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John Nofsinger Professor and William H. Seward Endowed Chair of International
Finance at the University of Alaska Anchorage. He earned his BS degree in electrical
engineering from Washington State University, his MBA degree from Chapman Univer-
sity, and his PhD degree in finance from Washington State University. Dr. Nofsinger has
written over 50 articles in the areas of investments, corporate finance, and behavioral
finance. These papers have appeared in the scholarly journals Journal of Finance, Jour-
nal of Business, Journal of Financial and Quantitative Analysis, Financial Management,
Journal of Corporate Finance, Journal of Banking and Finance, and Journal of Behav-
ioral Decision Making, among others. Dr. Nofsinger has also authored (or coauthored)
ten trade books, scholarly books, and textbooks that have been translated into eleven dif-
ferent languages. The most prominent of these books is the industry book, The Psychol-
ogy of Investing. Dr. Nofsinger is a leading expert in behavioral finance and is a frequent
speaker on this topic at industry conferences, universities, and academic conferences. He
is frequently quoted or appears in the financial media, including The Wall Street Journal,
Financial Times, Fortune, Bloomberg Business Week, Smart Money, The Washington
Post, and CNBC, and other media from The Dolans to The Street.com.

about the authors vii
a note from the authors
“There is a lot to cover in this course so I focus on the core concepts, theories, and
problems.”
“I like to teach the course by using examples from their own individual lives.”
“My students come into this course with varying levels of math skills.”
How many of these quotes might you have said while teaching the undergraduate corpo-
rate finance course? Our many years of teaching certainly reflect such sentiments, and as
we prepared to write this book, we conducted many market research studies that confirm
just how much these statements—or ones similar—are common across the country. This
critical course covers so many crucial topics that instructors need to focus on core ideas
to ensure that students are getting the preparation they need for future classes—and for
their lives beyond college.
We did not set out to write this book to change the way finance is taught, but rather
to parallel and support the way that instructors from across the country currently teach
finance. Well over 600 instructors teaching this course have shared their class experi-
ences and ideas via a variety of research methods that we used to develop the framework
for this text. We are excited to have authored a book that we think you will find fits your
classroom style perfectly.
KEY THEMES
This book’s framework emphasizes three themes. See the next section in this preface for
a description of features in our book that support these themes.
• Finance is about connecting core concepts. We all struggle with fitting so
many topics into this course, so this text strives to make it easier for you by
getting back to the core concepts, key research, and current topics. We realize
that today’s students expect to learn more in class from lectures than in closely
studying their textbooks, so we’ve created brief chapters that clearly lead stu-
dents to crucial material that they need to review if they are to understand how
to approach core financial concepts. The text is also organized around learning
goals, making it easier for you to prep your course and for students to study the
right topics.
• Finance can be taught using a personal perspective. Most long-term finance
instructors have often heard students ask “How is this course relevant to me?”
on the first day of class. We no longer teach classes dedicated solely to finance
majors; many of us now must teach the first finance course to a mix of business
majors. We need to give finance majors the rigor they need while not overwhelm-
ing class members from other majors. For years, instructors have used individual
examples to help teach these concepts, but this is the first text to integrate this per-
sonal way of teaching into the chapters.
• Finance focuses on solving problems and decision making. This isn’t to say that
concepts and theories aren’t important, but students will typically need to solve
some kind of mathematical problem—or at least understand the impact of different
viii
numerical scenarios—to make the right decision on common finance issues. If
you, as an instructor, either assign problems for homework or create exams made
up almost entirely of mathematical material, you understand the need for good
problems (and plenty of them). You also understand from experience the number
of office hours you spend tutoring students and grading homework. Students have
different learning styles, and this text aims to address that challenge to allow you
more time in class to get through the critical topics.
CHANGES IN THE FOURTH EDITION

Based on feedback from users and reviewers, we undertook an ambitious revision in order
to make the book follow your teaching strategy even more closely. Below are the changes
we made for this fourth edition, broken out by chapter.
Overall
• Simplified figures where appropriate and added captions to emphasize the main
“takeaways”
• Updated data, company names, and scenarios to reflect latest available data and
real-world changes
• Cross-referenced numbered examples with similar end-of-chapter problems and
self-test problems so students can easily model their homework
• Updated the numbers in the end-of-chapter problems to provide variety and limit
the transfer of answers from previous classes
Chapter 1: Introduction to Financial Management
• Updated the Personal Application with information on firms that have filed for
bankruptcy more recently
• Changed Learning Goal 1-9 to address the ramifications of China’s slowdown and
the drop in the price of oil
• Revised the Finance at Work—Markets box to discuss quantitative easing in the
United States and around the world
• Revised the Finance at Work—Corporate box to cover the proposed merger of AB
InBev and SABMiller
• Updated the data in Example 1-2 on executive compensation
• Replaced Section 1.7 on the financial crisis with a new Section 1.7: Big Picture
Environment, including discussions of the ramifications of plummeting oil prices
and China’s economic slowdown
• Revised the Research It! exercise to address environment, society,
and governance
• Changed the Mini-Case problem to cover Volkswagen’s emission test
cheating
Chapter 2: Reviewing Financial Statements
• Added a discussion of difference between EBIT and operating income

• Included extended definitions of net sales, cost of goods sold, and operating
expenses
• Added a discussion of the interpretation of a cash-based income statement
• Added a new Finance at Work box
• Added an Excel solution for the Integrated Mini-Case

a note from the authors ix
Chapter 3: Analyzing Financial Statements
• Added more discussion of debt ratios

Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
• Updated the data in Figure 4.5 on gold prices

• Added equation functions to Table 4.2 and Table 4.4
• Updated the gold return data in the Mini-Case
• Revised the data for the end-of-chapter Excel problem
• Added a new end-of-chapter Excel problem
Chapter 5: Time Value of Money 2: Analyzing Annuity Cash Flows
• Revised the chapter introduction to discuss Boeing

• Added equation functions to Tables 5.1, 5.2, 5.5, and 5.6
• Updated the present value of multiple annuities example to discuss the new David
Price contract with the Boston Red Sox
• Changed the Finance at Work—Behavioral box to address the record Powerball
jackpot of $1.5 billion on January 12, 2016
Chapter 6: Understanding Financial Markets and Institutions
• Updated all figures, tables, and values in the body of the chapter
• Added a section on the loanable funds theory/determination of equilibrium interest
rates
• Added new end-of-chapter problems
• Decreased the coverage of the financial crisis (detailed information is available in
the Web Appendix for Chapter 6 available in Connect or at mhhe.com/Cornett4e)
Chapter 7: Valuing Bonds
• Updated the Personal Application with new data

• Updated Figures 7.1–7.5 on bond issuance, interest rate path, yield to maturities,
new bond quotes, and a summary of the bond market
• Added equation functions to Tables 7.3 and 7.5
Chapter 8: Valuing Stocks
• Updated all table and figure values in the body of the chapter
• Updated the coverage of the stock market exchange in Section 8.2 to discuss the
changes that have occurred in the NYSE and elsewhere
• Revised Example 8-1 to include new Coca-Cola data
• Updated Example 8-4 with new P/E data for Caterpillar
• Updated the data in the Mini-Case problem
x a note from the authors

Chapter 9: Characterizing Risk and Return
• Revised the example that runs throughout the chapter to discuss Staples
• Updated all table and figure values in the body of the chapter
• Added equation functions to Table 9.3 and Table 9.5
• Updated Example 9-2 to include new Mattel data
• Updated the data in the Finance at Work—Markets box
• Updated the data in the Mini-Case problem
Chapter 10: Estimating Risk and Return
• Updated values and data in Tables 10.1–10.4

• Changed the Mini-Case to cover finding Disney’s beta
Chapter 11: Calculating the Cost of Capital
• Clarified and expanded the discussion of use of market values versus book values
in the calculation of WACC
• Expanded the discussion of when to use CAPM versus the constant-growth model
when estimating the cost of equity
• Expanded the discussion of computation of marginal tax rate for WACC
• Enhanced the discussion of use of firm versus project WACCs
• Enhanced the discussion of appropriateness of divisional WACCs
Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
• Clarified the definition of salvage value

• Expanded the discussion of substitutionary and complementary effects
• Enhanced the discussion of income tax shield from a project having taxable
losses
• Enhanced the discussion of NWC changes “leading” changes in sales
• Expanded the discussion of the half-year convention in depreciation
Chapter 13: Weighing Net Present Value and Other Capital Budgeting Criteria
• Clarified the discussion of the goal of capital budgeting decision rules and the
differing environments of investment and capital budgeting decisions
• Expanded the discussion of why using rate-based and time-based decision
statistics to choose across projects can be misleading with regards to NPV
Chapter 14: Working Capital Management and Policies
• Expanded the discussion of the rationale for NWC and the tradeoffs inherent in
having too little or too much
• Refined discussion of cash flows vs. the cash account
Chapter 15: Financial Planning and Forecasting
• Clarified the discussion of deseasonalizing sales

a note from the authors xi
Chapter 16: Assessing Long-Term Debt, Equity, and Capital Structure
• Refined the discussion of active versus passive capital structure changes

• Expanded the discussion of effects of no-taxation and no-bankruptcy assumptions
of M&M’s “perfect world” on optimal choice of capital structure
• Expanded the discussion of the effects of financial distress on capital structure
choices
Chapter 17: Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts
• Expanded the discussion of information effect on dividend policy

• Updated the example of real-world dividend policies
Chapter 18: Issuing Capital and the Investment Banking Process
• Updated all figures, tables, and values in the body of the chapter
• Added additional coverage of small business lending
• Added an Excel solution for the Mini-Case
Chapter 19: International Corporate Finance
• Revised the chapter introduction to include new data about Starbucks

• Updated all table and figure values and data in the body of the chapter
• Updated Example 9-1 to include new exchange rate data
• Revised the Mini-Case with new exchange rate data
Chapter 20: Mergers and Acquisitions and Financial Distress
• Added Herfindahl-Hirschman Index (HHI)

• Increased discussion of debtor in possession and cramdown
• New Finance at Work box on American Airline bankruptcy
• Added M&A calculation in Excel format
• Added new end-of-chapter problems
xii a note from the authors

value computations in the
previous chapter. Those
TVM equations covered moving a sin-
W ments through 2033 on money it
borrowed. The Boeing Company
(ticker: BA) paid a $0.42 per share
and semiannually for company debt).
How are we to value these payments
into common or comparable terms?
Unique Features
gle cash flow from one point in time to quarterly dividend to stockholders In this chapter, we illustrate how to
another. While this circumstance does for three straight years until 2012, value multiple cash flows over time,
describe some problems that busi- when it switched to a $0.44 dividend. including equal and uneven payments,
nesses and individuals face, most debt These examples require payments and how to incorporate different com-
and investment applications of time (and compounding) over different pounding frequencies.
CONNECTING CORE CONCEPTS value of money feature multiple cash
flows. In fact, most situations require
many equal payments over time. Since
these situations require a bit more Learning Goals
complicated analysis, this chapter con-
tinues the TVM topic for applications LG5-1 Compound multiple cash LG5-7 Explain the impact of com-
Learning Goals appear at thethat
beginning
require manyofequal
eachpayments
chapter over flows to the future. pound frequency and the dif-
ference between the annual
time. For example, car loans and home LG5-2 Compute the future value of
and are indicated throughout the text next to head- frequent, level cash flows. percentage rate and the effec-
mortgage loans require the borrower tive annual rate.
ings, examples, summary, andtoend-of-chapter
make the same monthlyproblems
payment LG5-3 Discount multiple cash flows
LG5-8 Compute the interest rate of
to the present.
to which they relate. These outcomes
for many months help instructors
or years. People save
LG5-4 Compute the present value
annuity payments.
for the future through monthly con-
structure their classes and assign readings and home- of an annuity. LG5-9 Compute payments and amor-
tributions to their pension portfolios. tization schedules for car and
work. The accompanying test bank
People provides
in retirement mustinstruc-
convert their
LG5-5 Figure cash flows and pres-
ent value of a perpetuity.
mortgage loans.
tors with hundreds of questions organized

savings by level
into monthly income.and
Com- LG5-6 Adjust values for beginning-
LG5-10 Calculate the number of pay-
ments on a loan.
panies also make regular payments.
learning goals to make customization even easier! of-period annuity payments.
Johnson & Johnson (ticker: JNJ) will
141
Confirming Pages
cor91411_ch05_140-177.indd 141 01/20/17 03:32 PM
Confirming Pages
finance at work markets

JP MORGAN ’S $2 BILLION BLUNDER
JP Morgan Chase & Co. is reeling after a huge trading bet basket, or index, of companies.” In April of 2012, these pro- Finance at Work boxes highlight current events
Per (common) share data:
Earnings per share (EPS) $ 6.335
and hot topics noted in the news. The Want to Know

backfired and left the bank with at least $2 billion in losses tection costs began to go up, which further contributed to the
Dividends per share (DPS) $ 1.975
from the bad trade. This may be the end of chief executive bank’s losses.
Book value per share (BVPS) $19.745
James Dimon’s run as the so-called “King of Wall Street.” The According to JP Morgan Chase company filings, Mr. Iksil’s
bank’s Chief Investment Office (CIO), responsible for manag-
ing the New York company’s risk, placed a series of risky bets
group had approximately $350 billion in investment securi-
ties, about 15% of the bank’s total assets, on December 31,
More? feature in each box contains suggested words
Market value (price) per share (MVPS) $26.850
to use for searching the Internet Care, Inc. for updates.

Industry These
and trades. In an article published last month, The Wall Street 2011. Mr. Dimon said the bank has an extensive review under Garners’ Platoon Mental Health
Journal reported that “large positions taken in that office by way of what went wrong. “These were grievous mistakes, Confirming
features are great to use for class discussion or as

a trader nicknamed ‘the London whale’ had roiled a sector of they were self-inflicted, we were accountable and we hap- Current ratio 2.00 times
the debt markets. The bank, betting on a continued economic pened to violate our own standards and principles by how we Quick ratio 1.20 times
recovery with a complex web of trades tied to the values of want to operate the company. This is not how we want to run
homework assignments.
Cash ratio 0.25 times
corporate bonds, was hit hard when prices moved against it a business.”
Inventory turnover (sales) 2.50 times
starting last month, causing losses in many of its derivatives Mr. Dimon held a conference call with investors and ana-
Days sales in inventory (sales) 146.00 days
positions. The losses occurred while J.P. Morgan tried to scale lysts on May 10, stating, “In hindsight, the . . . strategy was
Average collection period 91.00 days
back that trade.” flawed, complex, poorly reviewed, poorly executed, and
In April of 2012, The Wall Street Journal reported that poorly monitored. The portfolio has proven to be riskier, Average payment period 100.00 days
$205m − $111m
investors and hedge funds were trying to take advantage more volatile and less effective . . . than we thought.” Dimon Fixed asset
Quick ratio (acid-test ratio) = ________________ = 0.76 times Industry1.25
turnover times = 0.50 times
average
Sales to working capital $123m 4.00 times
of trades made by Chase’s London whale, Bruno Iksil, who resolves, “We will learn from it, we will fix it, we will move
worked out of the CIO, by making bets in the market on credit on, hopefully in the end, it will make us a better company.” $24m
_______
Cash ratio =
Total asset turnover = 0.20 times 0.50 times = 0.15 times
Industry average
default swaps (CDSs). The CIO group previously had stop- Though JP Morgan Chase came through the financial crisis Capital intensity $123m 2.00 times
gaps in place to protect and prevent the company from sig- better off than many other financial institutions, this trading Debt ratio 50.00%on its balance
All three liquidity ratios show that DPH Tree Farm, Inc., has more liquidity
nificant losses during periods of downturn in the economy. loss certainly tarnishes their reputation. Mr. Dimon reports that Debt-to-equity 1.00 an
times
sheet than the industry average (we discuss the process used to develop industry aver-
However, the Journal reports that earlier in 2012, “it began the loss is “slightly more than $2 billion” in the second quarter Equity multiplier (common
reducing that position, [taking] a bullish stance on the finan- of this year. age in section 3.8). equity) 2.00assets
Thus, DPH Tree Farm has more cash and other liquid times (or current
Times interestavailable
assets) earned to pay its bills (or current liabilities) as they come due7.25
thantimes
does the aver-
cial health of certain companies and selling protection that
Sources: Dan Fitzpatrick, Gregory Zuckerman, and Liz Rappaport, Cashage
coverage
firm in the tree farm industry. 8.00 times
would compensate buyers if those companies defaulted on “J.P. Morgan’s $2 Billion Blunder,” The Wall Street Journal Online, May 11,
debts. Mr. Iksil was a heavy seller of CDS contracts tied to a 2012. JP Morgan Chase & Co. Business Update Call, May 10, 2012.
Profit margin 18.75%
GrossSimilar to Problems 3-1, 3-2, Self-Test Problem 1
profit margin 49.16%
Key Words to Search for Updates: JPMorgan, London whale, derivative Operating profit margin 42.02%
! Want to Know More? trading losses Basic earnings power 19.90%
ROA 9.38%
ROE 18.75%
Dividend payout 35.00%
Derivative securities traders can be either users of derivative contracts (for hedging TIME OUT
Market-to-book ratio 1.30 times
and other purposes) or dealers (such as banks) that act as counterparties in customer PE ratio 4.10 times
3-1 What are the three major liquidity ratios used in evaluating financial statements?
trades for fees. An example of hedging involves commodities such as corn, wheat, or soy-
Time Out boxes, featured at the end of sections, test stu-
beans. For example, suppose you run a flour mill and will need to buy either soft wheat 3-2 How do the three major liquidity ratios used in evaluating financial statements differ?
Does a firm generally want to have high or low liquidity ratios? Why?
(Chicago) or hard red winter wheat (Kansas City) in the future. If you are concerned 3-3
dents’ understanding of the key terms and core concepts

that the price of wheat will rise, you might lock in a price today to meet your needs six
months from now by buying wheat futures on a commodities exchange. If you are correct
just presented. Answers to the Time Out questions appear
and wheat prices rise over the six months, you may purchase the wheat by closing out
3.2
ANSWERS TO TIME OUT
∙ Asset Management Ratios LG3-2
your futures positions, buying the wheat at the futures price rather than the higher market
at the end of each chapter. price. Likewise, if you know that you will be delivering a large shipment to, say, Europe,
3-1
Asset
The three most commonly used liquidity ratios are the current ratio, the quick (or acid-
test)management ratios
ratio, and the cash measure how efficiently a firm uses its assets (inventory,
ratio. asset managemen
in three months, you might take an offsetting position in euro futures contracts to lock accounts receivable, and fixed assets), as well as how efficiently the firm manages its ratios
in the exchange rate between the dollar and the euro as it stands today—and (you hope) 3-2 The current ratio measures the dollars of current assets available to pay each dollar of
accounts
currentpayable.
liabilities.The
Thespecific ratios
quick ratio allowthe
measures managers
dollars ofand investors
more to evaluate
liquid assets whether a
(cash and Measure how efficien
eliminate foreign exchange risk from the transaction.
firmmarketable
is holdingsecurities
a reasonable amountreceivable)
and accounts of each type of asset
available andeach
to pay whether
dollarmanagement
of current uses firm uses its assets (i
Derivative securities markets are the newest—and potentially the riskiest—of the tory, accounts receiv
eachliabilities.
type of Theasset to ratio
cash effectively
measures generate sales.
the dollars The and
of cash most frequently
marketable used asset
securities avail-manage-
financial security markets. Losses associated with off-balance-sheet mortgage-backed and fixed assets), as
mentableratios areeach
to pay listed in the
dollar following
of current sections, grouped by type of asset.
liabilities its accounts payable
securities created and held by FIs were at the very heart of the financial crisis. Signs of
significant problems in the U.S. economy first appeared in late 2006 and early 2007 when 3-3 The more liquid assets a firm holds, the less likely it is that the firm will experience
home prices plummeted and defaults began to affect the mortgage lending industry as a financial distress. Thus, the higher the liquidity ratios, the less liquidity risk a firm has.
Inventory Management
But liquid assets generate little, if any, profits for the firm. In contrast, fixed assets are
whole, as well as other parts of the economy noticeably. Mortgage delinquencies, particu-
larly on subprime mortgages, surged in the last quarter of 2006 through 2008 as home- As they decide
illiquid, the optimal
but generate inventory
revenue level
for the firm. to hold
Thus, on the
extremely highbalance sheet,
levels of managers
liquidity guard must
against
consider liquidity
the crises
trade-off but at the
between thecost of lower returns
advantages on assets.
of holding sufficient levels of inventory to
owners who had stretched themselves to buy or refinance a home in the early 2000s fell
keepThe
3-4 themajor
production process going
asset management versus
ratios theinventory
are the costs ofturnover,
holdingthelarge amounts
days’ sales inof inventory.
186 part four Valuing of Bonds and Stocks
Twoinventory,
frequentlytheused ratios
accounts are the inventory
receivable turnover, theturnover
averageand days’ sales
collection periodin(ACP),
inventory.
the
accounts payable turnover, the average payment period (APP), the fixed asset turn-
Sales orthecost of goods sold
______________________
Inventory
over, the salesturnover = capital,
to working total asset turnover, and the capital intensity. (3-4)
Inventory 107
The inventory turnover ratio measures the number of dollars of sales produced per dollar
cor91411_ch06_178-225.indd 186 01/20/17 03:45 PM
of inventory. Cost of goods sold is used in the numerator when managers want to empha-
size that inventory is listed on the balance sheet at cost, that is, the cost of sales generated
per dollar of inventory.
cor91411_ch03_072-109.indd 107 01/13/17 12:29 PM
Inventory × 365 days
Days’ sales in inventory = ______________________
Sales or cost of goods sold
365 days
= ________________
Inventory turnover
xiii
(3-5)
The days’ sales in inventory ratio measures the number of days that inventory is held before
the final product is sold.
In general, a firm wants to produce a high level of sales per dollar of inventory; that is, it
Confirming Pages
Research It! projects, perfect for individual assign-

ments or as group projects, are included at the end of research it! Analyzing Financial Statements
each chapter and require students to search the Web for Go to the website of Wal-Mart Stores, Inc., at www.walmartstores.com and get the latest
financial statements from the annual report using the following steps.
data and other information to answer the questions. Click on “Investors.” Click on “Annual Reports.” Click on the most recent date. This
will bring the file onto your computer that contains the relevant data.
Confirming Pages
Using the most recent balance sheet and income statement, calculate the financial
ratios for the firm, including the internal and sustainable growth rates.
PART TWO integrated mini-case Working with Financial Statements

Listed are the 2018 financial statements for Garners’ Platoon Mental Health Care, Inc.
Spread the balance sheet and income statement. Calculate the financial ratios for the
firm, including the internal and sustainable growth rates. Using the DuPont system of
3
analysis and the industry ratios reported, evaluate the performance of the firm.
Analyzing Financial GARNERS’ PLATOON MENTAL HEALTH CARE, INC.

Balance Sheet as of December 31, 2018
(in millions of dollars)
Statements
PERSONAL PERSPECTIVE
Assets
Current assets
Cash and marketable securities
Accounts receivable
$ 421
1,109
Liabilities and Equity
Current liabilities
Accrued wages and taxes
Accounts payable
$ 316
867
Inventory 1,760 Notes payable 872
Total $ 3,290 Total $ 2,055
Viewpoints, a unique feature presented at

Fixed assets Long-term debt $ 3,090
Gross plant and equipment $ 5,812 Stockholders’ equity
viewpoints
Less: Depreciation 840 Preferred stock (30 million
the beginning of each chapter, pose both a

Net plant and equipment $ 4,972
shares)
Common stock and paid-in
$ 60
Business Application business and a personal problem using key

Other long-term assets 892
surplus (200 million shares)
Retained earnings
637
3,312
The managers of DPH Tree Farm, Inc., have released public statements that the firm’s performance surpasses that of other
firms in the industry. They cite the firm’s liquidity and asset management positions as particularly strong. DPH’s superior
Total
Total assets
chapter topics. These Viewpoints scenarios
$ 5,864
$ 9,154
Total
Total liabilities and equity
$ 4,009
$ 9,154
performance in these areas has resulted in superior overall returns for their stockholders. What are the key financial ratios immediately set a context for the chapter and
GARNERS’ PLATOON MENTAL HEALTH CARE, INC.
that DPH Tree Farm, Inc., needs to calculate and evaluate in order to justify these statements? (See the solution at the end
of the chapter.) allow
Income instructors toDecember
Statement for Year Ending take 31,class
2018 discussion in
Personal Application Net sales multiple directions to make key concepts $ 4,980
clearer. Viewpoints Revisited at the end of

Less: Cost of goods sold 2,246
Chris Ryan is looking to invest in DPH Tree Farm, Inc. Chris has the most recent set of financial statements from DPH Tree Gross profits $ 2,734
the chapter show how these problems are

Farm’s annual report but is not sure how to evaluate them or measure the firm’s performance relative to other firms in the Less: Other operating expenses 125
industry. What are the financial ratios with which Chris should measure the performance of DPH Tree Farm, Inc.? How can Chris Earnings before interest, taxes, depreciation, and amortization (EBITDA) $ 2,609
solved. Viewpoints Extended leverage a

Less: Depreciation 200
use these ratios to evaluate the firm’s performance? (See the solution at the end of the chapter.)
Earnings before interest and taxes (EBIT) $ 2,409
Less: Interest 315
So how can these financial

Less: Taxes
variety of media to provide an extended look
Earnings before taxes (EBT) $ 2,094
764
at each personal application raised. These

ratios work in your life?
Net income $ 1,327
Less: Preferred stock dividends $ 60
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cor91411_ch03_072-109.indd 106 01/13/17 12:29 PM
Confirming Pages
PROBLEM-SOLVING AND LEARNING STYLES
Numbered examples in each chapter feature vari- LG4-3

EXAMPLE 4-1
ous
72 perspectives, so students gain practice in solving
Graduation Celebration Loan For interactive versions
problems in both business and individual contexts.

of this example, log in
Dominic is a fourth-year business student who wants to go on a graduation celebration/ to Connect or go to
mhhe.com/cornett4e.
vacation in Mexico but he has no money to pay for the trip. After the vacation, Dominic will
Each example contains a list of end-of-chapter prob- start his career. His job will require moving to a new town and buying professional clothes.
He asked his parents to lend him $1,500, which he figures he will be able to pay back in
lems that are similar, in order to better model the solu-
cor91411_ch03_072-109.indd 72 01/13/17 12:29 PM
three years. His parents agree to lend him the money, but they will charge 7 percent inter-
est per year. What amount will Dominic need to pay back? How much interest will he pay?
tion process. How much of what he pays is interest-on-interest?
SOLUTION: Dominic will have to pay:
FV 3 = $1,500 × (1.07) 3 = $1,500 × 1.225 = $1,837.56
Of the $1,837.56 he owes his parents, $337.56 (= $1,837.56 − $1,500) is interest. We can
illustrate this time-value problem in the following time line.
Period 0 7% 1 7% 2 7% 3 years
Cash flow PV = 1,500 FV = –1,837.56

CALCULATOR HINTS
Compare this compound interest with simple interest. Simple interest would be 7 percent N =3
of $1,500 (which is $105) per year. The three-year cost would then be $315 (= 3 × $105). The I =7
difference between the compound interest of $337.56 and the total simple interest of $315 PV = 1500
is the interest-on-interest of $22.56. PMT = 0
CPT FV = −1837.56
Similar to Problems 4-3, 4-4, 4-5, 4-6, 4-21, 4-22, 4-33, 4-34, Self-Test Problem 1
COMPOUNDING AT DIFFERENT INTEREST RATES OVER TIME LG4-4

Period 0 5% 1 6% 2 years
Cash flow PV = –100 FV = ?
We already know that the $100 deposit will grow to $105 at the end of the first
year. This $105 will then earn 6 percent in the second year and have a value of $111.30
(= $105 × 1.06). If we put the two steps together into one equation, the solution appears
as $111.30 = $100 × 1.05 × 1.06. From this you should not be surprised that a general
equation for future value of multiple interest rates is
Future value in N periods = Today’s value × Each period’s compounding

xiv Unique Features FVN = PV × (1 + iperiod 1) × (1 + iperiod 2)
× (1 + iperiod 3) × ⋅ ⋅ ⋅ 3 (1 + iperiod N) (4-3)
Note that the future value equation 4-2 is a special case of the more general equation 4-3.
If the interest rate every period is the same, we can write equation 4-3 as equation 4-2.
Each numbered example is accompanied by video guided
examples. These exciting, unique features detail the solution to
a key problem or concept within the chapter. For each example,
students can click or tap within the eBook or follow the direct
URL to find the following additional support.
• The exact example in the book is worked out in a visual,
narrated format.
• A similar example is presented in a video format, which
stops at decision points in the problem and asks the
students to identify the next step. The video continues, Confirming Pages
explaining why the student is correct or incorrect, and con-

tinues solving the problem. This feature allows students to
EXAMPLE 5-2
apply and check their learning before doing homework.
LG5-2
Saving in the Company Pension Plan For interactive versions

of this example, log in
• The solution to the example in the book is demonstrated

You started your first job after graduating from college. Your company offers a retirement to Connect or go to
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plan for which the company contributes 50 percent of what you contribute each year. So,
if you contribute $3,000 per year from your salary, the company adds another $1,500. You
using multiple calculator formats—reducing the class time needed to teach stu-
get to decide how to invest the total annual contribution from several portfolio choices
that the plan administrator provides. Suppose that you pick a mixture of stocks and bonds
that is expected to earn 7 percent per year. If you plan to retire in 40 years, how big will
dents how to use their calculators.

you expect that retirement account to be? If you could earn 8 percent per year, how much
money would be available? CALCULATOR HINTS
N = 40
• The solution to the example in the book is demonstrated using Excel, to help you
SOLUTION: Every year, you and your employer will set aside a total of $4,500 for your
retirement. Using equation 5-2 shows that the future value of this annuity is I =7
PV = 0
(1 + 0.07) 40 − 1 PMT = −4500
and your students get a basic understanding of how to set up the spreadsheets.
FVA 40 = $4,500 × ______________ = $4,500 × 199.6351 = $898,358.00
0.07 CPT FV = 898,358.00
Note that you can build a substantial amount of wealth ($898,358) through your pension plan at
NOW CHANGE TO:
work. If you can earn just 1 percent more each year, 8 percent total, you could be a millionaire! I =8
(1 + 0.08) 40 − 1 Confirming
CPT FV = 1,165,754.33 Pages
FVA 40 = $4,500 × ______________ = $4,500 × 259.0565 = $1,165,754.33
0.08
Similar to Problems 5-3, 5-4, Self-Test Problem 1
Future Value of Multiple Annuities

MATH COACH Math Coach boxes are featured in many chapters to help avoid
At times, multiple annuities can occur in both busi-
key terms
ness and personal life. For example, you may find that
you can increase the amount of money you save each
ANNUITIES AND THE FINANCIAL CALCULATOR
In the previous chapter, the level payment button (PMT) in the
the most common mathematical mistakes in a particular problem.
add-on
year becauseinterest A calculation
of a promotion or a of
new theand
amount
better of
job.interest annuity
financial calculatordue An annuity
was always in because
set to zero which no cash flows
constant are paid at
pay-
Asdetermined at thereconsider
an illustration, beginningtheof annual
the loan anddeposits
$100 to the
then added ments werebeginning of each
made every period. Wetime
use theperiod. p. 152
PMT button to input the
the principal.
made p. 163
for five years at 8 percent per year. This time, the annuityconsols
amount. For calculators, theassets
Investment present structured
value is of the opposite
as perpetuities.
deposit can beloan
increased sign (positive versus negative) from the future value. This is also the
amortized A loantoin$150 for the
which the fourth and pays
borrower fifth inter- p. 152
case with annuities. The level cash flow will be of the opposite sign
years. How
est and can weover
principal use time.
the annuity
p. 159 equation to com- as the effective
future value,annual rate
as the time line(EAR) Anshows.
on page 143 interest rate that reflects
pute the future value
amortization when we
schedule have two
A table levels of
detailing thecash
periodic Youannualizing
would use the with compounding
financial calculator to solvefigured in. p.of156
the problem
flows? In this case, the cash flow can be categorized
loan payment, interest payment, and debt balance over as loan$100
depositing principal The
for five years balance
via the followingyet to Nbe= 5,
inputs: paid
I = 8,on a loan.
two
theannuities.
life of theThe first
loan. p.annuity
160 is a $100 cash flow for PV = 0,p.PMT
160= –100. In this case, the input for present value is zero
five years. The second annuity is a $50 cash flow for because no deposit is made today. The result of computing the
annual percentage rate (APR) The interest rate per perpetuity An annuity with cash flows that continue
two years. We demonstrate this as future value is 586.66.
period times the number of periods in a year. p. 156 forever. p. 152
annuity A stream of level and frequent cash flows paid
Period 0 1 2 8%
at the end of each time period—often referred to3 as an 4 5 years
ordinary annuity.0 p. 143 –100

Cash flow –100 –100 –100 –100
–50 –50
FV = ?
To determine the future value of these two annuities, compute the future value of each
self-test problems with solutions
one separately, and then simply add them together. The future value of the $100 annu-
Self-Test Problems with Solutions appear before the gradable

ity is the same as computed before, $586.66. The future value of the $50 annuity, using
the1TVM equation
Future Valueforand
the Annuity
future value of a cashChandler
Payments stream, is
and Monica are trying to decide if LG5-2, 5-9
they will have enough Confirming Pages
(1 +money to retire early in 12 years, at age 60. Their current assets are
problem sets so students can test themselves before diving into
0.08) 2 − 1
FVAN in
$300,000 $50 × ____________
= retirement plans and they have $100,000 in other investments. Together, they
0.08
contribute $28,000 per year to their retirement plans and another $6,000 to other investments.
their homework.
= $50
If their assets × 2.08
grow at 8 = $104 per year, how much money will they have when they turn
percent
60? After they retire, they will invest their wealth chapter
more5 conservatively and2:itAnalyzing
Time Value of Money will earnAnnuity Cash Flows 145
5 percent per year. Is this enough to fund a $100,000 per year retirement for 40 years?
Solution: research it! Analyzing Financial Statements

Chandler and Monica’s current assets of $400,000 will grow to $1,007,268
cor91411_ch05_140-177.indd 145 01/20/17 03:32 PM Go to the website of Wal-Mart Stores, Inc., at www.walmartstores.com and get the latest
(= $400,000 × 1.0812) in 12 years. Their annuity contributions of $34,000
(= $28,000 + $6,000) will add another financial statements from the annual report using the following steps.
Click on “Investors.” Click on “Annual Reports.” Click on the most recent date. This
(1 + 0.08) 12 − 1 will bring the file onto your computer that contains the relevant data.
FVA12 = $34,000 × ____________ = $34,000 × 18.977126 = $645,222
0.08 Using the most recent balance sheet and income statement, calculate the financial
ratios for the firm, including the internal and sustainable growth rates.
So their total retirement wealth is $1,652,490 (= $1,007,268 + $645,222). To deter-
mine the income this wealth generates over 40 years, compute the annual annuity CALCULATOR HINTS
payments as
Integrated Mini-Cases
Future wealth:
⎡ ⎤ at the end of each chapter N = 12
⎢ ⎥
PMT = $1,652,490 ×
0.05 ______________
= $1,652,490 × 0.058278
I =8 integrated mini-case Working with Financial Statements
combine the chapter’s (1 + 0.05) ⎦ key concepts into a more com-
40 PV = −400000
1 ___________
1− Listed are the 2018 financial statements for Garners’ Platoon Mental Health Care, Inc.
⎣
PMT = −34000
40
CPT FV = 1,652,490
Spread the balance sheet and income statement. Calculate the financial ratios for the
plex problem = $96,304
to help students understand how con- Income annuity: firm, including the internal and sustainable growth rates. Using the DuPont system of
N = 40 analysis and the industry ratios reported, evaluate the performance of the firm.
cepts
requirement.and methods
However, tie
a few years after they retire,together.
It appears that Chandler and Monica would not quite make their $100,000 income
they would be eligible for Social
I =5
PV = −1652490
FV = 0 GARNERS’ PLATOON MENTAL HEALTH CARE, INC.
Security. Though relatively meager, the Social Security payments will be enough to
CPT PMT = 96,304 Balance Sheet as of December 31, 2018
comfortably put their income over the $100,000 level.
167
Assets Liabilities and Equity
Current assets Current liabilities
Cash and marketable securities $ 421 Accrued wages and taxes $ 316
Accounts receivable 1,109 Accounts payable 867
cor91411_ch05_140-177.indd 167 01/20/17 03:32 PM
Inventory 1,760 Notes payable 872
Total $ 3,290 Total $ 2,055
Fixed assets Long-term debt $ 3,090
Gross plant and equipment $ 5,812 Stockholders’ equity
Less: Depreciation 840 Preferred stock (30 million
shares) $ 60
Net plant and equipment $ 4,972 Common stock and paid-in
surplus (200 million shares) 637
Other long-term assets 892 Retained earnings 3,312
Total $ 5,864 Total $ 4,009
Total assets $ 9,154 Total liabilities and equity $ 9,154
GARNERS’ PLATOON MENTAL HEALTH CARE, INC.

Income Statement for Year Ending December 31, 2018
Net sales $ 4,980

Less: Cost of goods sold 2,246

Unique Features xv Gross profits
Less: Other operating expenses
$ 2,734
125
Earnings before interest, taxes, depreciation, and amortization (EBITDA) $ 2,609
Less: Depreciation 200
Earnings before interest and taxes (EBIT) $ 2,409
Less: Interest 315
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acknowledgments
Development of the first edition of this book series started with a course survey that was
completed by 400 instructors across the country. The following is a list of the review-
ers that became part of the many review stages, focus groups, and class-testing for the
revisions that followed—all of which were invaluable to us during the development of
this book.
Rebecca Abraham Denis Boureaux

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xx
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acknowledgments xxi
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xxii acknowledgments
We are also indebted to the talented staff at McGraw-Hill Education for their exper-
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ovec, executive brand manager; Trina Maurer, senior marketing manager; Doug Ruby,
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Wang, and Hongyan Fang.
We hope you like the outcome of this text. Research and development is always ongo-
ing, and we are interested in your feedback on how this text has worked for you!
Marcia Millon Cornett

Troy A. Adair Jr.
John Nofsinger

acknowledgments xxiii
brief table of contents
PART ONE: INTRODUCTION 2
1 Introduction to Financial Management 2
PART TWO: FINANCIAL STATEMENTS 30

2 Reviewing Financial Statements 30
Appendix 2A: Various Formats for Financial Statements (located at
www.mhhe.com/Cornett4e)
3 Analyzing Financial Statements 72
PART THREE: VALUING OF FUTURE CASH FLOWS 110

4 Time Value of Money 1: Analyzing Single Cash Flows 110
5 Time Value of Money 2: Analyzing Annuity Cash Flows 140
PART FOUR: VALUING OF BONDS AND STOCKS 178

6 Understanding Financial Markets and Institutions 178
Appendix 6A: The Financial Crisis: The Failure of Financial Institution
Specialness (located at www.mhhe.com/Cornett4e)
7 Valuing Bonds 226
8 Valuing Stocks 264
PART FIVE: RISK AND RETURN 296

9 Characterizing Risk and Return 296
10 Estimating Risk and Return 330
PART SIX: CAPITAL BUDGETING 362

11 Calculating the Cost of Capital 362
12 Estimating Cash Flows on Capital Budgeting Projects 392
Appendix 12A: MACRS Depreciation Tables 421
13 Weighing Net Present Value and Other Capital Budgeting
Criteria 426
PART SEVEN: WORKING CAPITAL MANAGEMENT AND

FINANCIAL PLANNING 462
14 Working Capital Management and Policies 462
Appendix 14A: The Cash Budget 492
15 Financial Planning and Forecasting 498
xxiv
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"But vhy don't you square you'self vith the goppers?"
"I don't know. I—I was broke, Max."
"I vish I gould help you, Mary," he said, his curiosity cooling at the
thought of an appeal for assistance.
She saw it, and it amused her.
"Can't you do it?" she asked, dropping her voice into a whine.
He tried to draw away from her, but her linked arm held him
affectionately fast.
"I been havin' rotten luck," he declared; "somethin' awful. I ain't got
hardly only the money vhat's in my glothes."
"Well, then," said Mary, looking at the clothes and knowing well that
they somewhere concealed an ample yellow sum, "why don't you take me
on your staff?"
"Mary," he cried, trying to spread his hands, and failing dismally with
the one that her pinioning arm hampered, "vhat do you think I am? A
millionaire? I ain't got no staff."
"Come off!" she bantered.
"I ain't—honest."
"Still in the other line?" she persisted. "I thought you might be trottin'
'em on the street—they say there's more in it. Why do you stick to supplyin'
the flats and the houses?"
Her voice was the perfection of good nature, but he writhed under it.
"Mary!" he pleaded.
"Well," she said, disregarding his tone, and keeping his arm fast in her
own, "you do supply 'em, don't you? I know one fellow who makes his
livin' goin' the rounds, findin' what girls is sore on their madams an' then
gettin' a commission by sneakin' 'em out an' changin' 'em to new flats. He
lets on he's sellin' kimonas, but one sample's lasted him three years."
"Mary!" repeated Max, more weakly.
"That's the truth," she said, and then: "But can't you start street-work an'
take me on your staff?"
Again he looked at her,
"No," he answered.
"Not young enough lookin' now, eh?" She was still smiling.
"Ach," he protested, "you oughtn't nod to be so hard on a feller. If you

chust knowed——"
But she had gone far enough, and she would not let him finish. They
had reached a saloon near to her new lodging-place, and she paused. There
was, and she knew it, no word in his excuse that she would have credited.
Nor did she mean, just yet, to let him see her hatred. In order that he might
the better see it at a later moment, she wanted now to quiet his naturally
ready fears. She had found that she could harass him, and that, for the
present, was all that she needed to know.
"Never mind," she said, "I told you I wasn't goin' to rake up nothin', an'
I mean to keep my word. Come on in here. This is a quiet place. You're
goin' to buy me a drink, anyhow, just to show that we're still friends."
He brightened at this indicated avenue of escape.
"Sure we're still friends," he declared, "an' you can haf all you vant to
drink, too."
She slipped her hand into his—she could do it, she had learned, without
the dumb flesh seeming to shrink from that contact—and pressed it.
They went into the deserted "ladies' room" of the saloon to which she
had referred, and sat down there, facing each other under a light turned
kindly low.
"Vhiskey?" asked Max.
"Yes," said Mary.
"Two of 'em," ordered Max of the waiter that had answered his ring, "an'
don'd make 'em so stingy like most you fellers ofer this vay."
The man brought the liquor, placed it before them, and went away.
"Vell," said Max, raising his glass, smiling his thin smile, and
apparently forgetting that he had ever denied whiskey; "here ve are, ain't
it?"
If Mary was remembering another night and another drink she did not
say so; instead, as Max tilted his sleek head far back between his shoulders
and dropped the whiskey down his throat, her hand watched for the instant
when his gray eyes were on the ceiling and that instant poured the liquor
from her own glass to the floor. When her companion's head came forward
her fingers, wrapped about the glass, were just withdrawing it from her lips.
"I can drink that better'n I used to," she said.
Max grinned again. So long as she did not upbraid him for his part in it,
so long as she did not go into the details of its earlier stages, he had no
objection to hearing of her past, was even languidly curious about it, and
was certainly sorry that it had not brought her to more seeming prosperity.
"You sure didn't take that like you vasn't used vith it," he said.
"I'll take another just to show you how," she answered, and pressed the
nearest button.
This time his eyes were on her and she had to drink. But she did not
scruple: so long as she retained her head and Max lost his, the effect of the
alcohol on her system concerned her but little.
They had a third drink, for "old time's sake," as Mary suggested, and
this she succeeded in pouring down her dress-front. At the fourth, Max
began to show signs of fear that he would have a drunken woman on his
hands, but Mary's patent sobriety soon reassured him, and overcame his
protests against a fifth by recalling his promise of liberality.
His cold eyes sparkled into a faint light. Little spots of red appeared in
the olive of his cheeks. He felt the advance of the enemy in his veins and
tried to go; but Mary began an imaginative narrative of her recent
experiences and insisted on his listening. When he at last successfully
interrupted that, she twitted him with being able to drink less than his
pupils, and Max was once more forced to order. He was not drunk, or nearly
drunk, but the fine edge of his discretion was dulled: he saw in the woman,
who had now moved to his side, nothing that, whatever motives might be at
work, could possibly harm him; he found something ludicrous in the
situation. Her looks seemed better than they had appeared an hour earlier,
and her tentative advances flattered him.
Mary, though she had drunk more than was good for her, had managed
to spill enough liquor to retain all the sobriety she needed; but, when they at
last rose, she swayed a little unsteadily.
"Now," she said, "you'll just buy me a half-pint for my head in the
mornin', an' then you'll walk as far as my door."
Still enjoying the piquancy of the affair, he obeyed her. He even

consented to come to her hall-bedroom with her—a room the exact
reproduction of that which she had formerly rented farther uptown—and
there, forgetful of the provision against the morning, they finished the half-
pint.
At last he stood up from the bed on which he had been sitting while she,
opposite, used the single chair.
"Vell," he said, grinning; "it's been good to see you again, und maybe I'll
gome back some efenin'."
She rose before him. The light was at her back and her face resumed, as
she stood there, some furtive traces of its earlier grace. The eyes seemed to
soften, the cheeks were a natural pink beneath their coating of rouge, and
her russet hair, curling about her face, relieved the harder outlines and cast a
gentle shadow around the neck. She spread out her arms.
"Kiss me," she said.
He smiled and leaned condescendingly toward her.
"What's your hurry?" she murmured.
He looked at her, and the weak light and the strong liquor stood her in
good stead.
"I ain't in no hurry," he smiled.
She met him smile for smile—and then, in a sudden sense of triumph,
she flung back her head and laughed.
It was not until three hours later that he finally left her, but he left
hurriedly, for the remorseless gray light of morning was coming in at the
window, and it fell upon her as she wrapped a soiled pink kimona around
her shivering figure and slipped her feet into a pair of rundown Turkish
slippers.
"Good-by," he said, looking away from her.
"Wait a minute," said Mary. "I'll go with you to the door."
She did go. She followed him down the dark stairway, creaking noisily
under their shamed feet, and she stood for a moment in the black hall,
holding the brass knob of the door, as he passed to the step outside. Mary
slipped the dead-latch, ready to bolt the door.
"Max," she said.
He turned quickly, nearly knocking over, as he did so, the milk-bottles

that were lined, in a white row, upon the step.
"Yes?" he returned, and grinned sheepishly.
She thrust out her towsled head and looked up and down the gray
morning street. The block was empty. She drew her head clear of the door.
She was still trembling, but from neither cold nor fear.
"You ain't goin' without kissin' me?" she asked.
But a reaction of disgust had seized him.
"Yes, I am," he said.
Mary's one hand tightened on the knob; the other flattened itself against
the nearest panel of the door, ready to push hard.
"All right," she replied, with a sudden change in her voice that, still low,
became tense and metallic. "You think I'm—I'm done for, Max. Well—
you're done for, too!"
The man's jaw dropped. His olive face was ashen. His eyes stared.
"What do you mean?" he asked.
Mary's mouth was wreathed in a smile.
"You know," she answered.
Max retreated so suddenly that he nearly fell down the stone steps.
"You've—you've——" he gasped.
"Yes," said Mary.
"It's a lie! You're tryin' to scare me!" His jaw worked spasmodically.
"It's a damned lie!" he repeated.
"You don't believe me?" the girl inquired.

If she had looked for heroics, if she had feared melodrama, she was as
yet disappointed. The knees of Max shook under him; he was in abject
terror.
"It's a lie," he muttered over and over. "It's a damn' lie!"
"Think what you please," said Mary. She was still smiling, still serene.
"You believed I'd forgot, didn't you? Well, I didn't forget, Max Grossman,
an' now you'll remember. If you don't yet think I'm givin' you a straight
story, all you have to do is just one thing: wait."
Max uttered an inarticulate cry and threw himself at her, but he only
bashed his head against the closed door.
Mary had shut it, and in time. Behind it, in the dark hallway, she lay half
fainting.
"It's the last of you, Max," she laughed.
And it was.
XXVIII
HUSKS OF THE SWINE
Mary was too ill to go to work that night, and on the night following she
was no better. The shock, the spasm of success, the recoil, not moral but
physical, after the satisfaction of a supreme desire—these things were, of
themselves, enough to leave her prostrate. But, in addition to these, she had,
while standing at that open door, contracted one of those heavy colds to
which she was now rendered especially susceptible. Through long hours of
the day and the darkness she tossed among the hot sheets of her bed,
sometimes with her teeth clicking in a chill, again with her body burning in
a fever, but always revolving in her seething brain the details of the
vengeance that she had wrought.
Her physical sufferings mattered little to her. There were hours when
she was wholly incapable of feeling them. When the inertia of the state of
reaction began at last to wear away, it left her with a glow of recollection so
great that there seemed no place for lesser sensation. She had accomplished
her great work, she had achieved her mission. What she had done had been
done solely for her own heart's sake; there had been no delusion of a
celestial command, no distorted thought of a social duty; yet, the impulse,
however utilitarian, had been supreme, and its end filled her with a sense of
triumph that, for want of the proper title, she was sure was happiness.
A wiser head and an unwounded heart would have known enough of

life to see that even Max Grossman was not entirely to blame. A better
brain could have looked back into the past. It could have seen Max as the
type of all his kind, the symbol of every one of the great company of
slavers, the inevitable result of a system blind both to its own interests and
to the interests of the race. It could have seen the child, one of half a dozen
born to a woman that could not, properly, have cared for three. It could have
seen that child neglected, dirty, forgotten, locked, by day, in the bedroom
where the whole family tried vainly to sleep by night, learning the highest
facts of life from the worst of teachers: the cramped childish brain—and
going out, at last, upon the street, with passions prematurely developed and
perverted. It could have seen the social order shape that child into society's
enemy: the starved boy-pickpocket sent to the monstrously misnamed
"reformatory"; the same child branded as a criminal, with none to shelter or
to trust him, and with a knowledge, gained in the state's own institution,
which fitted him to be only a crafty gorilla to harass the state. It could have
seen the fatal line of least resistance as clearly in the resultant man as it is
seen in the life of him that does no more than wreck a bank or steal a
corporation, and, hideous as its course is in the one instance, it would have
seen that the line was the same in all.
But Mary never doubted her justice, and never regretted it. One only
thought troubled her: she was afraid that, by telling Max, she might have
given him a warning sufficiently early to defeat her own ultimate purpose.
It was a large part of her plan that he should know whose hand had struck
him, and, for a man in his business, the only way in which she could make
that knowledge certain was the way that she had followed. Yet what if he
were in time to profit by her information? What if, even were he too late, he
should guard and doctor himself with proper caution? She turned the
questions over and over in her mind, but she had always to end in the faith
that the worst had happened.
Sometimes, in the moments of exhaustion from the mad round of these

inquiries, she reverted for relief to matters that touched her less nearly, and
endeavored to occupy herself with the affairs of others. She thought of
Dyker, and without resentment. She knew that he would use her written
retraction to regain Marian's confidence, and she hoped that he would be
successful. Again she fell to speculating upon the fate of Carrie Berkowicz
and to wondering what had become of Katie. But upon her own past and
present she did not permit herself to dwell, and always, with the certainty of
a machine, her brain recurred to Max and her vengeance on him.
On the third evening, however, her landlady, entering with supper,

reminded her, without mincing matters, that the rent was due, and Mary
recalled that her little stock of money was exhausted.
"Can you wait till to-morrow morning, Mrs. Foote?" she asked.
Mrs. Foote was an ample woman, with round cheeks and robust frame,
whose only dissipations were an over-indulgence in ritualism, babies, and
the hospital. She had a high-church cleric to whom she confessed the sins of
her neighbors; a wraithlike husband whose sole occupation appeared to be
that indispensable to the regular increase of her family—and whom she
would otherwise have failed altogether to tolerate—and such a passion for
being ill that she could never quite believe in the illnesses of others.
"I can wait just that long, Miss Morton," she said; "but I'm sufferin' so
from rheumatism in my fingers that I just know my old gastric trouble is
comin' on ag'in, an' that'll mean another of them hospital-bills."
Mary raised her aching head.

"You won't have to wait any longer," she answered.
"I'm glad of it, Miss Morton," responded Mrs. Foote, "for there was a
young lady lookin' at this room to-day an' she offered me a dollar more a
week for it, an' I wouldn't like to lose you."
"You won't lose me," said Mary, to whom even sustained conversation
was physical pain. "I'm goin' out to-night, an' I'll have plenty for you by the
mornin'."
"You're sure?" asked the landlady.
"Of course I am. It'd be a pity if I couldn't earn that much."
Mrs. Foote looked at Mary's face and seemed to doubt the foundation
for her assurance.
"Well," she sighed, "I certainly hope you can."
For some minutes after the door closed, Mary lay still. She had again
been brought face to face with the most poignant of tragedies, the tragedy
of living.
An hour earlier, had she questioned herself, she would have said that
she was careless of life, that neither this earth nor the quitting of it
interested her, that continued existence was a matter of indifference. Then
she was in that state of exultation above things mundane which is produced
only by great sorrow, great joy, or the great revenges that are both grief and
triumph. But now the words of the landlady had brought her back from the
indulgence of contemplation to the necessity of action. Mary's insidious,
implacable disease had completed what her business had begun, and what
her business alone would have completed far more slowly. The few
emotions that she was now capable of feeling were the more intense
because of their rarity, but their intensity was equaled by their brevity and,
when the moment had gone, it left her even more of a moral weakling than
it had found her.
She knew Mrs. Foote and her tribe too well to deceive herself as to what
must happen should the morning dawn upon an empty stocking. Life held
nothing for which Mary greatly cared, but the instant of death contained all
of which she was afraid. She did not greatly want to harm others by plying
her trade in her present condition, but she could not think of others. Each
step would be a separate wound to her tortured body and her throbbing
head, but she understood that the landlady had to wring out the rents by the
means that conditions had forced upon her; and so the worst of fears, the
fear of poverty, which is the fear of death, took this sick woman from her
bed, dressed her in her best frock, and sent her out into the street.
Along Sixth Avenue, where fortune had often, theretofore, been kind to
her, she met no significant glances. A passing girl or two, having missed her
for the last few evenings, proffered a casual sympathy; but that was all.
Through the open doors of the Haymarket, she turned in, but there even the
women at first disregarded her. Several men that she recognized in the
boxes of the gallery around the little hall nodded, but immediately looked
away. The one man that she happened to know better than any of the others
did not appear at all to remember her, and his neighbor, who had frequently
accompanied her, signaled elsewhere.
She was lonely. She approached two women who were circling the
floor, arm in arm. She addressed them with the familiarity of the craft.
"Hello," she said.
The one woman smiled, but her companion, a formidable, tailor-made

personage, swelled with dignity.
"You better beat it," she declared.
Mary flushed.
"What's eatin' you?" she demanded.
"You don't belong here," the woman answered. She made a lofty survey
of Mary's finery, and then added: "Goin'?"
Mary's heart sickened, but she stood her ground.
"No," she said, "I ain't."
The floor-manager was passing. The social arbiter turned to him.
"Will," she asked, and her shrill voice seemed to carry over all the
room; "what's this place comin' to? Throw that Fourteenth Street woman
out o' here!"
This was enough. Mary left the place, and, still aching in every limb,
turned through a narrow cross-street to Broadway. Her eyes swam as she
lingered before shop-windows in the hope that someone she passed would
accost her. Her throat was dry and it hurt her when she hummed into the
ears of careless pedestrians. Nobody seemed to heed her. The night was
cold, and she shook like a recovering drunkard. She mastered all her
strength to speak plainly to a complacent man in a great ulster.
"Hello!" she said, trying to smile. "What's your hurry?"
The man looked at her and swore.
"You must think I'm blind," he ended.
She knew that she looked ill, but she knew that she must find money.
She pleaded with age, because she knew it to be æsthetically tolerant; she
ogled youth, because she knew it to be inexperienced; and she stationed
herself at last near a saloon in a poorly lighted quarter, because she
concluded that the men leaving such places were the only men to whom she
was just then fitted successfully to appeal. It was one o'clock in the morning
before she could induce even one of these to give way to her, and he,
staggering with drink so that she had to support him with all her ebbing
powers, insisted on stopping in an alleyway when, for the first time, she
picked a pocket. A dollar and a half was all that she had as she left him, and
the next dark figure that she stopped—she did not look at his face or care
what sort of face it was—answered her with sharp laughter.
"A two-spot?" he cackled. "You have a few more thinks comin', old
girl!"
"A dollar?" suggested Mary, tremulously.
"I got just a half—an' you ain't worth a cent more."
She took it—what would she not have taken?—and she worked on into
the dawn, on with a mounting fever and a sick determination, knowing now
that her chances grew with the approach of morning and finding herself,
when at last the morning came, with scarcely a dollar beyond the sum due
for rent.
During all the months that followed she skirted the dire edge of
starvation, more than half the time too ill to rise from her bed and aware
that she was at no moment fit to rise. As her cold grew steadily better her
deeper illness steadily increased. It thrived on every exertion and seemed to
gain each atom of strength that she lost. Things might thus continue for
almost any period, but she knew that her manner of life forbade absolute
cure, and that, at the end, there waited a slow and loathsome death.
Anticipation made her faint; the melancholia and terror, which are
symptomatic, sometimes nearly maddened her. The last vestiges of the
moral sense, so early injured by previous experience, were almost wholly
destroyed; there was no social consciousness; the appeal of the individual
widened until it occupied her entire horizon; there was room for nothing but
the craven passion for life.
Fat Dr. Helwig, when she went to see him, blinked at her out of his
deep-set eyes, and told her that she was not taking sufficient rest.
Mary twisted her helpless hands.
"How can I afford to take it?" she asked.
"Save your money," said he, patting her thin shoulders, and chuckling
prosperously. "You girls never put aside a cent."
"We don't earn enough."

"Poof! That's what you all say. I know—I know. We men aren't such
fools as you take us for."
But Mary, as each evening she made up before her little mirror, noted
the gradual depreciation of her wares; each week she found it harder to pay
rent and retain enough money for food. Mrs. Foote seemed to come every
day, instead of every seventh, and yet each night business grew more
difficult. Whenever Mary missed a few evenings, or whenever she changed
her hunting-grounds, the police needed fresh payments. She surrendered
one uptown cross-street after another. At last she deserted Broadway and
patrolled only that Fourteenth Street which the woman at the Haymarket
had so scornfully referred to and which had so wonderfully burst upon
Mary's sight when she first stepped from the Hudson Tunnel upon the
surface of Manhattan.
Spring, summer, and autumn passed, and a lean winter followed them.
Mary caught another cold and was ill for a week. She went to work too
soon and had to go back to bed for several days and remain idle for several
nights. At last, with the ancient fear of the white race—the fear of that
poverty which is death—gnawing at her vitals, she struggled to her feet and
tramped once more along Fourteenth Street from Sixth Avenue to Third.
But now the sword descended. Even the Fourteenth Street saloon best
known for her purposes gave no fish to her net, and Eighth Street was little
better. She was too tired to go farther; she had, the next morning, to offer
Mrs. Foote only a third of what was due.
The landlady, whose bulk seemed to crowd the hall-bedroom, leaned

heavily against its frail door. Mary thought the woman's slow, brown eyes
more than commonly suspicious and her round face implacably hard. The
tenant, with all explanation frozen upon her lips, handed over the clinking
bits of money. They fell into the big, extended palm as a few drops of water
might fall into a basin. Mrs. Foote began slowly to count the coins.
Mary watched, in fascinated silence, the counting of those few pieces of

silver, each one of which seemed stained with her blood. She saw the
landlady's expression change to one of incredulity. She saw the counting
repeated.
Mrs. Foote again thrust out her grimy fingers.
"What's this?" she demanded.
"It's——" Mary looked at the floor. "It's the rent," she concluded, in a
whisper.
"What's the rent?"
"That's all I have—just now. I thought—I thought, considerin' how long

I've been here, you might wait a day for the rest, Mrs. Foote."
The landlady opened her hand, and Mary's little store of coin dropped to
the bed.
"I can't take this," she said.
"You mean," asked Mary, with a quick gasp of hope, "that you'll let me
keep it till I get the rest?"
"No, I don't mean nothin' of the sort," said Mrs. Foote. "I mean I've got
to have the whole bill—right now."
Mary's heart sank.
"That's all I have," she said.
She had sunk to a seat on the tumbled bed, beside her scattered coins.
Her thin hands were locked across her knees; the dirty pink kimona slipped
lower from her shoulders at every frequent cough, and her eyes sought
those of Mrs. Foote in dumb appeal. Her russet hair fell dully disordered
about her hollow cheeks, and the rouge on her lips was purple.
"I'm sorry," pursued Mrs. Foote, who was too used to such incidents
greatly to concern herself; "but I've got to make my living like anybody else
does."
"I was expectin' some money this evenin'," said Mary.

"Hump!" sniffed the landlady.
"You don't believe that?"
"I don't care, Miss Morton; I can't care."
"But I"—Mary's fingers knotted tighter about her knees—"I was

promised it," she lied, "an' I'm dead sure to get it then."
"I've heard that so many times," said Mrs. Foote, "that I knowed it by
heart three year' ago."
"I could pawn somethin'," suggested Mary.
The landlady swept the bare room with a critical glance.
"What?" she asked.
There was no adequate answer to be made. Mary had tried to pledge her
coat a few days before, and had been offered only an inadequate twenty-
five cents for it.
"Then you won't—you can't wait?"
"No, I can't. I'm a sick woman myself; my rent's due, Miss Mary, an' the
honest truth is that there's such a lot of women wantin' rooms that I'd only
be doin' a injustice to my children not to take in a lady that could pay
prompt—for a while."
Mary said nothing more. She packed her few belongings into her trunk,
left it in the hall to be called for, and, as the chill evening fell, went away
from the house with no idea where she was to find a lodging for the night.
For an hour, though she was still weak, and the time was as yet so early, she
walked up Broadway and, in the Forties, turned eastward for a few blocks,
and so south again. Not far from the Grand Central Station she saw a little
crowd gathered at a corner, and she stopped, rather for the luxury of
standing still than from any curiosity.
The place was a church. Colored lights streamed from its rich stained-
glass windows. Through its swinging doors there stole the scent of flowers
and the sound of delicate music. A long row of carriages, the coachmen
walking up and down to keep warm, stretched far around the corner.
Mary, shivering, worked her way quietly through the group of men and
women on the sidewalk. In order to avoid a particularly entangled portion
of the press, she started to walk along the steps by the tower-entrance, and
then, seeing a side-door open, she listlessly turned toward it and looked in.
Far away up the vaulted nave the altar stood, white with damask and
yellow with candles. The chancel was a garden, the whole building heavy
with scent. Acolytes in scarlet were grouped about the robed priests. The
choir had risen and, preceded by a lad that bore aloft a great brass cross,
were forming into a singing procession, which slowly filed down the center
aisle.
With a subdued scuffle and swish, the congregation also rose as the
double line of choristers moved between them. Women craned their necks
and men, pretending to look stolidly ahead of them, looked really out of the
corners of their eyes. The choir, at the main door, divided and stood still.
High overhead a deep-toned organ was playing the wedding-march from
Lohengrin, and through the respectful line of white-clad boys there moved a
man of regular features with lowered lids that hid his eyes, and a crisp
brown mustache, which concealed his lips, and, on his arm, in the costume
of a bride, a tall, graceful, pure woman, whose face was like a Greek cameo
and in whose hand was a huge bunch of orchids and lilies-of-the-valley.
The fingers of a policeman touched Mary's arm.
"You'll have to get back," he said. "The people'll be comin' out in a

minute."
But Mary did not wish to move.
"I've got a right here," she answered.

"You?" The policeman looked at her, and then laughed. "What right?"
he asked.
"Isn't that Miss Lennox?"
"It was."
"And Judge Dyker?"
"Sure."
"Well, I gave him his marriage-license."
The policeman's good-nature was amused, but he forced her back to the
street.
"No use," he said.
"An' I guess," said Mary bitterly—"I guess I paid for the bride's
bouquet."
He did not reply, nor would she have heard him had he spoken, for in
the stream of lesser guests now flowing from the rear of the church, which
had been assigned to them, she was met by Katie Flanagan.
Not the piquant Katie of that photograph which used to adorn the
bureau in the shabby tenement of bachelor Hermann Hoffmann, or the
saucy girl of the second-hand clothing-store, or yet the frightened clerk that
had at first evaded and at last defied the whiskered Mr. Porter. Those days
were patently passed; Katie, like many another strong soul, had faced
temptation and conquered it; and in the stead of the old days had come new
days that brought a maturity and a dignity with which Katie was
consciously satisfied. Her blue eyes were as glad as Mary remembered
them, but their happiness was calm; her black hair was gathered in a formal
knot, and her gown, though a better gown than that she used to wear, was of
a simplicity almost severe.
Nevertheless, when she saw Mary, who sought evasion, Katie came
frankly forward with outstretched hand. She recognized with regret, the
change in her former acquaintance, but, knowing, as she must have known,
its cause, she decided to ask no questions concerning it, and, if she offered
no assistance, she at least proffered no advice.
"I just come to see the last o' Miss Marian," she explained. "Near the
half of old Rivington Street's been tucked in here among th' swells to give
the good word to her—Jews an' Irish—an' if the rabbis won't mind for the
sheenies to come to such a heathen church, I thought Father Kelly might
manage to forgive me."
Mary's brain was just then too dull to make any but a commonplace
answer.
"You're lookin' well," she said.
"I ought to be, though there's a youngster expected. I tell Hermann—we

was married a few weeks after last election—I don't know how we'll keep a
family; but he just whistles an' says we'll make out some way, an' I guess
we will."
"I'm glad," said Mary, "that you're married."
"Well, so am I—most of the time. Of course, the man has some queer
ideas, but I'm doin' me best, with Father Kelly's help, to get 'em out of the
head of him, an' nowadays, when he goes to one of them Socialist meetin's
by night, I make him make up by goin' with me to early mass next mornin'."
She paused and surveyed again the pale woman before her. Essentially
Katie had not changed. She had still, and would always have, the big, kind
heart and the ready hand of her earlier days. But her condition had altered,
and Mary's had evidently again fallen; she looked through an alien
atmosphere, and her gaze was distant: the responsibilities and adjustment of
young married life shackled her, and must continue to shackle her until they
were no longer new. She did not know how to suggest any assistance, did
not even believe that it was desired; but, though she still felt that she must
refrain from intimate inquiry, one effort she tried to make.
"An' you," she asked—"how're you gettin' on, Mary?"

Mary bit her lip.
"Fine," she answered, huskily.
"Are you——? There ain't——?" Katie floundered in a maze that she

would, a few months previously or a few months in the future, have cut her
way through with a strong directness. "There ain't nothin' I could——?"
Mary's head shook, almost mechanically. It was not entirely that she felt
unable to accept assistance from her former protector; it was rather that she
felt only that she must run away.
"Oh, no," she said, forcing a smile. "I'm doin' grand."
The gala crowd was sweeping about them. It jostled both girls and
threatened momentarily to separate them. After all, there was nothing more
to be said.
"I—I got to go," murmured Mary. "I got an appointment——"
"But you'll come to see us sometime, won't you Mary?" asked Katie,
and she gave her address. "We'll have a fine party at the christening an' I'll
want you to see the baby."
"Oh, yes," said Mary; "yes, of course."
But Katie was hesitant.
"You're sure I can't do nothin'?" she asked.
"No, no. I——" Mary caught and pressed with what warmth there was
left in her fingers, the Irish girl's hand. "Good-by," she concluded, and then,
in order to keep up the farce of an appointment, she got upon a passing car.
Even if panic had not possessed her, she could not have accepted
anything that Katie might offer. The most that could have been given her
would have been but temporary, and what she must have was a means of
earning a living.

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CHANGES IN THE FOURTH EDITION

Chapter 1: Introduction to Financial Management

Chapter 2: Reviewing Financial Statements

• Added a discussion of difference between EBIT and operating income

• Added more discussion of debt ratios

Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows

• Updated the data in Figure 4.5 on gold prices

Chapter 5: Time Value of Money 2: Analyzing Annuity Cash Flows

• Revised the chapter introduction to discuss Boeing

Chapter 6: Understanding Financial Markets and Institutions

Chapter 7: Valuing Bonds

• Updated the Personal Application with new data

Chapter 8: Valuing Stocks

x a note from the authors

Chapter 10: Estimating Risk and Return

• Updated values and data in Tables 10.1–10.4

Chapter 11: Calculating the Cost of Capital

Chapter 12: Estimating Cash Flows on Capital Budgeting Projects

• Clarified the definition of salvage value

Chapter 14: Working Capital Management and Policies

Chapter 15: Financial Planning and Forecasting

• Clarified the discussion of deseasonalizing sales

• Refined the discussion of active versus passive capital structure changes

• Expanded the discussion of information effect on dividend policy

Chapter 18: Issuing Capital and the Investment Banking Process

Chapter 19: International Corporate Finance

• Revised the chapter introduction to include new data about Starbucks

Chapter 20: Mergers and Acquisitions and Financial Distress

• Added Herfindahl-Hirschman Index (HHI)

xii a note from the authors

tors with hundreds of questions organized

cor91411_ch05_140-177.indd 141 01/20/17 03:32 PM

finance at work markets

and hot topics noted in the news. The Want to Know

to use for searching the Internet Care, Inc. for updates.

features are great to use for class discussion or as

dents’ understanding of the key terms and core concepts

Research It! projects, perfect for individual assign-

PART TWO integrated mini-case Working with Financial Statements

Analyzing Financial GARNERS’ PLATOON MENTAL HEALTH CARE, INC.

Viewpoints, a unique feature presented at

the beginning of each chapter, pose both a

Business Application business and a personal problem using key

clearer. Viewpoints Revisited at the end of

the chapter show how these problems are

solved. Viewpoints Extended leverage a

So how can these financial

at each personal application raised. These

cor91411_ch03_072-109.indd 106 01/13/17 12:29 PM

Numbered examples in each chapter feature vari- LG4-3

problems in both business and individual contexts.

tion process. How much of what he pays is interest-on-interest?

SOLUTION: Dominic will have to pay:

FV 3 = $1,500 × (1.07) 3 = $1,500 × 1.225 = $1,837.56