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Cover image:
Pete Atkinson/Getty Images
The fourth edition of Corporate Finance takes an applied approach to cover all the latest research and topic areas
important to students taking Finance courses. The new edition provides an international perspective on all areas of
corporate finance and has been updated to include discussion on current trends such as the rise of populism and trade
barriers on international finance, the advent of Financial Technology, and key regulatory changes impacting the sector.
Available with McGraw-Hill Education’s
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David Hillier is Associate Principal and Executive Dean of the University of Strathclyde Business School. A Professor of
Finance, David was recognized as being in the top 3 per cent of the most prolific finance researchers in the world over the
past 50 years (Heck and Cooley, 2009) and appears regularly in the media as a business commentator.
Corporate
Finance
Corporate
Finance
David Hillier,
Stephen Ross,
Randolph Westerfield,
Jeffrey Jaffe,
Bradford Jordan
Hillier,

Ross, Westerfield,
Jaffe, Jordan
FOURTH European Edition
FOURTH
European
Edition
Understanding and Application
• Clear, user-friendly style
• Example boxes in every chapter provide hypothetical examples to illustrate theoretical concepts such as
cash flow timing, dividend smoothing and differential growth.
• Real World Insight boxes use real companies like Siemens, Avast and Adidas to show how they have applied corporate
finance theories and concepts to their businesses and business decisions.
• Chapter links in the margin provide quick cross-referencing to show students the connections between topics.
Practice and Proficiency
• Mini and Practical cases present scenarios and questions to practice applying what you have learnt.
• Rigorous testing: between 30 and 40 Questions and Problems per chapter are categorised by topic and level of
difficulty.
• Numbered maths equations and key notation boxes listing the variables and acronyms that will be
encountered in each chapter, designed to encourage mastery of Maths.
• Exam Questions designed to take 45 minutes and test you on material learned in a more formal exam style.
•
Connect® resources include algorithmic questions designed to ensure equations and calculations are not learned by
rote but by thorough understanding and practice
New to This Edition
• Updated discussions on peer-to-peer trading, cash flow forecasting methods, import/export partners and additional
investment appraisal methods
• Updated chapters on corporate governance to reflect global changes, efficient markets and mergers and acquisition
to reflect new research, financial distress to reflect new data with discussion on trends and insolvencies and fully
updated chapter on
Leasing to reflect new IFRS standards
• New section on Modified Internal Rate of Return and Margin of Safety in Investment Appraisal, Net Asset Value,
Islamic Financing, and alternatives to CAPM to reflect research developments

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hiL48086_fm_i-xxiv.indd i 12/13/19 03:22 PM
CORPORATE
FINANCE

hiL48086_fm_i-xxiv.indd ii 12/13/19 03:22 PMThis page has intentionally been left blank.

CORPORATE
FINANCE
hiL48086_fm_i-xxiv.indd iii 12/13/19 03:22 PM
FOURTH EUROPEAN EDITION
David Hillier,
Stephen Ross,
Randolph Westerfield,
Jeffrey Jaffe,
Bradford Jordan

hiL48086_fm_i-xxiv.indd iv 12/13/19 03:22 PM
Corporate Finance, 4th European Edition
David Hillier, Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan
ISBN-13 9781526848086
ISBN-10 1526848082
Published by McGraw-Hill Education
338 Euston Road,
London,
NW1 3BH
Telephone: +44 (0) 203 429 3400
Website: www.mheducation.co.uk
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloguing in Publication Data
The Library of Congress data for this book has been applied for from the Library of Congress
Portfolio Manager: Sabrina Farrugia
Content Developer: Maggie du Randt
Content Product Manager: Ali Davis
Text Design by Kamae Design
Cover design by Adam Renvoize
Published by McGraw-Hill Education. Copyright © 2021 by McGraw-Hill Education. All rights reserved.
No part of this publication may be reproduced or distributed in any form or by any means, or stored in a
database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not
limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.
Fictitious names of companies, products, people, characters and/or data that may be used herein (in case
studies or in examples) are not intended to represent any real individual, company, product or event.
ISBN-13 9781526848086
ISBN-10 1526848082
eISBN-10 1526848090
© 2021. Exclusive rights by McGraw-Hill Education for manufacture and export. This book cannot be
re-exported from the country to which it is sold by McGraw-Hill Education.

hiL48086_fm_i-xxiv.indd v 12/13/19 03:22 PM
Dedication
To Mary-Jo

hiL48086_fm_i-xxiv.indd vi 12/13/19 03:22 PM
Brief Table of Contents
Part 1: Overview 1
1 Introduction to Corporate Finance 2
2 Corporate Governance 23
Part 2: Value and Capital Budgeting 57
3 Financial Statement Analysis 58
4 Discounted Cash Flow Valuation 86
5 How to Value Bonds and Stocks 115
6 Net Present Value and Other Investment Rules 147
7 Making Capital Investment Decisions 177
8 Risk Analysis, Real Options and Capital Budgeting 205
Part 3: Risk 232
9 Risk and Return: Lessons from Market History 233
10 Risk and Return: The Capital Asset Pricing Model 255
11 Factor Models, the Arbitrage Pricing Theory, and Other Alternatives to CAPM 296
12 Risk, Cost of Capital and Capital Budgeting 319
13 Efficient Capital Markets and Behavioural Finance 346
Part 4: Long-term Financing 375
14 Long-term Financing: An Introduction 376
15 Equity Financing 392
16 Debt Financing 421
17 Leasing 445
Part 5: Capital Structure and Dividend Policy 464
18 Capital Structure: Basic Concepts 465
19 Capital Structure: Limits to the Use of Debt 497
20 Valuation and Capital Budgeting for the Levered Firm 527
21 Dividends and Other Payouts 551
Part 6: Options, Futures and Corporate Finance 584
22 Options and Corporate Finance 585
23 Options and Corporate Finance: Extensions and Applications 618
24 Warrants and Convertibles 644
25 Financial Risk Management with Derivatives 665
Part 7: Financial Planning and Short-term Finance 693
26 Short-term Finance and Planning 694
27 Short-term Capital Management 717
Part 8: Special Topics 744
28 Mergers and Acquisitions 745
29 Financial Distress 789
30 International Corporate Finance 809
Table of Equations 839
Index 851
Appendices online
Web Glossary online

hiL48086_fm_i-xxiv.indd vii 12/13/19 03:22 PM
Part 1: Overview 1
1 Introduction to Corporate Finance 2
1.1 What is Corporate Finance? 3
1.2 The Goal of Financial Management 8
1.3 Financial Markets 10
1.4 Corporate Finance in Action:
The Case of Alphabet 15
Summary and Conclusions 17
Questions and Problems 17
Exam Question (45 minutes) 21
Practical Case Study 21
References 21
Additional Reading 22
Endnote 22
2 Corporate Governance 23
2.1 The Corporate Firm 24
2.2 The Agency Problem and Control of the
Corporation 29
2.3 The Governance Structure of
Corporations 37
2.4 Corporate Governance Principles 39
2.5 International Corporate Governance 46
2.6 Corporate Governance in
Action: Starbucks 49
Summary and Conclusions 51
Questions and Problems 51
Exam Question (45 minutes) 53
Mini Case 53
Practical Case Study 53
Reference 54
Additional Reading 54
Part 2: Value and Capital
Budgeting 57
3 Financial Statement Analysis 58
3.1 The Statement of Financial Position 59
3.2 The Income Statement 61
3.3 Taxes 63
3.4 Net Working Capital 64
3.5 Cash Flow 65
3.6 Financial Statement Analysis 66
3.7 Ratio Analysis 67
3.8 The Du Pont Identity 74
3.9 Using Financial Statement Information 76
Summary and Conclusions 78
Questions and Problems 78
Exam Question (45 minutes) 83
Mini Case 84
Practical Case Study 85
Relevant Accounting Standards 85
Additional Reading 85
Detailed Table of Contents
4 Discounted Cash Flow Valuation 86
4.1 Valuation: The One-period Case 87
4.2 Valuation: The Multi-period Case 90
4.3 Compounding Periods 96
4.4 Simplifications 100
Summary and Conclusions 108
Questions and Problems 109
Exam Question (45 minutes) 112
Mini Case 113
Practical Case Study 113
Additional Reading 114
Endnotes 114
5 How to Value Bonds and Stocks 115
5.1 Definition and Example of a Bond 116
5.2 How to Value Bonds 116
5.3 Bond Concepts 119
5.4 The Present Value of Equity 121
5.5 Estimates of Parameters in the
Dividend Growth Model 124
5.6 Growth Opportunities 128
5.7 The Dividend Growth Model and the
NPVGO Model 131
5.8 Stock Market Reporting 132
5.9 Firm Valuation 134
Summary and Conclusions 138
Questions and Problems 140
Exam Question (45 minutes) 144
Mini Case 144
Practical Case Study 145
Relevant Accounting Standards 145
Additional Reading 146
Endnotes 146
6 Net Present Value and Other
Investment Rules 147
6.1 The Net Present Value Method 148
6.2 The Payback Period Method 150
6.3 The Discounted Payback
Period Method 152
6.4 The Average Accounting
Return Method 153
6.5 The Internal Rate of Return 155
6.6 Problems with the IRR Approach 157
6.7 The Profitability Index 163
6.8 Other Investment Appraisal Methods 165
6.9 The Practice of Capital Budgeting 166
Summary and Conclusions 168
Questions and Problems 168
Exam Question (45 minutes) 174
Mini Case 174
Practical Case Study 175
Additional Reading 175
Endnotes 175

hiL48086_fm_i-xxiv.indd viii 12/13/19 03:22 PM
Detailed Table of Contentsviii
7 Making Capital Investment
Decisions 177
7.1 Incremental Cash Flows 178
7.2 Energy Renewables Ltd: An Example 180
7.3 Inflation and Capital Budgeting 186
7.4 Alternative Definitions of Operating
Cash Flow 190
7.5 Investments of Unequal Lives:
The Equivalent Annual Cost Method 191
Summary and Conclusions 195
Questions and Problems 195
Exam Question (45 minutes) 201
Mini Case 202
Practical Case Study 202
Relevant Accounting Standards 203
Additional Reading 204
Endnote 204
8 Risk Analysis, Real Options
and Capital Budgeting 205
8.1 Sensitivity Analysis, Scenario
Analysis and Break-even Analysis 206
8.2 Monte Carlo Simulation 212
8.3 Real Options 216
8.4 Decision Trees 219
Summary and Conclusions 221
Questions and Problems 221
Exam Question (45 minutes) 228
Mini Case 228
Practical Case Study 230
Relevant Accounting Standards 230
Additional Reading 231
Endnotes 231
Part 3: Risk 232
9 Risk and Return: Lessons from
Market History 233
9.1 Returns 234
9.2 Holding Period Returns 237
9.3 Return Statistics 239
9.4 Average Stock Returns and
Risk-free Returns 241
9.5 Risk Statistics 242
9.6 More on Average Returns 245
Summary and Conclusions 248
Questions and Problems 248
Exam Question (45 minutes) 251
Mini Case 252
Practical Case Study 253
Relevant Accounting Standards 253
References 253
Additional Reading 254
Endnote 254
10 Risk and Return: The Capital
Asset Pricing Model 255
10.1 Individual Securities 256
10.2 Expected Return, Variance and Covariance 256
10.3 The Return and Risk for Portfolios 261
10.4 The Efficient Set for Two Assets 265
10.5 The Efficient Set for Many Securities 268
10.6 Diversification: An Example 271
10.7 Riskless Borrowing and Lending 273
10.8 Market Equilibrium 276
10.9 The Capital Asset Pricing Model 279
10.10 Criticisms of the CAPM 283
10.11 Variations of the CAPM 284
Summary and Conclusions 285
Questions and Problems 286
Exam Question (45 minutes) 292
Mini Case 292
Practical Case Study 293
References 293
Additional Reading 294
Endnotes 294
11 Factor Models, the Arbitrage
Pricing Theory, and Other
Alternatives to CAPM 296
11.1 Factor Models: Announcements,
Surprises and Expected Returns 297
11.2 Risk: Systematic and Unsystematic 298
11.3 Systematic Risk and Betas 299
11.4 Portfolios and Factor Models 302
11.5 Betas and Expected Returns 305
11.6 The Capital Asset Pricing Model and
the Arbitrage Pricing Theory 307
11.7 Other Alternatives to CAPM 308
Summary and Conclusions 310
Questions and Problems 311
Exam Question (45 minutes) 317
Mini Case 317
References 318
Additional Reading 318
Endnotes 318
12 Risk, Cost of Capital and Capital
Budgeting 319
12.1 The Cost of Equity Capital 320
12.2 Estimation of Beta 322
12.3 Determinants of Beta 324
12.4 Extensions of the Basic Model 327
12.5 Estimating Carrefour Group’s
Cost of Capital 330
12.6 Reducing the Cost of Capital 331
12.7 How Do Corporations Estimate Cost of
Capital in Practice? 334
12.8 Economic Value Added and the
Measurement of Financial
Performance 336
Summary and Conclusions 338
Questions and Problems 338
Exam Question (45 minutes) 343
Mini Case 343
References 344
Additional Reading 344
Endnotes 345

hiL48086_fm_i-xxiv.indd ix 12/13/19 03:22 PMDetailed Table of Contents
ix
13 Efficient Capital Markets and
Behavioural Finance 346
13.1 Can Financing Decisions
Create Value? 347
13.2 A Description of Efficient
Capital Markets 348
13.3 The Different Types of Efficiency 350
13.4 The Evidence 353
13.5 The Behavioural Challenge to Market
Efficiency 358
13.6 Empirical Challenges to
Market Efficiency 359
13.7 Behavioural Biases in Corporate Finance 364
Summary and Conclusions 366
Questions and Problems 367
Exam Question (45 minutes) 371
Mini Case 371
Practical Case Study 372
Relevant Accounting Standards 373
References 373
Additional Reading 374
Endnotes 374
Part 4: Long-term Financing 375
14 Long-term Financing: An Introduction 376
14.1 Ordinary Shares: The Basics 377
14.2 Corporate Long-term Debt: The Basics 380
14.3 Preference Shares 382
14.4 Patterns of Financing 383
14.5 Hierarchies in Long-term Financing 385
Summary and Conclusions 386
Questions and Problems 387
Exam Question (45 minutes) 389
Mini Case 389
Practical Case Study 390
Relevant Accounting Standard 390
References 390
Additional Reading 390
Endnote 391
15 Equity Financing 392
15.1 The Public Issue 393
15.2 Alternative Issue Methods 393
15.3 The Cash Offer 394
15.4 The Announcement of New
Equity and the Value of the Firm 401
15.5 The Cost of New Issues 402
15.6 Rights 403
15.7 Shelf Registration 406
15.8 The Private Equity Market 407
Summary and Conclusions 411
Questions and Problems 411
Exam Question (45 minutes) 416
Mini Case 416
Practical Case Study 417
Relevant Accounting Standard 417
References 417
Additional Reading 418
Endnotes 420
16 Debt Financing 421
16.1 Bank Loans 422
16.2 Debt Financing 423
16.3 The Public Issue of Bonds 424
16.4 Bond Refunding 427
16.5 Bond Ratings 430
16.6 Some Different Types of Bonds 433
16.7 Private Placement Compared to
Public Issues 436
16.8 Long-term Syndicated Bank Loans 436
Summary and Conclusions 438
Questions and Problems 438
Exam Question (45 minutes) 441
Mini Case 441
Practical Case Study 442
Relevant Accounting Standards 442
References 443
Additional Reading 443
Endnotes 444
17 Leasing 445
17.1 Types of Lease Financing 446
17.2 Accounting and Leasing 447
17.3 The Cash Flows of Leasing 448
17.4 A Detour for Discounting and Debt
Capacity with Corporate Taxes 450
17.5 NPV Analysis of the Lease-versus-buy
Decision 452
17.6 Does Leasing Ever Pay? 453
17.7 Reasons for Leasing 455
17.8 Some Unanswered Questions
about Leasing 458
Summary and Conclusions 459
Questions and Problems 459
Exam Question (45 minutes) 462
Mini Case 462
Practical Case Study 462
Relevant Accounting Standards 462
References 463
Additional Reading 463
Endnotes 463
Part 5: Capital Structure
and Dividend Policy 464
18 Capital Structure: Basic Concepts 465
18.1 The Capital Structure Question and
the Pie Theory 466
18.2 Maximizing Firm Value versus
Maximizing Shareholder Interests 466
18.3 Financial Leverage and Firm Value:
An Example 468
18.4 Modigliani and Miller: Proposition II
(No Taxes) 472
18.5 Corporate Taxes 479
18.6 Personal Taxes 485
Summary and Conclusions 488
Questions and Problems 488
Exam Question (45 minutes) 493
Mini Case 493

hiL48086_fm_i-xxiv.indd x 12/13/19 03:22 PM
Detailed Table of Contentsx
Practical Case Study 494
References 494
Additional Reading 495
Endnotes 495
19 Capital Structure: Limits to the
Use of Debt 497
19.1 Costs of Financial Distress 498
19.2 Description of Financial Distress Costs 498
19.3 Can Costs of Debt Be Reduced? 503
19.4 Integration of Tax Effects and Financial
Distress Costs 504
19.5 Signalling 506
19.6 Shirking, Perquisites and Bad
Investments: A Note on Agency
Cost of Equity 508
19.7 The Pecking Order Theory 510
19.8 Growth and the Debt–equity Ratio 513
19.9 Market Timing Theory 514
19.10 How Firms Establish Capital Structure 514
Summary and Conclusions 518
Questions and Problems 519
Exam Question (45 minutes) 523
Mini Case 523
Practical Case Study 524
References 524
Additional Reading 525
Endnotes 526
20 Valuation and Capital Budgeting
for the Levered Firm 527
20.1 Adjusted Present Value Approach 528
20.2 Flow to Equity Approach 529
20.3 Weighted Average Cost of Capital Method 530
20.4 A Comparison of the APV, FTE and
WACC Approaches 531
20.5 Capital Budgeting When the
Discount Rate Must Be Estimated 533
20.6 APV Example 534
20.7 Beta and Leverage 538
20.8 Net Asset Value 540
Summary and Conclusions 542
Questions and Problems 543
Exam Question (45 minutes) 547
Mini Case 548
Practical Case Study 549
References 549
Additional Reading 549
Endnotes 549
21 Dividends and Other Payouts 551
21.1 Different Types of Dividends 552
21.2 Standard Method of Cash Dividend
Payment 553
21.3 The Benchmark Case: An Illustration of
the Irrelevance of Dividend Policy 555
21.4 Share Repurchases 558
21.5 Personal Taxes and Dividends 560
21.6 Real-world Factors Favouring a
High-dividend Policy 563
21.7 The Clientele Effect 566
21.8 A Catering Theory of Dividends 567
21.9 What We Know and Do Not Know about
Dividend Policy 568
21.10 Stock Dividends and Stock Splits 572
Summary and Conclusions 574
Questions and Problems 574
Exam Question (45 minutes) 579
Mini Case 579
Practical Case Study 580
Relevant Accounting Standards 580
References 580
Additional Reading 581
Endnotes 583
Part 6: Options, Futures
and Corporate Finance 584
22 Options and Corporate Finance 585
22.1 Options 586
22.2 Call Options 586
22.3 Put Options 587
22.4 Writing Options 588
22.5 Option Quotes 589
22.6 Option Combinations 590
22.7 Valuing Options 593
22.8 An Option Pricing Formula 596
22.9 The ‘Greeks’ 603
22.10 Shares and Bonds as Options 604
Summary and Conclusions 609
Questions and Problems 609
Exam Question (45 minutes) 615
Mini Case 615
Relevant Accounting Standards 616
Reference 616
Additional Reading 617
Endnotes 617
23 Options and Corporate Finance:
Extensions and Applications 618
23.1 Executive Share Options 619
23.2 Investment in Real Projects and Options 621
23.3 Valuing a Start-up 623
23.4 More about the Binomial Model 626
23.5 Shutdown and Reopening Decisions 631
23.6 Options and Capital Budgeting 636
Summary and Conclusions 637
Questions and Problems 638
Exam Question (45 minutes) 640
Mini Case 641
Practical Case Study 641
Relevant Accounting Standards 642
References 642
Additional Reading 642
Endnotes 643
24 Warrants and Convertibles 644
24.1 Warrants 645
24.2 The Difference between Warrants and
Call Options 646

hiL48086_fm_i-xxiv.indd xi 12/13/19 03:22 PMDetailed Table of Contents
xi
24.3 Warrant Pricing and the
Black–Scholes Model 647
24.4 Convertible Bonds 648
24.5 The Value of Convertible Bonds 649
24.6 Reasons for Issuing Warrants and
Convertibles 652
24.7 Why Are Warrants and
Convertibles Issued? 654
24.8 Conversion Policy 656
Summary and Conclusions 657
Questions and Problems 658
Exam Question (45 minutes) 660
Mini Case 661
Practical Case Study 662
Relevant Accounting Standards 662
References 662
Additional Reading 663
Endnotes 664
25 Financial Risk Management with
Derivatives 665
25.1 Derivatives, Hedging and Risk 666
25.2 Forward Contracts 666
25.3 Futures Contracts 667
25.4 Hedging 670
25.5 Interest Rate Derivatives 672
25.6 Duration Hedging 677
25.7 Swaps Contracts 681
25.8 Financial Risk Management in Practice 684
Summary and Conclusions 686
Questions and Problems 686
Exam Question (45 minutes) 690
Mini Case 690
Practical Case Study 691
Relevant Accounting Standards 691
References 691
Additional Reading 691
Endnotes 692
Part 7: Financial Planning and
Short-term Finance 693
26 Short-term Finance and Planning 694
26.1 Tracing Cash and Net Working Capital 695
26.2 Defining Cash in Terms of Other
Elements 695
26.3 The Operating Cycle and the Cash Cycle 696
26.4 Some Aspects of Short-term
Financial Policy 699
26.5 Cash Budgeting 704
26.6 The Short-term Financial Plan 706
Summary and Conclusions 707
Questions and Problems 708
Exam Question (45 minutes) 714
Mini Case 714
Practical Case Study 715
Relevant Accounting Standards 715
References 715
Additional Reading 716
Endnotes 716
27 Short-term Capital Management 717
27.1 Reasons for Holding Cash 718
27.2 Determining the Target Cash Balance 719
27.3 Managing the Collection and
Disbursement of Cash 724
27.4 Investing Idle Cash 725
27.5 Terms of Sale 727
27.6 The Decision to Grant Credit: Risk and
Information 730
27.7 Optimal Credit Policy 732
27.8 Credit Analysis 734
27.9 Collection Policy 735
27.10 How to Finance Trade Credit 736
Summary and Conclusions 737
Questions and Problems 737
Exam Question (45 minutes) 741
Mini Case 741
References 742
Additional Reading 742
Part 8: Special Topics 744
28 Mergers and Acquisitions 745
28.1 The Basic Forms of Acquisition 746
28.2 Synergy 748
28.3 Sources of Synergy 749
28.4 Two ‘Bad’ Reasons for Mergers 752
28.5 A Cost to Shareholders from Reduction
in Risk 756
28.6 The NPV of a Merger 758
28.7 Valuation of Mergers in Practice 760
28.8 Friendly versus Hostile Takeovers 762
28.9 Defensive Tactics 763
28.10 The Diary of a Takeover: Takeda and
Shire plc 765
28.11 Do Mergers Add Value? 770
28.12 Accounting and Tax Considerations 774
28.13 Going Private and Leveraged Buyouts 774
28.14 Divestitures 775
Summary and Conclusions 776
Questions and Problems 776
Exam Question (45 minutes) 782
Mini Case 783
Practical Case Study 784
Relevant Accounting Standards 784
References 784
Additional Reading 785
Endnotes 788
29 Financial Distress 789
29.1 What is Financial Distress? 790
29.2 What Happens in Financial Distress? 792
29.3 Bankruptcy, Liquidation and
Reorganization 795
29.4 Private Workout or Bankruptcy:
Which is Best? 799
29.5 Predicting Financial Distress:
The Z-score Model 800
Summary and Conclusions 802
Questions and Problems 802

hiL48086_fm_i-xxiv.indd xii 12/13/19 03:22 PM
Detailed Table of Contentsxii
Exam Question (45 minutes) 836
Mini Case 836
Practical Case Study 837
Relevant Accounting Standards 838
Additional Reading 838
Endnote 838
Table of Equations 839
Index 851
The Following Can be Accessed
Through our Connect Platform
Appendices
Chapter 3 Appendix Financial Planning
Chapter 4 Appendix Net Present Value: First
Principles of Finance
Chapter 5 Appendix The Term Structure of Interest
Rates, Spot Rates and Yield to Maturity
Chapter 19 Appendix A Some Useful Formulae of
Financial Structure
Appendix A Mathematical Tables
Web Glossary
Exam Question (45 minutes) 804
Mini Case 805
Practical Case Study 806
Relevant Accounting Standards 807
References 807
Additional Reading 807
Endnotes 808
30 International Corporate Finance 809
30.1 Terminology 811
30.2 Foreign Exchange Markets and
Exchange Rates 812
30.3 Purchasing Power Parity 816
30.4 Interest Rate Parity, Unbiased
Forward Rates and the International
Fisher Effect 820
30.5 International Capital Budgeting 823
30.6 Exchange Rate Risk 825
30.7 Political Risk 827
30.8 Long-term Islamic Financing 828
Summary and Conclusions 831
Questions and Problems 832

hiL48086_fm_i-xxiv.indd xiii 12/13/19 03:22 PM
Preface
This is the fourth edition of Corporate Finance: European Edition, and it is safe to say the book has changed
considerably over the past 12 years. Each incarnation of the text has been profoundly affected by unanticipated
international events. Whether it was the 2008 global financial crisis, the 2012 Eurozone sovereign debt crisis, the
2015 worldwide collapse in oil prices, or more recently the rise of populism and advent of artificial intelligence,
Corporate Finance has been forced to adapt to all these changes.
Financial managers now face challenges that would have appeared fanciful when the first edition of Corporate
Finance was published. We now have countries with negative interest rates; digital payment systems that make
cheques and lockboxes obsolete (don’t worry if you don’t know what these are for!); the spectre of trade barriers,
taxes and import/export tariffs in international business; and an explosion of technology, cryptocurrencies,
artificial intelligence and automation that is revolutionizing business processes.
I’ve been teaching finance courses since 1994, first as a tutorial assistant in small-group classes for master’s
and undergraduate students, all the way through to large lecture auditoriums of several hundred people. In recent
years, I have engaged much more closely with corporate executives and senior managers. This experience has
been invaluable in allowing me to reflect on the material in the book and determine whether it is fit for purpose
for the modern organization and finance professionals. I have particularly benefited from my work with large
multinationals, family businesses and social enterprises over the past few years. These engagements have changed
much of my thinking about finance, and the practicality and usefulness of what is covered in Corporate Finance
has improved as a result.
Now, more than ever, the principles and applications of corporate finance are needed to ensure organizations
(for-profit and not-for-profit) can steer through these uncharted territories without taking too many casualties. I
have undertaken major updates of all chapters, introduced new real-world examples in each topic and updated
the discussion to reflect new research findings. The text has also been sense checked for relevance and practice
through my industry engagements. Finally, the references for each area have been comprehensively updated to the
most recent research in the area.
I am exceptionally honoured that academics and practitioners have found previous editions of Corporate
Finance to be helpful and useful. The feedback from readers all over the world via email and my YouTube channel
(professordavidhillier) has helped me improve the book and fix the odd error. I am eternally grateful to those who
have taken time to contact me with comments and advice regarding the book.
I’ve thoroughly enjoyed writing this edition and I sincerely hope you have the same enjoyment reading it.
David Hillier
3 July 2019

hiL48086_fm_i-xxiv.indd xiv 12/13/19 03:22 PM
Guided Tour
Understanding and Application
The best way to understand corporate finance is to
explain it via situations and scenarios you can relate
to.
• Example boxes in every chapter to provide
hypothetical examples to illustrate theoretical
concepts.
• Opening chapter vignettes illustrate topical
discussions that will be covered in the chapter.
• Real World Insight boxes use real companies
to show how they have applied corporate
finance theories and concepts to their
businesses and business decisions.
• Practical case studies, mini cases and
additional reading further aid your
understanding of concepts and to practise
applying them.
Mastery of Mathematics
Many find the hardest part of learning finance
is mastering the jargon, maths, data and
standardized notation. Corporate Finance helps
you by:
• Making extensive use of figures and
tables that use real data throughout the
text
• Listing in key notation boxes at the start
of the chapter the variables and acronyms
you will encounter as you read the chapter.
• Numbering maths equations the first time
they appear in full, for ease of reference
and understanding.
hiLxxxxx_ch24_644-664 644 10/16/19 07:42 PM
KEY NOTATIONS
# Number of shares
outstanding
#
W
Number of warrants
c
w
Value of a call option
written on the equity of a
firm without warrants
S Current share price
E Exercise price of option
R Annual risk-free rate
of return, continuously
compounded
σ
2
Variance (per year) of the
continuous share price
return
t Time (in years) to
expiration date
N(d) Probability that a
standardized, normally
distributed, random
variable will be less than
or equal to d
d
1
= [ln(S/E ) + (R + σ
2
/2)t]/ √
___
σ
2
t
d
2
= d
1
−


___
σ
2
t
CHAPTER
24
In the last few years, there has been a major paradigm shift in the way in which corporate finance is practised.
We have come through a sustained period of deregulation and globalization in the world’s markets.
Financial innovation and the introduction of new securities have been commonplace as a result of the free
markets that have spread throughout the world. However, things are very much different going into the second
decade of the twenty-first century.
The financial world has seen a glut of corporate insolvencies. Governments of the major developed
economies have all reduced interest rates to near zero and pumped cash into their ailing firms. Whole industries
have effectively been nationalized and purchased by governments. Corporate strategies that were successful
because of the availability of cheap debt are no longer possible.
Finally, financial instruments that may have been viable and
popular in a vibrant economy have become obsolete.
Conver tible bonds are par t of many companies’ capital
structure. They allow bondholders to conver t the debt instruments
into equity during a specified window in the future. The conversion
feature is an embedded option that holders will exercise if the
conver tible is in the money. At the turn of the century, these
became exceptionally popular investment targets of hedge funds
that looked for a quick return from conversion and although we
have seen much market volatility in recent times, conver tible
bonds are more popular than ever.
Warrants and
Convertibles
627
hiLxxxxx_ch23_618-643 627 10/16/19 09:22 PM
More about the Binomial Model
new terms, u and d. We define u as 1 + 0.37 = 1.37 and d as 1 − 0.27 = 0.73.
2
Using the methodology of the previous
chapter, we value the contract in the following two steps.
Step 1: Determining the Risk-Neutral Probabilities
We determine the probability of a price rise such that the expected return on oil exactly equals the risk-free rate.
Assuming an 8 per cent annual interest rate, which implies a 2 per cent rate over the next 3 months, we can solve
for the probability of a rise as follows:
3
2 % = Probability of rise × 0.37 + ( 1 − Probability of rise ) × ( −0.27 )
Solving this equation, we find that the probability of a rise is approximately 45 per cent, implying that the
probability of a fall is 55 per cent. In other words, if the probability of a price rise is 45 per cent, the expected return
on heating oil is 2 per cent. In accordance with what we said in the previous chapter, these are the probabilities that
are consistent with a world of risk neutrality. That is, under risk neutrality, the expected return on any asset would
equal the riskless rate of interest. No one would demand an expected return above this riskless rate, because risk-
neutral individuals do not need to be compensated for bearing risk.
Step 2: Valuing the Contract
If the price of oil rises to €2.74 on 1 December, CECO will want to buy oil from Mr Meyer at €2.10 per litre.
Mr Meyer will lose €0.64 per litre because he buys oil in the open market at €2.74 per litre, only to resell it to
CECO at €2.10 per litre. This loss of €0.64 is shown in parentheses in Figure 23.2. Conversely, if the market price of
heating oil falls to €1.46 per litre, CECO will not buy any oil from Mr Meyer. That is, CECO would not want to pay
€2.10 per litre to him when the utility could buy heating oil in the open market at €1.46 per litre. Thus, we can say
that Mr Meyer neither gains nor loses if the price drops to €1.46. The gain or loss of zero is placed in parentheses
under the price of €1.46 in Figure 23.2. In addition, as mentioned earlier, Mr Meyer receives €1,000,000 up front.
Given these numbers, the value of the contract to Mr Meyer can be calculated as:
[0.45 × (€2.10 - €2.74) × 6 million + 0.55 × 0]/1.02 + €1,000,000,000 =-€694,118
Value of the call option
(23.1)
As in the previous chapter, we are valuing an option using risk-neutral pricing. The cash flows of –€0.64
(= €2.10 − €2.74) and €0 per litre are multiplied by their risk-neutral probabilities. The entire first term in Equation 23.1
is then discounted at €1.02 because the cash flows in that term occur on 1 December. The €1,000,000 is not
discounted because Mr Meyer receives it today, 1 September. Because the present value of the contract is negative,
Mr Meyer would be wise to reject the contract.
As stated before, the distributor has sold a call option to CECO. The first term in the preceding equation, which
equals –€1,694,118, can be viewed as the value of this call option. It is a negative number because the equation
looks at the option from Mr Meyer’s point of view. Therefore, the value of the call option would be +€1,694,118 to
CECO. On a per-litre basis, the value of the option to CECO is:

[ 0.45 ( €2.74 − €2.10 ) + 0.55 × 0 ] /1.02 = €0.282 (23.2)
Equation 23.2 shows that CECO will gain €0.64 (= €2.74 − €2.10) per litre in the up state because CECO can buy
heating oil wor th €2.74 for only €2.10 under the contract. By contrast, the contract is wor th nothing to CECO in the
down state because the utility will not pay €2.10 for oil selling for only €1.46 in the open market. Using risk-neutral
pricing, the formula tells us that the value of the call option on one litre of heating oil is €0.282.
Three-date Example
Although the preceding example captures a number of aspects of the real world, it has one deficiency. It assumes
that the price of heating oil can take on only two values on 1 December. This is clearly not plausible: oil can take
on essentially any value in reality. Although this deficiency seems glaring at first glance, it is easily correctable.
All we have to do is to introduce more intervals over the 3-month period of our example.
For example, consider Figure 23.3, which shows the price movement of heating oil over two intervals of
1½ months each.
4
As shown in the figure, the price will be either €2.50 or €1.60 on 15 October. We refer to €2.50 as
the price in the up state and €1.60 as the price in the down state. Thus, heating oil has returns of 25 per cent
(= €2.50/€2.00) and –20 per cent (= €1.60/€2) in the two states.
We assume the same variability as we move forward from 15 October to 1 December. That is, given a price
of €2.50 on 15 October, the price on 1 December will be either €3.12 (= €2.50 × 1.25) or €2 (= €2.50 × 0.80).
416
hiLxxxxx_ch15_392-420 416 10/18/19 08:13 PM
Chapter 15 Equity Financing
1 ‘In a public share issue, the probability of receiving an allocation of an underpriced security is less than
or equal to the probability of receiving an allocation of an overpriced issue.’ Discuss this statement in the
context of initial public offerings. (25 marks)
Ai Due Fanali SA has decided to undertake a rights issue that will raise €288 million. The current share price is
€4.50 and there are 160 million shares in circulation. They have to make a decision on whether to underwrite
the rights issue. The underwriting fee will be 2 per cent of proceeds if the shares are offered at a 20 per
cent discount. Ai Due Fanali’s finance director believes that a discount of 40 per cent will avoid the need for
underwriting altogether.
2 Set out the terms of the issue under each of the two alternatives referred to above. Calculate the theoretical
ex-rights price and the value of a right. (25 marks)
3 Demonstrate that, in principle, a wealth-maximizing shareholder owning six shares will be indifferent
between the two alternative methods of raising the funds. (25 marks)
4 Discuss the benefits of using an underwriter in a rights issue. Review the factors that determine an
underwriter’s fee. (25 marks)
Exam Question (45 minutes)
West Coast Yachts Goes Public
Larissa Warren and Dan Ervin have been discussing the future of West Coast Yachts. The company has been
experiencing fast growth, and the future looks like clear sailing. However, the fast growth means that the
company’s growth can no longer be funded by internal sources, so Larissa and Dan have decided the time
is right to take the company public. To this end, they have entered into discussions with the bank of Crowe
& Mallard. The company has a working relationship with Robin Perry, the underwriter who assisted with
the company’s previous bond offering. Crowe & Mallard have helped numerous small companies in the IPO
process, so Larissa and Dan feel confident with this choice.
Robin begins by telling Larissa and Dan about the process. Although Crowe & Mallard charged an
underwriter fee of 4 per cent on the bond offering, the underwriter fee is 7 per cent on all initial equity
offerings of the size of West Coast Yachts’ initial offering. Robin tells Larissa and Dan that the company can
expect to pay about £1,200,000 in legal fees and expenses, £12,000 in registration fees, and £15,000 in other
filing fees. Additionally, to be listed on the London Stock Exchange, the company must pay £100,000. There
are also transfer agent fees of £6,500 and engraving expenses of £450,000. The company should also expect
to pay £75,000 for other expenses associated with the IPO.
Finally, Robin tells Larissa and Dan that, to file with the London Stock Exchange, the company must
provide three years’ worth of audited financial statements. She is unsure of the costs of the audit. Dan
tells Robin that the company provides audited financial statements as part of its bond indenture, and the
company pays £300,000 per year for the outside auditor.
1 At the end of the discussion Dan asks Robin about the Dutch auction IPO process. What are the
differences in the expenses to West Coast Yachts if it uses a Dutch auction IPO versus a traditional IPO?
Should the company go public with a Dutch auction or use a traditional underwritten offering?
2 During the discussion of the potential IPO and West Coast Yachts’ future, Dan states that he feels the
company should raise £50 million. However, Larissa points out that, if the company needs more cash
soon, a secondary offering close to the IPO would be potentially problematic. Instead she suggests that
the company should raise £80 million in the IPO. How can we calculate the optimal size of the IPO?
What are the advantages and disadvantage of increasing the size of the IPO to £80 million?
3 After deliberation, Larissa and Dan have decided that the company should use a firm commitment
offering with Crowe & Mallard as the lead underwriter. The IPO will be for £60 million. Ignoring
underpricing, how much will the IPO cost the company as a percentage of the funds received?
Mini Case
410
hiLxxxxx_ch15_392-420 410 10/18/19 08:13 PM
Chapter 15 Equity Financing
5 Third-round financing: Financing for a company that is at least breaking even and is contemplating an
expansion. This is also known as mezzanine financing.
6 Fourth-round financing: Money provided for firms that are likely to go public within half a year. This round is
also known as bridge financing.
Although these categories may seem vague to the reader, we have found that the terms are well accepted within the
industry. For example, the venture capital firms listed in Pratt’s Guide to Venture Capital indicate which of these
stages they are interested in financing. Figure 15.2 also presents a breakdown of where private equity funding was
made in Europe in 2017. The use of venture capital varied considerably across countries and, whereas in the UK
and Ireland it was used to fund new growth, in continental Europe it was more associated with start-up funding.
The penultimate stage in venture capital finance is the initial public offering.
12
Venture capitalists are important
participants in initial public offerings. Venture capitalists rarely sell all of the shares they own at the time of the
initial public offering. Instead they usually sell out in subsequent public offerings.
Real World Insight 15.1
What do Business Angels look for in an Investment?
(Excerpts taken from ‘How to Find and Pitch your Business to an Angel Investor’ from growthbusiness.co.uk)
Jenny Tooth, CEO of the UK Business Angels Association, explains what angel investors look for if they
are thinking of investing in your growth business.
Where do I find an angel investor?
The best way to approach an angel investor is often through a warm introduction – one from a friend,
contact, company or entrepreneur. Investors get a lot of inbound pitches, so it’s hard to qualify what’s a cold
lead or not. There is a lack of infrastructure, which means that neither angels nor entrepreneurs are visible
to one another.
What do angel investors want to know?
We want to know the challenge that you’re addressing in the market or society, whether you have done your
market research to show why your project meets a real need and can bring something new or disruptive to
the market. We also want to know how you plan to make money and that your business model can be scaled.
We will ask if you have tested it out on any potential customers – not necessarily having sold anything, but
you have to prove interest and whether you have checked out your competitors. International scalability
is growing ever more important, so to be able to think about how you would like your business to fit on an
international stage is always a huge bonus.
How much can a UK angel investor invest?
While business angels can invest on their own, more frequently angels invest alongside other angel investors
through syndication. This enables you to pool your funds and share the risks, as well as share the due
diligence and experience of other investors. The average individual angel investment is around £25,000, with
syndicates providing – on average – around £190,000. How much an angel investor invests depends on the
individual needs of both the business and the investor. Larger SMEs expanding internationally may require
more funding than a small business looking to grow nationally. This is one of the ways in which angel
investors can tailor their support in ways that may be unavailable from traditional bank lenders. It also
benefits the investor with an increased flexibility to the amount invested, especially as part of a syndicate.
How long do angel investors stay on as investors?
Angel investing is generally regarded as ‘patient capital’ and you may not see an exit or a return for up to
8–10 years. Entrepreneurs often rely on the guidance of people who have experience in running and building
a business. This guidance is of just as much importance as investment and funding. How long angels remain
part of the business again varies on a case-by-case basis, depending on the amount of guidance needed in
the life of the business. It is often beneficial to the business to retain the expertise and experience of angels,
and what is good for the business is by extension good for the investors themselves.

hiL48086_fm_i-xxiv.indd xv 12/13/19 03:22 PM
Practice and Proficiency
To obtain a solid understanding of finance it has
been proven that practising questions is essential.
• At the end of every chapter there are
questions and problems; these are presented
by topic and level of difficulty. There are more
than 1,000 in the book altogether!
• These end-of-chapter questions and problems
are all integrated into Connect.
• Algorithmic versions of the questions
appear in Connect to ensure equations and
calculations are not learned by rote but by
thorough understanding and practice.
• Also at the end of each the chapter are exam
questions designed to take 45 minutes and
test you in a more formal exam style.
• SmartBook is also available through
Connect to help you learn; it adaptively
assesses your skill and knowledge levels to
track which topics you have mastered and
which require further instruction and practice.
Signposting and Navigation
To gain a full understanding of corporate finance
it is important to understand how topics are linked
together and how they relate to one another.
• Chapter links appear within the margin
and are highlighted in the text; they
provide a chapter and page reference for
quick cross-referencing of information
discussed in other chapters. They aid in the
enhancement of your understanding and
background to topics.
• Part openers provide a preface to the
chapters that are to follow, linking the
chapters, and explaining how and where
topics are discussed within the chapters.
638
hiLxxxxx_ch23_618-643 638 10/16/19 09:22 PM
Chapter 23 Options and Corporate Finance: Extensions and Applications
CONCEPT
1 Executive Share Options Why do companies issue options to executives if they cost the company more
than they are wor th to the executive? Why not just give cash and split the difference? Wouldn’t that make
both the company and the executive better off?
2 Real Options What are the two options that many businesses have? Why does a traditional NPV analysis
tend to underestimate the value of an investment oppor tunity? Explain.
3 Valuing a Start-up Given that anything is possible in the future, why can’t an entrepreneur who is seeking
funding choose assumptions that make a star t-up look good when it isn’t? Is this more a danger with real
option analysis than with normal capital budgeting analysis?
4 The Binomial Model Why is the binomial model more appropriate for real option analysis than
Black–Scholes?
5 Executive Stock Options Do you think that executive stock options motivate executives to act in the
best interests of the company? Explain.
REGULAR
6 Stock Option Exercises and Share Prices The stock price of ABC plc is currently at £30, and the
company has 2 million shares outstanding. The company’s CEO exercises 200,000 stock options with a strike price of £20. What will happen to the share price of ABC plc?
7 Real Options Utility companies often face a decision to build new plants that burn coal, oil or both. If the
prices of both coal and gas are highly volatile, how valuable is the decision to build a plant that can burn either
coal or oil? What happens to the value of this option as the correlation between coal and oil prices increases?
8 Real Options Your company owns a vacant plot in a suburban area. What is the advantage of waiting to
develop the plot?
9 Real Options Ventiora SpA has a disused warehouse it is holding until land prices increase before selling
to potential buyers. In option terminology, what type of option(s) does the company have on the warehouse?
10 Real Options and Capital Budgeting Most companies use traditional capital budgeting techniques,
such as payback period and net present value. Why do you think this is the case? How would you justify the
use of real option methodology to a reluctant chief executive?
11 Insurance as an Option Insurance, whether purchased by a corporation or an individual, is in essence
an option. What type of option is an insurance policy?
12 Real Options How would the analysis of real options change if a company has competitors?
13 Employee Share Options Kevin Swinson is the finance director of Mountainbrook Trading plc.
The board of directors has just granted Mr Swinson 30,000 at-the-money European call options on the
company’s equity, which is currently trading at £30 per share. The equity pays no dividends. The options
will expire in four years, and the standard deviation of the returns on the shares is 55 per cent. Treasury
bills that mature in four years currently yield a continuously compounded interest rate of 3 per cent.
(a) Use the Black–Scholes model to calculate the value of the share options.
(b) You are Mr Swinson’s financial adviser. He must choose between the previously mentioned share
option package and an immediate £500,000 bonus. If he is risk-neutral, which would you recommend?
(c) How would your answer to (b) change if Mr Swinson were risk-loving and he could not sell the options
prior to expiration?
14 Employee Share Options Joseph-Benoit Suvee has just been named the new chief executive officer
of BluBell Fitness NV. In addition to an annual salary of €400,000, his three-year contract states that his
compensation will include 10,000 at-the-money European call options on the company’s shares that expire in
three years. The current share price is €40 per share, and the standard deviation of the returns on the firm’s
equity is 68 per cent. The company does not pay a dividend. Treasury bills that mature in three years yield a
continuously compounded interest rate of 5 per cent. Assume that Mr Suvee’s annual salary payments occur
Questions and Problems
hiLxxxxx_ch22_584-617 584 10/14/19 07:15 PM
Derivative securities have become ubiquitous in business, and now every firm with
any scale will have considered using some derivative contract in managing its
risk. Derivatives allow a company and investor to control the level of risk they are
willing to bear. As such, derivatives are the standard risk management tool used by
modern corporations.
There are many types of derivatives. Forward contracts, futures, options and warrants
can be combined in a limitless number of innovative ways to create entirely new
securities to reflect the needs and desires of investors and companies. In Par t 6, we will
discuss derivatives in great detail. We will explore their characteristics, how a company
can use them to optimize its risk profile and how these instruments can be valued. We
will then look at hybrid securities, which have derivative characteristics. Finally, we will
consider risk management, one of the most impor tant new areas in finance.
Specifically, Par t 6 begins in Chapter 22 with a study of options and their use in
corporate finance. We then extend the conceptual material in Chapter 23 to look at
real-world applications of options and how they can be used to make better financial
decisions. Warrants and conver tible bonds are investigated in Chapter 24, and Chapter 25
ends Par t 6 with a very detailed look at financial risk management.
Options, Futures and
Corporate Finance
PART 6
619
hiLxxxxx_ch23_618-643 619 10/16/19 09:22 PM
Executive Share Options
23.1 Executive Share Options
Why Options?
Executive compensation (see Chapter 2, Section 2.2 for more on executive compensation) is usually made up of
base salary plus some or all of the following elements:
• Base salary
• Annual bonuses
• Long-term incentives, such as retirement contributions, options and restricted stock units.
When stock markets are on an upward trajectory, the final component of compensation,
options, is by far the most significant part of total compensation for many top executives. In many
parts of Europe, full disclosure of executive pay is not yet standard practice. However, this has
not stopped politicians and the media from criticizing the total compensation of executives,
whose share options are a major component of their total remuneration. Figure 23.1 presents a
breakdown of chief executive pay in Europe in 2015–2017. Bonuses represent any payments paid for performance
during the year, and LTI is long-term incentives, which include executive share options.
Chapter 2
Page 32
Figure 23.1 Total Direct Compensation at CEO level
Switzerland
UK
France
Germany
BeNeLux
Spain
Italy
Nordics
Base Salary 20
15
Base Salary 20
16
Base Salary 2017
Actual Bonus 2015
Actual Bonus 20
16Actual Bonus 2017
Long-Term Incentives 2015
Long-Term Incentives 20
16Long-Term Incentives 2017
24% 39%
38%
40%
37%
38%
35%
24%
23%
25%
28%
27%
29% 34%
33%
33%
37%
39%
38%
28%
29%
34%
34%
30%
33%
33%
30%
37%
35%
35%
39%
37%
36%
5
1%
46%
56%
4
1%
37%
34%
2
1%
2
1%
23%
28%
33%
2
1%
20%
26%
30%
5
1%
48%
52% 12%
17%
13%
24%
23%
28%
43%
44%
42%
37%
39%
38%
29%
27%
32%
3
1%
25%
27%
46%
47%
46%
Source: TowersWatson, ‘CEO Pay Landscape in Europe’s Top 100 Companies’ report,
Autumn 2018.

hiL48086_fm_i-xxiv.indd xvi 12/13/19 03:22 PM
Connect® is an online platform that integrates the
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Our Excel Simulation environment focuses on learning basic Excel skills, such as formulas
and cell referencing, and requires students to enter answers as a formula. In addition to all
basic cell referencing and mathematical operations, the following functions are featured:
Excel Simulations
1. Absolute references
2. ActiveX control
3. Descriptive statistics
4. Goal seek
5. Loan amortization
worksheet
Excel Features and Tools:
6. Pivot tables
7. Scenario manager
8. Solver (add-in)
9. Trace dependents/
precedents
10. Two-way data tables
Algorithmic Problem Sets
The problem sets help students to become more proficient in a topic by providing the
opportunity to practice and master concepts with multiple versions of each problem.
Algorithmic problems can also be used in class testing to provide each student with a
different version than that seen by their peers.
These questions feature animated, narrated
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enabled, as well as automatic feedback and
grading for both students and instructors.
Calculation Questions
Auto-graded calculation questions are
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Connect® for Finance
We have a wide selection of activities on hand to help students gain valuable
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which test their application on theory and concept.
Case Studies

hiL48086_fm_i-xxiv.indd xviii 12/13/19 03:22 PM
More Personalised More Productive More Prepared
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hiL48086_fm_i-xxiv.indd xix 12/13/19 03:22 PM
About the Author
David Hillier is Associate Principal and Executive Dean of the University of
Strathclyde Business School. A Professor of Finance, David was recognized as being
in the top 3 per cent of the most prolific finance researchers in the world over the past
50 years (Heck and Cooley, 2009) and appears regularly in the media as a business
commentator. His YouTube channel of finance lectures (professordavidhillier) has
attracted nearly half a million views worldwide.
David has acted as a World Bank consultant, and provided consultancy advice to
the NHS and several international stock exchanges. His executive clients include the
Wise Group, Weir Group, Babcock, Wm Grant & Sons, Iberdrola and David Brown
Gears. He has taught in many international environments, including China, Greece,
Malaysia, the Netherlands, Oman, Bahrain, Switzerland, Tanzania and Romania.
David sits on the CBI Scotland regional council and the MCR Pathways National
Advisory Council. David has won a number of industry and academic awards,
including the Institute of Directors Scotland Public Sector Director of the Year.
David publishes in the area of corporate finance. His PhD research is related to corporate insider trading and
this is an area in which he is still very active. David’s research has been funded by a number of international
organizations, including the Italian and Spanish governments, the Thai Stock Exchange, Thai Securities and
Exchange Commission, Thai Government Pension Fund, Australian Research Council, The Actuarial Profession,
Rotman International Centre for Pension Management, and the Central Bank of Tanzania.
US Authors
Stephen A. Ross was the Franco Modigliani Professor of Finance and Economics at the Sloan School of
Management, Massachusetts Institute of Technology.
Randolph W. Westerfield is Dean Emeritus of the University of Southern California’s Marshall School of Business
and is the Charles B. Thornton Professor of Finance.
Jeffrey F. Jaffe has been a frequent contributor to many finance and economics literatures for a number of years.
Bradford D. Jordan is Professor of Finance and holder of the Richard W. and Janis H. Furst Endowed Chair in
Finance at the University of Kentucky.

hiL48086_fm_i-xxiv.indd xx 12/13/19 03:22 PM
Acknowledgements
I would like to acknowledge the following individuals who have all contributed in one way or another to the book.
First mention must go to Sabrina Farrugia and Yasmine Amin who worked with me tirelessly on this project
from its inception. Sabrina and Yasmine deserve as much credit as me for putting everything together and I am
extremely grateful for their support.
The review process has been extensive and many individuals have provided extensive advice and suggestions
on how to make the text much more relevant and current to its intended readership. Every chapter has been
scrutinized by several reviewers, leading to a substantial improvement in the quality of the text. In particular, I
would like to recognize the efforts of
Tom Aabo, Aarhus University
Eser Arisoy, Lancaster University
Shantanu Banerjee, Lancaster University
Christina Bannier, Frankfurt School of Finance and
Management
Edel Barnes, University College Cork
Mikael Bask, Uppsala University
Anthony Birts, University of Bath
Jaap Bos, Maastricht University
James Brown, Edinburgh Napier University
Evert Carlsson, University of Gothenburg
Jeremy Cheah, University of Sheffield
Peter Corvi, Warwick Business School
Twm Evans, Swansea University
Maria Gårdängen, Lund University
Peter de Goeij, Tilburg University
Manuel Goudie, Instituto de Estudios Bursatiles, Madrid
Ufuk Gucbilmez, University of Edinburgh
Stefan Hirth, Aarhus University
Jan Lemmen, Erasmus University
Maria-Teresa Marchica, University of Manchester
Kristian Miller, Aarhus University
Tomoe Moore, Brunel University
Arjen Mulder, Erasmus University
James Ryan, University of Limerick
Gert Sandhal, University of Gothenburg
Mohamed Sherif, Heriot-Watt University
Chris Veld, University of Glasgow
Steven Walters, Glasgow Caledonian Univeristy
Jason Laws, University of Liverpool
Mike Ellington, University of Liverpool
Fergal O’Brien, University of Limerick
A book of this type involves more than just writing the main text. The online learning materials have to be
developed, checked and revised, and the drafts typeset and proofread. The marketing endeavour is also
something that often gets ignored but it is an exceptionally important component of the book’s production
process. Finally, I am truly indebted to the sales representatives who are at the coalface in raising sales.
I’m very grateful to my family, who mean everything to me: Benjy, Danny, Con, Maria, Patrick, Saoirse and Thomas.
Finally, to Mary-Jo, my inspiration.

hiL48086_fm_i-xxiv.indd xxi 12/13/19 03:22 PM
Photo Credits
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p. 233 ©Zapp2Photo/Shutterstock; p. 255 ©slavcic/Shutterstock; p. 255 ©paulaphoto/Shutterstock;
p. 296 ©Red ivory/Shutterstock; p. 319 ©gopixa/Shutterstock; p. 346 ©Jirapong Manustrong/Shutterstock;
p. 376 ©SFIO CRACHO/Shutterstock; p. 392 ©iamharin/Shutterstock; p. 421 ©Scott Rothstein/Shutterstock;
p. 445 ©Casimiro PT/Shutterstock; p. 465 ©BRG.photography/Shutterstock; p. 497 ©Stefano Garau/
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p. 745 ©BigTunaOnline/Shutterstock; p. 789 ©The Sun photo/Shutterstock; p. 809 ©Avigator Fortuner/Shutterstock

hiL48086_fm_i-xxiv.indd xxii 12/13/19 03:22 PM

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Make the grade!

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hiL48086_ch01_001-022 1 12/13/19 03:00 PM
You are at the beginning of a long but rewarding journey. In this book you will come
to understand the decisions financial managers make in their day-to-day activities and
take a significant step forward towards being able to make these decisions yourself.
Corporate finance is at the heart of all business activity. Whether you are in marketing,
human resources, strategy or communications, whether you are an entrepreneur setting
up a new business, or an engineer or scientist trying to understand how companies invest
in new projects, this book will give you that necessary insight to be a full member of the
team that makes decisions to increase the value of your company.
In this first part of the book we introduce you to the basic building blocks of corporate
finance. Look on this section as the necessary overview of terms and concepts that form
the foundations of the material covered later in the text. We explain key terminology and
ideas, which will help you appreciate what is meant by the title of the book, ‘Corporate
Finance’. You will also come to understand why companies place financial management
at the core of their business, and the differences between the fields of accounting and
finance. Companies don’t operate in a bubble, so we must also discuss the international
environment in which businesses raise cash for their operations and do their business.
Ultimately, the decisions financial managers make must be acceptable to the owners of
the firm. However, this is not necessarily experienced in practice. In many companies
across the world, managers prioritize their welfare and personal earnings over those of
the firm. In Chapter 2, we discuss in detail how to structure the leadership of a company
so that managers are more likely to maximize firm value and make the best financial
decisions. This is discussed in an international context so the cultural variations that
exist across countries can be fully understood.
Overview
PART 1

hiL48086_ch01_001-022 2 12/13/19 03:00 PM
Introduction to Corporate
Finance
CHAPTER
1
The last 10 years have led to a completely new understanding of corporate finance. Many established truths that
existed prior to the global financial crisis of 2008 are now fiercely debated.
A common question is ‘Are financial markets rational?’
Classic corporate finance is based on the premise that all decisions are rational and those who make financial
decisions are also rational. Once we drop this fundamental axiom, many financial theories become hard to prove. In
fact, when we no longer expect decision-makers to be rational, many observed ‘financial anomalies’ make perfect sense.
There is now widespread recognition of the importance of ethics in financial decision-making and managers
must consider the wider non-financial impact of their business decisions. This has been accompanied by an increase
in shareholder activism, especially from financial institutions that have become more vocal in their criticism of
corporate management when bad decisions are made.
Another change is the integrated nature of global business, which has become the norm for every company.
The international financial environment is now so central to business decision-making that any course on finance
must give consideration to the dynamics of currency movements, geopolitical risk and economics. Financial risk
management is an area that has consequently come to the fore as a result of these changes, and it will remain
essential for years to come.
In recent years, technological advancements have led to changes in business models, and corporate executives
face an evolving economic environment where automation and machine learning have become viable alternatives
to skilled and unskilled human workforces. Technology also has an impact on corporate financing and there are
now more opportunities for companies to raise money for their operations than there were three years ago.
Finally, the role of the corporate executive has changed. Irrespective of background, today’s leaders must
be fully loaded with financial tools to cope with the rapidly changing business environment. The corporate
executive must be an entrepreneur who not
only understands risk but can also use it to his
or her advantage. More than this, the executive
must be willing and have the confidence to
implement investment and financing decisions
that fully incorporate risky outcomes.
Bringing these issues together and integrating
them into a coherent framework for optimal
financial decision-making is the goal of this text.
However, we first require an understanding of
what is meant by the term ‘corporate finance’,
why it is so important to a successful business,
the different financial environments in which
businesses operate, and the emerging trends
in global business – all of which we discuss in
Chapter 1.

3
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What is Corporate Finance?
1.1 What is Corporate Finance?
Suppose you decide to start a firm to make tennis balls. To do this you hire managers to buy raw materials, and
you assemble a workforce that will produce and sell finished tennis balls. In the language of finance, you invest in
assets such as inventory, machinery, land and labour, and you match the amount of cash you spend in assets with
an equal amount of cash raised by financing. When you begin to sell tennis balls, your firm will generate cash, and
this is the basis of value creation. The purpose of the firm is to create value for the owner, who may or may not be
the manager of the firm. This concept of value is reflected in the framework of the simple balance sheet model of
the firm.
The Balance Sheet Model of the Firm
Take a financial snapshot of the firm and its activities at a single point in time. Figure 1.1 shows a
graphic conceptualization of a firm’s balance sheet, and it will help introduce you to the field of
corporate finance. (See Chapter 3 for more information on the statement of financial position.)
The assets of the firm are on the left side of the balance sheet. Think of these assets as short-
term (current) and long-term (non-current). Non-current assets are those that will last a long time,
such as buildings. Some non-current assets are tangible, such as machinery and equipment. Other non-current
assets are intangible, such as patents and trademarks. The other category of assets, current assets, comprises
those that have short lives, such as inventory. For example, tennis balls your firm has made but not yet sold are
current assets. Unless you have overproduced, the tennis balls will leave the firm shortly and will not be in the
company for a long time.
Before a company can invest in an asset, it must obtain financing, which means it must raise money to pay for
the investment. The various forms of funding are represented on the right side of the balance sheet in Figure 1.1.
A firm will issue (sell) pieces of paper called bonds (debt or loan agreements) or shares (certificates representing
fractional ownership of the firm).
Just as we classify assets as long-lived or short-lived, so too are liabilities. Short-term debt is called a current
liability, and represents loans and other obligations that must be repaid within one year. Non-current liabilities
include debt that does not have to be repaid within one year. Shareholders’ equity represents the difference between
the value of the firm’s assets and liabilities and, in this sense, it is a residual claim on the firm’s assets.
Chapter 3
Page 58
Figure 1.1 The Balance Sheet Model of the Firm
Current assets
Total value of assets Total value of the fi rm
to investors
Net
working
capital
Current liabilities
Shareholders’ equity
Non-current liabilities
Non-current assets
1. Tangible non-
current assets
2. Intangible non-
current assetsFrom the balance sheet model of the firm, we can ask three questions:
1 In which long-lived assets should the firm invest? This question concerns the left side of the balance sheet.
Of course, the types and proportions of assets the firm needs tend to be set by the nature of the business. We
use the term capital budgeting to describe the process of making and managing expenditures on long-lived
assets.

4
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Chapter 1 Introduction to Corporate Finance
2 How can the firm raise cash for required capital expenditures? This question concerns the right side of
the balance sheet. The answer to this question involves the firm’s capital structure, which represents the
proportions of the firm’s financing from current and long-term debt and equity.
3 How should short-term operating cash flows be managed? This question concerns the upper portion of
the balance sheet. There is often a mismatch between the timing of cash inflows and cash outflows during
operating activities. Furthermore, financial managers do not know the amount and timing of operating cash
flows with certainty and must manage the gaps in cash flow. From a balance sheet perspective, short-term
management of cash flow is associated with a firm’s net working capital. We define net working capital as
current assets minus current liabilities. From a financial perspective, short-term cash flow problems come
from the mismatching of cash inflows and outflows. This is the subject of short-term finance.
Real World Insight 1.1
The Berkeley Group is a large British building company focusing on new housing estate developments.
The assets of Berkeley Group include not only buildings and property (tangible assets), but also the
value of its brand and skilled workforce (intangible assets). In 2018, the company had £399.8 million in
tangible non-current assets and £17.2 million in intangible non-current assets. Current assets amounted
to £4,359.5 million and current liabilities (liabilities due within one year) were £1,725.9 million. Berkeley
Group had £430.6 million in non-current liabilities. A statement of financial position (balance sheet) for the
company is presented below.
£ million £ million
Tangible assets 399.8 Non-current liabilities 430.6
Intangible assets17.2 Current liabilities 1,725.9
Non-current assets 417.0 Equity 2,620.0
Current assets4,359.5
Total assets 4,776.5 Total equity and liabilities 4,776.5
Net working capital is (current assets – current liabilities) = £2,633.6 million. Typically, one would
expect a positive net working capital figure to ensure that the company has enough liquid assets to pay
off its short-term liabilities. Berkeley’s net working capital is high in comparison to the size of the firm and
it would be considered cash rich. This will give the firm an excellent basis to invest over the coming year.
Capital Structure
Financing arrangements determine how the value of the firm is sliced up. The people or institutions that buy debt
from (i.e., lend money to) the firm are called creditors, bondholders or debtholders. The holders of equity are
called shareholders.
Sometimes it is useful to think of the firm as a pie. Initially, the size of the pie will depend on how well the firm
has made its investment decisions. After a firm has invested, it determines the value of its assets (e.g., its buildings,
land and inventories).
The firm can then determine its capital structure. It might initially have raised the cash to invest in its assets by
issuing more debt than equity; now it can consider changing that mix by issuing more equity and using the proceeds
to buy back (pay off) some of its debt. Financing decisions like this can be made independently of the original
investment decisions. The decisions to issue debt and equity affect how the pie is sliced.
We depict the pie in Figure 1.2. The size of the pie is the value of the firm in the financial markets. We can write
the value of the firm, V, as
V = D + E
where D is the market value of the debt (bonds) and E is the market value of the equity (shares). The pie diagrams
consider two ways of slicing the pie: 50 per cent debt and 50 per cent equity, and 25 per cent debt and 75 per cent
equity. The way the pie is sliced could affect its value. If so, the goal of the financial manager will be to choose the
ratio of debt to equity that makes the value of the pie – that is, the value of the firm, V – as large as it can be. (See
Chapter 15 for more information on capital structure.)

5
hiL48086_ch01_001-022 5 12/13/19 03:00 PM
What is Corporate Finance?
The Financial Manager
In large firms, we usually associate finance activity with a top officer of the firm, such as the chief financial
officer (CFO), and some lesser officers. Reporting to the chief financial officer are the treasurer and the
financial controller. The treasurer is responsible for handling cash flows, managing capital expenditure decisions
and making financial plans. The financial controller handles the accounting function, which includes taxes,
financial and management accounting, and information systems.
In smaller firms, a single employee covers many of the roles within an organization. Although each firm will be
different, there will always be someone who is responsible for the duties of a financial manager. The most important
role of a financial manager is to create value from the firm’s capital budgeting, financing and net working capital
activities. How do financial managers create value? The answer is that the firm should:
1 Try to buy assets that generate more cash than they cost
2 Sell bonds, shares and other financial instruments that raise more cash than they cost.
Thus, the firm must create more cash flow than it uses. The cash flows paid to bondholders and shareholders of the
firm should be higher than the cash flows put in to the firm by the bondholders and shareholders. To see how this
is done, we trace the cash flows from the firm to the financial markets and back again.
We illustrate the interplay of the firm’s activities with the financial markets in Figure 1.3. The arrows in
Figure 1.3 trace cash flow from the firm to the financial markets and back again. Suppose we begin with the firm’s
financing activities. The firm sells debt (bonds) and equity (shares) to investors in the financial markets to raise
money, resulting in cash flowing from the financial markets to the firm (A). This cash is invested in the investment
activities (assets) of the firm (B) by the firm’s management. Shareholders and bondholders (F) are then paid with
the cash generated by the firm (C). The shareholders receive cash in the form of dividends; the bondholders who
lent funds to the firm receive interest and, when the initial loan is repaid, principal. Not all of the firm’s cash is paid
out: some is retained (E), and some is paid to the government as taxes (D).
Real World Insight 1.2
Every company that needs cash must raise it from somewhere. In 2018, Siemens received a total of
€4.2 billion by issuing new equity of its subsidiary Siemens Healthineers on the German stock exchange,
Deutsche Börse.
Why did Siemens choose to issue new equity? It based its decision on what would maximize the value of
the company. In this case, equity was the most sensible option.
Siemens is a technology company and does not have extensive experience of raising large amounts
of external financing. This is where banks come in. Although banks are best known for lending funds to
borrowers and taking deposits, they are also very experienced in marketing and raising money from other
investors. We call this type of activity ‘investment banking’, and a number of banking institutions specialize
in this area.
Seven banks were involved in finding buyers for the €4.2-billion Siemens issue. These were: Deutsche
Bank, Goldman Sachs, J.P. Morgan, BNP Paribas, BofA Merrill Lynch, Citigroup and UBS.
Figure 1.2 Two Pie Models of the Firm
25% debt
50% equity50% debt 75% equity
Capital structure 2Capital structure 1

6
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Chapter 1 Introduction to Corporate Finance
Example 1.1
Accounting Profit versus Cash Flows
Midland plc is an Irish firm that refines and trades gold. At the end of the year, it sold 2,500 ounces of gold
for €1.67 million. The company had acquired the gold for €1 million at the beginning of the year by paying
cash. Unfortunately, it has yet to collect from the customer. The following is a standard accounting of
Midland’s financial circumstances at year-end:
The Accounting View Midland plc Income Statement Year Ended 3 1 December
€
Sales 1,670,000
–Costs 1,000,000
Profit 670,000
Under International Financial Reporting Standards (IFRS), we record the sale even though the customer
has yet to pay. We also assume the customer will pay soon. From the accounting perspective, Midland seems
to be profitable. However, the perspective of corporate finance is different. It focuses on cash flows:
The Financial View Midland plc Income Statement Year Ended 3 1 December
€
Cash inflow 0
Cash outflow −1,000,000
Net Cash Flow −1,000,000
Figure 1.3 Cash Flows between the Firm and the Financial Markets
Financial
markets
Current liabilities
Non-current liabilities
Equity shares
Government
(D)
Cash for securities issued by the firm (A)
Cash flow
from firm (C )
Dividends and
debt payments (F )
Total value of assets Total value of the firm
to investors in
the financial markets
Firm invests
in assets
(B)
Current assets
Non-current assets
Retained cash flows (E )
Taxes
Over time, if the cash paid to shareholders and bondholders (F) is greater than the cash raised in the financial
markets (A), value will be created.
Identification of Cash Flows
Unfortunately, it is not easy to observe cash flows directly. Much of the information we obtain is in the form of
accounting statements, and much of the work of financial analysis is to extract cash flow information from
accounting statements. Example 1.1 illustrates how this is done.

7
hiL48086_ch01_001-022 7 12/13/19 03:00 PM
What is Corporate Finance?
The Timing of Cash Flows
The value of an investment made by a firm depends on the timing of cash flows. One of the fundamental principles
of finance is that individuals prefer to receive cash flows earlier rather than later. One euro received today is worth
more than one euro received next year. See Example 1.2.
Corporate finance is interested in whether the gold trading operations of Midland create cash flow,
because value creation depends on cash. For Midland, value creation depends on whether and when it
receives the €1.67 million.
Example 1.2
Cash Flow Timing
The Italian firm Montana SpA is attempting to choose between two proposals for new products. Both
projects will provide additional cash flows over four years and will initially cost €10,000. The cash flows
from the proposals are as follows:
Year New Product A (€) New Product B (€)
1 0 4,000
2 0 4,000
3 0 4,000
4 20,0004,000
Total 20,000 16,000
At first, it appears that Product A is better because it earns more money. However, the cash flows from
Project B come earlier than those of A. Without more information, we cannot decide which set of cash
flows would create the most value for the bondholders and shareholders. It depends on whether the benefit
of getting cash from B up front outweighs the total extra cash from A. Bond and share prices reflect this
preference for earlier cash, and we will see how to use them to decide between A and B.
Risk of Cash Flows
The firm must consider the risk of cash flows since their amount and timing are not usually known with certainty.
Most investors have an aversion to risk.
Real World Insight 1.3
Risk
The Norwegian firm Fjell ASA is considering expanding operations overseas, and is evaluating the Netherlands
and South Africa as possible sites. The Netherlands is viewed as relatively safe, whereas operating in South
Africa is seen as riskier. In both cases, the company would close down operations after one year.
After undertaking a complete financial analysis, Fjell has come up with the following cash flows of the
alternative expansion plans under three scenarios – pessimistic, most likely and optimistic:
Pessimistic (NKr) Most likely (NKr) Optimistic (NKr)
Netherlands 750,000 1,000,000 1,250,000
South Africa 0 1,500,000 2,000,000
If we ignore the pessimistic scenario, perhaps South Africa is the best alternative. When we take the
pessimistic scenario into account, the choice is unclear. South Africa appears to be riskier, but it also offers
a higher expected level of cash flow.

8
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Chapter 1 Introduction to Corporate Finance
What is Risk and How Can it Be Defined?
Financial managers cannot avoid facing risky decisions and much of our book is devoted to developing methods
to help in these situations. We can measure risk in a number of ways and it isn’t all about adverse outcomes.
Companies can face upside risk as well as downside risk, and the financial manager’s objective is to identify the
risk, measure it, then optimally manage it.
In later chapters, we explore a number of quantitative risk measures and consider how these can be used to
make good corporate decisions. Managers need not be afraid of risk and should see it as a friend, although one on
which they keep a close eye!
There are two main ways a company can approach risk. It can speculate and attempt to benefit by leaving
the company exposed to future fluctuations in prices or cash flows. This is risky and may lead to extremely good
or bad outcomes. The alternative is to hedge against the risk and reduce its impact on the company’s future cash
flows. If a company hedges too much, it will not benefit from future price or cash flow fluctuations. However, if it
hedges too little, it will be exposed to big shifts in cash flows or prices.
Striking a healthy balance is fundamental to the optimal running of companies and we discuss this in much
more detail in later chapters.
1.2 The Goal of Financial Management
Assuming we restrict our discussion to for-profit businesses, the goal of financial management is to make money or
add value for the owners. This goal is a little vague, of course, so we examine some different ways of formulating it
to come up with a more precise definition. A clear definition is important because it leads to an objective basis for
making and evaluating financial decisions.
Possible Goals
If we were to consider possible financial goals, we might come up with some ideas like the following:
• Survive
• Avoid financial distress and bankruptcy
• Beat the competition
• Maximize sales or market share
• Minimize costs
• Maximize profits
• Maintain steady earnings growth.
These are only a few of the goals we could list. Furthermore, each of these possibilities presents problems as a goal
for the financial manager.
For example, it is easy to increase market share or unit sales – all we have to do is lower our prices or relax
our credit terms. Similarly, we can always cut costs simply by doing away with things such as research and
development. We can avoid bankruptcy by never borrowing any money or never taking any risks, and so on. It is
not clear that any of these actions are in the shareholders’ best interests.
Profit maximization would probably be the most commonly cited goal, but even this is not a precise objective.
Do we mean profits this year? If so, then we should note that actions such as deferring maintenance, letting
inventories run down and taking other short-run cost-cutting measures will tend to increase profits now, but these
activities are not necessarily desirable.
The goal of maximizing profits may refer to some sort of ‘long-run’ or ‘average’ profits, but it
is still unclear exactly what this means. First, do we mean something like accounting net income
or earnings per share? As we will see in more detail in Chapter 4, these accounting numbers may
have little to do with what is good or bad for the firm. Second, what do we mean by the long run?
As a famous economist once remarked, in the long run, we are all dead! More to the point, this goal
does not tell us what the appropriate trade-off is between current and future profits.
The goals we have listed here are all different, but they tend to fall into two classes. The first of these relates
to profitability. The goals involving sales, market share and cost control all relate, at least potentially, to different
Chapter 4
Page 86

9
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The Goal of Financial Management
ways of earning or increasing profits. The goals in the second group, involving bankruptcy avoidance, stability and
safety, relate in some way to controlling risk. Unfortunately, these two types of goals are somewhat contradictory.
The pursuit of profit normally involves some element of risk, so it is not really possible to maximize both safety and
profit. What we need, therefore, is a goal that encompasses both factors.
The Goal of Financial Management
The financial manager in a corporation makes decisions for the shareholders of the firm. So, instead of listing
possible goals for the financial manager, we really need to answer a more fundamental question: from the
shareholders’ point of view, what is a good financial management decision?
If we assume that shareholders buy shares because they seek to gain financially, then the answer is obvious:
good decisions increase the value of the company’s shares, and poor decisions decrease the value of the shares.
From our observations, it follows that the financial manager acts in the shareholders’ best interests by making
decisions that increase the value of the company’s shares. The appropriate goal for the financial manager can thus
be stated quite easily:
The goal of financial management is to maximize the value of a company’s equity shares.
The goal of maximizing share value avoids the problems associated with the different goals we listed earlier. There
is no ambiguity in the criterion, and there is no short-run versus long-run issue. We explicitly mean that our goal is
to maximize the current share price. (See Chapter 4 for more information on value maximization.)
If this goal seems a little strong or one-dimensional to you, keep in mind that the shareholders in a firm are
residual owners. By this we mean that they are entitled only to what is left after employees, suppliers and creditors
(and everyone else with legitimate claims) are paid their due. If any of these groups go unpaid, the shareholders
get nothing. So if the shareholders are winning in the sense that the leftover, residual portion is growing, it must be
true that everyone else is winning also.
Because the goal of financial management is to maximize the value of the equity, we need to learn how to
identify investments and financing arrangements that favourably impact share value. This is precisely what we
will be studying. In fact, we could have defined corporate finance as the study of the relationship between business
decisions and the value of the shares in the business.
A More General Goal
If our goal is as stated in the preceding section (to maximize the company’s share price), an obvious question
comes up: what is the appropriate goal when the firm has no traded shares? Corporations are certainly not the only
type of business; and the shares in many corporations rarely change hands, so it is difficult to say what the value
per share is at any particular time.
As long as we are considering for-profit businesses, only a slight modification is needed. The total value of the
shares in a corporation is simply equal to the value of the owners’ equity. Therefore, a more general way of stating
our goal is as follows: maximize the market value of the existing owners’ equity.
With this in mind, we do not care what the organizational form is, since good financial decisions increase the
market value of the owners’ equity, and poor financial decisions decrease it. In fact, although we choose to focus
on corporations in the chapters ahead, the principles we develop apply to all forms of business. Many of them even
apply to the not-for-profit sector.
Finally, our goal does not imply that the financial manager should take illegal or unethical actions in the hope
of increasing the value of the equity in the firm. What we mean is that the financial manager best serves the owners
of the business by identifying goods and services that add value to the firm because they are desired and valued in
the free marketplace.
The Triple Bottom Line
In several quarters, shareholder value maximization (the profit objective) has attracted criticism because it appears
to ignore other important factors, such as employees (the social objective) and sustainability (the environment
objective).
Critics argue that, since companies consist of people and use the planet’s resources, they have a responsibility
not only to shareholders but to society as well. The triple bottom line is an attempt to bring this to the centre of
corporate decision-making by asking companies to maximize not just shareholder value, but also to measure its
contribution to society and the environment.

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Chapter 1 Introduction to Corporate Finance
One major difficulty with the triple bottom line is the difficulty in accurately measuring in monetary terms the
effect a company has on society and the environment. For example, how would you measure the triple bottom line
of a fracking company that extracts gas from underground shale formations? Fracking has been in existence since
the 1990s but the long-term environmental effects are still unknown. To value the environmental and social costs of
fracking would require assumptions, many of which are controversial and lack agreement.
Until we have designed a valuation paradigm that effectively incorporates all aspects of a company’s operations,
shareholder wealth maximization is the best option. In addition, assuming that shareholders value society and
the environment in the same way as the general population, the goal of shareholder wealth maximization will
necessarily capture societal and environmental objectives.
Consequently, the financial manager best serves shareholders (the business owners) by making decisions
that are valued by shareholders, who in turn reflect the broader societal and environmental concerns of the
general population. Therefore, shareholder wealth maximization is consistent with the triple bottom line approach
(assuming shareholders have the same objectives and concerns as the general population).
1.3 Financial Markets
When firms require cash to invest in new projects, they have to choose the most efficient and cost-effective
financing option from a range of appropriate alternatives. First, they must decide whether to borrow money (debt)
or give up a fraction of ownership in their firm (equity). When borrowing, the company takes out a loan and agrees
to later pay back the borrowed amount (principal) plus interest, to compensate the lender for giving the money to
the borrower. If the firm decides to give up ownership, they sell a part of their company for a set cash amount. At
the end of this process, the firm will end up with the cash it needs.
When a firm borrows, it can go to a bank for a loan, or it can issue debt securities in the financial markets.
Debt securities are contractual obligations to repay corporate borrowing. If a firm gives up ownership, it can
do this through private negotiation or a public sale. A public sale is undertaken through marketing and sale
of equity securities. Equity securities are shares (known as ordinary shares or common stock) that represent
non-contractual claims to the residual cash flow of the firm. Issues of debt and equity that are publicly sold by the
firm are then traded in the financial markets, such as stock markets.
In many countries, the financial markets are not nearly as well developed as in Europe. For example in Africa,
many stock exchanges are small, and only a handful of companies have publicly traded equity or debt securities.
For these firms, it is usually cheaper to get funding from banks and strategic investors.
The financial markets are composed of the money markets and the capital markets. Money markets are for
debt securities that will pay off in the short term (usually less than one year). Capital markets are for long-term
debt (for longer than a year) and equities.
The term money market applies to a group of loosely connected markets, usually in the form of a dealer market.
Dealers are firms that make continuous price quotations for which they stand ready to buy and sell short-term
financial instruments for their inventory and at their own risk. Thus, the dealer is a principal in most transactions,
which is different from a stockbroker acting as an agent for a customer in buying or selling shares on most stock
exchanges. An agent will not acquire the securities.
Figure 1.4 illustrates the difference between dealer and agency markets. In both cases, Trader A wishes to
sell to Trader B. Moreover, in each scenario, Trader A sells shares for £100 and Trader B buys shares for £110.
So what is the difference between the market types? In the dealer market, the dealer bears the risk of holding the
shares before he can find a counterparty to buy them. In Figure 1.4, the dealer finds someone to buy the shares
at £110. However, if they are unable to locate a counterparty, they may end up with shares that are worth less
than the value at which they were purchased (£100). This is known as inventory risk and constitutes a cost to the
dealer. The difference between the dealer’s buying and selling price is known as the bid–ask spread, which in this
case is £10.
In an agency market, Trader A hires an agent or broker to find a counterparty. The broker, it is hoped, will find
someone and then take a commission on the sale price, which in this case is £10. At no time does the broker own
the shares that she is trying to sell and, as a result, does not bear inventory risk.
At the core of the money markets are the money market banks (these tend to be large banks with headquarters
in Frankfurt, London and New York), government securities dealers (some of which are the same large banks) and
many money brokers. Money brokers specialize in finding short-term money for borrowers and placing money for
lenders. The financial markets can be classified further as the primary market and the secondary markets.

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Financial Markets
Figure 1.4 Comparison of Dealer and Agency Markets
Dealer market
Sells to dealer for £100
Sells to Trader B for £110
Trader A receives £100
Trader B pays £110
Dealer earns £10 in profit
Trader A
Trader B
Dealer makes a £10
profit
Agency market
Hires agent to sell shares
Sells to Trader B for £110
Trader A receives £100
Trader B pays £110
Agent earns £10 in commission
Trader A
Trader B
Agent takes £10
commission
The Primary Market: New Issues
Governments and public corporations use the primary markets to sell securities. Corporations engage in two types
of primary market sales of debt and equity: public offerings and private placements.
Most publicly offered corporate debt and equity come to the market underwritten by a syndicate of investment
banking firms. The underwriting syndicate buys the new securities from the firm for the syndicate’s own account
and resells them at a higher price. Publicly issued debt and equity must be registered with the local regulatory
authority. Registration requires the corporation to disclose all material information in a registration statement.
The legal, accounting and other costs of preparing the registration statement are
not negligible. In part to avoid these costs, privately placed debt and equity are sold
by private negotiation to large financial institutions, such as insurance companies and
mutual funds, and other investors. Private placements tend not to be registered with
regulatory authorities in the same way as public issues. (See Chapters 14, 19 and 20 for
more information on financing decisions.)
Chapter 14 Page 376
Chapter 19 Page 497
Chapter 20 Page 527
Real World Insight 1.4
Avast plc
In 2018, the cybersecurity firm Avast realized it had borrowed too much and needed to reduce the level
of debt in the company. Borrowing more wouldn’t work because the debt would become even higher.
The only option the firm had was to issue new equity on the London Stock Exchange and use the
money to pay back some of its borrowings. The company raised £147.4 million in return for giving up
6.77 per cent ownership. This valued the total equity at around £2.178 billion. J.P. Morgan and UBS both led
a consortium of international banks in selling the shares to investors. The issue was the UK’s largest ever
technology offering.
Every country has its own regulatory authority that deals with the registration of publicly traded securities.
Corporations that wish to have traded securities in a country’s securities exchange must register with the competent
authority. Table 1.1 presents the names of regulators for a sample of countries.

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Chapter 1 Introduction to Corporate Finance
Peer-to-peer Investing Platforms
A new type of trading platform has emerged giving companies, especially small and medium-sized enterprises,
access to alternative sources of finance. Peer-to-peer trading platforms can be used by small companies to
borrow without going through the normal stock exchange requirements for listing. Investors from all over the
world lend to a company using an electronic platform without the need to go through a financial intermediary.
Although there are lower transaction costs with these platforms, investors must undertake their own research
into the company, which takes time and money. For borrowers, the cost of borrowing is likely to be lower
because they don’t need to pay fees to a bank. However, the amount they can borrow tends to be small (maximum
Table 1.1 Corporate and Financial Regulators
Country Regulator
Australia Australian Securities and Investment Commission
Austria Financial Market Authority
Bahrain Central Bank of Bahrain
Belgium Financial Services and Markets Authority
China China Securities Regulatory Commission
Denmark Financial Supervisory Authority (Finanstilsynet)
Dubai Dubai Financial Services Authority
Finland Financial Supervision Authority
France Autorité des Marchés Financiers (AMF)
Germany Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)
Greece Hellenic Capital Market Commission
India Securities and Exchange Board of India
Ireland Central Bank of Ireland
Israel Israel Securities Authority
Italy Commissione Nazionale per le Società e la Borsa
Malaysia Securities Commission Malaysia
The Netherlands Netherlands Authority for the Financial Markets
Norway Financial Supervisory Authority (Finanstilsynet)
Oman Capital Market Authority (Oman)
Poland Polish Financial Supervision Authority (KNF)
Portugal Comissão do Mercado de Valores Mobiliários
Saudi Arabia Capital Market Authority (Saudi Arabia)
Singapore Money Authority of Singapore
South Africa Financial Services Board (South Africa)
Spain Comisión Nacional del Mercado de Valores
Sweden Financial Supervisory Authority (Sweden) Finansinspektionen
Switzerland Swiss Financial Market Supervisory Authority
Turkey Capital Markets Board
United Arab EmiratesSecurities and Commodity Authority
United Kingdom Financial Conduct Authority; Financial Policy Committee; Prudential Regulation Authority
United States Securities and Exchange Commission

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Financial Markets
of £5 million) and the borrowing period is short (up to five years). Each platform is different and there is no
consistency across platforms.
Given its recent emergence, peer-to-peer investing is not regulated in many countries and investors use this
medium at their own risk. With the development of new financial technologies, such as blockchain, expect to
see many more investing platforms in the future using not just standard currencies like euros and sterling, but
cryptocurrencies, such as bitcoin and etherium.
Secondary Markets
A secondary market transaction involves one owner or creditor selling to another. The secondary
markets provide the means for transferring ownership of corporate securities. Although a
corporation is only directly involved in a primary market transaction (when it sells securities
to raise cash), the secondary markets are still critical to large corporations. The reason is that
investors are more willing to purchase securities in a primary market transaction when they know
that those securities can be later resold if desired. (See Chapter 13 for more information on
secondary markets.)
Chapter 13
Page 346
Real World Insight 1.5
Avast
Following on from Real World Insight 1.4, on the day that Avast issued its new equity, the share price in the
firm fell from the issue price of £2.50 to £2.43 as soon as trading started. Investment banks usually set the
issue price low so that the price increases during the day. As you can see from Avast’s experience, events
don’t always go to plan!
Dealer versus Auction Markets
There are two kinds of secondary market: dealer markets and auction markets. Generally speaking, dealers buy
and sell for themselves, at their own risk. A car dealer, for example, buys and sells automobiles. In contrast, brokers
and agents match buyers and sellers, but they do not own the commodity that is bought or sold. An estate agent, for
example, does not normally buy and sell houses.
Dealer markets in equities and long-term debt are called over-the-counter (OTC) markets. Most trading in
debt securities takes place over the counter. The expression over the counter refers to days of old when securities
were bought and sold at counters in offices around the country. Today a significant fraction of the market
for equities and almost all of the market for long-term debt has no central location and dealers are connected
electronically.
Auction markets differ from dealer markets in two ways. First, an auction market or exchange has a physical
location (such as Wall Street in New York). Second, in a dealer market, most of the buying and selling is done by the
dealer. The primary purpose of an auction market, on the other hand, is to match those who wish to sell with those
who want to buy. Dealers play only a limited role.
Trading in Corporate Securities
The equities of most large firms trade in organized auction markets. The largest such market is the New York Stock
Exchange (NYSE). Other auction exchanges include Euronext, Shanghai Stock Exchange and the London Stock
Exchange Group.
In addition to the stock exchanges, there is a large OTC market for equities. The National Association of
Securities Dealers Automated Quotation System (NASDAQ) in the United States and many equity securities traded
on the London Stock Exchange are both examples of OTC markets. The fact that OTC markets have no physical
location means national borders do not present a significant barrier, and there is now a huge international OTC
debt market. Because of globalization, financial markets have reached the point where trading in many assets,
commodities or securities never stops; it just travels around the world.
Stock market liquidity is essential to a listed company because the more accessible and cheaper it is to trade
the firm’s securities, the more demand there will be in the firm. Recent research has shown that companies have

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Chapter 1 Introduction to Corporate Finance
higher values when their shares are liquid and heavily traded, even after taking out all other factors that may drive
valuation differences. Also, having numerous options on where to trade a company’s shares do not harm the value,
and in fact can make pricing of the shares more efficient.
1
Exchange Trading of Listed Companies
The London Stock Exchange is ideal for describing how shares are traded in a dealer system and auction system
since both operate simultaneously on the exchange. In 2020, there were more than 2,100 equities traded on the
London Stock Exchange. Out of this number, the largest equities were traded on the main market and smaller
companies were trading on the smaller market, the Alternative Investment Market (AIM).
On the main market, traders are allowed to submit orders to buy or sell at a stated price within a reasonable
time (limit order) or to buy or sell a stated number of shares immediately at the best price (market order). If a limit
order cannot execute immediately (i.e. there are not enough shares at the stated price to fulfil the order), it will stay
in the limit order book, which lists all outstanding limit orders.
Smaller companies (around 900 firms listed on the AIM) are traded through a dealer system. Dealers compete
with one another by posting buy and sell quotes for a maximum number of shares through an electronic system
that lists every dealer’s quotes. The dealer that quotes the highest buy price and the lowest sale price is most likely
to trade.
Listing
Shares that trade on an organized exchange are said to be listed on that exchange or publicly listed. To be listed,
firms must meet specific minimum criteria concerning, for example, asset size and number of shareholders. These
criteria differ from one exchange to another. For instance, Euronext has three main requirements for listing. First,
a company must have at least 25 per cent of its shares listed on the exchange and the value of these shares must
be at least €5 million. The second requirement is that the listing firm has at least three years of financial accounts
filed with the regulator. Finally, all of the company’s financial statements must follow the recognized International
Financial Reporting Standards, also known as IFRS.
Figure 1.5 gives a picture of the largest stock exchanges around the world in 2019.
Figure 1.5 Largest Stock Exchanges in 2019
0
5
10
15
20
25
23.14
10.38
6.29
5.02
4.65 4.6 4.44
3.55
2.34 2.3
NYSE Nasdaq Japan
Exchange
Group
Shanghai
Stock
Exchange
Eutonext,
Europe
Market capitalization ($ trillions)
London
Stock
Exchange
Hong KongShenzen
Stock
Exchange
Deutsche
Börse
Bombay
Stock
Exchange
Source: Statista.
Note: The graph shows the largest stock exchanges by market capitalization of listed companies (in trillions of US$).

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Corporate Finance in Action: The Case of Alphabet
1.4 Corporate Finance in Action: The Case of Alphabet
The verb ‘to Google’ is defined in Webster’s New Millennium™ Dictionary of English as ‘to search for information
on the internet’. This integration into everyday language is just one signal of the exceptional success of the internet
search engine that was started in 1996 by two Stanford PhD students, Sergey Brin and Larry Page. Google is now
part of a much larger company called Alphabet, Inc., which is worth more than $709 billion. During its massive
growth, the management of Google had to consider and deal with many issues, all of which we cover in this
textbook over the next 29 chapters.
Early Days
The foundation of any new business is the product or service idea. Through their research, Brin and Page believed
they had a more efficient model of searching through internet pages than the search engines that existed in
1996. Armed only with this idea and a few working algorithms, they approached several potential investors and
successfully attracted $100,000 from one of the founders of Sun Microsystems to develop their business concept.
Within a year, they had received a further $25 million from venture capitalists. To attract this financing, Brin
and Page would have had to create a business plan and cash flow forecast that estimated their future costs and
revenues. From business plans and cash flows, investors can arrive at a valuation of the potential company. We
cover company valuation in Part 2 of this text.
Google and Corporate Governance
By 2004, Google had been so successful with its business model and grown so much that it needed significant
injections of cash to capture the emerging business opportunities that were becoming available. To the two
founders, Brin and Page, it was paramount that they retained control of the company, but they also knew that
they would have to issue many shares to investors so the firm could receive adequate funding. As a solution,
Google restructured its ownership to have two types of equity shares, A and B class. B-class shares, which were
predominantly owned by Brin and Page, were awarded 10 votes at company meetings for every
share certificate, while A-class shares received one vote for every share certificate. Even though
the number of shares held by outside investors was much higher than the number held by the
two founders combined, the number of votes available to outsiders was lower. Issues relating to
ownership structure and corporate governance, in general, are covered in Chapter 2.
Google and Financing Decisions
When Google was thinking of raising capital, it had two choices. It could borrow the money (through a bank
loan or public debt markets) or issue equity (through the equity markets). In the end, it chose to raise all the
money in the form of equity financing. Google issued no long-term debt until 2011. There are several reasons
Chapter 2
Page 23
Real World Insight 1.6
The London Stock Exchange
At more than 300 years of age, the London Stock Exchange is one of the world’s oldest and largest
exchanges. This stock exchange allows trading in equities, bonds and derivatives for UK companies as well
as firms from all over the world. However, this isn’t the end of the exchange’s services – it is also involved in
post-trade settlement and risk management for investors who use its products.
Data is a precious asset to any stock exchange, and a substantial part of its revenues come from the
sale of and subscription to real-time and reference data products that include stock quotes, orders and
transaction prices. The exchange provides more than 200,000 international equity, bond and alternative
asset class indices, through its index provider, FTSE.
To fully exploit the power of data, the London Stock Exchange provides high-performance trading
platforms and capital markets software, as well as trading, surveillance and post-trade technology.
Although the London Stock Exchange has its headquarters in London, it also has significant operations in
Italy, France, North America and Sri Lanka, employing approximately 2,800 people.

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Chapter 1 Introduction to Corporate Finance
for this, and there are many factors to take into consideration when a firm chooses its debt to
equity mix, which is also known as its capital structure. Companies may even decide to use
more complex instruments, such as options or warrants. We cover capital structure in Part 4
and complex funding securities in Part 6. For more information on financing decisions see
Chapter 15.
Google and the Financing Process
The original Google share issue was highly unusual in that it was organized wholly
over the internet. However, the management needed to address several fundamental
issues. First, what should the value of the new shares be? Should A-class shares have
a different value to B-class shares? How risky are the shares? These questions are of
enormous importance to investors who wish to invest cash in new investments. We
explore how to measure the risk of investments in Part 3 and review the process of
issuing new securities in Part 5. (See Chapters 14, 19 and 20 for more information on
the financing process.)
Google Becomes Alphabet
By the time Google became Alphabet, it had acquired more than 160 companies. Most notably, it bought Motorola
Mobility for $12.5 billion in 2011, YouTube ($1.65 billion) in 2006, DoubleClick ($3.1 billion) in 2007, and Nestlabs
($3.2 billion) in 2014. Google’s operations spanned many countries, and with the range of businesses in its portfolio,
it was concerned that the performance of its core internet search business was becoming difficult to analyse. It
consequently created a new company, Alphabet, Inc., that would own all the acquired companies as well as Google.
Creating this new structure allowed investors to see how well Google was doing, separately from the other
businesses in its corporate family.
Alphabet, Inc. is one of the biggest companies in the world, and will continue to evolve and
develop in the future. We explore the issues Google dealt with as it expanded in Chapters 28–30,
where we cover topics like corporate restructuring, acquisitions and mergers, financial distress
and international finance. These are extremely important to all companies, and not just Alphabet.
(See Chapter 28 for more information on mergers and acquisitions.)
Alphabet as a Business
Although Alphabet is known as a technology firm, its success and size make it quite similar to other large firms in
more capital-intensive industries. By 2019, Alphabet had more than $48 billion invested in property and equipment,
and more than 94,000 workers. In fact, Alphabet’s management was so concerned that the firm was losing its old
values and culture that they appointed a chief cultural officer, whose remit was to develop and maintain the early
Google working environment.
Alphabet and Short-term Financing
Like all other firms, Alphabet must ensure it has enough cash available to pay off its
creditors. Short-term financial planning is therefore crucial to its continued existence.
Unlike many companies, Alphabet is exceptionally cash rich. According to its 2018
accounts, the company had more than $102 billion in cash and highly marketable
securities. Is this too much or too little? We cover short-term financing in Part 7 of the
text. (See Chapters 26 and 27 for more information on short-term financing.)
So What is Corporate Finance?
Many people believe corporate finance is only about valuation and investment appraisal. It is to be hoped that this
section shows that, for a business to be truly successful, the firm’s leadership and its shareholders must have a solid
understanding of all corporate finance areas and not just one or two topics. Alphabet, Inc. is a success not only
because it had a fantastic business idea, but because it understands the fundamental basis of good business and
corporate finance.
Chapter 14 Page 376
Chapter 19 Page 497
Chapter 20 Page 527
Chapter 28
Page 745
Chapter 26 Page 693
Chapter 27 Page 717
Chapter 15
Page 392

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Questions and Problems
Summary and Conclusions
This chapter introduced you to some of the basic ideas in corporate finance:
1 Corporate finance has three main areas of concern:
(a) Capital budgeting: What long-term investments should the firm take?
(b) Capital structure: Where will the firm get the long-term financing to pay for its investments? Also,
what mixture of debt and equity should it use to fund operations?
(c) Working capital management: How should the firm manage its everyday financial activities?
2 The goal of financial management in a for-profit business is to make decisions that increase the value of
the shares, or, more generally, the market value of the equity.
Of the topics we have discussed thus far, the most important is the goal of financial management: maximizing
share value. Throughout the text we will be analysing many different financial decisions, but we will always
ask the same question: how does the decision under consideration affect the value of the equity?
CONCEPT
1 What is Corporate Finance? What are the main elements of corporate finance? How might these
elements relate to typical family life?
2 Introduction to Corporate Finance Which of the following is not a core element of corporate finance?
(a) The investment decision
(b) The equity decision
(c) The financing decision
(d) Short-term capital management
3 Goal of Financial Management Explain the assumption behind the statement: ‘The goal of financial
management is to maximize the current share price.’ Why isn’t the goal to maximize the future share price?
4 Financial Markets Why do you think there are so many different types of financial markets? Would it not
make sense to have just one global stock exchange where every equity was traded? What are the reasons why
this would and wouldn’t happen in reality?
REGULAR
5 Financial Markets Explain the difference between primary and secondary markets. Why should companies
be interested in secondary markets if they don’t raise money directly for transactions that take place
on them?
6 Corporate Finance in Action The section highlighting Alphabet as a case study is special in many ways
because of the firm’s meteoric success. Extend the case study on Alphabet by looking at the title of each
chapter in this book and then identifying a similar event or news story about the firm that captures the
material in the book. Write your own case study on Alphabet.
7 Balance Sheet Equation Passenger plc has €619 million in current assets and €1,403 million in total
assets. It has €338 million in current liabilities and €1,253 million in total liabilities. How much is the equity
of Passenger plc worth? How much does it have in non-current assets and non-current liabilities?
8 Capital Structure In the previous question, Passenger plc announced that it plans to increase its non-
current assets by €100 million. If the company wishes to maintain its ratio of total liabilities to equity, how
much long-term debt should it issue?
Questions and Problems

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Chapter 1 Introduction to Corporate Finance
9 Accounting and Cash Flows You work for a private airport that has just purchased a new radar system
from the UK for £3.5 billion. You have paid £100 million up front with the rest to be paid in three months.
Explain how these figures would appear on an accounting statement and a statement of cash flows.
10 Timing of Cash Flows Your company has just entered into a 12-month contract to supply mobile telephones
to all its staff. You have been given two payment options. The first is to pay £50,000 every month for 12 months.
The second is to pay £600,000 at the end of the year. Which option should you choose? Why?
11 Risk of Cash Flows You are assessing the viability of two projects. Project A has a 25 per cent chance
of losing €1,000,000, a 50 per cent chance of breaking even and a 25 per cent chance of making €1,000,000
profit. Project B has a 10 per cent chance of losing €2,000,000, an 80 per cent chance of breaking even, and
a 10 per cent chance of making €2,000,000 profit. Which project should you choose? Why?
12 Corporate Goals Explain what is meant by the triple bottom line. What are the main issues financial
managers must consider when pursuing a triple bottom line perspective?
13 Triple Bottom Line Do you consider the triple bottom line to be important to a firm’s management?
Explain.
14 Financing Goals As a firm progresses throughout its life cycle it will typically move from seeking
investment from private sources towards raising money on the capital markets. Explain why this is the case.
15 Short-term Financing Goals In 2019, it was reported that Apple had more than $250 billion in cash. This
was more than the whole GDP of Finland, which is the market value of all goods and services produced by
the country in a year. Is this a problem for Apple? Explain.
16 Financial Management Goals You have read the first chapter of this textbook and have taken over a
company that you now discover is losing £100,000 a week. At the rate things are going, the company will
not have any cash left in six months to pay its creditors. What are your goals as a financial manager? Is this
consistent with what you have read in this chapter? Explain.
17 Financial Management Goals Explain why shareholder wealth maximization is consistent with the
triple bottom line concept. Are societal and environmental issues a necessary function of business? Explain.
18 Ethical and Non-ethical Funds You have just joined a graduate scheme in a fund management company,
and your manager tells you that ethical funds do not significantly outperform non-ethical funds, according
to the bulk of empirical evidence. How would you respond to your manager?
19 Financial Management Goals Many ‘experts’ suggest that maximizing profit should be the main
financial goal of a corporation. Is this a correct view? Explain.
20 Financial Management Goals If you are in charge of a private firm and it doesn’t have a share price,
what should be your goal as a financial manager? Explain.
21 Financial Management Goals You have been manager of a small company for 20 years and have become
great friends with your employees. In the last month, foreign owners have bought out the company’s founding
owner and have told you that they need to cut costs in order to maximize the value of the company. One of the
things they suggest is to lay off 30 per cent of the workforce. However, you believe that the workforce is
the company’s greatest asset. On what basis do you argue against the new owners’ opinions?
CHALLENGE
22 Goals of the Firm Your company’s new owners suggest the following changes to maximize the value of
the firm. Write a brief report responding to each point in turn.
(a) Add a cost of living adjustment to the pensions of your retired employees.
(b) It is expected that high oil prices will increase your revenues by 25 per cent. The company wishes to
increase its exploration costs by 15 per cent and pay the rest of the profit out to shareholders (i.e.,
themselves) in the form of increased cash dividends.
(c) Begin new research and development into more advanced but untried exploration techniques.
(d) Lay off 15 per cent of the workforce to keep costs down.
23 Dealer versus Agency Markets Explain the difference between dealer and agency markets. Why do
you think both types of market exist? Is there one type of market that is the best? Explain.
24 Statement of Financial Position If a firm is to cut costs as a result of falling revenues, how would this
appear in the statement of financial position? Explain.

19
hiL48086_ch01_001-022 19 12/13/19 03:00 PM
Questions and Problems
25 Dual-class Shares The multinational media company News Corporation has a dual-class share structure.
Why might the company do this? Are there any drawbacks?
26 Balance Sheet Equation You have the following information for the German engineering firm, thyssenkrupp
AG. All figures are in millions of euros (€).
2018 2017
Non-current assets 14,118 14,501
Current assets20,34720,546
Total assets34,46535,047
Current liabilities 16,796 17,097
Non-current liabilities14,33414,546
Total liabilities 31,130 31,643
Total equity3,3353,404
Total liabilities plus equity34,46535,047
Give a brief interpretation of how you think thyssenkrupp AG did over the two-year period. Do you think its
position improved or got worse? Explain.
27 Balance Sheet Assume that thyssenkrupp AG increased its non-current assets by €1 billion in 2019 and at
the same time reduced its current assets by €500 million. Review the ways in which thyssenkrupp would be
able to finance this expansion. What would the balance sheet look like under each strategy?
28 Statement of Financial Position Assume that, in 2019, thyssenkrupp purchased a new automation
technology for €500 million. It paid this on credit and won’t actually be due to pay for the automation
technology until 2020. The managers of thyssenkrupp state that, in the future, any increase in assets will be
wholly funded by debt. Using the data in Question 26, what would the statement of financial position look
like at the end of 2019? At the end of 2020?
29 Statement of Financial Position Assume that, instead of fully financing the expansion with debt, the
managers of thyssenkrupp say they wish to maintain the pre-transaction ratio of non-current liabilities
to equity after the expansion. What would thyssenkrupp’s statement of financial position look like
in 2020?
30 Financial Market Regulators The UK’s financial markets regulator states that its objectives are to
promote efficient, orderly and fair markets, help retail consumers achieve a fair deal, and improve the
country’s business capacity and effectiveness. The German financial markets regulator, BaFin, states
that, ‘The objective of securities supervision is to ensure the transparency and integrity of the financial
market and the protection of investors.’ Are the British and German objectives consistent with each
other? Explain.
31 Balance Sheet Model of the Firm The layout of financial accounts is rarely the same across companies
and, sometimes, it can be difficult to establish a simple picture of a firm’s balance sheet. The accounts
below are for Rogik plc. Construct a simple balance sheet model of the firm in the same way as Real World
Insight 1.1 for years 1 and 0. Provide a brief report on how you think the company has changed.
Current assets Year 1 Year 0
Cash and cash equivalents 937.8 943.7
Marketable securities and financial assets 1,117.1 55.6
Trade accounts receivable 2,328.3 2,296.3
Inventories 1,691.1 1,673.5
Other current assets 250.2 564.7
Tax receivables 72.7 93.7
Assets held for sale – 36.7
6,397.2 5,664.2

20
hiL48086_ch01_001-022 20 12/13/19 05:06 PM
Chapter 1 Introduction to Corporate Finance
Current assets Year 1 Year 0
Non-current assets
Intangible assets 11,764.3 12,484.1
Property, plant and equipment 3,113.4 3,241.5
Investments at equity – 5.0
Non-current financial assets 60.3 130.3
Financial assets covering pensions – 216.9
Other non-current assets 54.9 52.9
Deferred tax assets 730.0 593.1
15,722.9 16,723.8
Current liabilities
Current financial liabilities 1,394.4 356.1
Trade accounts payable 1,100.8 1,200.1
Other current liabilities 1,102.1 1,054.6
Tax liabilities 399.4 368.4
Current provisions 365.5 374.5
Liabilities directly related to assets held for sale – 5.9
4,362.2 3,359.6
Non-current liabilities
Non-current financial liabilities 4,144.9 5,127.4
Other non-current liabilities 43.6 42.9
Non-current provisions 619.5 524.2
Provisions for pensions and other post-employment benefits 1,136.9 1,581.6
Deferred tax liabilities 1,319.6 1,380.5
7,264.5 8,656.6
Net equity
Equity capital 565.2 565.2
Reserves 8,671.7 8,484.2
Gains/losses recognized immediately in equity 1,210.2 1,280.4
Equity attributable to Rogik plc shareholders 10,447.1 10,329.8
Non-controlling interest 46.3 42.0
1
0,493.4 10,371.8
32 Goals of a Financial Manager In
subsidiary of Repsol, the Spanish oil giant. YPF was integral to the operations of Repsol. The firm was set
up 10 years earlier and had received more than €20 billion of capital investment from Repsol. The benefits
to Repsol’s shareholders from YPF were large and, every year, more than €527 million of dividends were
paid to the parent company. If you were the financial manager of YPF, how do you think your goals would
change as a result of the change of owners (i.e. from Repsol to the Argentinian government)?
33 Stock The U
electronic order book and the smallest firms are traded through a competitive dealer market. Do you think this is a sensible system? If you were a new firm, on which system would you prefer to have your shares listed? Explain.
34 Lif Choose any company from your country and develop a chronology of the firm’s
life cycle, from the business start-up, through initial expansion, to stock exchange listing, and then (if applicable) death through merger, acquisition or insolvency. For each stage, explain the company’s evolution through the eyes of a financial manager.

21
hiL48086_ch01_001-022 21 12/13/19 03:00 PM
References
You have been hired to help a well-known artist commercialize her oil and acrylic paintings. Your client has
never worked in industry since leaving art college, having been funded by academic grants, and has very little
understanding of how to develop a business that captures the true value of her artistic creations. In fact, she
admits to you she does not know one thing about running a business and asks what you can do for her company.
Specifically, she has a number of queries that she feels are important to understand before going forward:
1 As a financial manager, what will be your main activities in her new company? (12 marks)
2 What will be your first priority? Explain. (12 marks)
3 Will the company need to invest money? Explain. (12 marks)
4 Will the company need financing? Explain. (12 marks)
5 How will the company raise financing? Is it sensible to list the company on the stock market or issue debt?
What about bank loans? (12 marks)
6 What are the benefits of holding cash? (12 marks)
7 What should be the goal of the company? (12 marks)
8 The artist has said to you that she does not wish to run a company that does not contribute to society. She
asks if it is possible to have corporate objectives that are broader than just maximizing profit. She asks
you whether this is a sensible objective and, if not, are there other options to contribute to society and the
environment? Explain your view in a way she can easily understand. (16 marks)
Exam Question (45 minutes)
A skill any financial manager must have is to be able to find and understand financial information. Choose
three companies from your country. Download their financial accounts for the most recent year. At first you
may find it difficult to find these, but persevere because the information is there (hint: visit the company’s
corporate website and look for investor information).
1 For each firm, look at its statement of financial position and record the following:
(a) Non-current assets
(b) Current assets
(c) Current liabilities
(d) Non-current liabilities.
Construct the balance sheet for each firm and calculate the value of shareholders’ equity. What do the
figures say about each company?
2 Find the share price of each firm. What does the share price history tell you about each company?
3 Read the news for each company. What does the news tell you about the fortunes of each company?
4 Combining all the information, which company do you think is the best investment? Explain.
Practical Case Study
Bris, A., Y. Koskinen and M. Nilsson (2009) ‘The Euro and
Corporate Valuations’, Review of Financial Studies,
Vol. 22, No. 8, 3171–3209.
Fang, V.W., T. Hoe and S. Tice (2009) ‘Stock Market
Liquidity and Firm Value’, Journal of Financial
Economics, Vol. 94, 150–169.
O’Hara, M. and M. Ye (2011) ‘Is Market Fragmentation
Harming Market Quality?’, Journal of Financial
Economics, Vol. 100, 459–474.
References

22
hiL48086_ch01_001-022 22 12/13/19 03:00 PM
Chapter 1 Introduction to Corporate Finance
The field of corporate finance is enormous and evolves
in conjunction with events in the global business
environment. A couple of interesting papers for readers
who wish to delve further are given below.
1 Rajan, R.G. (2012) ‘Presidential Address: The
Corporation in Finance’, Journal of Finance, Vol. 67,
1173–1217.
2 Zingales, L. (2000) ‘In Search of New Foundations’,
Journal of Finance, Vol. 55, No. 4, 1623–1653.
Since the financial crisis, many academics have
reconsidered some of the fundamental paradigms
of finance and ask whether these are still valid. Two
interesting papers from the Harvard Business Review
discuss this issue with respect to the way in which
company performance is measured and the too focused
nature of finance on figures (and too little on strategy).
3 Christensen, C.M. and D. Bever (2014) ‘The Capitalist’s
Dilemma’, Harvard Business Review, Vol. 92, No. 6,
60–68.
4 Mukunda, G. (2014) ‘The Price of Wall Street’s Power’,
Harvard Business Review, Vol. 92, No. 6, 70–78.
One question that has been approached in a very
interesting way is ‘Which is more important, the business
plan or the managers who carry it out?’ This is examined
in the following paper:
5 Kaplan, S., B. Sensoy and P. Stromberg (2009) ‘Should
Investors Bet on the Jockey or the Horse? Evidence
from the Evolution of Firms from Early Business
Plans to Public Companies’, Journal of Finance,
Vol. 64, 75–115.
Some interesting papers on the triple bottom line are listed
below:
6 Glavas, A. and J. Mish (2015) ‘Resources and
Capabilities of Triple Bottom Line Firms: Going Over
Old or Breaking New Ground?’, Journal of Business
Ethics, Vol. 127, No. 3, 623–642.
7 Hussain, N., U. Rigoni and R.P. Orij (2018) ‘Corporate
Governance and Sustainability Performance: Analysis
of Triple Bottom Line Performance’, Journal of
Business Ethics, Vol. 149, No. 2, 411–432.
8 Slaper, T.F. and T.J. Hall (2011) ‘The Triple Bottom
Line: What is It and How Does It Work?’, Indiana
Business Review, Vol. 86, No. 1, 4–8.
9 Tate, W.L. and L. Bals (2018) ‘Achieving Shared triple
bottom line (TBL) Value Creation: Toward a Social
Resource-based View (SRBV) of the Firm’, Journal of
Business Ethics, Vol. 152, No. 3, 803–826.
Finally, Luigi Zingales has written a very interesting paper
criticizing the approach that finance academics sometimes
take towards the subject. In the interests of humility, we
present it here:
13 Zingales, L. (2015) ‘DP10350, Does Finance Benefit
Society?’, CEPR Policy Paper.
Additional Reading
1 See Fang et al. (2009) and O’Hara and Ye (2011).
Endnote

hiL48086_ch02_023-056 23 11/29/19 06:31 PM
CHAPTER
2
Does it matter how a company is structured for managers to make the best financial decisions? Does it matter
who owns a company? Where do ethics come into the decision to invest a firm’s resources and does this have any
relevance for the financial manager? Do managers always follow the wishes of shareholders? Are lenders equally
important to owners of a firm? How should a company manage its relationships with diverse stakeholder groups,
such as employees, customers and suppliers? Are some shareholders more important than others?
All of the above are significant in understanding the various pressures managers face when running a business.
Many finance textbooks assume companies pursue firm value maximization without a discussion of other objectives.
However, there is nothing to stop managers from pursuing their agendas over that of the firm or its owners.
The 2018 collapse of the multinational firm Carillion, with more than 40,000 redundancies, showed that poor
corporate cultures could create existential risks for firms. Despite concepts such as managerial accountability
and transparency receiving much greater emphasis in recent times, there is still a long way to go to ensure that
‘recklessness, hubris and greed’ do not dominate managerial decision-making.
Financial institutions have become more involved in
the strategic decisions of firms, and shareholder activism
is common. Other changes have also affected the way
companies are managed and run. For example, the
influx of money from international investors in China,
India, South America and the Middle East has influenced
corporate cultures in ways we could not have imagined
10 years ago.
Unfortunately, even with improvements in corporate
governance, scandals like the Carillion case occur with
worrying frequency. What made Carillion so disturbing
was a size of failure not seen since the 2008 financial crisis.
The poor managerial behaviours were the same in 2018 as
they had been 10 years earlier. An inquiry carried out by the
British government said that Carillion’s failure was ‘a story
of recklessness, hubris and greed, its business model was a
relentless dash for cash’. The inquiry also said that Carillion
directors misrepresented how well (or just how poorly) the
company was performing.
Why did Carillion exhibit this behaviour, and did
regulators and investors do anything to curtail it? When a
firm is reporting healthy profits, investors react positively
and increase their shareholdings. Stronger demand for the
firm’s shares would result in higher share prices and capital
gains for investors. We must also ask questions about the
Corporate Governance

24
hiL48086_ch02_023-056 24 11/29/19 06:31 PM
Chapter 2 Corporate Governance
power and effectiveness of independent monitors such as Carillion’s non-executive directors and its auditor, KPMG.
Why didn’t they do anything?
In this chapter, we will cover the various issues involved with corporate governance, from the different
organizational structures that can be created, through the multiple ways investors put money into the firm and the
powers of regulators in incentivizing positive management behaviour. The topic is necessarily broad, and so our
purpose is to provide a comprehensive introduction to corporate governance and how it affects financial decision-
making. The interested reader is invited to review the articles presented in the reference list at the end of the
chapter if they wish to investigate the area in more depth.
2.1 The Corporate Firm
A firm is a way of organizing the economic activity of many individuals. A basic problem faced by a firm is how to
raise cash. The corporate form of business – that is, organizing the firm as a corporation – is the standard method
for solving problems encountered in raising large amounts of cash. However, businesses can take other forms. In
this section we consider the three basic legal forms of organizing firms, and we see how firms go about the task of
raising large amounts of money under each form.
The Sole Proprietorship
A sole proprietorship is a business owned by one person. Suppose you decide to start a business to produce
bagpipes. Going into business is simple: you announce to all who will listen, ‘Today, I am going to build
better bagpipes.’
A sole proprietorship is the most common form of business structure in the world. From London to Dar es
Salaam, from Bangkok to Amsterdam, from Oman to Madrid, you will see people doing their business in the streets
and at roadsides. These are all businesses owned by one person. Possibly, you, the reader, may come from a family
that has a sole proprietorship business.
In many countries, you need a business licence to run a sole proprietorship but it is also common for sole
proprietorships to be set up without any paperwork. Once started, a sole proprietorship can hire as many people as
needed and borrow whatever money is required. At year-end, all the profits and losses will belong to the owner and
this becomes his or her annual income.
Here are some factors that are important in considering a sole proprietorship:
• The sole proprietorship is the cheapest business to form. No formal charter, articles or memoranda of
association are required. Very few government regulations must be satisfied for most industries.
• A sole proprietorship pays no corporate income taxes. All profits of the business are taxed as individual income.
• The sole proprietorship has unlimited liability for business debts and obligations. No distinction is made
between personal and business assets. This means that if a sole proprietorship owes money to creditors and
cannot pay, the owner’s own possessions must be used to pay off the firm’s debts.
• The life of the sole proprietorship is limited by the life of the owner of the firm.
• Because the only money invested in the firm is the proprietor’s, the cash that can be raised by the sole proprietor
is limited to the proprietor’s own personal wealth.
Example 2.1
JonMac Builders
JonMac Builders is a building contractor, owned as a sole proprietorship by John McAfee. Started in 1987
by a fresh-looking 24 year old with his own savings, John leased a small van for £200, used his own tools
and began working on jobs garnered through word of mouth. The firm still exists as a sole proprietorship
and now has four employees, all family members. All income from the company’s activities is taxed at John’s
income tax rate and the firm’s liabilities are secured by John’s personal assets, such as his house.

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Title: The Saintsbury Affair
Author: Lily A. Long
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Language: English
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(Harvard College Library)
The Saintsbury Affair

As I came up, emptied a chatelaine purse upon Barney's tray.
FRONTISPIECE. See page 23.
THE SAINTSBURY AFFAIR
By

ROMAN DOUBLEDAY
Author of "The Hemlock Avenue Mystery,"
"The Red House on Rowan Street," etc.
With Illustrations by
J. V. McFall
BOSTON
LITTLE, BROWN AND COMPANY
1912
Copyright, 1911, 1912,
By Little, Brown , and Company .
All rights reserved

Published, February, 1912
Electrotyped and Printed by
THE COLONIAL PRESS
C. B. Simonds & Co., Boston, U.S.A.
CONTENTS
CHAPTER
I. The Beginning of the Tangle .
II. Two Lovely Ladies .
III. The Unexpected Happens.
IV. Crossed Wires.
V.
Bertillon Methods and Some
Others .
VI. The Frat Supper .

VII. Chiefly Gossip .
VIII. Some of Jean's Ways.
IX. A Gleam of Light.
X. Ways That Are Dark.
XI. The Simmering Samovar .
XII. On the Trail of Diavolo.
XIII. The Samovar Explodes .
XIV. Tangled Heart-Strings .
XV. The Outlaw .
XVI. The Gift-Bond.
XVII. A Voice from the Past.
XVIII.A Rescue .
XIX. Cards on the Table.
XX. The Ultimate Discovery.
Illustrations
As I came up, his listener emptied
a chatelaine purse upon Barney 's
tray
Frontispiece

"He was Diavolo 's partner ," he
said vehemently
Page 137
"I believe it," said a voice that
started us all
Page 186
There lay a pathetic little heap on
the daghestan rug on my floor
Page 290
The
Saintsbury Affair
CHAPTER I
THE BEGINNING OF THE TANGLE
Let me see where the story begins. Perhaps I can date it from the
telephone invitation to dinner which I received one Monday from my
dear and kind friend Mrs. Whyte.

"And see that you are just as clever and agreeable as your naturally
morose nature will permit," she said saucily. "I have a charming
young lady here as my guest, and I want you to make a good
impression."
"Another?" I gasped. "So soon?"
"I don't wonder that your voice is choked with surprise and
gratitude," she retorted, and I could see with my mind's eye how her
eyebrows went up. "You don't deserve it,--I'll admit that freely. But I
am of a forgiving nature."
"You are so near to being an angel," I interrupted, "that it gives me
genuine pleasure to suffer martyrdom at your behest. I welcome the
opportunity to show you how devotedly I am your slave. Who is the
young lady this time?"
"Miss Katherine Thurston. Now if you would only talk in that way to
her,--"
"I won't," I said hastily. "At least, not until her hair is as white as
yours is,--it can never be as lovely. But for your sake I will undertake
to be as witty and amiable and generally delightful as I think it safe
to be, having due regard for the young lady's peace of mind,--." I
rang off just in time to escape the "You conceited puppy!" which I
knew was panting to get on the wire. Mrs. Whyte's speech was at
times that of an older generation.
So that was how I came to go to Mrs. Whyte's dinner that
memorable Monday evening, and to meet Katherine Thurston.
But now that I come to look at it in this historical way, I see that I
shall have to begin a little farther back, or you won't understand the
significance of what took place that night.
I already had another engagement for that evening, but I thought I
could fit the two appointments in, by getting away from Mrs.

Whyte's by ten o'clock. Under the circumstances she would forgive
an early departure. My other engagement was of a peculiar and
unescapable nature. It had come about in this way.
There was a man in our town who had always interested me to an
unusual degree, though my personal acquaintance with him was of
the slightest. He was an architect, Kenneth Clyde by name, and he
had done some of the best public buildings in the State. He had a
wide circle of friends and acquaintances, and was related to half a
dozen of the "Old families" of the town. (I am comparatively new
myself. But I soon saw that Clyde belonged to the inner circle Of
Saintsbury.) And yet, with all his professional success and his social
privileges, there was something about the man that expressed an
excessive humility. It was not diffidence or shyness,--he had all the
self-possession that goes with good breeding. But he held himself
back from claiming public credit or accepting any public place,
though I knew that more than once it had been pressed upon him in
a way that made it difficult for him to evade it. He persistently kept
himself in the background, until his desire to remain inconspicuous
almost became conspicuous in turn. He was the man, for instance,
who did all the work connected with the organization of our Boat
Club, but he refused to accept any Office. He was always ready to
lend a hand with any public enterprise that needed pushing, but his
name never figured on the committees that appeared in the
newspapers. And yet, if physiognomy counts for anything, he was
not born to take a back seat. He was approaching forty at this time,
and in spite of his consistent modesty, he was one of the best known
men in Saintsbury.
As I say, he had always interested me as a man out of the ordinary,
and when he walked into my law office a few days before that
telephone call from Mrs. Whyte, I was uncommonly pleased at the
idea that he should have come to me for legal advice when he might
have had anything he wanted from the older lawyers in town whom
he had known all his life. I guessed at a glance that it was

professional advice he wanted, from the curiously tense look that
underlay his surface coolness.
"I have come to you, Mr. Hilton," he said directly, "partly because
you are enough of a stranger here to regard me and my perplexities
in an impersonal manner, and so make it easier for me to discuss
them."
"Yes," I said encouragingly. He had hesitated after his last words as
though he found it hard to really open up the subject matter.
"But that is only a part of my reason for asking you to consider my
case," he went on with a certain repressed intensity. "I believe, from
what I have seen of you, that you have both physical and moral
courage, and that you will look at the matter as a man, as well as a
lawyer."
I nodded, not caring to commit myself until I understood better
what he meant.
"First, read this letter," he said, and laid before me a crumpled sheet
which he had evidently been clutching in his hand inside of his coat
pocket.
It was a half sheet of ruled legal cap, and in the center was written,
in a bold, well-formed hand,----
"I need $500. You may bring it to my office Monday night at ten. No
fooling on either side, you understand."
"Blackmail!" I said.

Clyde nodded. "What is the best way of dealing with a blackmailer?"
he asked, looking at me steadily.
"That may depend on circumstances," I said evasively. I felt that, as
he had suggested, he was trying to appeal to my sympathies as a
man rather than to my judgment as a lawyer.
"I heard of one case," he said casually, "where a prominent man was
approached by a blackmailer who had discovered some
compromising secret, and he simply told the fellow that if he gave
the story to the papers, as he threatened to do, he would shoot him
and take the consequences, since life wouldn't be worth living in any
event, if that story came out. I confess that course appeals to my
common-sense. It is so conclusive."
"I infer, however, that you didn't take that tone with this fellow when
he first approached you," I said, touching the paper on my desk.
"This is not his first demand."
"No. The first time that it came, I was paralyzed, in a manner. I had
been dreading something of that sort,--discovery, I mean,--for years.
I had gone softly, to avoid notice, I had only half lived my life, I had
felt each day to be a reprieve. Then he came,--and asked money for
keeping my secret. It seemed a very easy way of escape. In a way,
it made me feel safer than before. I knew now where the danger
was, and how to keep it down. It was only a matter of money. I
paid, and felt almost cheerful. But he came again, and again. He has
grown insolent." He drew his brows together sternly as he looked at
the written threat which lay before us. He did not look like a man
afraid.
"Can you tell me the whole situation?" I asked. "If I know all the
facts, I can judge better,--and you know that you speak in
professional confidence."
"I want to tell you," he said. "I--he knew--the fact is, I was
sentenced to be hanged for a murder some fifteen years ago in

Texas. The sentence is still suspended over me. I escaped before it
was executed."
A lawyer learns not to be surprised at any confession, for the depths
of human nature which are opened to his professional eye are so
amazing that he becomes accustomed to strange things, but I admit
that I was staggered at my client's confidence. I picked up and
folded and refolded the paper before I could speak quite casually.
"And no one knows that fact? Your name--?"
"I was known by another name at the time,--an assumed name. I'll
tell you the whole story. But one word first,--I was and am
innocent."
He looked at me squarely but appealingly as he spoke, and suddenly
I saw what the burden was which he had been carrying for fifteen
years,--nearly half his life.
"I believe you," I said, and unconsciously I held out my hand. He
gripped it as a drowning man clutches a spar, and a dull flush swept
over his face. His hand was trembling visibly as he finally drew it
away, but he tried to speak lightly.
"That's what I couldn't induce the judge or jury to do," he said. "Let
me tell you how it all came about. It was in August of 1895. I had
graduated in June,--I was twenty-three,--and before settling down to
my new profession I went off on a vacation trip with a fellow I had
come to know pretty well at the University during my last year there.
He was not the sort of a friend I cared to introduce to my family, but
there are worse fellows than poor Henley was. He was merely rather
wild and lawless, with an instinct for gambling which grew upon him.
We went off avowedly for a lark,--to see life, Henley put it. I knew
his tastes well enough to guess beforehand that the society to which
he would introduce me would not be creditable. The Clydes are as
well known in this State as Bunker Hill is in Boston, and I felt a

responsibility toward the name. So I insisted that on our travels I
should be Tom Johnson."
"I see. Then when the trouble came you were known by that name
instead of your own?"
"Yes. That's how I was able to come back here and to go on living
my natural life."
"That was fortunate. That situation was much easier to manage than
if it had been the other way around."
Clyde had picked up a paper knife and was examining it with absent
attention, and instead of answering my remark directly he looked up
with a frank smile.
"You can't imagine what it means to me to be able to talk this over
with you," he said. "All these years I have carried it--here. Why, it is
like breathing after being half suffocated."
"I understand."
"You want to know the details, though," he went on more gravely.
"We were together for several weeks, going from one city to another.
Henley had a special faculty for striking up acquaintance with
picturesque rascals, and for a time I found it very interesting as well
as novel. It was a side of life I had never before come close to. But
gradually I couldn't help seeing that Henley was helping out an
uncommon knack with the cards by the tricks of a sharper. We
quarrelled over it more than once, and things began to grow
uncomfortable. The old irresponsible comradeship was chilled,
though I didn't yet feel like cutting loose from him. One night we
had been playing cards in a saloon in Houston, Texas,--Henley and I
and two men we had picked up. They were rough and ready
Westerners, and a sort to stand no fooling. We had all been drinking
a little, but not enough to lose our heads. I saw Henley make a
misdeal and I told him so. He was furious, and we all but came to

blows in the quarrel that followed. I left him with the others and
went off by myself. That evening had finally sickened me with the
swine's husks I had been eating, and I suddenly determined to quit
it then and there and get back to my own life, my own name, and
my own people. I walked down to the station, found that a train for
the north was just about to pull out, and jumped aboard. I was an
hour away from Houston before I remembered something that made
me change my hasty plan. I had left my bag in the room at the
hotel, and though I didn't care about the clothes or the other things,
there was-- Well, there is no reason why I should not tell you. There
was a girl's picture in an inside compartment, and some letters, and
I couldn't leave them to chance. I had simply forgotten all about that
matter in my angry passion, but the thought now was like a dash of
cold water, bringing me to my senses. I got out of the train at the
next stop,--a place called Lester. It was just midnight. I found that
the first train I could catch to take me back to Houston would go
through at five in the morning, and I walked up and down that
deserted platform,--for even the station agent went off to sleep after
the midnight train went through,--for five mortal hours. I had time to
think things over, and to realize that I had been playing with pitch as
no Clyde had a right to."
He paused for an instant, as though he were living the moment over,
but I did not speak. I wanted him to tell the story in his own way.
"I caught the five o'clock train back and was in Houston soon after
six. I went at once to the hotel and to my room. Henley's room
communicated with mine. The door between them was ajar, and I
pushed it open to speak to him. He was leaning over the table, on
which cards were scattered about, and he was quite dead, from a
knife thrust between the shoulders."
Clyde had been speaking in a composed manner, like one telling an
entirely impersonal tale, but at this point he paused and a look of
embarrassment clouded his face.

"I find it hard to explain to you or to myself why I did so foolish a
thing as I did next, but I was rather shaken up by weeks of
dissipation, and the racketing of the night before and my excited,
sleepless night had thrown me off my balance. When I saw Henley
dead over the cards, I realized in a flash how bad it would look for
me after my row with him in the saloon the night before. I jumped
back into my own room and began stuffing my things into my bag
pell-mell to make my escape."
"The worst thing you could have done."
"Of course. And it proved so. I had left my room-door ajar, a
sweeper in the halls saw my mad haste, and it made him suspicious.
When I stepped out of my room, the proprietor stopped me. Of
course the whole thing was uncovered. I was arrested, tried for
murder, and, as I told you, sentenced to be hanged." He finished
grimly. His manner was studiedly unemotional.
"And yet you had a perfect alibi, if you could prove it."
"But I couldn't. No one knew I took that train. The train conductors
were called, but neither of them remembered me. The station agent
at Lester, with whom I had had some conversation about the first
train back, was killed by an accident the next day. The fact that I
was out of Houston from eleven until six was something I could not
prove. And it was the one thing that would have saved me."
"But neither could they prove, I take it, that you were in the hotel
that night."
"They tried to. The clerk testified that four men came in shortly after
eleven and went up to Henley's room. One of them was Henley, two
were strangers, and the fourth he had taken for granted to be me.
My lawyer pressed him on that point, of course, and forced him to
admit that he had not noticed particularly, but had assumed that it
was I from the fact that he was with Henley, and because he was
about my size and figure. Drinks had been sent up, and an hour

later two of the men had quietly come down and gone out. Nothing
further had been heard from our room until the sweeper reported in
the morning that he had seen me acting like a man distracted,
through the partly open door. Everything seemed to turn against me.
I was bent on saving my name at any rate, so I could not be entirely
open about my past history, and that prejudiced my case."
"What is your own theory of the affair and of the missing third
man?" I asked.
"I suppose the men whom I had left with Henley in the saloon had
picked up a fourth man for the game and gone to Henley's room. He
probably tried to cheat again, and they were ready for him. One of
them stabbed him. Then the other two waited quietly in the room
while the actual slayer walked out, to make sure that he had a clear
passage, and then they followed after he had had time to disappear.
They were hard-bitted men, but not thugs."
"You were tried and sentenced. How did you get away?"
"After the sentence, and while I was on the way back to jail, I made
my escape. I have always believed that the deputy sheriff who had
me in charge gave me the opportunity intentionally. Certainly he
fired over my head, and made a poor show at guessing my direction.
I think he had doubts of the justice of the verdict and took that way
of reversing the decision of the court, but of course I can never
know."
"Then you came back here? This had been your home before?"
"Yes. It was the way to avoid comment. Kenneth Clyde was well
known here, and nobody in Saintsbury even heard of the trial of one
Tom Johnson in Houston. I have thought it best to go on living my
life just as I should have done in any event. And I have done so,
except that I have never-- But that doesn't matter." From the
expression that swept over his face I guessed what the exception
was. He had never dared to marry.

"Then this man--?" I prompted.
A fleeting smile passed over Clyde's face. He spoke with light
cynicism.
"As you say, then this man. I had almost come to believe that the
past was dead and buried and that I would be justified in forgetting
it myself. Then this man came into my office one day, affected
surprise at seeing me, called me Tom Johnson, and laughed in my
face when I denied the name. I was panic-stricken. I bought his
silence. Of course he came again. As I said at the beginning, I am
tired of the situation." There was a tone in his voice that would have
held a warning for the blackmailer if he had heard it.
"How much does the man know? Do you know whether he has
anything to prove his charges?"
"It seems that he was in the court-house as a spectator during the
trial. He didn't know me at the time, though he might, for he seems
to have been in this neighborhood time and again,--at least in the
State. He is a trouble man himself,--some ten years ago he shot and
killed a State senator here in Saintsbury. He was acquitted, because
he got some friends to swear that Senator Benbow had made a
motion as though to draw a gun, though he was found afterwards to
be unarmed. But popular anger was so aroused against him, he had
to leave the State, and he has drifted down stream ever since,--
pretty far down, I imagine; fairly subterranean at times. All this I
have found out since he forced his acquaintance upon me. I knew
nothing of him before."
"What is his name? Where is he to be found?"
"Alfred Barker. He has an office in the Phœnix Building at present.
Whether he has any legitimate business I do not know. He hangs
out under the shingle of the Western Land and Improvement Co.,
but I have a feeling that that is only a cover."

"A man who has lived that sort of a life is probably vulnerable," I
said cheerfully. "I'll see what I can find out about him. In the
meantime, I, as your attorney, will keep this appointment for you
next Monday evening."
"I thought that would probably be your plan. But now that I have
put it into your hands, I am more than half sorry I did not keep it to
myself and meet him with a revolver."
I shook my head. "For a burnt child, you have curiously little respect
for the fire of the law."
Clyde had risen, and he stood looking at me with an impersonal
sternness that made his eyes hard.
"My life, and, what I value far more, my reputation, my name, are in
that fellow's hands. And he is an unhung murderer,--his life is
already forfeit."
"His time will come," I said hastily. My new client looked altogether
too much as though he were disposed to hurry on the slow-paced
law! I could not encourage such reflections.
Clyde nodded, but with an absent air, as though he were following
his own thoughts rather than my words, and soon took his leave.
When I decided to take up the practice of the law, I had fancied, in
my youthful ignorance, that it was a sort of glorified compound of a
detective story and Gems of Oratory. I had now been at it for some
years, and so far my detective instincts had been chiefly required in
the search for missing authorities in the law books, and my oratorical
gifts had been exercised almost exclusively on delinquent debtors
who didn't want to pay their debts. You can therefore imagine that
Clyde's interview left me pleasantly excited. This was the real thing!
This was the case I long had sought and mourned because I found it
not! Not for worlds would I have missed the opportunity of meeting
his blackmailing correspondent. To face a rascal was no uncommon

experience, unfortunately; but to face so complete and melodramatic
a rascal, and to try to wrest from him some incriminating admission
that would give me a controlling hold on him in my turn,--that was
something that did not come often into the day's work.
Very much to my surprise, I found unexpected light upon the career
of Alfred Barker not farther away than my own office. My first step
was to set my clerk, Adam Fellows, to looking up the court and
newspaper records of Barker's connection with the killing of Senator
Benbow. When I mentioned his name to Fellows I saw by his sudden
change of expression that I had touched some sore chord,--and if
Fellows had an ambition it was to conceal his feelings, moreover.
"You know Barker, then?" I said abruptly.
"Yes," he said, in a very low voice,--and I guessed in what
connection.
I may say here that Fellows was a souvenir of my first trial case and
of an early enthusiasm for humanity. One day, not long after my
admission to the bar, (this was before I came to Saintsbury,) the
court assigned to me the defense of a young fellow who had no
lawyer. He was a clerk in a city office, and was charged with
embezzlement by his employers. The money had gone for race-track
gambling, and he could not deny his guilt; but by bringing out the
facts of his youth and his unfortunate associations, I was able to get
a minimum sentence for him,--the best that could be expected under
the circumstances. When his sentence expired, I was on the lookout
for him, and took him into my own office as a clerk. I had nothing he
could embezzle, for one thing, and the dogged stoicism with which
he had met his fate interested me. Besides, I knew it would be
difficult for him to get work, particularly as he did not have an
engaging personality. I think that in a manner he was grateful, but
he never could forget that he carried the stigma of a convict, and he
imagined that everyone else was remembering it also. This
moodiness had grown upon him instead of wearing off. It used to

make me impatient,--but it is easy enough for one whose withers
are unwrung to be impatient with the galled jade's tendency to
wince.
"What do you know of him?" I asked.
"I know that where he is, there is deviltry, but no one ever catches
him," he said bitterly. "Someone else will pay all right, but the law
doesn't touch him."
"Did he get you into trouble?" I asked bluntly.
"He made me believe he could make a fortune for me. He kept me
going with hopes that the next time, the next time, I would win
enough to square things up. It was his doing, not mine, really. But
he did nothing that the law takes note of." He spoke with unusual
excitement and feeling, and I didn't think any good would come of a
discussion of moral responsibility at that time.
"Well, look up everything possible about that affair when Benbow
was killed," I said. "I want to see if there is anything in that which
would give a hold on him."
"Oh, there won't be," he said, scornfully. "He plays safe. But if there
is any justice in heaven, he will come a cropper some day. Only it
won't be by process of law. No convict stripes for him."
"Let me know as soon as you find the record," I said, turning away.
His bitterness only grew if you gave it opportunity.
I then took occasion to visit the Phœnix Building, in order to locate
the office which I expected to visit the Monday evening following. I
wanted to know my way without wasting time.
As I entered, I noticed a man standing before the building directory
which hung opposite the elevators. He was a tall, athletic fellow, in
clothes that suggested an engineer or fireman. His hat was pulled

down over the upper part of his face, but his powerful, smooth-
shaven jaw showed the peculiar blue tint of very dark men. All this I
saw without consciously looking, but in a moment I had reason to
notice him more closely. The elevator gate opened, and a man
stepped out,--a rather shabby, untidy man, with a keen eye. He
glanced at me carelessly, then his eye fell upon the tall young fellow
before the bulletin board, and he smiled. He stepped up near him.
"Hello! You here?" he said, softly. Then, deliberately, "Are you
married yet?"
The tall fellow turned and lunged toward him, but the other ducked
and slipped adroitly out of his way and ran down to the open
doorway and so into the street. The tall fellow made no attempt to
follow. I think that lurch toward the other had been partly the result
of surprise. But not wholly. He stood now, leaning against the wall,
apparently waiting for the elevator, but I saw that his two fists had
not yet unclenched themselves, and his blue-black jaw was squared
in a way that told of locked teeth. He jerked his hat down farther
over his face as he saw me looking at him, and turned away. He was
breathing hard.
"Can you direct me to Mr. Barker's office?" I asked the elevator man.
"His office is in No. 23, second floor, but he ain't in. That was he that
came down with me and went out."
"Oh, all right. I'll come again," I said, and turned away.
The tall young fellow had gone. Had he, too, come to look up Mr.
Barker? At any rate, I should know Barker when we met again.

CHAPTER II
TWO LOVELY LADIES
I am trying to give you this story as it opened up step by step before
me and around me, not merely as I came to see it afterwards,
looking backward. But of course I shall have to select my scenes.
The story ran sometimes, like a cryptogram, through other events
that seemed at the time to mean something entirely different, and I
also did some living and working and thinking along other lines
through those days. But these matters I eliminate in telling the tale.
They were equally important to me at the time but now they are
forgotten, and the links of the story are the only things that stand
out in my memory.
Mrs. Whyte's dinner was an important link, but before that there
came another incident most significant, as I saw afterwards,--or,
rather, two related incidents.
There was an old beggar on the street-corner right across from my
office for whom I had an especial affection. Of course he made a
show of being a merchant rather than a beggar, by having a tray of
cut flowers in summer and hot peanuts in winter and newspapers at
all seasons, on a tripod arrangement beside him; and the police
knew better than to see if he sometimes held up a wayfarer for more
than the price of his wares. I was fond of him because he was so
imperturbably cheerful, rain or shine, and so picturesque and
resourceful in flattery. He was an old soldier; and one leg that had
danced in days agone, and that had most heedlessly carried him to
the firing line in half a dozen battles of our own Civil War was buried
at Gettysburg. Barney seemed to regard this as a peculiarly
fortunate circumstance, since it had made it possible for him to use
a crutch. That crutch was a rare and wonderful possession,
according to Barney. Hearing him dilate on its convenience and

comfortableness, you might almost come to believe that he meant it
all.
Well, you'll understand from this that I not only liked but respected
Barney, and I usually stopped to get a flower when I passed his
stand on leaving my office. On that Monday,--that eventful and ever-
to-be-remembered Monday,--I saw as I approached that Barney was
holding forth in the spell-binding manner I knew, to another
listener,--a young fellow, I thought at first. But as I came up, his
listener emptied a chatelaine purse upon Barney's tray, and my
surprised glance from the jingling shower of silver to the face of the
impetuous donor showed me that it was a young girl,--a gallant,
boyish-faced girl, whose eyes were shining into Barney's with the
enthusiasm of a hero-worshipper.
"I'll never forget that,--never!" she cried, in a voice thrilled with
emotion. "It was great." And on the instant she turned on her heel
like a boy and marched off down the street.
I looked at Barney with suspended disapproval, and for once, to do
him credit, he looked abashed.
"Faith, and who'd think the chit would have all that money about her
and her that reckless in shcattering it about!" he exclaimed. Then,
recovering himself, he thrust the coins carelessly in his pocket
(perhaps to get them out of my accusing sight) and ran on,
confidentially,--
"It's the Lord's own providince that she turned it over to me, instead
of carrying it about to the shops where temptation besets a young
girl on all sides. It's too full their pretty heads are of follolls and
such, for it's light-headed they are at that age, and that's the Lord's
truth."
"You worked on her sympathies," I said sternly. "You saw she was a
warm-hearted young girl, and you played up to her. You made
yourself out a hero, you rascal."

"You're the keen gentleman," said Barney admiringly. "Sure and
you'd make a good priest, saving your good looks, for you'd see the
confession in the heart before a poor lying penitent had time to think
of a saving twist to give it that might look like the truth and save
him a penance."
"Never mind me and my remarkable qualities," I said severely.
"What were you telling that girl?"
Barney bent over his flowers to shift the shades which protected
them from the sun, but after a moment's hesitation he answered,
without looking up.
"She has the way with her, that bit! When she looked me in the eye
and says 'Tell me what I ask,' I knew my commanding officer, and
it's not Barney that risks a court-martial for disobedience! No, sir! If
she didn't keep at me to tell her how I lost my leg, now! Your honor
couldn't have held out agin her, not to be the man you are."
I knew the story of that lost leg, and how shy Barney was of
retailing that heroic bit of his history, and I wondered less at the
girl's emotion than at her success in drawing the hidden tale from
him. He didn't tell it to many. While I marvelled he looked up with
the twinkle I couldn't help liking.
"She didn't give me time to tell her that that bit story wasn't the kind
you pay to hear, but it would maybe have chilled the warm heart of
her to have me push her silver back, and I wouldn't do that even if I
had to keep the money to save her feelin's, the darlin'."
"Awfully hard on you, I know," I said, letting us both down with the
help of a little irony. "Where's my rosebud, you rascal?"
He lifted a slender vase from the covered box beneath his table and
brought out the flower he had reserved for me. It was a creamy
white bud, deepening into a richer shade that hinted at stores of

gold at the sealed-up heart. As he held it out silently, something in
his whimsical face told me his thought.
"Yes, you are right," I said casually, as I took the flower. "It does
look like her."
Barney's eyes wrinkled appreciatively. "There was a mistake
somewhere, sir, when you were born outside of Eire. But you got it
straight this time."
I went home to dress for Mrs. Whyte's dinner, and when I was ready
I slipped into my pocket, to show my hostess, a little locket which
held a miniature of my mother. Mrs. Whyte and my mother had been
schoolmates,--that was why she was so much kinder to me than I
could ever have deserved on my own account,--and I knew she
would like to see the picture. I opened the case to look at it myself
(my mother is still living, thank Heaven, and unchangeably young)
and I was struck with the youthful modernity of it. Perhaps it was
because the old style of dressing the hair had come back that it
looked so of the present generation rather than of the past. It had
been painted for my father in the days of their courtship, and on his
death I had begged for the portrait, though my mother had refused
to let me have the old case he carried. I had therefore spent some
time and care in selecting a new case and had decided finally on one
embellished with emeralds set in the form of a heart. I thought it
symbolical of my dear mother's young-heartedness, but I found out
afterwards that she especially objected to emeralds! Such are the
hazards run by a mere man when he tries to deal with the Greater
Mysteries. I have dwelt on this locket because it played an important
part in after affairs,--and a very different part from what I designed
for it when I slipped it into my pocket to show it to Mrs. Whyte.
It is a good two miles from my lodgings to Mrs. Whyte's, but I was
early and I wanted exercise, so I walked. It was within a few
minutes of seven when I came to her highly respectable street. As I
turned the corner of her block my attention was caught by the sight

of a young girl in excited colloquy with the driver of a cab, which
stood before the house adjoining Mrs. Whyte's. I think I should have
looked for a chance to be of service in any case, but when I saw, as
I did at once, that the girl with so gallant a bearing was the same
girl who had impulsively emptied her purse among Barney's flowers,
and that the driver seemed to be bullying her, I felt that it was very
distinctly my affair.
"But I tell you that I have no money," she was saying with dramatic
emphasis, "and there is nobody at home, and I can't get in, and if
you will come to-morrow--"
"Gammon," the man interrupted roughly. (She had not chosen her
jehu with discrimination.) "You can't work that game on me--"
"I can give you my watch as a pledge," she said eagerly.
By that time I was near enough to interfere. (I always was lucky.
Here I was ready if necessary to go through fire and water--a certain
amount of each, at any rate--to get a better knowledge of the frank-
hearted girl whose enthusiasm had so touched me in the afternoon,
and all that Fate asked was a cabman's fare and a few stern words
delivered with an air! Fate is no bargainer worthy the name.)
"It was most awfully good of you to come to the rescue," said the
girl, in the direct and gallant manner that I felt was a part of herself.
"I was just beginning to wonder what under the sun I should do.
You see, I--I spent all my money down town, and I took a cab up,
thinking I'd get the money here to pay the man, and now I find the
house locked up and not a soul at home,--and me on the doorstep
like a charity child without a penny!"
"That, was unlucky, certainly," I said. "I am more than glad that I
could be of service. But now that the cabman is disposed of, how are
you going to get into the house?"
She turned and looked at the house dubiously.

"I--don't--know. Unless I find an open window,--just a teeny one
would be big enough. But Gene is very particular about my not being
undignified. I think," she added, with a delightfully confidential
smile, "that Gene would rather have me be dignified and hungry
than undignified and comfortable. Under those circumstances would
you advise me to hunt for an open window?"
"It's a delicate point to decide. Who is Gene? That might have some
bearing on the question."
She looked surprised at my ignorance.
"Oh, he's my brother,--my twin. He lives in that house. So does Mr.
Ellison. He's my guardian. But it surely looks as though nobody were
at home!"
"Don't you live there, too?" I demanded in surprise.
"Oh, no. I'm at Miss Elwood's school at Dunstan. I don't mean I am
there this minute, because of course I am here; but I'm supposed to
be there. I just came down to surprise Gene because it is our
birthday--you see we have only one between us--and now I can't get
in!" And she threw out her hands dramatically.
(The worst part of trying to reproduce Miss Benbow's language
accurately is that it sounds silly in type, but it never sounded silly
when she was looking at you with her big, ambiguous eyes, and you
were waiting, always in affectionate amusement, for the next
absurdity. I sometimes wondered whether that frank air of hers was
nature's disguise for a maid's subtlety, or whether her subtle
witchery lay really in the fact that she was so transparent that you
could see her thoughts breathe.)
"I have always heard that it was wise," I said, with a grandfatherly
air, "to save out at least a street-car fare before flinging all one's
broad gold pieces to the beggar in the street."

She looked a little startled, then swiftly comprehending. I knew she
must have bit her inner lip to keep from smiling, but she spoke
sedately.
"A street-car fare wouldn't help me to get into the house, would it?
And that's the trouble now. Though of course if I had had a street-
car fare I shouldn't have had any trouble with the cabman and you
wouldn't have had to come to the rescue, so another time I'll be
careful and remember--"
"Heavens, and they say a woman isn't logical!" I cried. "I hadn't
thought out the sequence. I'm mighty glad that you were not wise
when you flung away your purse since I was going to so profit by it.
But now the question is, what are you going to do? I can't go off
and leave you, like a charity child on the doorstep without a penny,
not to mention a dinner. Haven't you any friends in the
neighborhood?"
"Not what you would call friends, exactly, though I suppose they
wouldn't let me starve if they knew. There's a Mrs. Whyte,--"
"Of course! In that red brick house next door. What luck! I'm going
there for dinner."
She glanced at my evening garb and drew down the corners of her
lips comically. "She won't like having a charity child thrust upon her
when she is having a dinner party."
"Oh, that won't make the slightest difference in the world," I
protested eagerly. "Mrs. Whyte is the kindest woman,--and besides,
it's your birthday,--"
She looked at me under her lashes. "You're just a man. You don't
understand," she said, with large tolerance. "See how I am dressed,-
-shirt-waist and linen collar! I didn't prepare for a party. Oh, I believe
Gene is having a birthday party somewhere,--that's why everybody
is away! And me supperless! Isn't it a shame?" She looked at me

with tragedy on her face,--and a delicious consciousness of its
effectiveness in the corner of her eye.
"Why didn't you come home earlier?" I asked, wondering (though it
really wasn't my business) what she had been doing since I saw her
leave Barney.
"You mean after I left that perfectly beautiful old soldier? How did
you know about him and me, by the way?"
"Oh, I'm a friend of his, too. I happened to be quite near. My name,
by the way, is Robert Hilton. I'll be much obliged if you'll remember
it."
"Why, of course I'll remember. My name is Jean Benbow, and it is so
nearly the same as Gene's because we are twins, but really his name
is Eugene, and when he does something to make himself famous I
suppose they will call him that. Well, after the soldier, and I wish I
had had fifty times as much to give him, though that makes a sum
that I simply can't do in my head,--not that it matters, because he
didn't get it,--I remembered that I was going to get a birthday
present for Gene, but I didn't remember, you see, that I hadn't any
money. I don't think money is a nice thing to have on your mind,
anyway. So I went to a bookstore and looked at some books and the
first thing I knew they were closing up, and I hadn't yet decided.
Have you ever noticed how time just flies when you are doing
something you are interested in, and then if it is lessons or the day
before a holiday or anything like that, how it literally drags?"
"I have noticed that phenomenon,--and Time is giving an example of
flying this very minute. Really, I think you'd better come over to Mrs.
Whyte's--"
"Oh, there's Minnie coming back now! She'll let me in," Miss Benbow
interrupted me. A bareheaded young woman, from her dress
evidently a housemaid, was hurriedly crossing the service court

toward the Ellison back door, and without further words Miss
Benbow started toward her across the lawn.
"Wave your hand if it is all right. I'll wait," I called after her.
The maid halted when she saw that fleet figure crossing the grass,
they conferred a moment, then Miss Benbow waved a decisive hand
to me, and they disappeared together in the rear of the house.
Something ran through my brain about the ceasing of exquisite
music,--I wished I could remember the exact words, because they
seemed so to fit the occasion. Miss Benbow certainly had a way of
keeping your attention on the qui vive.
Even after I had made my bow before Mrs. Whyte and had been
presented to the beautiful Miss Thurston, I had intervals of absent-
mindedness during which I wondered what Miss Benbow could be
doing all alone in that big house. This was all the more
complimentary to her memory, because Miss Thurston was a young
woman to occupy the whole of any man's attention under ordinary
or even moderately extraordinary circumstances. I had to admit that
this time Mrs. Whyte had played a masterstroke. And that does not
spell overweening conceit on my part, either! It required no special
astuteness to read the concealed cryptogram in Mrs. Whyte's plans.
I had had experience! So, unless I made a wild guess, had Miss
Thurston. There could be no other explanation, consistent with my
self-respect, of the cold dignity, the pointed iciness, that marked her
manner toward me. She was a stately young woman by nature, but
mere stateliness does not lead a young woman to fling out signs of
"Keep off the grass" when a young man is introduced. I guessed at
once that she had experienced Mrs. Whyte's friendly interest in the
same (occasionally embarrassing) way that I had, and that she
wished me to understand from the beginning that she was not to be
regarded as particeps criminis in any schemes which Mrs. Whyte
might be entertaining regarding my life, liberty, and happiness. Her
intent was so clear that it amused as well as piqued me, and I set
myself to being as good company as my limited gifts made possible.

I knew that it was good policy, in such a case, to give Mrs. Whyte no
reason for shaking her lovely locks at me afterwards; but partly I
exerted myself to do my prettiest because Miss Thurston attracted
me to an extraordinary degree. That does not indicate any special
susceptibility on my part, either. She was (and is, I am happy to
say,) one of the most charming women I have ever met. No, that is
not the word. She made no effort to charm. She merely was. She
wrapped herself in a veil of aloofness, sweet and cool, and looked
out at you with a wistful, absent air that made you long to go into
that chill chamber where she dwelt and kiss some warmth and
tenderness upon her lips and a flash into her dreamy eye. I'm afraid
that, in spite of my disclaimer, you will think me susceptible. Well,
you may, then. I admit that I determined, within five minutes after
my first bow, that I was not going to lose the advantage of knowing
Miss Thurston, or permit her to forget me. (I cemented this
determination before the evening was over with an act which had
consequences I could never have anticipated.)
I am not going to dwell in detail upon the incidents of that dinner,
because I want to get to the extraordinary events that followed it;
but there were one or two matters that I must mention, because of
the bearing they had on after events.
"I hear," said Mr. Whyte at a pause in the chatter, "that they are
talking of nominating Clyde for mayor."
I happened to be looking at Miss Thurston when he spoke, and I
saw a sort of breathless look come over her, as though every nerve
were listening.
"Do you think he would take it?" Mrs. Whyte asked.
"That's the rub, confound the man. I don't understand Clyde. If ever
there was a man fitted for public life, it is he. His father was
governor, his grandfather was a United States senator, and he has all
the qualities and faculties that made them distinguished. Yet here he

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Corporate Finance 4th Edition 4th David Hillier Stephen Ross Randolph Westerfield Jeffrey Jaffe Bradford Jordan

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Corporate Finance 4th Edition 4th David Hillier Stephen Ross Randolph Westerfield Jeffrey Jaffe Bradford Jordan

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7-10. STP + Branding and Product & Services Strategies.pptx