urban
“requests the honour” of your company, you are greeted with every delicacy
the season can afford; you are pampered with every wine, “from humble
port to imperial tokay,” and you are put to the blush by every form of
adulation that a wish to be civil can devise. Yet we had rather dine once
with Tom Hardy than a hundred times with Lord Urban; for the mutton of
the one is cooked by politeness, and the turtle of the other is dressed by
politesse.
About a month ago, as we were shooting in the north of England with
the son of a celebrated Tory baronet, we were encountered by Mr. Ayscott, a
landed proprietor notorious for his Whig principles. We were somewhat
surprised to see the latter divest himself of all prejudices in a moment; he
came up to our companion with the greatest appearance of cordiality, shook
him by the hand, reminded him that politics ought not to interfere among
friends, knew he was fond of dancing, and hoped to see him frequently at
Ayscott. Now this really looked like politeness; for politeness is that feeling
which prompts us to make others happy and pleased with themselves, and
which for this purpose puts off all dislike, all party spirit, all affectation of
superiority. But when we were informed the next day that Mr. Ayscott had
seven marriageable daughters, we decided that his behaviour was not
politeness, but politesse.
We remember, shortly after Mrs. C. Nugent eloped with an officer in the
dragoons, we were riding in Hyde Park with poor Charles, who
endeavoured to bear his loss unconcernedly, and betrayed not, except to a
close observer, the canker that preyed upon his heart. We were met in the
Park by Sir Harry Soulis, an intimate acquaintance of our friend. He was
riding at a brisk pace, but the moment he observed us he pulled up, and his
flexible features immediately assumed the appearance of unfeigned
sympathy. He came up to us, and began, “Ah Charles! How are you? How
is this unfortunate business to end? I feel for you, Charles! Upon my soul, I
feel for you! You know you may command me in anything”—and he rode
on with the same air of nonchalance that he had first worn. Immediately
afterwards we met Colonel Stanhope, who also halted, and entered into
conversation. He inquired after our friend’s health, addressed a few
indifferent remarks to us on the weather, bowed, and passed on. We are sure
Nugent felt, as we should have felt under such circumstances: Soulis had
wounded his feelings—Stanhope had spared them. The officiousness of the
former was politesse—the silence of the latter was politeness.
But their distinct shades were never so fully impressed upon our minds
as upon a visit which we lately paid to two gentlemen, during a short tour.
The first specimen of their dissimilarity is to be found in the letters by
which we were invited to partake of their hospitality. They were as follows:
—
“As Mr. P. Courtenay will in the course of his tour be within a few miles
of Melville Lodge, Mr. Melville hopes that he will not turn southward
without allowing him, for one day at least, the gratification of his company.
“Melville Lodge, August 1820.”
“Dear Peregrine,—You’ll pass within eyeshot of my windows on your
way to Eastbourne. I am sure you’ll stop a moment to ask your old friend
how he does, and we will try to detain you for the night.
“Yours, as sincerely as ever,
“Marmaduke Warren.
“P.S. The girls would send love if I’d let ’em.
“Hastings, August 1820.”
Our first visit was paid at Melville Lodge. We have known Mr. Melville
long, and we know him to be one who is generally actuated by good
motives; and when he is swayed by interested ones is himself unconscious
of the fact. On the whole, his character is such that when he is absent we
feel the strongest inclination to like him, and when we are in his company
we feel an equally strong inclination to say, “Mr. Melville, you are a fool.”
We arrived at the Lodge in good time to prepare for dinner, with its usual
accompaniments of bows from our host, compliments from our hostess, and
smiles from their daughters. A small party was invited to meet us, which
somewhat diminished the frequency of the compliments we were doomed
to undergo, while it rendered those which were actually forced upon us
infinitely more distressing. We pass over the civilities we received at dinner,
the care taken to force upon us the choicest morsels of fish, flesh, and fowl;
the attention with which Mr. Melville assured us that we were drinking his
very best champagne. We hasten to take notice of the far more perplexing
instances of politesse which rendered miserable the evening. When tea and
coffee had been disposed of, the Misses Melville sat down to the piano;
and, as we are passionately fond of music, and the ladies excel in it, we
should have been perfectly happy if we had been allowed to enjoy that
happiness unmolested. Diis aliter visum est. Our sisters were known to be
tolerable singers; à fortiori, we must be downright nightingales ourselves.
Upon the word of an editor, we never committed any further outrage upon
harmony than what takes place when we join in the chorus of our witty
associate Mr. Golightly or our well-meaning friend Mr. O’Connor, and we
were now required to assist the Misses Melville in “La mia Dorabella.”
Horrible idea! Peregrine Courtenay warbling Italian! His Majesty of Clubs
sinking into an opera-singer! Politesse was sure he could sing—politesse
knew he had a sweet voice—politesse knew we only refused from modesty.
Politesse was disappointed, however, for we were immovably determined
not to be made a fool. Nevertheless we felt somewhat uncomfortable at
being the subject of general observation, and this feeling was not
diminished by what followed. Politesse, in the shape of Mrs. Melville,
whispered it about that the fat silent young gentleman in the black coat was
a great writer, who had published an extraordinary quantity of learning, and
was likely to publish an extraordinary quantity more. This was all intended
to flatter our vanity, and the consequence was that we were bored
throughout the remainder of the evening by hearing whispers around us, “Is
that the gentleman Mrs. Melville was speaking of?” “I guessed who he was
by the family likeness!” “I knew he was an author directly!” “How odd that
he should be so reserved!” At the suggestion of politesse Mrs. Melville next
discovered that we were precisely a year older than Kitty, and Mr. Melville
hinted in a loud whisper that the girl would have ten thousand pounds.
Finally, politesse prepared for us the great state bedroom; and, when we
retired, insisted upon it that we had spent a most miserable evening. Alas!
Politeness had hardly the grace to contradict politesse upon this point.
How different was the reception we received on the following day! Our
old friend Mr. Warren rose from his armchair as we entered, with a look that
set formality at defiance; Mrs. Warren put by her work to observe how
much we were grown; and their two daughters greeted with a smile,
beautiful because it was unaffected, the scarce-remembered playmate of
their childhood. The flowers which Elizabeth was painting, the landscape
which Susan was designing, were not hastily concealed at the approach of
their guest; nor was our old acquaintance Shock, who was our favourite
puppy ten years ago, driven in his old age from the parlour rug at the
appearance of an idler dog than himself. The few friends who met us at
dinner were not prepared to annoy us by accounts of our abilities and
attainments. The conversation was general and entertaining; and on
reconsideration we perceived that Mr. Warren took pains to draw out what
talent we possessed, although we could not at the same time perceive that
such was the object of his attention. In the evening Elizabeth entertained us
with Handel and Mozart, and Susan sang us some simple airs, in a voice
perhaps the more engaging because it was uncultivated. We were allowed to
enjoy the “melody of sweet sounds” unmolested and unobserved. The
quadrille which followed was not danced with the less spirit because the
Brussels carpet supplied the place of a chalked floor, and a single pianoforte
was substituted for the formality of a band. We were happy—because we
were permitted to enjoy our happiness in our own way; we were amused—
because we did not perceive the efforts which were made for our
amusement. “This,” we exclaimed, as we buttoned our coat, and proceeded
on our journey the next morning—“this is real politeness.”
In spite of the endeavours of those who would dress our native manners
in a Parisian costume, politesse will never be the motive by which England
as a nation will be characterized. As long as France shall be the mother of
light heads, and Britain of warm hearts, the Frenchman will show his
politesse by the profundity of his bow, and the Englishman will prove his
politeness by the cordiality of his welcome. Who is not content that it
should be so?
 A WINDSOR BALL.
We have often thought that the endeavours of a dancing master go but a
very little way to prepare a lady for a ball. Were it possible to procure such
an acquisition, we should recommend to our sisters not only a maître à
danser, but a maître à parler, inasmuch as it is usually much easier to dance
than to talk. One does not immediately see why it should be so; dancing and
talking are in a ball-room equally mechanical qualifications; they differ
indeed in this, that the former requires a “light fantastic toe,” and the other a
light fantastic tongue. But for mind—seriously speaking, there is no more
mind developed in small-talk than there is in chassez à droit.
We do not admire the taste of Etonians who dislike dancing; we are not
of the number of those who go to a ball for the purpose of eating ice. On the
contrary, we adore waltzing, and feel our English aversion for the French
much diminished when we recollect that we derive from them Vestris and
quadrilles. Nevertheless, if anything could diminish the attachment we feel
for this our favourite amusement, it would be that we must occasionally
submit to dangle at the heels of an icy partner, as beautiful, and, alas! as
cold as the Venus de’ Medicis; whose look is torpor, whose speech is
monosyllables; who repulses all efforts at conversation, until the austerity,
or the backwardness of her demeanour, awes her would-be adorer into a
silence as deep as her own. Now all this gravity of demeanour, in the
opinion of some people, is a proof of wisdom: we know not how this may
be, but for our own part we think with the old song, “’Tis good to be merry
and wise,” and if we cannot have both—why, then the merry without the
wise.
These are the ideas which occur to us upon looking back to the last time
that we heard “Voulez vous danser?” played at the Town Hall. Start not, fair
reader! do not throw us into the fire; we will not be very libellous; and if
you shall erroneously suppose that your own defects have afforded matter
for our malicious pen, we are sure your indignation will forthwith subside
when you recollect that you may possibly have listened to the colloquial
raptures of Gerard Montgomery, or been honoured with an editorial tête-à-
tête by the condescension of Peregrine Courtenay. Think over your
favourite partners. Did any one ask your opinion of the Bill of Pains and
Penalties? It could be no one but Sir Francis Wentworth. Did any one hold
forth upon the beauties of a Scotch reel? Of a surety it was Mr. Alexander
M‘Farlane. Did any one observe to you that a quadrille was a “strange
cross-road, and very hilly?” Doubt not but it was the all-accomplished
Robert Musgrave. Did any one remark upon the immorality of waltzing?
Thrice-honoured fair one! You have danced with Martin Sterling.
Alas! we intended, as Mr. Musgrave would say, to drive straight to the
Town Hall, and we have got out of our road a full page. It is indeed a cruel
delay in us, for we know, reader, say what you will, you have been all the
time turning over the leaf to meet with a spice of scandal. Well, then,
suppose all preliminaries adjusted; suppose us fairly lodged in the ball-
room, with no other damage than a ruined Cavendish and a dirtied pump;
and suppose us immediately struck dumb by the intelligence that the
beautiful, the fascinating Louisa had left the room the moment before we
entered it. It was easy to perceive that something of the kind had occurred,
for the ladies were all looking happy. We bore our disappointment as well
as we could, and were introduced to Theodosia—— No! we will refrain
from surnames—— Theodosia is a woman of sense (we are told so, and we
are willing to believe it), but she is very unwilling that any one should find
it out. As in duty bound, we commenced, or endeavoured to commerce, a
conversation by general observations upon the room and the music. By-the-
by, we strongly recommend these generalities to our friends in all
conversations with strangers; they are quite safe, and can give no offence.
In our case, however, they were unavailing—no reply was elicited. A long
pause. We inquired whether the lady was fond of “The Lancers?” To our
utter astonishment we were answered with a blush and a frown which
would have put to silence a much more pertinacious querist than the
Etonian—we ventured not another word. Upon after-consideration, we are
sure that the lady was thinking of a set of dashing young officers instead of
a set of quadrilles.
We were next honoured by the hand of Emily. When we have said that
she is backward, beautiful, and seventeen, we have said all we know of the
enchanting Emily. Far be it from us to attack with unwarrantable severity
the unfortunate victim of mauvaise honte; we merely wish to suggest to one
for whose welfare we have a real regard, that modesty does not necessarily
imply taciturnity, and that the actual inconvenience of a silent tongue is not
altogether compensated by the poetical loquacity of a speaking eye.
 Being again left to ourselves, we sunk by degrees into a profound fit of
authorship, and were in imminent danger of becoming misanthropic, when
we were roused from our reverie by a tap on the shoulder from George
Hardy, and an inquiry, “what were our dreams?” We explained to him our
calamities, and assured him that, had it not been for his timely intervention,
we should certainly have died of silence. “Died of silence!” reiterated our
friend; “God forbid! when Corinna is in the room!” And so saying, he half-
led, half-dragged us to the other end of the room, and compelled us to make
our bow to a girl of lively manners, whom he described to us in a whisper
as “a perfect antidote for the sullens.” Our first impression was, “she is a
fool;” our second, “she is a wit;” our third, “she is something between
both!” Oh! that it were possible for us to commit to paper one-half of what
was uttered by Corinna! Our recollection of our tête-à-tête is like the
recollection of a dream. In dreams we remember that we were at one
moment in a mud-built cottage, and were the next transported to a Gothic
chapel, but by what means the transmutation of place was effected our
waking thoughts are unable to conceive. Thus it was when we listened to
Corinna. We were hurried from one topic to another with an unaccountable
velocity, but by what chain one idea was connected with its predecessor we
cannot imagine. The conversation (if conversation it may be called, where
the duty of talking devolves upon one person) set out with some mention of
fresco; from hence it turned off to Herculaneum, and then passed with
inconceivable rapidity through the following stages:—Rome—the
Parthenon—National Monument at Edinburgh—Edinburgh Review—
Blackwood—Ebony bracelets—Fashion of short sleeves—Fashion in
general dress in Queen Elizabeth’s time—“The Abbot”—Walter Scott—
Highland scenery. In the Highlands we lost our route for some minutes, and
soon afterwards found ourselves (we know not how) at Joannina, in
company with Ali Pasha. By this time we were thoroughly wearied, and
were unable to keep up regularly with our unfeeling conductress, so that we
have but a very faint idea of the places we visited. We remember being
dragged to the Giant at the Windsor Fair, from whence we paid a flying
visit to the Colossus of Rhodes; we attended Cato, the lady’s favourite pug,
during a severe illness, and were shortly after present at the Cato Street
conspiracy. We have some idea that after making the tour of the Lakes, we
set out to discover the source of the Nile. In our way thither we took a brief
survey of the Lake of Como, and were finally for some time immersed in
the Red Sea. This put the finishing stroke to our already fatigued senses. We
resigned ourselves, without another struggle, to the will and disposal of our
sovereign mistress, and for the next half-hour knew not to what quarter of
the globe we were conveyed. At the close of that period we awoke from our
trance, and found that Corinna had brought us into the Club-room, and was
discussing the characters of the members with a most unwarrantable
freedom of speech. Before we had time to remonstrate against this manifest
breach of privilege, we found ourselves in the gallery of the House of
Lords, and began to think we never should make our escape from this
amusing torture. Fortunately, at this moment a freeholder of—— entered
the room. One of the candidates was a friend of Corinna’s, and she hurried
from us, after a thousand apologies, to learn the state of the poll.

Sic nos servavit Apollo.[3]

Our next companion was Sappho the Blue-stocking. We enjoyed a

literary confabulation for some time, for which we beg our readers to
understand we are in every way qualified. The deep stores of our reading,
enlivened by the pungent readiness of our wit, are bonâ fide the admiration
of London as well as of Windsor belles; we beg our friends to have this in
mind whenever they sit down to peruse us. But to proceed. We very shortly
perceived that Sappho was enchanted with our erudition, and the manner in
which we displayed it. She was particularly pleased with our critiques on
“Zimmerman upon Solitude,” and was delighted by the praise we bestowed
(for the first time in our life) on Southey’s “Thalaba.” We had evidently
made considerable progress in her affections, when we ruined ourselves by
a piece of imprudence which we have since deeply regretted. We were
satirical—this satire is the devil!—we were satirical upon German
literature. The lady turned up her nose, turned down her eyes, bit her lip,
and looked—we cannot explain how she looked, but it was very terrific. We
have since heard she is engaged in translating Klopstock’s “Messiah” into
the Sanskrit.
We were next introduced to one of those ladies who are celebrated for
the extraordinary tact which they display in the discovery of the faults of
their sex. Catherine is indeed one of the leaders of the tribe. She has the
extraordinary talent which conveys the most sarcastic remarks in a tone of
the greatest kindness. In her the language of hatred assumes the garb of
affection, and the observation which is prompted by envy appears to be
dictated by compassion. If in her presence you bestow commendation upon
a rival, she assents most warmly to your opinion, and immediately destroys
its effect by a seemingly extorted “but.” We were admiring Sophia’s
beautiful hair. “Very beautiful!” said Catherine, “but she dresses it so ill!”
We made some allusion to Georgiana’s charming spirits. “She has
everlasting vivacity,” said Catherine, “but it’s a pity she is so indiscreet.”
Then followed something in a whisper which we do not feel ourselves at
liberty to repeat. We next were unguarded enough to find something very
fascinating in Amelia’s eyes. “Yes,” replied Catherine, “but then she has
such an unfortunate nose between them.” Finally, in a moment of imprudent
enthusiasm, we declared that we thought Maria the most interesting girl in
the room. We shall never (although we live, like our predecessors, Griffin
and Grildrig, to the good old age of forty numbers), we shall never, we
repeat, forget the “Some people think so!” with which our amiable auditress
replied to our exclamation. We saw we were disgraced, and, to say the truth,
were not a little pleased that we were no longer of Catherine’s Privy
Council.
Now all these ladies are foolish in their way. Theodosia is a silent fool,
Emily is a timid fool, Corinna is a talkative fool, Sappho is a learned fool,
and Catherine is a malicious fool. With their comparative degrees of moral
merit we have nothing to do; but in point of the agreeable, we hesitate not
to affirm that the silent fool is to us the more insupportable creature of the
five.
We lately were present at a large party, where an Etonian, for whom we
have a great esteem, was terribly abused by a witty Marchioness for his
inflexible taciturnity. Without entering upon the merits of this particular
case, let us be allowed to plead in behalf of our sex, that a gentleman may
be silent when a lady is silly, and that it is needless for a beau to be
entertaining where a belle is decidedly impracticable.
 LOVERS’ VOWS.

“What grace hast thou, thus to reprove

These worms for loving?” Shakespeare.

We were engaged the other day in making some purchases at Flint’s, when
Lady Honoria Saville entered, attended by the Hon. George Comyn. As the
lady is a professed coquette, and the gentleman a professed dangler, we
conceived it by no means improper to play the listener; for the conversation
of these characters is seldom such as to require much secrecy. We therefore
placed ourselves in a convenient situation for hearing whatever was said by
the beau, the belle, and the milliner, which last I consider the most rational
person of the three. The questions which were put to her by her ladyship
escaped us; they seemed to be conveyed, not in the language of common
mortals, but in signs which were to us incomprehensible. Without exposing
ourselves to the notice of either party, we were beyond measure amused at
the timely aid which the milliner’s descriptions of her wares afforded to the
lover’s description of his passion; for whenever the latter was at a loss for
words, the former stepped in to finish his sentence, and occasionally gave a
point to it, in which lovers’ vows are generally deficient.
When they first made their appearance, the gentleman was deposing
upon oath to the truth of something of which his companion seemed to
entertain doubts. He had run through some of the usual forms of adjuration,
such as Sun, Moon, Stars, Venus, and Blue Eyes, when he was stopped by
“Lovers’ vows, Comyn! lovers’ vows! Where do they come from?”
“Where?” repeated the gentleman, in a theatrical attitude; “they come from
a sincere affection, from a passionate heart, from a devoted adoration, from
——” “From Paris, I assure you, madam,” said the milliner, who was
turning over some silks. “But I wonder, Comyn!” resumed her ladyship, “I
wonder you can continue to bore me with this nonsense! Lovers’ vows have
given me the vapours these last five years, and, after all, what are they
worth?” “Worth!” reiterated the fop; “they are worth the mines of Peru, the
diamonds of Golconda, the sands of Pactolus!” “They are worth five
shillings a pair, madam,” said the milliner, “and it’s really throwing them
away.” She was talking of some kid gloves.
“You gentlemen,” said her ladyship, “must think us very weak creatures,
if you fancy that we are to be imposed upon by any folly you choose to
utter. Lovers’ vows have been proverbial since the days of Queen Bess, and
it would be strange if, in 1820, we should not have found out what they are
made of.” “In my case,” said the exquisite, “your ladyship is cruel in
supposing them to be made of anything but the purest sincerity.” “They are
made of the finest materials,” said the milliner, “and your ladyship can see
through them like glass.” She was holding up to the window some stuff
with a hard name, which we know nothing about. “Say what you will,
Comyn,” said her ladyship,

Men were deceivers ever;

One foot on sea, and one on shore,
To one thing constant never.

“Lovers’ vows are never intended to last beyond a day!” “Your ladyship is
unjust!” replied the dandy; “they will last when all other ties shall be
broken; they will last when the bond of relationship shall be cancelled, and
the link of friendship riven; they will last——” “They will last for ever,
madam, and wash afterwards!” said the milliner. She was speaking of some
scarfs.
“Really, George,” observed her ladyship, “you would think me an
egregious fool if I were to believe one quarter of what you say to me. Speak
the truth, George, for once, if it is in your nature—should I not be folle—
folle beyond measure?” “You love to trifle with my passion,” sighed the
Honourable; “but this is what we must all expect! Fascinating as you are,
you feel not for the woes of your victims; you are more insensible than
flints—nothing is dear to you.” “Flint’s will make nothing dear to your
ladyship,” said the milliner, wrapping up the parcel.
“In this age of invention,” said Lady Honoria, “it is surprising to me that
no one has invented a thermometer to try the temperature of lovers’ vows.
What a price would a boarding-school miss give for such an invention! I
certainly will make the suggestion to young Montgomery, that writes the
sonnets!” “Good God!” cried the worshipper, “where shall I send for such a
test of sincerity? I would send to the suns of India, to the snows of Tobolsk;
I would send to the little-toed ladies of China, and the great-hatted
chieftains of Loo-Choo; I would send——” “Shall I send it to your
ladyship’s house?” said the milliner, holding up the parcel.
“Well,” said her ladyship, rising to leave the shop, “I shall contend no
more with so subtle a disputant; my opinion of lovers’ vows remains
unchanged, and I desire you won’t pester me with them at the Opera this
evening, or I shall positively die of ennui.” We saw that this was meant as
an assignation, and the Honourable George Comyn saw things in the same
light. “How,” he cried, “how shall I thank your ladyship for this
condescension? How shall I express the feelings of the heart you have
rescued from despair? Language is too poor, utterance is too weak, for the
emotion which I feel; what can I say?” “Much obliged to your ladyship,”
said the milliner.