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Financial Management: Theory and Practice: 2017, 2014 Cengage Learning®
Fifteenth Edition WCN: 02-200-203
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Brief Contents
© EpicStockMedia/Shutterstock.com
Preface xix
PART 1 THE COMPANY AND ITS PART 3 STOCKS AND OPTIONS 239
ENVIRONMENT 1
CHAPTER 6 Risk and Return 241
CHAPTER 1 An Overview of Financial Web Extensions 6A: Continuous Probability
Management and the Financial Distributions
Environment 3
Web Extensions 6B: Estimating Beta with a Financial
1A: An Overview of Derivatives
Web Extensions Calculator
CHAPTER 2 Financial Statements, Cash Flow,
CHAPTER 7 Corporate Valuation and Stock
and Taxes 57
Valuation 293
Web Extension 2A: The Federal Income Tax System for
Web Extension 7A: Derivation of Valuation
Individuals
Equations
CHAPTER 3 Analysis of Financial
CHAPTER 8 Financial Options and Applications
Statements 101
in Corporate Finance 343
PART 2 FIXED INCOME SECURITIES 137 PART 4 PROJECTS AND THEIR

CHAPTER 4 Time Value of Money 139 VALUATION 373
Web Extensions 4A: The Tabular Approach CHAPTER 9 The Cost of Capital 375
4B: Derivation of Annuity Formulas Web Extension 9A: The Required Return Assuming
4C: Continuous Compounding Nonconstant Dividends and Stock
Repurchases
CHAPTER 5 Bonds, Bond Valuation, and
Interest Rates 193 CHAPTER 10 The Basics of Capital Budgeting:
Evaluating Cash Flows 413
Web Extensions 5A: A Closer Look at Zero Coupon
and Other OID Bonds Web Extension 10A: The Accounting Rate of Return
(ARR)
Web Extensions 5B: A Closer Look at TIPS: Treasury
Inflation-Protected Securities CHAPTER 11 Cash Flow Estimation and Risk
Web Extensions 5C: A Closer Look at Bond Risk: Analysis 453
Duration Web Extension 11A: Certainty Equivalents and Risk-
Adjusted Discount Rates
Web Extensions 5D: The Pure Expectations Theory and
Estimation of Forward Rates
vi Brief Contents
CHAPTER 20 Hybrid Financing: Preferred

PART 5 CORPORATE VALUATION AND Stock, Warrants, and
GOVERNANCE 501 Convertibles 819
CHAPTER 12 Corporate Valuation and Financial Web Extensions 20A: Calling Convertible Issues
Planning 503
CHAPTER 13 Corporate Governance 541
PART 9 STRATEGIC FINANCE IN
A DYNAMIC ENVIRONMENT 847
PART 6 CASH DISTRIBUTIONS AND CHAPTER 21 Dynamic Capital Structures and
CAPITAL STRUCTURE 563 Corporate Valuation 849
CHAPTER 14 Distributions to Shareholders: Web Extensions 21A: Projecting Consistent Debt and
Dividends and Repurchases 565 Interest Expenses
CHAPTER 22 Mergers and Corporate
CHAPTER 15 Capital Structure Decisions 607
Control 873
Web Extension 15A: Degree of Leverage
CHAPTER 23 Enterprise Risk
Web Extension 15B: Capital Structure Theory: Management 911
Arbitrage Proofs of the Modigliani-
CHAPTER 24 Bankruptcy, Reorganization, and
Miller Theorems
Liquidation 947
Web Extensions 24A: Multiple Discriminant
PART 7 MANAGING GLOBAL Analysis
OPERATIONS 653
PART 10 SPECIAL TOPICS 979
CHAPTER 16 Supply Chains and Working
Capital Management 655 CHAPTER 25 Portfolio Theory and Asset Pricing
Web Extension 16A: Secured Short-Term Financing Models 981
CHAPTER 17 Multinational Financial CHAPTER 26 Real Options 1015
Management 705 Web Extensions 26A: The Abandonment Real
Option
PART 8 TACTICAL FINANCING Web Extensions 26B: Risk-Neutral Valuation

DECISIONS 749
CHAPTER 18 Public and Private Financing: Initial APPENDIXES
Offerings, Seasoned Offerings, and
Investment Banks 751 APPENDIX A Solutions to Self-Test Problems 1041
APPENDIX B Answers to End-of-Chapter
Web Extensions 18A: Rights Offerings
Problems 1075
CHAPTER 19 Lease Financing 791 APPENDIX C Selected Equations 1085
Web Extensions 19A: Leasing Feedback APPENDIX D Values of the Areas under the
Web Extensions 19B: Percentage Cost Analysis Standard Normal Distribution
Web Extensions 19C: Leveraged Leases Function 1099
Brief Contents vii
GLOSSARY AND INDEXS WEB CHAPTERS:
Glossary 1101 CHAPTER 27 Providing and Obtaining Credit

Name Index 1149 CHAPTER 28 Advanced Issues in Cash
Subject Index 1153 Management and Inventory
Control
CHAPTER 29 Pension Plan Management
CHAPTER 30 Financial Management in Not-
for-Profit Businesses
Contents
© Panda3800/Shutterstock.com
Preface xix CHAPTER 2

Financial Statements, Cash Flow,
and Taxes 57
PART 1 THE COMPANY AND ITS Box: Intrinsic Value, Free Cash Flow, and
ENVIRONMENT 1 Financial Statements 58
Financial Statements and Reports 58
CHAPTER 1
The Balance Sheet 59
An Overview of Financial
Box: The Great Recession of 2007: Let s Play
Management and the Financial
Hide-and-Seek! 62
Environment 3
The Income Statement 62
The Five-Minute MBA 4
Statement of Stockholders’ Equity 65
Finance from 40,000 Feet Above 4
Box: Financial Analysis on the Web 66
The Corporate Life Cycle 5
Statement of Cash Flows 66
Governing a Corporation 10
Box: Filling in the GAAP 69
Box: Be Nice with a B-Corp 12
Net Cash Flow 70
Box: Taxes and Whistleblowing 14
Free Cash Flow: The Cash Flow Available for
An Overview of Financial Markets 14
Distribution to Investors 70
Claims on Future Cash Flows: Types of Financial
Box: Sarbanes-Oxley and Financial Fraud 76
Securities 16
Performance Evaluation 78
Claims on Future Cash Flows: The Required Rate
of Return (The Cost of Money) 20 The Federal Income Tax System 84
The Functions of Financial Institutions 24 Box: When It Comes to Taxes, History Repeats
and Repeals Itself! 86
Financial Markets 29
Summary 89
Overview of the U.S. Stock Markets 33
Web Extension
Trading in the Modern Stock Markets 34
2A: The Federal Income Tax System for
Box: Measuring the Market 42 Individuals
Finance and the Great Recession of 2007 42
Box: Anatomy of a Toxic Asset 50 CHAPTER 3
The Big Picture 52 Analysis of Financial Statements 101
e-Resources 53 Box: Intrinsic Value and Analysis of Financial
Summary 53 Statements 102
Web Extensions Financial Analysis 102
1A: An Overview of Derivatives Liquidity Ratios 104
ix
x Contents
Asset Management Ratios 106 Finding Annuity Payments, Periods, and Interest
Debt Management Ratios 109 Rates 162
Box: The Great Recession of 2007: The Price Is Box: Variable Annuities: Good or Bad? 163
Right! (Or Wrong!) 110 Box: Using the Internet for Personal Financial
Profitability Ratios 114 Planning 164
Box: The World Might Be Flat, but Global Uneven, or Irregular, Cash Flows 165
Accounting Is Bumpy! The Case of IFRS versus Future Value of an Uneven Cash Flow Stream 168
FASB 115 Solving for I with Irregular Cash Flows 169
Market Value Ratios 116 Semiannual and Other Compounding Periods 170
Trend Analysis, Common Size Analysis, and Box: Truth in Lending: What Loans Really Cost 173
Percentage Change Analysis 120 Fractional Time Periods 174
Tying the Ratios Together: The DuPont Amortized Loans 175
Equation 123
Box: What You Know Is What You Get: Not in
Comparative Ratios and Benchmarking 124 Payday Lending 176
Uses and Limitations of Ratio Analysis 125 Growing Annuities 178
Box: Ratio Analysis on the Web 126
Box: The Great Recession of 2007: An Accident
Looking Beyond the Numbers 126 Waiting to Happen: Option Reset Adjustable Rate
Summary 127 Mortgages 179
Summary 181
Web Extensions
PART 2 FIXED INCOME SECURITIES 137 4A: The Tabular Approach
4B: Derivation of Annuity Formulas
CHAPTER 4 4C: Continuous Compounding
Time Value of Money 139
Box: Corporate Valuation and the Time Value of
Money 140 CHAPTER 5
Bonds, Bond Valuation, and Interest
Time Lines 140
Rates 193
Future Values 141
Box: Intrinsic Value and the Cost of Debt 194
Box: Hints on Using Financial Calculators 145
Who Issues Bonds? 194
Present Values 149
Box: Betting With or Against the U.S.
Box: It s a Matter of Trust 150 Government: The Case of Treasury Bond Credit
Finding the Interest Rate, I 153 Default Swaps 196
Finding the Number of Years, N 154 Key Characteristics of Bonds 196
Perpetuities 154 Bond Valuation 200
Annuities 155 Changes in Bond Values Over Time 205
Future Value of an Ordinary Annuity 156 Box: Chocolate Bonds 208
Box: The Power of Compound Interest 159 Bonds with Semiannual Coupons 208
Future Value of an Annuity Due 159 Bond Yields 209
Present Value of Ordinary Annuities and Annuities The Pre-Tax Cost of Debt: Determinants of Market
Due 160 Interest Rates 212
Contents xi
The Risk-Free Interest Rate: Nominal (rRF) and Box: The Benefits of Diversifying Overseas 263
Real (r *) 213 The Relationship between Risk and Return in the
The Inflation Premium (IP) 214 Capital Asset Pricing Model 263
The Maturity Risk Premium (MRP) 216 Box: Another Kind of Risk: The Bernie Madoff
The Default Risk Premium (DRP) 219 Story 271
Box: Insuring with Credit Default Swaps: Let the The Efficient Markets Hypothesis 272
Buyer Beware! 221 The Fama-French Three-Factor Model 276
Box: The Great Recession of 2007: U.S. Treasury Behavioral Finance 280
Bonds Downgraded! 223 The CAPM and Market Efficiency: Implications for
Box: The Few, the Proud, the AAA-Rated Corporate Managers and Investors 282
Companies! 225 Summary 283
The Liquidity Premium (LP) 225 Web Extensions
Box: The Great Recession of 2007: Fear and 6A: Continuous Probability Distributions
Rationality 226
6B: Estimating Beta with a Financial Calculator
The Term Structure of Interest Rates 226
Financing with Junk Bonds 228
Bankruptcy and Reorganization 228 CHAPTER 7
Corporate Valuation and Stock
Summary 229
Valuation 293
Web Extensions
Box: Corporate Valuation and Stock Prices 294
5A: A Closer Look at Zero Coupon and Other OID
Bonds Legal Rights and Privileges of Common
5B: A Closer Look at TIPS: Treasury Inflation- Stockholders 294
Protected Securities Types of Common Stock 295
5C: A Closer Look at Bond Risk: Duration Stock Market Reporting 296
5D: The Pure Expectations Theory and Valuing Common Stocks—Introducing the Free
Estimation of Forward Rates Cash Flow (FCF) Valuation Model 297
The Constant Growth Model: Valuation When
PART 3 STOCKS AND OPTIONS 239 Expected Free Cash Flow Grows at a Constant
Rate 300
CHAPTER 6
Risk and Return 241 The Multistage Model: Valuation when Expected
Short-Term Free Cash Flow Grows at a
Box: Intrinsic Value, Risk, and Return 242
Nonconstant Rate 305
Investment Returns and Risk 242
Application of the FCF Valuation Model to
Measuring Risk for Discrete Distributions 243 MicroDrive 309
Risk in a Continuous Distribution 247 Do Stock Values Reflect Long-Term or Short-Term
Box: What Does Risk Really Mean? 249 Cash Flows? 315
Using Historical Data to Estimate Risk 249 Value-Based Management: Using the Free Cash Flow
Box: The Historic Trade-Off between Risk and Valuation Model to Identify Value Drivers 316
Return 252 Why Are Stock Prices So Volatile? 319
Risk in a Portfolio Context 252 Valuing Common Stocks with the Dividend
The Relevant Risk of a Stock: The Capital Asset Growth Model 320
Pricing Model (CAPM) 256 The Market Multiple Method 328
xii Contents
Comparing the FCF Valuation Model, the Box: How Effective Is the Effective Corporate Tax
Dividend Growth Model, and the Market Rate? 382
Multiple Method 329 Cost of Preferred Stock, rps 384
Preferred Stock 330 Cost of Common Stock: The Market Risk
Summary 331 Premium, RPM 384
Web Extensions Using the CAPM to Estimate the Cost of Common
7A: Derivation of Valuation Equations Stock, rs 388
Using the Dividend Growth Approach to Estimate
CHAPTER 8 the Cost of Common Stock 390
Financial Options and Applications in
The Weighted Average Cost of Capital
Corporate Finance 343 (WACC) 393
Box: The Intrinsic Value of Stock Options 344 Box: Global Variations in the Cost of Capital 395
Overview of Financial Options 344 Adjusting the Cost of Equity for Flotation
The Single-Period Binomial Option Pricing Costs 395
Approach 347 Privately Owned Firms and Small Businesses 397
Box: Financial Reporting for Employee Stock The Divisional Cost of Capital 398
Options 348
Estimating the Cost of Capital for Individual
The Single-Period Binomial Option Pricing Projects 401
Formula 353
Managerial Issues and the Cost of Capital 402
The Multi-Period Binomial Option Pricing
Summary 404
Model 355
The Black-Scholes Option Pricing Model Web Extensions
(OPM) 357 9A: The Required Return Assuming Nonconstant
Dividends and Stock Repurchases
Box: Taxes and Stock Options 362
The Valuation of Put Options 363
CHAPTER 10
Applications of Option Pricing in Corporate The Basics of Capital Budgeting:
Finance 365
Evaluating Cash Flows 413
Summary 367
Box: Corporate Valuation and Capital
Budgeting 414
PART 4 PROJECTS AND THEIR An Overview of Capital Budgeting 414
VALUATION 373 The First Step in Project Analysis 416
Net Present Value (NPV) 417
CHAPTER 9 Internal Rate of Return (IRR) 419
The Cost of Capital 375 Modified Internal Rate of Return (MIRR) 426
Box: Corporate Valuation and the Cost of
Profitability Index (PI) 429
Capital 376
Payback Period 430
The Weighted Average Cost of Capital 376
How to Use the Different Capital Budgeting
Choosing Weights for the Weighted Average Cost Methods 432
of Capital 378
Other Issues in Capital Budgeting 435
After-Tax Cost of Debt: rd 1 T and
rstd 1 T 379 Summary 441
Contents xiii
Web Extensions Additional Funds Needed (AFN) Equation

10A: The Accounting Rate of Return (ARR) Method 523
Forecasting When the Ratios Change 526
CHAPTER 11
Summary 530
Cash Flow Estimation and Risk
Analysis 453 CHAPTER 13
Corporate Governance 541
Box: Project Valuation, Cash Flows, and Risk
Analysis 454 Box: Corporate Governance and Corporate
Valuation 542
Identifying Relevant Cash Flows 454
Agency Conflicts 542
Analysis of an Expansion Project 459
Box: Mistakes in Cash Flow Estimation Can Kill
Innovation 466 Box: Would the U.S. Government Be an Effective
Board Director? 550
Risk Analysis in Capital Budgeting 467
Box: The Dodd-Frank Act and Say on Pay 552
Measuring Stand-Alone Risk 467
Box: The Sarbanes-Oxley Act of 2002 and
Sensitivity Analysis 468
Scenario Analysis 471
Box: International Corporate Governance 555
Monte Carlo Simulation 474
Employee Stock Ownership Plans (ESOPs) 557
Project Risk Conclusions 477
Summary 560
Replacement Analysis 478
Real Options 480
Phased Decisions and Decision Trees 482 PART 6 CASH DISTRIBUTIONS AND
Summary 485 CAPITAL STRUCTURE 563
Web Extensions CHAPTER 14
11A: Certainty Equivalents and Risk-Adjusted Distributions to Shareholders: Dividends
Discount Rates and Repurchases 565
Box: Uses of Free Cash Flow: Distributions to
PART 5 CORPORATE VALUATION AND Shareholders 566
GOVERNANCE 501 An Overview of Cash Distributions 566
CHAPTER 12 Procedures for Cash Distributions 568
Corporate Valuation and Financial Cash Distributions and Firm Value 571
Planning 503 Clientele Effect 575
Box: Corporate Valuation and Financial Signaling Hypothesis 576
Planning 504
Implications for Dividend Stability 577
Overview of Financial Planning 504
Box: The Great Recession of 2007: Will Dividends
Financial Planning at MicroDrive, Inc. 506 Ever Be the Same? 578
Forecasting Operations 508 Setting the Target Distribution Level: The Residual
Evaluating MicroDrive’s Strategic Initiatives 512 Distribution Model 578
Projecting MicroDrive’s Financial Statements 515 The Residual Distribution Model in Practice 580
Analysis and Selection of a Strategic Plan 519 A Tale of Two Cash Distributions: Dividends
The CFO’s Model 521 versus Stock Repurchases 581
xiv Contents
The Pros and Cons of Dividends and Overview of Supply Chain Management 656
Repurchases 590 Using and Financing Operating Current Assets 658
Box: Dividend Yields around the World 592 The Cash Conversion Cycle 662
Other Factors Influencing Distributions 592 Box: Some Firms Operate with Negative Working
Summarizing the Distribution Policy Decision 594 Capital! 667
Stock Splits and Stock Dividends 595 Inventory Management 668
Box: The Great Recession of 2007: Talk About a Receivables Management 669
Split Personality! 596 Box: Supply Chain Finance 671
Dividend Reinvestment Plans 598 Accruals and Accounts Payable (Trade Credit) 673
Summary 599 Box: A Wag of the Finger or Tip of the Hat? The
Colbert Report and Small Business Payment
CHAPTER 15 Terms 674
Capital Structure Decisions 607
The Cash Budget 677
Box: Corporate Valuation and Capital
Structure 608
Cash Management and the Target Cash
Balance 681
An Overview of Capital Structure 608
Box: Use It or Lose Part of It: Cash Can Be
Business Risk and Financial Risk 610
Costly! 682
Capital Structure Theory: The Modigliani and
Miller Models 614 Cash Management Techniques 682
Box: Yogi Berra on the MM Proposition 616 Managing Short-Term Investments 685
Capital Structure Theory: Beyond the Modigliani Box: Your Check Isn t in the Mail 686
and Miller Models 618 Short-Term Financing 687
Capital Structure Evidence and Implications 623 Short-Term Bank Loans 688
Estimating the Optimal Capital Structure 628 Commercial Paper 692
Anatomy of a Recapitalization 634 Use of Security in Short-Term Financing 692
Box: The Great Recession of 2007: Summary 693
Deleveraging 639
Web Extensions
Risky Debt and Equity as an Option 639
16A: Secured Short-Term Financing
Managing the Maturity Structure of Debt 642
Summary 645
CHAPTER 17
Web Extensions Multinational Financial Management 705
15A: Degree of Leverage
Box: Corporate Valuation in a Global Context 706
15B: Capital Structure Theory: Arbitrage Proofs
of the Modigliani-Miller Theorems Multinational, or Global, Corporations 706
Multinational versus Domestic Financial
PART 7 MANAGING GLOBAL Management 707
OPERATIONS 653 Exchange Rates 709
Exchange Rates and International Trade 714
CHAPTER 16
Supply Chains and Working Capital The International Monetary System and Exchange
Management 655 Rate Policies 715
Box: Corporate Valuation and Working Capital
Trading in Foreign Exchange 720
Management 656 Interest Rate Parity 722
Contents xv
Purchasing Power Parity 724 Web Extensions

Box: Hungry for a Big Mac? Go to Ukraine! 725 18A: Rights Offerings
Inflation, Interest Rates, and Exchange Rates 726
International Money and Capital Markets 726 CHAPTER 19
Lease Financing 791
Box: Greasing the Wheels of International
Business 727 Types of Leases 792
Box: Stock Market Indices around the World 731 Tax Effects 795
Multinational Capital Budgeting 732 Financial Statement Effects 796
Box: Consumer Finance in China 733 Box: Off-Balance Sheet Financing: Is It Going to
Disappear? 798
Box: Double Irish with a Dutch Twist 735
Evaluation by the Lessee 799
International Capital Structures 737
Evaluation by the Lessor 804
Multinational Working Capital Management 738
Other Issues in Lease Analysis 806
Summary 741
Box: What You Don t Know Can Hurt
You! 807
Box: Lease Securitization 809
PART 8 TACTICAL FINANCING
Other Reasons for Leasing 810
DECISIONS 749
Summary 811
CHAPTER 18 Web Extensions
Public and Private Financing: Initial 19A: Leasing Feedback
Offerings, Seasoned Offerings, and 19B: Percentage Cost Analysis
Investment Banks 751 19C: Leveraged Leases
The Financial Life Cycle of a Start-Up
Company 752 CHAPTER 20
The Decision to Go Public 753 Hybrid Financing: Preferred Stock,
The Process of Going Public: An Initial Public Warrants, and Convertibles 819
Offering 755
Preferred Stock 820
Equity Carve-Outs: A Special Type of IPO 765
Box: The Romance Had No Chemistry, but It Had
Other Ways to Raise Funds in the Capital a Lot of Preferred Stock! 822
Markets 766
Box: Hybrids Aren t Only for
Box: Where There s Smoke, There s Fire 770
Corporations 823
Investment Banking Activities 771
Warrants 824
Box: The Great Recession of 2007: What Was the
Role of Investment Banks? 773 Convertible Securities 830
The Decision to Go Private 773 A Final Comparison of Warrants and
Refunding Operations 775 Convertibles 837
Box: TVA Ratchets Down Its Interest Reporting Earnings When Warrants or
Expenses 779 Convertibles Are Outstanding 838
Managing the Risk Structure of Debt with Project Summary 839
Financing 781 Web Extensions
Summary 782 20A: Calling Convertible Issues
xvi Contents
Who Wins: The Empirical Evidence 898

PART 9 STRATEGIC FINANCE IN
Box: Merger Mistakes 898
A DYNAMIC ENVIRONMENT 847
Corporate Alliances 899
CHAPTER 21 Divestitures 900
Dynamic Capital Structures and
Holding Companies 901
Corporate Valuation 849
Summary 902
Box: Corporate Valuation and Capital Structure
Decisions 850
The Adjusted Present Value (APV) Approach 850 CHAPTER 23
Enterprise Risk Management 911
The Modigliani and Miller Models 853
Box: Corporate Valuation and Risk
The Compressed Adjusted Present Value (CAPV)
Management 912
Model 855
Reasons to Manage Risk 912
Multistage Valuation When the Capital Structure Is
Stable 856 An Overview of Enterprise Risk
Management 915
Illustration of the Three Valuation Approaches for
A Framework for Enterprise Risk
a Constant Capital Structure 860
Management 917
Analysis of a Dynamic Capital Structure 866 Categories of Risk Events 920
Summary 867 Foreign Exchange (FX) Risk 922
Web Extensions Commodity Price Risk 923
21A: Projecting Consistent Debt and Interest Interest Rate Risk 927
Expenses
Box: The Game of Truth or LIBOR 933
Project Selection Risks 935
CHAPTER 22
Managing Credit Risks 938
Mergers and Corporate Control 873
Risk and Human Safety 940
Rationale for Mergers 874
Summary 941
Types of Mergers 877
Level of Merger Activity 877 CHAPTER 24
Hostile versus Friendly Takeovers 878 Bankruptcy, Reorganization, and
Merger Regulation 879 Liquidation 947
Overview of Merger Analysis 881 Financial Distress and Its Consequences 948
Estimating a Target’s Value 882 Issues Facing a Firm in Financial Distress 949
Setting the Bid Price 886 Settlements without Going through Formal
Analysis When the Capital Structure Bankruptcy 950
Changes during the Explicit Forecast Federal Bankruptcy Law 952
Period 888 Reorganization in Bankruptcy (Chapter 11 of
Taxes and the Structure of the Takeover Bid 889 Bankruptcy Code) 953
Box: Tempest in a Teapot? 891 Liquidation in Bankruptcy 962
Financial Reporting for Mergers 892 Box: A Nation of Defaulters? 966
Analysis for a “True Consolidation” 895 Anatomy of a Bankruptcy: Transforming the GM
The Role of Investment Bankers 896 Corporation into the GM Company 967
Contents xvii
Other Motivations for Bankruptcy 968 The Growth Option: An Illustration 1027
Some Criticisms of Bankruptcy Laws 969 Concluding Thoughts on Real Options 1033
Summary 970 Summary 1034
Web Extensions Web Extensions
24A: Multiple Discriminant Analysis 26A: The Abandonment Real Option
26B: Risk-Neutral Valuation
PART 10 SPECIAL TOPICS 979
CHAPTER 25 APPENDIXES
Portfolio Theory and Asset Pricing
Appendix a Solutions to Self-Test Problems 1041
Models 981
Appendix b Answers to End-of-Chapter
Box: Intrinsic Value, Risk, and Return 982
Problems 1075
Efficient Portfolios 982 Appendix c Selected Equations 1085
Choosing the Optimal Portfolio 987 Appendix d Values of the Areas under the Standard
The Basic Assumptions of the Capital Asset Pricing Normal Distribution Function 1099
Model 990
The Capital Market Line and the Security Market
Line 991 GLOSSARY AND INDEXES
Calculating Beta Coefficients 995 Glossary 1101

Box: Skill or Luck? 996 Name Index 1149
Empirical Tests of the CAPM 1004 Subject Index 1153
Arbitrage Pricing Theory 1006
Summary 1009 WEB CHAPTERS:
Chapter 27 Providing and Obtaining Credit
CHAPTER 26 Chapter 28 Advanced Issues in Cash
Real Options 1015 Management and Inventory Control
Valuing Real Options 1016 Chapter 29 Pension Plan Management
The Investment Timing Option: An Chapter 30 Financial Management in Not-for-
Illustration 1017 Profit Businesses
Preface
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When we wrote the first edition of Financial Management: Theory and Practice, we
resource
Students: Access the
had four goals: (1) to create a text that would help students make better financial
Financial Management: decisions; (2) to provide a book that could be used in the introductory MBA course,
Theory and Practice but one that was complete enough for use as a reference text in follow-on case courses
(15th Edition)
companion site and and after graduation; (3) to motivate students by demonstrating that finance is both
online student resources interesting and relevant; and (4) to make the book clear enough so that students could
by visiting www
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The events precipitating the recession of 2007, the dramatic changes in financial
under “Study Tools” to technology at stock exchanges across the world, and the sovereign debt crisis in
go to the student
textbook companion
Greece make it more important than ever for students and managers to understand
site. the role that finance plays in a global economy, in their own companies, and in their
own lives. So in addition to the four goals listed above, this edition has a fifth goal: to
Instructors: Access the
Financial Management: prepare students for a changed world.
Theory and Practice
(15th Edition)
Intrinsic Valuation as a Unifying Theme

companion site and
instructor resources by
going to login.cengage
.com, logging in with Our emphasis throughout the book is on the actions that a manager can and should
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username and password, take to increase the intrinsic value of the firm. Structuring the book around intrinsic
and using ISBN valuation enhances continuity and helps students see how various topics are related
9781305632295 to reach
the site through your
to one another.
account. As the title indicates, this book combines theory and practical applications. An
understanding of finance theory is essential for anyone developing and/or implement-
ing effective financial strategies. But theory alone isn’t sufficient, so we provide
numerous examples in the book and the accompanying Excel spreadsheets to illus-
trate how theory is applied in practice. Indeed, we believe that the ability to analyze
financial problems using Excel also is essential for a student’s successful job search
and subsequent career. Therefore, many exhibits in the book come directly from the
accompanying Excel spreadsheets. Many of the spreadsheets also provide brief “tutor-
ials” by way of detailed comments on Excel features that we have found to be
especially useful, such as Goal Seek, Tables, and many financial functions.
The book begins with fundamental concepts, including background on the economic
and financial environment, financial statements (with an emphasis on cash flows), the time
value of money, bond valuation, risk analysis, and stock valuation. With this background,
we go on to discuss how specific techniques and decision rules can be used to help
maximize the value of the firm. This organization provides four important advantages:
1. Managers should try to maximize the intrinsic value of a firm, which is determined
by cash flows as revealed in financial statements. Our early coverage of financial
xix
xx Preface
statements helps students see how particular financial decisions affect the
various parts of the firm and the resulting cash flow. Also, financial statement
analysis provides an excellent vehicle for illustrating the usefulness of
spreadsheets.
2. Covering time value of money early helps students see how and why expected future
cash flows determine the value of the firm. Also, it takes time for students to digest
TVM concepts and to learn how to do the required calculations, so it is good to
cover TVM concepts early and often.
3. Most students—even those who do not plan to major in finance—are interested in
investments. The ability to learn is a function of individual interest and motivation,
so Financial Management’s early coverage of securities and security markets is
pedagogically sound.
4. Once basic concepts have been established, it is easier for students to understand
both how and why corporations make specific decisions in the areas of
capital budgeting, raising capital, working capital management, mergers, and
the like.
Improvements in the 15th Edition

As in every revision, we updated and clarified materials throughout the text, reviewing the
entire book for completeness, ease of exposition, and currency. We made hundreds of small
changes to keep the text up to date, with particular emphasis on updating the real-world
examples and including the latest changes in the financial environment and financial theory.
In addition, we made a number of larger changes. Some affect all chapters, some involve
reorganizing sections among chapters, and some modify material covered within specific
chapters.
Changes That Affect All Chapters

Following are some of the changes that affect all chapters.
THE GREAT RECESSION OF 2007

In every chapter we use real-world examples to show how the chapter’s topics are
related to some aspect of the global economic crisis. In addition, many chapters have
“Great Recession of 2007” boxes that focus on important issues related to the recent
recession.
CONTINUED INTEGRATION WITH EXCEL

We have continued to integrate the textbook and the accompanying Excel Tool Kit
spreadsheet models for each chapter. Many figures in the textbook show the appro-
priate area from the chapter’s Excel Tool Kit model. This makes the analysis more
transparent to the students and better enables them to follow the analysis in the Excel
model.
Notable Changes within Selected Chapters

We made too many small improvements within each chapter to mention them all, but
some of the more notable ones are discussed below.
Preface xxi
CHAPTER 1: AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE

FINANCIAL ENVIRONMENT
We added a new, short section, “1-2 Finance from 40,000 Feet Above,” to give students an
overview of the main issues in finance. We added more coverage of ethics in Section 1-4c,
including a new box on benefit corporations, “Be Nice with a B-Corp,” and a box on
whistleblowing, “Taxes and Whistleblowing.” We completely rewrote the sections on
trading procedures (Section 1-9c) and the stock market (Section 1-10) to reflect the impact
of Reg NMS and automated trading, including a section (1-10d) on high-frequency
trading.
CHAPTER 2: FINANCIAL STATEMENTS, CASH FLOW, AND TAXES

In past editions, we introduced the operating profitability ratio and the capital require-
ment ratio in later chapters, but we now introduce them in our discussion of the return
on invested capital (ROIC) in Section 2-8a because they provide insight into the sources
of ROIC (i.e., profitability and capital utilization). We also use these ratios in our
expanded coverage of the free cash flow valuation model in Chapter 7 (Corporate
Valuation and Stock Valuation).
CHAPTER 5: BONDS, BOND VALUATION, AND INTEREST RATES

We added a new box on “Chocolate Bonds.” We also streamlined and
improved our discussions of the real risk-free rate and the nominal risk-free rate
in Section 5-8.
CHAPTER 7: CORPORATE VALUATION AND STOCK VALUATION

We expanded the material on the free cash flow corporate valuation model and
moved it so that it now precedes the dividend growth model. We did this because
most companies don’t pay a dividend and because most practitioners use the free cash
flow corporate valuation model. The expanded coverage now illustrates the valuation
of MicroDrive, which was formerly shown in Chapter 12 (Corporate Valuation and
Financial Planning). This allows us to emphasize valuation (and value-based manage-
ment) in Chapter 7 and to emphasize financial planning in Chapter 12. The expanded
FCF valuation treatment in Chapter 7 now covers forecasting free cash flows and
identifying value drivers in much more detail (we also included a corresponding
Spreadsheet Problem in the end-of-chapter problems). We also use the FCF valuation
model to frame the discussion of stock price volatility and the relative values of cash
flows in the first four years versus the value of later cash flows (we illustrated these
concepts using the dividend growth model in previous editions). We have been using
this approach in our own classrooms for several years and have found it to be
effective.
CHAPTER 11: CASH FLOW ESTIMATION AND RISK ANALYSIS

We added a new box, “Mistakes in Cash Flow Estimation Can Kill Innovation,”
describing common mistakes in project analysis that are made by many
managers.
xxii Preface
CHAPTER 12: CORPORATE VALUATION AND FINANCIAL PLANNING

We expanded our coverage of valuation and included an additional Spreadsheet
Problem on valuation. We did this to reinforce our treatment of valuation in
Chapter 7.
CHAPTER 15: CAPITAL STRUCTURE DECISIONS

We added a short section (15-8) discussing insights gained from comparing the
equity in a risky levered firm with a call option written on the underlying value of
the firm, with an expiration equal to the debt’s maturity and a strike price equal to
the debt’s face value. We also included a short section (15-9) discussing the debt
maturity choice and providing recent empirical evidence on the shift away from
long-term debt. For those instructors wishing to cover the Modigliani and Miller
proofs, we have added a new Web Extension (15B) and PowerPoint file showing the
MM proofs.
CHAPTER 16: SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT

We improved our discussion of the cash conversion cycle and reduced its length
by simplifying the example. To more quickly reinforce the concepts of the cash
conversion cycle, we now follow it immediately with coverage of inventory man-
agement, receivables management, and payables management. We added a new
section (16-9a) that explains the U.S. payment, clearing, and settlement infra-
structure. We added a box on the recent phenomenon of banks charging corporate
customers for cash deposit accounts, “Use It or Lose Part of It: Cash Can Be
Costly!”
CHAPTER 17: MULTINATIONAL FINANCIAL MANAGEMENT

A new opening vignette uses Medtronic and Covidien to illustrate a tax inversion
merger.
CHAPTER 18: PUBLIC AND PRIVATE FINANCING: INITIAL OFFERINGS,

SEASONED OFFERINGS, AND INVESTMENT BANKS
We added a new Spreadsheet Problem on setting IPO terms.
CHAPTER 20: HYBRID FINANCING: PREFERRED STOCK, WARRANTS,

AND CONVERTIBLES
We added a new opening vignette discussing the convertible bonds issue by Tesla,
Twitter, and Fiat Chrysler.
CHAPTER 21: DYNAMIC CAPITAL STRUCTURES

We have focused this chapter on valuation issues associated with the interest
tax shield, including cases in which the capital structure changes during the
forecast period. We provide a brief review of the free cash flow corporate valuation
model, we describe the free cash flow to equity (FCFE) valuation model, and we
show that these models are inappropriate for situations in which the capital
structure is changing. We describe a very general version of the adjusted present
Preface xxiii
value (APV) approach and show how it can be used when the capital structure is
changing. This provides a natural segue into the compressed adjusted present
value (CAPV) model, in which the tax shield is discounted at the unlevered cost of
equity.
We illustrate the valuation concepts using a hypothetical company, Tutwiler
Controls. (We use this same company in Chapter 22 as the target of an acquisition,
except we then include synergies and a different capital structure.) Discussing
Tutwiler’s valuation in Chapter 21 permits a natural extension into merger-related
issues in Chapter 22.
As noted previously, we moved the material on viewing equity as an option on the
assets of a levered firm to Chapter 15. We moved the MM proofs (including Power-
Point slides) into Chapter 15 as a new web extension, Web Extension 15B. This
consolidates important capital structure concepts in Chapter 15 and permits Chapter
21 to focus on valuation issues associated with capital structures.
CHAPTER 22: MERGERS AND CORPORATE CONTROL

We added a new opening vignette describing Verizon’s buyout of Vodafone’s hold-
ings of Verizon Wireless. We moved the comparison of the FCF corporate valuation
model, the free cash flow to equity model, and the compressed adjusted present value
model to Chapter 21, allowing us to focus more on merger analysis in Chapter 22
rather than on the development of valuation models.
CHAPTER 25: PORTFOLIO THEORY AND ASSET PRICING MODELS

In Chapter 6, we estimated General Electric’s beta using four years of monthly
returns. In this chapter, we estimate betas using one year of weekly returns because
this is another widely used approach. In addition to this change, we are using Apple, a
high-tech company, to illustrate the estimation techniques for an individual company.
Learning Tools Available to Students

and Instructors
Financial Management includes a broad range of ancillary materials designed to
enhance students’ learning and to make it easier for instructors to prepare for and
conduct classes. All resources available to students are, of course, also available to
instructors; in addition, instructors have access to the course management tools.
In addition to these resources and the items noted previously, many other
resources are available on the Web at Financial Management’s Web site. These
ancillaries include the following.
Excel Tool Kits

Proficiency with spreadsheets is an absolute necessity for all MBA students. With that
in mind, for each chapter we created Excel spreadsheets, called Tool Kits, to show
how the calculations used in the chapter were done. The Tool Kit models include
explanations that show students how to use many of the features and functions of
Excel, enabling the Tool Kits to serve as self-taught tutorials.
xxiv Preface
Web Extensions
Many chapters have Adobe PDF “appendices” that provide more detailed coverage of
topics that were addressed in the chapter.
End-of-Chapter Spreadsheet Problems

Each chapter has a Build a Model problem, where students start with a spreadsheet that
contains financial data plus general instructions about solving a specific problem. The
model is partially completed, with headings but no formulas, so the student must literally
build a model. This structure guides the student through the problem, minimizes
unnecessary typing and data entry, and also makes it easy to grade the work, because
all students’ answers are in the same locations on the spreadsheet. The partial spread-
sheets for the Build a Model problems are available to students on the book’s Web site;
the completed models are in files on the Instructor’s portion of the Web site.
Interactive Study Center

The textbook’s Web site contains links to all Web sites that are cited in each chapter.
Course Management Tools Available Only to

Instructors
Instructors have access to all of the materials listed above in addition to course
management tools. These tools are available at Financial Management’s Instructor
companion Web site. These materials include the following resources.
Solutions Manual
This comprehensive manual contains worked-out solutions to all end-of-chapter
materials. It is available in electronic form at the Instructor’s Web site.
PowerPoint Slides
For each chapter, we provide a set of PowerPoint slides that present graphs, tables,
lists, and calculations for use in lectures. Although the slides correspond to the
Mini Cases at the end of the chapter, the slides are completely self-contained in the
sense that they can be used for lectures regardless of whether students have read
the Mini Cases. In fact, we often don’t assign the Mini Case, but we do use the
PowerPoint slides. Copies of these files are on the Instructor’s Web site and the
CengageNOWTM site.
Instructors can easily customize the slides and convert them quickly into any
PowerPoint Design Template.1 If you add some of your own slides or modify the
1
To convert into a different design template in PowerPoint for Office 2010, select Design, Theme, and choose a
theme. Always double-check the conversion; some templates use fonts of different sizes, which can cause some
slide titles to run over their allotted space.
Preface xxv
existing slides to better illustrate important concepts, please share your changes with
us—many of our best learning points have come from instructors and we appreciate
all suggestions for ways to improve learning experiences for students.
In addition to the slides, there is a Mini Case at the end of each chapter. We assign
the Mini Cases only for specific chapters, but some professors assign the Mini Cases
for most chapters. These cases cover all the essential issues presented in the chapter,
and they provide the structure for our class lectures even if we don’t assign the Mini
Case.
Mini Case Spreadsheets

In addition to the PowerPoint slides, we also provide Excel spreadsheets that perform the
calculations required in the Mini Cases. These spreadsheets are similar to the Tool Kits, but
with two differences. (1) The numbers correspond to the Mini Cases rather than the chapter
examples. (2) We added some features that enable “what if” analysis on a real-time basis in
class.
We usually begin our lectures with the PowerPoint presentation, but after we have
explained a basic concept, we “toggle” to the Mini Case Excel file and show how the
analysis can be done in Excel.2 For example, when teaching bond pricing, we begin
with the PowerPoint show and cover the basic concepts and calculations. Then we
toggle to Excel and use a sensitivity-based graph to show how bond prices change
as interest rates and time to maturity vary. More and more students are bringing
their laptops to class—they can follow along and do the “what if” analysis for
themselves.
Solutions to End-of-Chapter Spreadsheet

Problems
The partial spreadsheets for the Build a Model problems are available to students, and
the completed models are in files on the Instructor’s Web site.
NEW! Test Banks in Cognero

The Test Bank for Financial Management is now available online in a new system
named Cengage Learning Testing Powered by Cognero. This is a flexible, online
system that allows instructors to:
• Author, edit, and manage test bank content.
• Use searchable metadata to ensure tests are complete and compliant.
• Create multiple test versions in an instant.
• Deliver tests from your Learning Management System (LMS), your classroom, or
anywhere you have online access.
Cengage Learning Testing Powered by Cognero works on any operating system or
browser with no special installs or downloads needed. With its intuitive tools and
2
To toggle between two open programs, such as Excel and PowerPoint, hold the Alt key down and hit the Tab
key until you have selected the program you want to show.
xxvi Preface
familiar desktop drop-down menus, Cognero enables instructors to easily create and
edit tests from school or home—anywhere with Internet access.
In addition to the Test Bank available online through Cognero, the Test Bank is
also available in a number of file formats on the Instructor companion Web site. Each
chapter’s bank of questions includes dozens of True/False, Multiple Choice, and Essay
questions. Instructors can retrieve the appropriate file formats to administer tests
through their schools’ learning management systems (Blackboard, Canvas, Moodle,
Desire2Learn, etc.), or they can opt for Word documents.
The Test Bank contains more than 1,200 class-tested questions and problems.
Information regarding the topic and degree of difficulty, along with the complete
solution for all numerical problems, is provided with each question.
Additional Course Tools

MindTap Finance for Financial Management:
Theory and Practice
Financial Management: Theory and Practice, 15th Edition, includes a brand new
MindTap learning experience, powered by a rich array of online resources designed
to deliver an all-in-one solution for learning and retaining the course topics. The
following items are included in the MindTap learning path:
• A media-rich e-version of the text enhanced with Concept Clips (brief animated
videos that describe and define key concepts) and Problem Walkthroughs (longer
videos that demonstrate how to solve the most common problem types step by step).
• A comprehensive digital homework problem set designed to guide students from
basic comprehension to real-world application of concepts and to facilitate
preparation for exams. Practice problems, tutorials, and other learning modules are
drawn from both Aplia and CNOW homework solutions.
• An MBA Refresher Module, including a pre-test, remediation, and a post-test, that
provides those students who need it with a refresher of core concepts in Finance,
Math/Algebra, Statistics, Accounting, and more.
• Group case activities designed to facilitate students working in teams to analyze short
cases at a number of key points throughout the course.
• Practice quizzes to measure overall comprehension of chapter concepts.
CengageNOWTM for Financial Management:

Theory and Practice
Designed by instructors for instructors, CengageNOWTM mirrors your natural workflow
and provides time-saving, performance-enhancing tools for you and your students—all
in one program! CengageNOWTM takes the best of current technology tools including
online homework management and fully customizable algorithmic end-of-chapter pro-
blems and test bank to support your course goals and save you significant preparation
and grading time!
• Plan student assignments with an easy online homework management component.
• Manage your grade book with ease.
Preface xxvii
• Teach today’s student using valuable course support materials.

• Reinforce student comprehension with Personalized Study.
• Test with customizable algorithmic end-of-chapter problems that provide students
with immediate feedback upon answer submission.
• Grade automatically for seamless, immediate results.
ApliaTM Finance
ApliaTM Finance, an interactive learning system, engages students in course concepts,
ensures they practice on a regular basis, and helps them prepare to learn finance
through a series of problems and tutorials. Created by an instructor to help students
excel, book-specific problem sets have instant grades and detailed feedback, ensuring
students have the opportunity to learn from and improve with every question.
Chapter assignments use the same language and tone of the course textbook,
giving students a seamless experience in and out of the classroom. Problems are
automatically graded and offer detailed explanations, helping students learn from
every question.
ApliaTM Finance offers:
• Problem Sets: Chapter-specific problem sets ensure that students are completing
finance assignments on a regular basis.
• Preparing for Finance Tutorials: Hands-on tutorials solve math, statistics, economics,
and accounting roadblocks before they become a problem in the course, and financial
calculator tutorials help students learn to use the tools needed in a finance course.
• Finance in Action: Exploratory modules help students understand how financial
theories are applied in the real world, and how finance professionals synthesize, use,
and apply financial information.
• Course Management System
• MindTap Reader: Aplia now features Cengage’s premier e-book format. MindTap
Reader is highly interactive, allows for inline note-taking and highlighting, and
features a variety of apps to further assist students.
For more information, visit www.aplia.com/finance.
Cengage Learning Custom Solutions

Whether you need print, digital, or hybrid course materials, Cengage Learning Custom
Solutions can help you create your perfect learning solution. Draw from Cengage Learning’s
extensive library of texts and collections, add or create your own original work, and create
customized media and technology to match your learning and course objectives. Our
editorial team will work with you through each step, allowing you to concentrate on the
most important thing—your students. Learn more about all of our custom services at www.
cengage.com/custom.
The Cengage Global Economic Watch (GEW)

Resource Center
This is your source for turning today’s challenges into tomorrow’s solutions. This
online portal houses the most up-to-date content concerning the economic crisis.
xxviii Preface
Organized by discipline, the GEW Resource Center offers the solutions instructors
and students need in an easy-to-use format. Included are an overview and time line of
the historical events leading up to the crisis, links to the latest news and resources,
discussion and testing content, an instructor feedback forum, and a Global Issues
Database. Visit www.cengage.com/thewatch for more information.
Acknowledgments
This book reflects the efforts of a great many people over a number of years. In addition to
our immediate colleagues, we appreciate very much the many helpful comments and
suggestions we receive from professors who use our book in their classes. Professors Greg
Faulk, Anthony Gu, Andrew Mose, Chee Ng, John Stieven, and Serge Wind have been
especially helpful, providing many hints and tips for improving the learning points in our
textbook.
Many professors and professionals who are experts on specific topics reviewed
earlier versions of individual chapters or groups of chapters, and we are grateful for
their insights; in addition, we would like to thank those whose reviews and comments
on earlier editions and companion books have contributed to this edition:
Mike Adler Omar M. Benkato Mary Broske

Syed Ahmad Bill Beranek Dave Brown
Sadhana M. Alangar Tom Berry Kate Brown
Ed Altman Bill Bertin Bill Brueggeman
Mary Schary Amram Roger Bey Kirt Butler
Anne Anderson Dalton Bigbee Robert Button
Bruce Anderson John Bildersee Chris Buzzard
Ron Anderson Rahul Bishnoi Bill Campsey
Bob Angell Eric Blazer Bob Carleson
Vince Apilado Russ Boisjoly Severin Carlson
Henry Arnold Keith Boles David Cary
Nasser Arshadi Gordon R. Bonner Steve Celec
Bob Aubey Geof Booth Don Chance
Abdul Aziz Kenneth Boudreaux Antony Chang
Gil Babcock Helen Bowers Susan Chaplinsky
Peter Bacon Oswald Bowlin Jay Choi
Kent Baker Don Boyd S. K. Choudhury
Tom Bankston G. Michael Boyd Lal Chugh
Les Barenbaum Pat Boyer Jonathan Clarke
Charles Barngrover Ben S. Branch Maclyn Clouse
Michael Barry Joe Brandt Margaret Considine
Bill Beedles Elizabeth Brannigan Phil Cooley
Moshe Ben-Horim Greg Brauer Joe Copeland
Preface xxix
David Cordell Sharon H. Garrison Keith Howe

John Cotner Jim Garvin Hugh Hunter
Charles Cox Adam Gehr Steve Isberg
David Crary Jim Gentry Jim Jackson
John Crockett Stuart Gillan Vahan Janjigian
Roy Crum Philip Glasgo Kurt Jesswein
Brent Dalrymple Rudyard Goode Kose John
Bill Damon Myron Gordon Craig Johnson
Joel Dauten Walt Goulet Keith Johnson
Steve Dawson Bernie Grablowsky Steve Johnson
Sankar De Theoharry Grammatikos Ramon Johnson
Miles Delano Ed Grossnickle Ray Jones
Fred Dellva John Groth Manuel Jose
Anand Desai Alan Grunewald Gus Kalogeras
Bernard Dill Manak Gupta Mike Keenan
Greg Dimkoff Sam Hadaway Eric Kelley
Les Dlabay Don Hakala Bill Kennedy
Mark Dorfman Janet Hamilton Joe Kiernan
Gene Drycimski Sally Hamilton Robert Kieschnick
Dean Dudley Gerald Hamsmith Rick Kish
David Durst William Hardin Linda Klein
Ed Dyl John Harris Don Knight
Dick Edelman Paul Hastings Dorothy Koehl
Charles Edwards Patty Hatfield Theodor Kohers
John Ellis Bob Haugen Jaroslaw Komarynsky
Dave Ewert Steve Hawke Duncan Kretovich
John Ezzell Del Hawley Harold Krogh
Richard Fendler Hal Heaton Charles Kroncke
Michael Ferri Robert Hehre Lynn Phillips Kugele
Jim Filkins John Helmuth Joan Lamm
John Finnerty George Hettenhouse P. Lange
Susan Fischer Hans Heymann Howard Lanser
Mark Flannery Kendall Hill Martin Laurence
Steven Flint Roger Hill Ed Lawrence
Russ Fogler Tom Hindelang Richard LeCompte
E. Bruce Frederickson Linda Hittle Wayne Lee
Dan French Ralph Hocking Jim LePage
Tina Galloway J. Ronald Hoffmeister Ilene Levin
Partha Gangopadhyay Jim Horrigan Jules Levine
Phil Gardial John Houston John Lewis
Michael Garlington John Howe James T. Lindley
xxx Preface
Chuck Linke John O’Donnell A. Jon Saxon

Bill Lloyd Jim Olsen Thomas Scampini
Susan Long Robert Olsen Kevin Scanlon
Judy Maese Frank O’Meara Frederick Schadler
Bob Magee David Overbye James Schallheim
Ileen Malitz R. Daniel Pace Mary Jane Scheuer
Phil Malone Coleen Pantalone Carl Schweser
Terry Maness Jim Pappas John Settle
Chris Manning Stephen Parrish Alan Severn
Terry Martell Pam Peterson Sol Shalit
D. J. Masson Glenn Petry Elizabeth Shields
John Mathys Jim Pettijohn Frederic Shipley
John McAlhany Rich Pettit Dilip Shome
Andy McCollough Dick Pettway Ron Shrieves
Tom McCue Hugo Phillips Neil Sicherman
Bill McDaniel John Pinkerton J. B. Silvers
Robin McLaughlin Gerald Pogue Clay Singleton
Jamshid Mehran Ralph A. Pope Joe Sinkey
Ilhan Meric R. Potter Stacy Sirmans
Larry Merville Franklin Potts Jaye Smith
Rick Meyer R. Powell Steve Smith
Stuart E. Michelson Chris Prestopino Don Sorenson
Jim Millar Jerry Prock David Speairs
Ed Miller Howard Puckett Ken Stanly
John Mitchell Herbert Quigley John Stansfield
Carol Moerdyk George Racette Ed Stendardi
Bob Moore Bob Radcliffe Alan Stephens
Hassan Moussawi Allen Rappaport Don Stevens
Barry Morris Bill Rentz Jerry Stevens
Gene Morris Ken Riener G. Bennett Stewart
Fred Morrissey Charles Rini Mark Stohs
Chris Muscarella John Ritchie Glen Strasburg
Stu Myers Jay Ritter Robert Strong
David Nachman Pietra Rivoli Philip Swensen
Tim Nantell Fiona Robertson Ernie Swift
Don Nast Antonio Rodriguez Paul Swink
Bill Nelson E. M. Roussakis Eugene Swinnerton
Bob Nelson Dexter Rowell Robert Taggart
Bob Niendorf Mike Ryngaert Gary Tallman
Tom O’Brien Jim Sachlis Dennis Tanner
Dennis O’Connor Abdul Sadik Craig Tapley
Another random document with
no related content on Scribd:
DANCE ON STILTS AT THE GIRLS’ UNYAGO, NIUCHI
Newala, too, suffers from the distance of its water-supply—at least

the Newala of to-day does; there was once another Newala in a lovely
valley at the foot of the plateau. I visited it and found scarcely a trace
of houses, only a Christian cemetery, with the graves of several
missionaries and their converts, remaining as a monument of its
former glories. But the surroundings are wonderfully beautiful. A
thick grove of splendid mango-trees closes in the weather-worn
crosses and headstones; behind them, combining the useful and the
agreeable, is a whole plantation of lemon-trees covered with ripe
fruit; not the small African kind, but a much larger and also juicier
imported variety, which drops into the hands of the passing traveller,
without calling for any exertion on his part. Old Newala is now under
the jurisdiction of the native pastor, Daudi, at Chingulungulu, who,
as I am on very friendly terms with him, allows me, as a matter of
course, the use of this lemon-grove during my stay at Newala.
FEET MUTILATED BY THE RAVAGES OF THE “JIGGER”
(Sarcopsylla penetrans)
The water-supply of New Newala is in the bottom of the valley,

some 1,600 feet lower down. The way is not only long and fatiguing,
but the water, when we get it, is thoroughly bad. We are suffering not
only from this, but from the fact that the arrangements at Newala are
nothing short of luxurious. We have a separate kitchen—a hut built
against the boma palisade on the right of the baraza, the interior of
which is not visible from our usual position. Our two cooks were not
long in finding this out, and they consequently do—or rather neglect
to do—what they please. In any case they do not seem to be very
particular about the boiling of our drinking-water—at least I can
attribute to no other cause certain attacks of a dysenteric nature,
from which both Knudsen and I have suffered for some time. If a
man like Omari has to be left unwatched for a moment, he is capable
of anything. Besides this complaint, we are inconvenienced by the
state of our nails, which have become as hard as glass, and crack on
the slightest provocation, and I have the additional infliction of
pimples all over me. As if all this were not enough, we have also, for
the last week been waging war against the jigger, who has found his
Eldorado in the hot sand of the Makonde plateau. Our men are seen
all day long—whenever their chronic colds and the dysentery likewise
raging among them permit—occupied in removing this scourge of
Africa from their feet and trying to prevent the disastrous
consequences of its presence. It is quite common to see natives of
this place with one or two toes missing; many have lost all their toes,
or even the whole front part of the foot, so that a well-formed leg
ends in a shapeless stump. These ravages are caused by the female of
Sarcopsylla penetrans, which bores its way under the skin and there
develops an egg-sac the size of a pea. In all books on the subject, it is
stated that one’s attention is called to the presence of this parasite by
an intolerable itching. This agrees very well with my experience, so
far as the softer parts of the sole, the spaces between and under the
toes, and the side of the foot are concerned, but if the creature
penetrates through the harder parts of the heel or ball of the foot, it
may escape even the most careful search till it has reached maturity.
Then there is no time to be lost, if the horrible ulceration, of which
we see cases by the dozen every day, is to be prevented. It is much
easier, by the way, to discover the insect on the white skin of a
European than on that of a native, on which the dark speck scarcely
shows. The four or five jiggers which, in spite of the fact that I
constantly wore high laced boots, chose my feet to settle in, were
taken out for me by the all-accomplished Knudsen, after which I
thought it advisable to wash out the cavities with corrosive
sublimate. The natives have a different sort of disinfectant—they fill
the hole with scraped roots. In a tiny Makua village on the slope of
the plateau south of Newala, we saw an old woman who had filled all
the spaces under her toe-nails with powdered roots by way of
prophylactic treatment. What will be the result, if any, who can say?
The rest of the many trifling ills which trouble our existence are
really more comic than serious. In the absence of anything else to
smoke, Knudsen and I at last opened a box of cigars procured from
the Indian store-keeper at Lindi, and tried them, with the most
distressing results. Whether they contain opium or some other
narcotic, neither of us can say, but after the tenth puff we were both
“off,” three-quarters stupefied and unspeakably wretched. Slowly we
recovered—and what happened next? Half-an-hour later we were
once more smoking these poisonous concoctions—so insatiable is the
craving for tobacco in the tropics.
Even my present attacks of fever scarcely deserve to be taken
seriously. I have had no less than three here at Newala, all of which
have run their course in an incredibly short time. In the early
afternoon, I am busy with my old natives, asking questions and
making notes. The strong midday coffee has stimulated my spirits to
an extraordinary degree, the brain is active and vigorous, and work
progresses rapidly, while a pleasant warmth pervades the whole
body. Suddenly this gives place to a violent chill, forcing me to put on
my overcoat, though it is only half-past three and the afternoon sun
is at its hottest. Now the brain no longer works with such acuteness
and logical precision; more especially does it fail me in trying to
establish the syntax of the difficult Makua language on which I have
ventured, as if I had not enough to do without it. Under the
circumstances it seems advisable to take my temperature, and I do
so, to save trouble, without leaving my seat, and while going on with
my work. On examination, I find it to be 101·48°. My tutors are
abruptly dismissed and my bed set up in the baraza; a few minutes
later I am in it and treating myself internally with hot water and
lemon-juice.
Three hours later, the thermometer marks nearly 104°, and I make
them carry me back into the tent, bed and all, as I am now perspiring
heavily, and exposure to the cold wind just beginning to blow might
mean a fatal chill. I lie still for a little while, and then find, to my
great relief, that the temperature is not rising, but rather falling. This
is about 7.30 p.m. At 8 p.m. I find, to my unbounded astonishment,
that it has fallen below 98·6°, and I feel perfectly well. I read for an
hour or two, and could very well enjoy a smoke, if I had the
wherewithal—Indian cigars being out of the question.
Having no medical training, I am at a loss to account for this state
of things. It is impossible that these transitory attacks of high fever
should be malarial; it seems more probable that they are due to a
kind of sunstroke. On consulting my note-book, I become more and
more inclined to think this is the case, for these attacks regularly
follow extreme fatigue and long exposure to strong sunshine. They at
least have the advantage of being only short interruptions to my
work, as on the following morning I am always quite fresh and fit.
My treasure of a cook is suffering from an enormous hydrocele which
makes it difficult for him to get up, and Moritz is obliged to keep in
the dark on account of his inflamed eyes. Knudsen’s cook, a raw boy
from somewhere in the bush, knows still less of cooking than Omari;
consequently Nils Knudsen himself has been promoted to the vacant
post. Finding that we had come to the end of our supplies, he began
by sending to Chingulungulu for the four sucking-pigs which we had
bought from Matola and temporarily left in his charge; and when
they came up, neatly packed in a large crate, he callously slaughtered
the biggest of them. The first joint we were thoughtless enough to
entrust for roasting to Knudsen’s mshenzi cook, and it was
consequently uneatable; but we made the rest of the animal into a
jelly which we ate with great relish after weeks of underfeeding,
consuming incredible helpings of it at both midday and evening
meals. The only drawback is a certain want of variety in the tinned
vegetables. Dr. Jäger, to whom the Geographical Commission
entrusted the provisioning of the expeditions—mine as well as his
own—because he had more time on his hands than the rest of us,
seems to have laid in a huge stock of Teltow turnips,[46] an article of
food which is all very well for occasional use, but which quickly palls
when set before one every day; and we seem to have no other tins
left. There is no help for it—we must put up with the turnips; but I
am certain that, once I am home again, I shall not touch them for ten
years to come.
Amid all these minor evils, which, after all, go to make up the
genuine flavour of Africa, there is at least one cheering touch:
Knudsen has, with the dexterity of a skilled mechanic, repaired my 9
× 12 cm. camera, at least so far that I can use it with a little care.
How, in the absence of finger-nails, he was able to accomplish such a
ticklish piece of work, having no tool but a clumsy screw-driver for
taking to pieces and putting together again the complicated
mechanism of the instantaneous shutter, is still a mystery to me; but
he did it successfully. The loss of his finger-nails shows him in a light
contrasting curiously enough with the intelligence evinced by the
above operation; though, after all, it is scarcely surprising after his
ten years’ residence in the bush. One day, at Lindi, he had occasion
to wash a dog, which must have been in need of very thorough
cleansing, for the bottle handed to our friend for the purpose had an
extremely strong smell. Having performed his task in the most
conscientious manner, he perceived with some surprise that the dog
did not appear much the better for it, and was further surprised by
finding his own nails ulcerating away in the course of the next few
days. “How was I to know that carbolic acid has to be diluted?” he
mutters indignantly, from time to time, with a troubled gaze at his
mutilated finger-tips.
Since we came to Newala we have been making excursions in all
directions through the surrounding country, in accordance with old
habit, and also because the akida Sefu did not get together the tribal
elders from whom I wanted information so speedily as he had
promised. There is, however, no harm done, as, even if seen only
from the outside, the country and people are interesting enough.
The Makonde plateau is like a large rectangular table rounded off
at the corners. Measured from the Indian Ocean to Newala, it is
about seventy-five miles long, and between the Rovuma and the
Lukuledi it averages fifty miles in breadth, so that its superficial area
is about two-thirds of that of the kingdom of Saxony. The surface,
however, is not level, but uniformly inclined from its south-western
edge to the ocean. From the upper edge, on which Newala lies, the
eye ranges for many miles east and north-east, without encountering
any obstacle, over the Makonde bush. It is a green sea, from which
here and there thick clouds of smoke rise, to show that it, too, is
inhabited by men who carry on their tillage like so many other
primitive peoples, by cutting down and burning the bush, and
manuring with the ashes. Even in the radiant light of a tropical day
such a fire is a grand sight.
Much less effective is the impression produced just now by the
great western plain as seen from the edge of the plateau. As often as
time permits, I stroll along this edge, sometimes in one direction,
sometimes in another, in the hope of finding the air clear enough to
let me enjoy the view; but I have always been disappointed.
Wherever one looks, clouds of smoke rise from the burning bush,
and the air is full of smoke and vapour. It is a pity, for under more
favourable circumstances the panorama of the whole country up to
the distant Majeje hills must be truly magnificent. It is of little use
taking photographs now, and an outline sketch gives a very poor idea
of the scenery. In one of these excursions I went out of my way to
make a personal attempt on the Makonde bush. The present edge of
the plateau is the result of a far-reaching process of destruction
through erosion and denudation. The Makonde strata are
everywhere cut into by ravines, which, though short, are hundreds of
yards in depth. In consequence of the loose stratification of these
beds, not only are the walls of these ravines nearly vertical, but their
upper end is closed by an equally steep escarpment, so that the
western edge of the Makonde plateau is hemmed in by a series of
deep, basin-like valleys. In order to get from one side of such a ravine
to the other, I cut my way through the bush with a dozen of my men.
It was a very open part, with more grass than scrub, but even so the
short stretch of less than two hundred yards was very hard work; at
the end of it the men’s calicoes were in rags and they themselves
bleeding from hundreds of scratches, while even our strong khaki
suits had not escaped scatheless.
NATIVE PATH THROUGH THE MAKONDE BUSH, NEAR

MAHUTA
I see increasing reason to believe that the view formed some time
back as to the origin of the Makonde bush is the correct one. I have
no doubt that it is not a natural product, but the result of human
occupation. Those parts of the high country where man—as a very
slight amount of practice enables the eye to perceive at once—has not
yet penetrated with axe and hoe, are still occupied by a splendid
timber forest quite able to sustain a comparison with our mixed
forests in Germany. But wherever man has once built his hut or tilled
his field, this horrible bush springs up. Every phase of this process
may be seen in the course of a couple of hours’ walk along the main
road. From the bush to right or left, one hears the sound of the axe—
not from one spot only, but from several directions at once. A few
steps further on, we can see what is taking place. The brush has been
cut down and piled up in heaps to the height of a yard or more,
between which the trunks of the large trees stand up like the last
pillars of a magnificent ruined building. These, too, present a
melancholy spectacle: the destructive Makonde have ringed them—
cut a broad strip of bark all round to ensure their dying off—and also
piled up pyramids of brush round them. Father and son, mother and
son-in-law, are chopping away perseveringly in the background—too
busy, almost, to look round at the white stranger, who usually excites
so much interest. If you pass by the same place a week later, the piles
of brushwood have disappeared and a thick layer of ashes has taken
the place of the green forest. The large trees stretch their
smouldering trunks and branches in dumb accusation to heaven—if
they have not already fallen and been more or less reduced to ashes,
perhaps only showing as a white stripe on the dark ground.
This work of destruction is carried out by the Makonde alike on the
virgin forest and on the bush which has sprung up on sites already
cultivated and deserted. In the second case they are saved the trouble
of burning the large trees, these being entirely absent in the
secondary bush.
After burning this piece of forest ground and loosening it with the
hoe, the native sows his corn and plants his vegetables. All over the
country, he goes in for bed-culture, which requires, and, in fact,
receives, the most careful attention. Weeds are nowhere tolerated in
the south of German East Africa. The crops may fail on the plains,
where droughts are frequent, but never on the plateau with its
abundant rains and heavy dews. Its fortunate inhabitants even have
the satisfaction of seeing the proud Wayao and Wamakua working
for them as labourers, driven by hunger to serve where they were
accustomed to rule.
But the light, sandy soil is soon exhausted, and would yield no
harvest the second year if cultivated twice running. This fact has
been familiar to the native for ages; consequently he provides in
time, and, while his crop is growing, prepares the next plot with axe
and firebrand. Next year he plants this with his various crops and
lets the first piece lie fallow. For a short time it remains waste and
desolate; then nature steps in to repair the destruction wrought by
man; a thousand new growths spring out of the exhausted soil, and
even the old stumps put forth fresh shoots. Next year the new growth
is up to one’s knees, and in a few years more it is that terrible,
impenetrable bush, which maintains its position till the black
occupier of the land has made the round of all the available sites and
come back to his starting point.
The Makonde are, body and soul, so to speak, one with this bush.
According to my Yao informants, indeed, their name means nothing
else but “bush people.” Their own tradition says that they have been
settled up here for a very long time, but to my surprise they laid great
stress on an original immigration. Their old homes were in the
south-east, near Mikindani and the mouth of the Rovuma, whence
their peaceful forefathers were driven by the continual raids of the
Sakalavas from Madagascar and the warlike Shirazis[47] of the coast,
to take refuge on the almost inaccessible plateau. I have studied
African ethnology for twenty years, but the fact that changes of
population in this apparently quiet and peaceable corner of the earth
could have been occasioned by outside enterprises taking place on
the high seas, was completely new to me. It is, no doubt, however,
correct.
The charming tribal legend of the Makonde—besides informing us
of other interesting matters—explains why they have to live in the
thickest of the bush and a long way from the edge of the plateau,
instead of making their permanent homes beside the purling brooks
and springs of the low country.
“The place where the tribe originated is Mahuta, on the southern
side of the plateau towards the Rovuma, where of old time there was
nothing but thick bush. Out of this bush came a man who never
washed himself or shaved his head, and who ate and drank but little.
He went out and made a human figure from the wood of a tree
growing in the open country, which he took home to his abode in the
bush and there set it upright. In the night this image came to life and
was a woman. The man and woman went down together to the
Rovuma to wash themselves. Here the woman gave birth to a still-
born child. They left that place and passed over the high land into the
valley of the Mbemkuru, where the woman had another child, which
was also born dead. Then they returned to the high bush country of
Mahuta, where the third child was born, which lived and grew up. In
course of time, the couple had many more children, and called
themselves Wamatanda. These were the ancestral stock of the
Makonde, also called Wamakonde,[48] i.e., aborigines. Their
forefather, the man from the bush, gave his children the command to
bury their dead upright, in memory of the mother of their race who
was cut out of wood and awoke to life when standing upright. He also
warned them against settling in the valleys and near large streams,
for sickness and death dwelt there. They were to make it a rule to
have their huts at least an hour’s walk from the nearest watering-
place; then their children would thrive and escape illness.”
The explanation of the name Makonde given by my informants is
somewhat different from that contained in the above legend, which I
extract from a little book (small, but packed with information), by
Pater Adams, entitled Lindi und sein Hinterland. Otherwise, my
results agree exactly with the statements of the legend. Washing?
Hapana—there is no such thing. Why should they do so? As it is, the
supply of water scarcely suffices for cooking and drinking; other
people do not wash, so why should the Makonde distinguish himself
by such needless eccentricity? As for shaving the head, the short,
woolly crop scarcely needs it,[49] so the second ancestral precept is
likewise easy enough to follow. Beyond this, however, there is
nothing ridiculous in the ancestor’s advice. I have obtained from
various local artists a fairly large number of figures carved in wood,
ranging from fifteen to twenty-three inches in height, and
representing women belonging to the great group of the Mavia,
Makonde, and Matambwe tribes. The carving is remarkably well
done and renders the female type with great accuracy, especially the
keloid ornamentation, to be described later on. As to the object and
meaning of their works the sculptors either could or (more probably)
would tell me nothing, and I was forced to content myself with the
scanty information vouchsafed by one man, who said that the figures
were merely intended to represent the nembo—the artificial
deformations of pelele, ear-discs, and keloids. The legend recorded
by Pater Adams places these figures in a new light. They must surely
be more than mere dolls; and we may even venture to assume that
they are—though the majority of present-day Makonde are probably
unaware of the fact—representations of the tribal ancestress.
The references in the legend to the descent from Mahuta to the
Rovuma, and to a journey across the highlands into the Mbekuru
valley, undoubtedly indicate the previous history of the tribe, the
travels of the ancestral pair typifying the migrations of their
descendants. The descent to the neighbouring Rovuma valley, with
its extraordinary fertility and great abundance of game, is intelligible
at a glance—but the crossing of the Lukuledi depression, the ascent
to the Rondo Plateau and the descent to the Mbemkuru, also lie
within the bounds of probability, for all these districts have exactly
the same character as the extreme south. Now, however, comes a
point of especial interest for our bacteriological age. The primitive
Makonde did not enjoy their lives in the marshy river-valleys.
Disease raged among them, and many died. It was only after they
had returned to their original home near Mahuta, that the health
conditions of these people improved. We are very apt to think of the
African as a stupid person whose ignorance of nature is only equalled
by his fear of it, and who looks on all mishaps as caused by evil
spirits and malignant natural powers. It is much more correct to
assume in this case that the people very early learnt to distinguish
districts infested with malaria from those where it is absent.
This knowledge is crystallized in the
ancestral warning against settling in the
valleys and near the great waters, the
dwelling-places of disease and death. At the
same time, for security against the hostile
Mavia south of the Rovuma, it was enacted
that every settlement must be not less than a
certain distance from the southern edge of the
plateau. Such in fact is their mode of life at the
present day. It is not such a bad one, and
certainly they are both safer and more
comfortable than the Makua, the recent
intruders from the south, who have made USUAL METHOD OF
good their footing on the western edge of the CLOSING HUT-DOOR
plateau, extending over a fairly wide belt of
country. Neither Makua nor Makonde show in their dwellings
anything of the size and comeliness of the Yao houses in the plain,
especially at Masasi, Chingulungulu and Zuza’s. Jumbe Chauro, a
Makonde hamlet not far from Newala, on the road to Mahuta, is the
most important settlement of the tribe I have yet seen, and has fairly
spacious huts. But how slovenly is their construction compared with
the palatial residences of the elephant-hunters living in the plain.
The roofs are still more untidy than in the general run of huts during
the dry season, the walls show here and there the scanty beginnings
or the lamentable remains of the mud plastering, and the interior is a
veritable dog-kennel; dirt, dust and disorder everywhere. A few huts
only show any attempt at division into rooms, and this consists
merely of very roughly-made bamboo partitions. In one point alone
have I noticed any indication of progress—in the method of fastening
the door. Houses all over the south are secured in a simple but
ingenious manner. The door consists of a set of stout pieces of wood
or bamboo, tied with bark-string to two cross-pieces, and moving in
two grooves round one of the door-posts, so as to open inwards. If
the owner wishes to leave home, he takes two logs as thick as a man’s
upper arm and about a yard long. One of these is placed obliquely
against the middle of the door from the inside, so as to form an angle
of from 60° to 75° with the ground. He then places the second piece
horizontally across the first, pressing it downward with all his might.
It is kept in place by two strong posts planted in the ground a few
inches inside the door. This fastening is absolutely safe, but of course
cannot be applied to both doors at once, otherwise how could the
owner leave or enter his house? I have not yet succeeded in finding
out how the back door is fastened.
MAKONDE LOCK AND KEY AT JUMBE CHAURO

This is the general way of closing a house. The Makonde at Jumbe
Chauro, however, have a much more complicated, solid and original
one. Here, too, the door is as already described, except that there is
only one post on the inside, standing by itself about six inches from
one side of the doorway. Opposite this post is a hole in the wall just
large enough to admit a man’s arm. The door is closed inside by a
large wooden bolt passing through a hole in this post and pressing
with its free end against the door. The other end has three holes into
which fit three pegs running in vertical grooves inside the post. The
door is opened with a wooden key about a foot long, somewhat
curved and sloped off at the butt; the other end has three pegs
corresponding to the holes, in the bolt, so that, when it is thrust
through the hole in the wall and inserted into the rectangular
opening in the post, the pegs can be lifted and the bolt drawn out.[50]
MODE OF INSERTING THE KEY
With no small pride first one householder and then a second

showed me on the spot the action of this greatest invention of the
Makonde Highlands. To both with an admiring exclamation of
“Vizuri sana!” (“Very fine!”). I expressed the wish to take back these
marvels with me to Ulaya, to show the Wazungu what clever fellows
the Makonde are. Scarcely five minutes after my return to camp at
Newala, the two men came up sweating under the weight of two
heavy logs which they laid down at my feet, handing over at the same
time the keys of the fallen fortress. Arguing, logically enough, that if
the key was wanted, the lock would be wanted with it, they had taken
their axes and chopped down the posts—as it never occurred to them
to dig them out of the ground and so bring them intact. Thus I have
two badly damaged specimens, and the owners, instead of praise,
come in for a blowing-up.
The Makua huts in the environs of Newala are especially
miserable; their more than slovenly construction reminds one of the
temporary erections of the Makua at Hatia’s, though the people here
have not been concerned in a war. It must therefore be due to
congenital idleness, or else to the absence of a powerful chief. Even
the baraza at Mlipa’s, a short hour’s walk south-east of Newala,
shares in this general neglect. While public buildings in this country
are usually looked after more or less carefully, this is in evident
danger of being blown over by the first strong easterly gale. The only
attractive object in this whole district is the grave of the late chief
Mlipa. I visited it in the morning, while the sun was still trying with
partial success to break through the rolling mists, and the circular
grove of tall euphorbias, which, with a broken pot, is all that marks
the old king’s resting-place, impressed one with a touch of pathos.
Even my very materially-minded carriers seemed to feel something
of the sort, for instead of their usual ribald songs, they chanted
solemnly, as we marched on through the dense green of the Makonde
bush:—
“We shall arrive with the great master; we stand in a row and have
no fear about getting our food and our money from the Serkali (the
Government). We are not afraid; we are going along with the great
master, the lion; we are going down to the coast and back.”
With regard to the characteristic features of the various tribes here
on the western edge of the plateau, I can arrive at no other
conclusion than the one already come to in the plain, viz., that it is
impossible for anyone but a trained anthropologist to assign any
given individual at once to his proper tribe. In fact, I think that even
an anthropological specialist, after the most careful examination,
might find it a difficult task to decide. The whole congeries of peoples
collected in the region bounded on the west by the great Central
African rift, Tanganyika and Nyasa, and on the east by the Indian
Ocean, are closely related to each other—some of their languages are
only distinguished from one another as dialects of the same speech,
and no doubt all the tribes present the same shape of skull and
structure of skeleton. Thus, surely, there can be no very striking
differences in outward appearance.
Even did such exist, I should have no time
to concern myself with them, for day after day,
I have to see or hear, as the case may be—in
any case to grasp and record—an
extraordinary number of ethnographic
phenomena. I am almost disposed to think it
fortunate that some departments of inquiry, at
least, are barred by external circumstances.
Chief among these is the subject of iron-
working. We are apt to think of Africa as a
country where iron ore is everywhere, so to
speak, to be picked up by the roadside, and
where it would be quite surprising if the
inhabitants had not learnt to smelt the
material ready to their hand. In fact, the
knowledge of this art ranges all over the
continent, from the Kabyles in the north to the
Kafirs in the south. Here between the Rovuma
and the Lukuledi the conditions are not so
favourable. According to the statements of the
Makonde, neither ironstone nor any other
form of iron ore is known to them. They have
not therefore advanced to the art of smelting
the metal, but have hitherto bought all their
THE ANCESTRESS OF
THE MAKONDE
iron implements from neighbouring tribes.
Even in the plain the inhabitants are not much
better off. Only one man now living is said to
understand the art of smelting iron. This old fundi lives close to
Huwe, that isolated, steep-sided block of granite which rises out of
the green solitude between Masasi and Chingulungulu, and whose
jagged and splintered top meets the traveller’s eye everywhere. While
still at Masasi I wished to see this man at work, but was told that,
frightened by the rising, he had retired across the Rovuma, though
he would soon return. All subsequent inquiries as to whether the
fundi had come back met with the genuine African answer, “Bado”
(“Not yet”).
BRAZIER
Some consolation was afforded me by a brassfounder, whom I

came across in the bush near Akundonde’s. This man is the favourite
of women, and therefore no doubt of the gods; he welds the glittering
brass rods purchased at the coast into those massive, heavy rings
which, on the wrists and ankles of the local fair ones, continually give
me fresh food for admiration. Like every decent master-craftsman he
had all his tools with him, consisting of a pair of bellows, three
crucibles and a hammer—nothing more, apparently. He was quite
willing to show his skill, and in a twinkling had fixed his bellows on
the ground. They are simply two goat-skins, taken off whole, the four
legs being closed by knots, while the upper opening, intended to
admit the air, is kept stretched by two pieces of wood. At the lower
end of the skin a smaller opening is left into which a wooden tube is
stuck. The fundi has quickly borrowed a heap of wood-embers from
the nearest hut; he then fixes the free ends of the two tubes into an
earthen pipe, and clamps them to the ground by means of a bent
piece of wood. Now he fills one of his small clay crucibles, the dross
on which shows that they have been long in use, with the yellow
material, places it in the midst of the embers, which, at present are
only faintly glimmering, and begins his work. In quick alternation
the smith’s two hands move up and down with the open ends of the
bellows; as he raises his hand he holds the slit wide open, so as to let
the air enter the skin bag unhindered. In pressing it down he closes
the bag, and the air puffs through the bamboo tube and clay pipe into
the fire, which quickly burns up. The smith, however, does not keep
on with this work, but beckons to another man, who relieves him at
the bellows, while he takes some more tools out of a large skin pouch
carried on his back. I look on in wonder as, with a smooth round
stick about the thickness of a finger, he bores a few vertical holes into
the clean sand of the soil. This should not be difficult, yet the man
seems to be taking great pains over it. Then he fastens down to the
ground, with a couple of wooden clamps, a neat little trough made by
splitting a joint of bamboo in half, so that the ends are closed by the
two knots. At last the yellow metal has attained the right consistency,
and the fundi lifts the crucible from the fire by means of two sticks
split at the end to serve as tongs. A short swift turn to the left—a
tilting of the crucible—and the molten brass, hissing and giving forth
clouds of smoke, flows first into the bamboo mould and then into the
holes in the ground.
The technique of this backwoods craftsman may not be very far
advanced, but it cannot be denied that he knows how to obtain an
adequate result by the simplest means. The ladies of highest rank in
this country—that is to say, those who can afford it, wear two kinds
of these massive brass rings, one cylindrical, the other semicircular
in section. The latter are cast in the most ingenious way in the
bamboo mould, the former in the circular hole in the sand. It is quite
a simple matter for the fundi to fit these bars to the limbs of his fair
customers; with a few light strokes of his hammer he bends the
pliable brass round arm or ankle without further inconvenience to
the wearer.
SHAPING THE POT
SMOOTHING WITH MAIZE-COB
CUTTING THE EDGE

FINISHING THE BOTTOM
LAST SMOOTHING BEFORE

BURNING
FIRING THE BRUSH-PILE

LIGHTING THE FARTHER SIDE OF
THE PILE
TURNING THE RED-HOT VESSEL
NYASA WOMAN MAKING POTS AT MASASI

Pottery is an art which must always and everywhere excite the
interest of the student, just because it is so intimately connected with
the development of human culture, and because its relics are one of
the principal factors in the reconstruction of our own condition in
prehistoric times. I shall always remember with pleasure the two or
three afternoons at Masasi when Salim Matola’s mother, a slightly-
built, graceful, pleasant-looking woman, explained to me with
touching patience, by means of concrete illustrations, the ceramic art
of her people. The only implements for this primitive process were a
lump of clay in her left hand, and in the right a calabash containing
the following valuables: the fragment of a maize-cob stripped of all
its grains, a smooth, oval pebble, about the size of a pigeon’s egg, a
few chips of gourd-shell, a bamboo splinter about the length of one’s
hand, a small shell, and a bunch of some herb resembling spinach.
Nothing more. The woman scraped with the
shell a round, shallow hole in the soft, fine
sand of the soil, and, when an active young
girl had filled the calabash with water for her,
she began to knead the clay. As if by magic it
gradually assumed the shape of a rough but
already well-shaped vessel, which only wanted
a little touching up with the instruments
before mentioned. I looked out with the
MAKUA WOMAN closest attention for any indication of the use
MAKING A POT. of the potter’s wheel, in however rudimentary
SHOWS THE a form, but no—hapana (there is none). The
BEGINNINGS OF THE embryo pot stood firmly in its little
POTTER’S WHEEL
depression, and the woman walked round it in
a stooping posture, whether she was removing
small stones or similar foreign bodies with the maize-cob, smoothing
the inner or outer surface with the splinter of bamboo, or later, after
letting it dry for a day, pricking in the ornamentation with a pointed
bit of gourd-shell, or working out the bottom, or cutting the edge
with a sharp bamboo knife, or giving the last touches to the finished
vessel. This occupation of the women is infinitely toilsome, but it is
without doubt an accurate reproduction of the process in use among
our ancestors of the Neolithic and Bronze ages.
There is no doubt that the invention of pottery, an item in human
progress whose importance cannot be over-estimated, is due to
women. Rough, coarse and unfeeling, the men of the horde range
over the countryside. When the united cunning of the hunters has
succeeded in killing the game; not one of them thinks of carrying
home the spoil. A bright fire, kindled by a vigorous wielding of the
drill, is crackling beside them; the animal has been cleaned and cut
up secundum artem, and, after a slight singeing, will soon disappear
under their sharp teeth; no one all this time giving a single thought
to wife or child.
To what shifts, on the other hand, the primitive wife, and still more
the primitive mother, was put! Not even prehistoric stomachs could
endure an unvarying diet of raw food. Something or other suggested
the beneficial effect of hot water on the majority of approved but
indigestible dishes. Perhaps a neighbour had tried holding the hard
roots or tubers over the fire in a calabash filled with water—or maybe
an ostrich-egg-shell, or a hastily improvised vessel of bark. They
became much softer and more palatable than they had previously
been; but, unfortunately, the vessel could not stand the fire and got
charred on the outside. That can be remedied, thought our
ancestress, and plastered a layer of wet clay round a similar vessel.
This is an improvement; the cooking utensil remains uninjured, but
the heat of the fire has shrunk it, so that it is loose in its shell. The
next step is to detach it, so, with a firm grip and a jerk, shell and
kernel are separated, and pottery is invented. Perhaps, however, the
discovery which led to an intelligent use of the burnt-clay shell, was
made in a slightly different way. Ostrich-eggs and calabashes are not
to be found in every part of the world, but everywhere mankind has
arrived at the art of making baskets out of pliant materials, such as
bark, bast, strips of palm-leaf, supple twigs, etc. Our inventor has no
water-tight vessel provided by nature. “Never mind, let us line the
basket with clay.” This answers the purpose, but alas! the basket gets
burnt over the blazing fire, the woman watches the process of
cooking with increasing uneasiness, fearing a leak, but no leak
appears. The food, done to a turn, is eaten with peculiar relish; and
the cooking-vessel is examined, half in curiosity, half in satisfaction
at the result. The plastic clay is now hard as stone, and at the same
time looks exceedingly well, for the neat plaiting of the burnt basket
is traced all over it in a pretty pattern. Thus, simultaneously with
pottery, its ornamentation was invented.
Primitive woman has another claim to respect. It was the man,
roving abroad, who invented the art of producing fire at will, but the
woman, unable to imitate him in this, has been a Vestal from the
earliest times. Nothing gives so much trouble as the keeping alight of
the smouldering brand, and, above all, when all the men are absent
from the camp. Heavy rain-clouds gather, already the first large
drops are falling, the first gusts of the storm rage over the plain. The
little flame, a greater anxiety to the woman than her own children,
flickers unsteadily in the blast. What is to be done? A sudden thought
occurs to her, and in an instant she has constructed a primitive hut
out of strips of bark, to protect the flame against rain and wind.
This, or something very like it, was the way in which the principle
of the house was discovered; and even the most hardened misogynist
cannot fairly refuse a woman the credit of it. The protection of the
hearth-fire from the weather is the germ from which the human
dwelling was evolved. Men had little, if any share, in this forward
step, and that only at a late stage. Even at the present day, the
plastering of the housewall with clay and the manufacture of pottery
are exclusively the women’s business. These are two very significant
survivals. Our European kitchen-garden, too, is originally a woman’s
invention, and the hoe, the primitive instrument of agriculture, is,
characteristically enough, still used in this department. But the
noblest achievement which we owe to the other sex is unquestionably
the art of cookery. Roasting alone—the oldest process—is one for
which men took the hint (a very obvious one) from nature. It must
have been suggested by the scorched carcase of some animal
overtaken by the destructive forest-fires. But boiling—the process of
improving organic substances by the help of water heated to boiling-
point—is a much later discovery. It is so recent that it has not even
yet penetrated to all parts of the world. The Polynesians understand
how to steam food, that is, to cook it, neatly wrapped in leaves, in a
hole in the earth between hot stones, the air being excluded, and
(sometimes) a few drops of water sprinkled on the stones; but they
do not understand boiling.
To come back from this digression, we find that the slender Nyasa
woman has, after once more carefully examining the finished pot,
put it aside in the shade to dry. On the following day she sends me
word by her son, Salim Matola, who is always on hand, that she is
going to do the burning, and, on coming out of my house, I find her
already hard at work. She has spread on the ground a layer of very
dry sticks, about as thick as one’s thumb, has laid the pot (now of a
yellowish-grey colour) on them, and is piling brushwood round it.
My faithful Pesa mbili, the mnyampara, who has been standing by,
most obligingly, with a lighted stick, now hands it to her. Both of
them, blowing steadily, light the pile on the lee side, and, when the
flame begins to catch, on the weather side also. Soon the whole is in a
blaze, but the dry fuel is quickly consumed and the fire dies down, so
that we see the red-hot vessel rising from the ashes. The woman
turns it continually with a long stick, sometimes one way and
sometimes another, so that it may be evenly heated all over. In
twenty minutes she rolls it out of the ash-heap, takes up the bundle
of spinach, which has been lying for two days in a jar of water, and
sprinkles the red-hot clay with it. The places where the drops fall are
marked by black spots on the uniform reddish-brown surface. With a
sigh of relief, and with visible satisfaction, the woman rises to an
erect position; she is standing just in a line between me and the fire,
from which a cloud of smoke is just rising: I press the ball of my
camera, the shutter clicks—the apotheosis is achieved! Like a
priestess, representative of her inventive sex, the graceful woman
stands: at her feet the hearth-fire she has given us beside her the
invention she has devised for us, in the background the home she has
built for us.
At Newala, also, I have had the manufacture of pottery carried on
in my presence. Technically the process is better than that already
described, for here we find the beginnings of the potter’s wheel,
which does not seem to exist in the plains; at least I have seen
nothing of the sort. The artist, a frightfully stupid Makua woman, did
not make a depression in the ground to receive the pot she was about
to shape, but used instead a large potsherd. Otherwise, she went to
work in much the same way as Salim’s mother, except that she saved
herself the trouble of walking round and round her work by squatting
at her ease and letting the pot and potsherd rotate round her; this is
surely the first step towards a machine. But it does not follow that
the pot was improved by the process. It is true that it was beautifully
rounded and presented a very creditable appearance when finished,
but the numerous large and small vessels which I have seen, and, in
part, collected, in the “less advanced” districts, are no less so. We
moderns imagine that instruments of precision are necessary to
produce excellent results. Go to the prehistoric collections of our
museums and look at the pots, urns and bowls of our ancestors in the
dim ages of the past, and you will at once perceive your error.
MAKING LONGITUDINAL CUT IN
BARK
DRAWING THE BARK OFF THE LOG
REMOVING THE OUTER BARK

BEATING THE BARK
WORKING THE BARK-CLOTH AFTER BEATING, TO MAKE IT

SOFT
MANUFACTURE OF BARK-CLOTH AT NEWALA

To-day, nearly the whole population of German East Africa is
clothed in imported calico. This was not always the case; even now in
some parts of the north dressed skins are still the prevailing wear,
and in the north-western districts—east and north of Lake
Tanganyika—lies a zone where bark-cloth has not yet been
superseded. Probably not many generations have passed since such
bark fabrics and kilts of skins were the only clothing even in the
south. Even to-day, large quantities of this bright-red or drab
material are still to be found; but if we wish to see it, we must look in
the granaries and on the drying stages inside the native huts, where
it serves less ambitious uses as wrappings for those seeds and fruits
which require to be packed with special care. The salt produced at
Masasi, too, is packed for transport to a distance in large sheets of
bark-cloth. Wherever I found it in any degree possible, I studied the
process of making this cloth. The native requisitioned for the
purpose arrived, carrying a log between two and three yards long and
as thick as his thigh, and nothing else except a curiously-shaped
mallet and the usual long, sharp and pointed knife which all men and
boys wear in a belt at their backs without a sheath—horribile dictu!
[51]
Silently he squats down before me, and with two rapid cuts has
drawn a couple of circles round the log some two yards apart, and
slits the bark lengthwise between them with the point of his knife.
With evident care, he then scrapes off the outer rind all round the
log, so that in a quarter of an hour the inner red layer of the bark
shows up brightly-coloured between the two untouched ends. With
some trouble and much caution, he now loosens the bark at one end,
and opens the cylinder. He then stands up, takes hold of the free
edge with both hands, and turning it inside out, slowly but steadily
pulls it off in one piece. Now comes the troublesome work of
scraping all superfluous particles of outer bark from the outside of
the long, narrow piece of material, while the inner side is carefully
scrutinised for defective spots. At last it is ready for beating. Having
signalled to a friend, who immediately places a bowl of water beside
him, the artificer damps his sheet of bark all over, seizes his mallet,
lays one end of the stuff on the smoothest spot of the log, and
hammers away slowly but continuously. “Very simple!” I think to
myself. “Why, I could do that, too!”—but I am forced to change my
opinions a little later on; for the beating is quite an art, if the fabric is
not to be beaten to pieces. To prevent the breaking of the fibres, the
stuff is several times folded across, so as to interpose several
thicknesses between the mallet and the block. At last the required
state is reached, and the fundi seizes the sheet, still folded, by both
ends, and wrings it out, or calls an assistant to take one end while he
holds the other. The cloth produced in this way is not nearly so fine
and uniform in texture as the famous Uganda bark-cloth, but it is
quite soft, and, above all, cheap.
Now, too, I examine the mallet. My craftsman has been using the
simpler but better form of this implement, a conical block of some
hard wood, its base—the striking surface—being scored across and
across with more or less deeply-cut grooves, and the handle stuck
into a hole in the middle. The other and earlier form of mallet is
shaped in the same way, but the head is fastened by an ingenious
network of bark strips into the split bamboo serving as a handle. The
observation so often made, that ancient customs persist longest in
connection with religious ceremonies and in the life of children, here
finds confirmation. As we shall soon see, bark-cloth is still worn
during the unyago,[52] having been prepared with special solemn
ceremonies; and many a mother, if she has no other garment handy,
will still put her little one into a kilt of bark-cloth, which, after all,
looks better, besides being more in keeping with its African
surroundings, than the ridiculous bit of print from Ulaya.
MAKUA WOMEN

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PART 2 FIXED INCOME SECURITIES 137 PART 4 PROJECTS AND THEIR

CHAPTER 20 Hybrid Financing: Preferred

PART 8 TACTICAL FINANCING Web Extensions 26B: Risk-Neutral Valuation

GLOSSARY AND INDEXS WEB CHAPTERS:

Glossary 1101 CHAPTER 27 Providing and Obtaining Credit

Preface xix CHAPTER 2

Web Extensions Additional Funds Needed (AFN) Equation

Purchasing Power Parity 724 Web Extensions

Who Wins: The Empirical Evidence 898

Calculating Beta Coefficients 995 Glossary 1101

Intrinsic Valuation as a Unifying Theme

Improvements in the 15th Edition

Changes That Affect All Chapters

THE GREAT RECESSION OF 2007

CONTINUED INTEGRATION WITH EXCEL

Notable Changes within Selected Chapters

CHAPTER 1: AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE

CHAPTER 2: FINANCIAL STATEMENTS, CASH FLOW, AND TAXES

CHAPTER 5: BONDS, BOND VALUATION, AND INTEREST RATES

CHAPTER 7: CORPORATE VALUATION AND STOCK VALUATION

CHAPTER 11: CASH FLOW ESTIMATION AND RISK ANALYSIS

CHAPTER 12: CORPORATE VALUATION AND FINANCIAL PLANNING

CHAPTER 15: CAPITAL STRUCTURE DECISIONS

CHAPTER 16: SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT

CHAPTER 17: MULTINATIONAL FINANCIAL MANAGEMENT

CHAPTER 18: PUBLIC AND PRIVATE FINANCING: INITIAL OFFERINGS,

CHAPTER 20: HYBRID FINANCING: PREFERRED STOCK, WARRANTS,

CHAPTER 21: DYNAMIC CAPITAL STRUCTURES

CHAPTER 22: MERGERS AND CORPORATE CONTROL

CHAPTER 25: PORTFOLIO THEORY AND ASSET PRICING MODELS

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Mike Adler Omar M. Benkato Mary Broske

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Chuck Linke John O’Donnell A. Jon Saxon

Newala, too, suffers from the distance of its water-supply—at least

The water-supply of New Newala is in the bottom of the valley,

NATIVE PATH THROUGH THE MAKONDE BUSH, NEAR

MAKONDE LOCK AND KEY AT JUMBE CHAURO

MODE OF INSERTING THE KEY

With no small pride first one householder and then a second

Some consolation was afforded me by a brassfounder, whom I

SMOOTHING WITH MAIZE-COB

CUTTING THE EDGE

LAST SMOOTHING BEFORE

FIRING THE BRUSH-PILE

TURNING THE RED-HOT VESSEL

NYASA WOMAN MAKING POTS AT MASASI