(eBook PDF) Essentials Of Corporate

Finance 4th Stephen A. Ross

Visit to download the full and correct content document:
https://ebooksecure.com/download/ebook-pdf-essentials-of-corporate-finance-4th-ste
phen-a-ross/
 ABOUT THE ORIGINAL AUTHORS

Stephen A. Ross is the Franco Modigliani Professor of Finance and Economics at the Sloan School of Management, Massachusetts Institute of Technology. One
of the most widely published authors in finance and economics, Professor Ross is recognised for his work in developing Arbitrage Pricing Theory and his
substantial contributions to the discipline through his research in signalling, agency theory, option pricing and the theory of the term structure of interest rates,
among other topics. A past president of the American Finance Association, he currently serves as an associate editor of several academic and practitioner
journals. He is a trustee of CalTech and a co-author of Fundamentals of Corporate Finance 9e (US edition) and Corporate Finance 9e (US edition), both
published by McGraw-Hill/Irwin.

Randolph W. Westerfield is Dean Emeritus of the University of Southern California’s Marshall School of Business and is the Charles B. Thornton Professor of
Finance. He came to USC from the Wharton School, University of Pennsylvania, where he was the chairman of the finance department and a member of the finance
faculty for 20 years. He is a member of several public company boards of directors including Health Management Associates, Inc. and the Nicholas Applegate
Growth Fund. His areas of expertise include corporate financial policy, investment management and stock market price behaviour. He is a co-author of
Fundamentals of Corporate Finance 9e (US edition) and Corporate Finance 9e (US edition), both published by McGraw-Hill/Irwin.

Bradford D. Jordan is Professor of Finance and holder of the Richard W. and Janis H. Furst Endowed Chair in Finance at the University of Kentucky. He has a
longstanding interest in both applied and theoretical issues in corporate finance and has extensive experience teaching all levels of corporate finance and financial
management policy. Professor Jordan has published numerous articles on issues such as cost of capital, capital structure and behaviour of security prices. He is a
past president of the Southern Finance Association and he is a co-author of Fundamentals of Investments: Valuation and Management 5e, a leading investments
text, also published by McGraw-Hill/Irwin.
 ABOUT THE AUSTRALIAN AUTHORS

Rowan Trayler is a Senior Lecturer in the UTS Business School at the University of Technology Sydney (UTS) and has held a number of administrative
appointments, including Director of the Bachelor of Business and Director of the Master of Business in Finance. He has taught introductory finance courses to
both undergraduate and postgraduate students at UTS for more than 28 years. His experience includes teaching small groups and executive MBA classes, and
giving mass lectures for first year undergraduate finance students. He has also been a visiting lecturer at several universities in the United States and has
conducted a number of in-house finance courses for non-finance executives.
Rowan has extensive experience in the banking and finance industry and has several international publications to his name in these areas. He was a member of
the New South Wales state committee of the Australasian Institute of Banking and Finance from 2000 to 2005.
His teaching philosophy is closely aligned to the writing style of the Ross text and this Australian adaptation incorporates that style. Rowan has a
straightforward and well-designed approach to teaching introductory finance courses, which students appreciate, and he is keen to embrace new technologies in
teaching, including web-based resources.

Gerhard Van de Venter, PhD, CFA, is the Head of the Finance Discipline Group at University of Technology Sydney (UTS). He began his career in South Africa
as a financial analyst in the agricultural sector and later as a dealer on the Bond Exchange, trading in fixed income securities. Gerhard’s academic career spans over
20 years where he has taught in the areas of finance, investments and ethics, and has published a number of papers and books in these fields. He was previously
Director, Curriculum Projects, in the Education Division at CFA Institute and holds a PhD in finance from UTS.

Ron Bird began his academic career at Macquarie University in 1970, before moving to the Economics Faculty at the Australian National University (ANU) in
Canberra in 1973, where he became a Professor in, and Head of, the Commerce Department.
After leaving the ANU in 1988 (and subsequently being awarded the title of Emeritus Professor by that university), Ron embarked on a career in the private
sector, including asset consulting with Towers Perrin and funds management with Westpac, before establishing a new funds management firm in conjunction with
Grantham, Mayo, Van Otterloo (Boston). Ron returned to academia in 1999, joining UTS, where he is now Director of the Paul Woolley Centre for Capital Market
Dysfunctionality.
Ron was co-author of the first corporate finance text to be published in Australia and has authored copious articles in Australian and international journals. He
has also made numerous conference presentations and held visiting positions at several prestigious American, British and European universities. Ron maintains
interests outside of the university and has been the academic adviser to several asset management firms and has undertaken consulting projects for the financial
services sector more generally.
His current research interests are directed towards arriving at a better understanding of the economic and social costs attributable to dysfunctional capital
markets and financial institutions and the associated policy implications.
LearnSmart Advantage is a series of adaptive learning products fuelled by LearnSmart—the most widely used and adaptive learning resource proven to
strengthen memory recall, increase retention and boost grades.

Adaptive learning
No two students are the same, so why should their learning experience be? Adaptive technology uses continual assessment and artificial intelligence to
personalise the learning experience for each individual student. As the global leader in adaptive and personalised learning technologies, McGraw-Hill
Education is pioneering ways to improve results and retention across all disciplines.

SmartBook
Fuelled by LearnSmart, SmartBook is the first and only adaptive reading experience available today. Starting with an initial preview of each chapter and key
learning objectives, students read material and are guided to the topics they most need to practise at that time, based on their responses to a continuously
adapting diagnostic. To ensure concept mastery and retention, reading and practice continue until SmartBook directs students to recharge and review
important material they are most likely to forget.

LearnSmart
LearnSmart maximises learning productivity and efficiency by identifying the most important learning objectives for each student to master at a given point
in time. It knows when students are likely to forget specific information and revisits that content to advance knowledge from their short-term to long-term
memory. LearnSmart is proven to improve academic performance, ensuring higher retention rates and better grades.

McGraw-Hill Connect® is the only learning platform that continually adapts to you, delivering precisely what you need, when you need it.
Proven effective
With Connect, you can complete your coursework anytime, anywhere. Millions of students have used Connect and the results are in: research shows that
studying with McGraw-Hill Connect will increase the likelihood that you’ll pass your course and get a better grade.

Connect support
Connect includes animated tutorials, videos and additional embedded hints within specific questions to help you succeed. The Connect Success Academy
for Students is where you’ll find tutorials on getting started, your study resources and completing assignments in Connect. Everything you need to know
about Connect is here!

Visual progress
Connect provides you with reports to help you identify what you should study and when your next assignment is due, and tracks your performance.
Connect’s Overall Performance report allows you to see all of your assignment attempts, your score on each attempt, the date you started and submitted the
assignment, and the date the assignment was scored.

To find out more about SmartBook visit

www.mheducation.com.au/student-smartbook
 HIGHLIGHTS OF THIS EDITION

WE DESIGNED Essentials of Corporate Finance 4e to be as flexible and modular as possible. There are a total of nine parts and, generally speaking, the instructor
is free to decide the particular sequence. Furthermore, within each part the first chapter generally contains an overview and survey. Thus, when time is limited,
subsequent chapters can be omitted. Finally, the sections placed early in each chapter are generally the most important, and later sections frequently can be
omitted without loss of continuity. For these reasons, the instructor has great control over the topics covered, the sequence in which they are covered and the
depth of coverage. Each chapter has numbered learning objectives that are linked to the end-of-chapter questions.
Just to get an idea of the breadth of coverage in this edition of Essentials of Corporate Finance, the following table presents some of the most significant
updates for each chapter, as well as selected chapter highlights.
New and enhanced learning resources in the book and online include:
•new or updated end-of-chapter material, including Review Questions and Challenge Questions
•new Graduate Spotlights that show readers the career diversity a degree in Finance can bring
•new or updated opening vignettes for all chapters
•new or updated boxed features, including Finance Matters, for all chapters
•figures, examples and illustrations featuring real companies have been thoroughly revised and updated.

CHAPTER UPDATES CHAPTER HIGHLIGHTS

PART 1 OVERVIEW OF FINANCIAL MANAGEMENT

CHAPTER 1
•Updated opener on executive remuneration •Highlights important developments regarding the very current question of
appropriate executive compensation
•Updated corporate ethics box •Describes ethical issues in the context of recent insider trading scandals
•Compares the financial implications of different forms of business organisation
•Incorporates real-world issues concerning conflicts of interest and current
controversies surrounding ethical conduct and management pay
PART 2 UNDERSTANDING FINANCIAL STATEMENTS AND CASH FLOW
CHAPTER 2
•Updated Finance Matters on write-offs •Clearly defines cash flow and spells out the differences between cash flow and
earnings
•Emphasises the relevance of market values over book values
•Explains the difference between average and marginal tax rates
CHAPTER 3
•New comparison table for Downer EDI Limited and Transfield •Comparison of ratios
Services Limited
•New Du Pont analysis of Warrnambool Cheese and Butter •Uses real data from the two companies to compare performance using Du Pont
Factory Company and Bega Cheese Ltd anaylsis
•New example of expanded Du Pont analysis •Uses real data from Flight Centre to construct a Du Pont analysis of the company
PART 3 VALUATION OF FUTURE CASH FLOWS
CHAPTER 4
•First of two chapters on time value of money •Introduces the basic ideas on time value of money to get students started on this
•New helpful tips on evaluating investments traditionally difficult topic
CHAPTER 5
•Second of two chapters on time value of money •Covers more advanced time value topics with numerous examples, calculator tips and
Excel spreadsheet exhibits
•Contains many real-world examples
PART 4 VALUING SHARES AND BONDS
CHAPTER 6
•New opening vignette on government bonds •Discusses mortgage-backed securities
•Updated data and examples covering bank bill valua0tion and
bond valuation
•Thorough coverage of bill price concepts
•Thorough coverage of bond price/yield concepts
•Highly intuitive discussion of inflation, the Fisher effect and the term structure of
interest rates
CHAPTER 7
•Updated opener on the closing share prices of ASX-listed •Thorough coverage of constant and non-constant growth models
companies
•New and updated examples and figures
•Covers valuation using multiples
•Up-to-date description of major share market operations
PART 5 CAPITAL BUDGETING
CHAPTER 8
•First of two chapters on capital budgeting •Illustrates te growing importance of ‘green’ business
•Updated examples of capital budgets •Shorter chapter introduces key ideas on an intuitive level to help students with this
traditionally difficult topic
•Consistent, balanced examination of advantages and disadvantages of various criteria
•Covers NPV, IRR, MIRR, payback, discounted payback, accounting rate of return
CHAPTER 9
•Project cash flow •Thorough coverage of project cash flows and the relevant numbers for a project
 analysis
•Updated Finance Matters on when things go wrong •Real-world example of capital budgeting decisions that have gone wrong
•Scenario and sensitivity ‘what-if’ analyses •Illustrates how to actually apply and interpret these tools in a project analysis
PART 6 RISK AND RETURN
CHAPTER 10
•New material and presentation of half yearly returns from •Discusses the dramatic collapse and equally dramatic rebound in equity prices over
1990-2015 this period
•Extensive coverage of historical returns, volatilities and risk premiums
•Efficient markets hypothesis discussed along with common misconceptions
•Discusses calculation and interpretation of geometric returns
•Clarifies common misconceptions regarding appropriate use of arithmetic vs.
geometric average returns
CHAPTER 11
•New real-world examples (Blackmores Ltd and Ansell) •Illustrates basics of risk and return in a straightforward fashion
•New Work the Web features •Develops the security market line with an intuitive approach that bypasses much of
the usual portfolio theory and statistics
PART 7 LONG-TERM FINANCING
CHAPTER 12
•Intuitive develoment of the WACC and a complete, web-based illustration of cost and
capital for a real company, JB Hi-Fi
•New section on company valuation with the WACC •Both approaches are used in practice
•Clears up issues surrounding growth rate estimates
•Uses operating cash flow to value the firm and explains the treatment of interest and
tax
CHAPTER 13
•Illustrates effect of leverage on risk and return
•Describes the basic trade-offs leading to an optimal capital structure
•Financial distress and liquidation •Briefly surveys the bankruptcy/liquidation process for a firm
•Updated definitions of direct and indirect liquidation costs •Covers the basics of financial leverage
•Explores optimal capital structure
CHAPTER 14
•Brings students the latest thinking and evidence on dividend policy
•Updated section on share buybacks •Describes dividend payments and the factors favouring higher and lower payout
policies
•Includes recent survey results on setting dividend policy
CHAPTER 15
•New section on crowdfunding •Introduces the issues around crowdfunding
•Updated figures on equity raised in Australia 20042014 •Extensive, up-to-date discussion of IPOs, including the 1990-2015 period
•New Finance Matters feature on Godfreys Group Ltd
•Updated IPO box •Discusses the 2014 IPO of Godfreys Group as an example of a recient IPO and its
costs
•IPO Underpricing around the world •Looks at the well-known phenomenon of IPO underpricing, with examples around the
world
PART 8 SHORT-TERM FINANCIAL MANAGEMENT
CHAPTER 16
•Updated Finance Matters feature on cash cycle competition •Stresses the importance of cash flow timing
•Illustrates creation of cash budgets and potential need for financing
CHAPTER 17
•Updated figures from an ASIC report on company failures •Examines of systems used by firms to handle cash inflows and outflows
•Analyses of credit policy and implementation
•Brief overview of important inventory concepts
•Examines credit management and inventory management
PART 9 TOPICS IN BUSINESS FINANCE
CHAPTER 18
•New table on the change in value of the currency over the •Covers essentials of exchange rates and their determination
2014/2015 financial year
•Shows how to adapt the basic DCF approach to handle exchange rates
•Discusses hedging and issues surrounding sovereign risk
•Covers international capital budgeting
•Explores exchange rate and political risk
 TEXT AT A GLANCE

IN ADDITION to illustrating relevant concepts and presenting up-to-date coverage, Essentials of Corporate Finance 4e strives to present its material in a way
that makes it engaging and easy to understand. To meet the varied needs of the intended audience, this edition is rich in valuable learning tools and support. Each
feature can be categorised by the benefit to the student: real financial decisions; application tools; study aids.
REAL FINANCIAL DECISIONS
We have included two key features that help students connect chapter concepts to how decision makers use this material in the real world.
OPENING VIGNETTE
Each chapter begins with a contemporary real-world event to introduce students to chapter concepts.
FINANCE MATTERS
Most chapters include at least one Finance Matters boxed feature, which takes a chapter issue and shows how it is being used right now in everyday financial
decision making.
APPLICATION TOOLS
Because there is more than one way to solve problems in corporate finance, we include many sections that encourage students to learn or brush-up on different
problem-solving methods, such as a financial calculator and Excel® spreadsheet skills.
CALCULATOR HINTS
(Basic skills and problem-solving activities)
Calculator Hints is a self-contained section occurring in various chapters. It first introduces students to calculator basics and then illustrates how to solve
problems using the calculator.

SPREADSHEET STRATEGIES
(Basic skills)
The unique Spreadsheet Strategies feature is also in a self-containedsection, showing students how to set up spreadsheets to solve problems—a vital part of
every business student’s education.

WORK THE WEB

These in-chapter boxes show students how to use the information they find to make business decisions.

STUDY AIDS
We want students to get the most from this book and this course, and we realise that students have different learning styles and study needs. Therefore, we
present a number of study features to appeal to a wide range of students.
LEARNING OBJECTIVES
Each chapter begins with a number of learning objectives that are key to the student’s understanding of the chapter. Learning objectives are also linked to the
end-of-chapter Critical Thinking and Concepts Review and Questions and Problems.

SUMMARY AND CONCLUSIONS

At the end of each chapter, key material is covered succinctly to assist students.
CHAPTER REVIEW AND SELF-TEST PROBLEMS (AND ANSWERS)
Review and self-test problems appear after the chapter summaries. Detailed answers to the self-test problems immediately follow. These questions and answers
allow students to test their abilities in solving key problems related to the content of the chapter.
CRITICAL THINKING AND CONCEPTS REVIEW
Every chapter ends with a set of critical thinking questions that challenge the students to apply the concepts they havelearned in the chapter to new situations.
QUESTIONS AND PROBLEMS
We have found that many students learn better when they have plenty of opportunity to practise. We therefore provide extensive end-of-chapter questions and
problems, now linked to learning objectives. Questions and Problems are generally separated into three levels—basic, intermediate and challenge. All problems
are fully annotated so that students and instructors can readily identify particular types. We have worked hard to supply interesting problems that illustrate real-
world applications of chapter material.
WEBLINKS IN MARGIN
We have included links to related material on the web, ensuring students can see theory in practice and explore topics further as require d.

WHAT’S ON THE WEB

These end-of-chapter activities show students how to use and learn from the vast amount of financial resources available on the web.

CONCEPT QUESTIONS
Chapter sections are intentionally kept short to promote a buelding-block approach to learning. Each section is followed by a series of short Concept Questions
that highlight the key ideas just presented. Students use these questions to make sure they can identify and understandthe most important concepts as they read.

NUMBERED EXAMPLES
Separate numbered and titled examples are extensively integrated into the chapters. These examples provide detailed applications and illustrations of the text
material in a step-by-step format. Each example is completely self-containedso that students don’t have to search for additional information. Based on our
classroom testing, these examples are among the most useful learning aids because they provide both detail and explanation.

SUMMARY TABLES
These tables succinctly restate key principles, results and equations. They appear whenever it is useful to emphasise and summarise a group of related concepts.
KEY EQUATIONS
These are called out in the text and identified by equation numbers. Appendix B shows the key equaiions by chapter.
IMPORTANT CONCEPTS
Highiighted phrases appear throughout the text, where significant ideas are presented separately to indicate their importance to the students.
MINI-CASES
Located at the end of every chapter, these cases focus on hypothetical company situations that embody corporate finance topics. Each case presents a new
scenario, data and dilemma. Several s at the end of each case require students to analyse and focus on all the material they learned from the chapters in that part.
Great for homework or in-class exercises and discussions!
GLOSSARY
Available at the end of the book and online at Connect Plus, the glossary contains all the key terms and concepts as they appear in the margin notes.

GRADUATE SPOTLIGHTS
Graduate spotlights, located at the start of each part of the book, present finance graduates’ stories. They share their experiences of studying finance and how
those experiences have informed their career choices.

MATHEMATICAL TABLES
Appendix A provides a list of mathematical tables, conveniently located at the end of the book. This is a handy tool for student revision.
PART 1
OVERVIEW OF FINANCIAL MANAGEMENT

Introduction to
1 financial management

GRADUATE SPOTLIGHT
NAME
Dean Fremder
DEGREE STUDIED
Bachelor of Applied Finance
UNIVERSITY
Macquarie University
CURRENT POSITION
Associate Director, Institutional Equity Sales
EMPLOYER
UBS Investment Bank
What did you learn from your degree and how has it prepared you for a career in finance?
I’ve found the simple financial and economic principles the most useful in my career to date. Whether you’re looking at a mining company or a retailer, what you’re
trying to understand are the basic drivers of supply and demand.
What interested you about working in/studying finance?
I was always fascinated by business and the way in which news, politics and company fundamentals come together to drive the prices of individual stocks and
wanted to be in a position to understand why markets move the way they do (and to profit from it, if possible!).
What have you been up to since graduation?
This year marks my 7th year with UBS. I started as a Cadet in the Operations function at 17-years-old, shortly after graduating from high school. Since then I have
worked with a number of different teams across the bank before transitioning to the Equities business in 2012. That meant I had to complete my degree at night
which wasn’t the most conducive to my social life but positioned me well for my current role.
What does your job/position involve?
Essentially I’m a stockbroker but, instead of speaking with individuals, my clients are large superannuation funds and boutique fund managers. My
responsibilities range from account management to idea generation, order execution and equity capital markets syndication.
What do you enjoy most about your job?
Every day is unique. Market movements are influenced by everything from global politics to fashion trends and even the latest fad TV show (don’t forget the
major TV networks and their regional affiliates are listed). I come to work every morning never knowing what the day will bring. Some days involve spending time
with the management of large companies to better understand their businesses while others you may be glued to your seat, executing trades on behalf of your
clients.
What are your thoughts on the future of the financial industry? What advice would you give to students wanting to work in finance?
Unfortunately, opportunities for young graduates in finance are becoming scarcer. Investment banks globally are undergoing cost-cutting initiatives and youth
development programs are often caught in the crossfire. The best advice is to get your foot in the door early. That may involve cold calling a small broker or fund
manager and offering to volunteer one day a week or leveraging off a friend, family member or lecturer to meet someone in the industry. With respect to the
industry itself, capital will likely continue to flow away from active funds management to passive strategies while technology will drive further declines in broker
commission pools. The regulatory environment is only getting more rigorous and complex while new, innovative financial technology companies will continue to
take share of mind and wallet.
 CHAPTER 1
Introduction to financial management
LEARNING OBJECTIVES (LO)
1.1 Discuss the basic types of financial management decisions and the role of the financial manager.
1.2 Identify the goal of financial management.
1.3 Compare the financial implications of the different forms of business organisation.
1.4 Describe the conflicts of interest that can arise between managers and owners.

COMPENSATION OF CORPORATE EXECUTIVES IN AUSTRALIA and the world continues to be a hot topic with many shareholders and people being unhappy with
high executive pay. It is widely thought that Chief Executive Officers (CEO) pay has grown to exorbitant levels (at least in some cases). In 2011 an amendment to the Australian
Corporations Act came into force to give shareholders a greater say in executive remuneration by legislating the ‘two strikes and you are out’ policy. That is, if 25% or more of
votes cast at two consecutive annual general meetings (AGMs) oppose the adoption of a remuneration report, then the company must formally respond by asking all board
members, except the managing director, to stand for re-election within 90 days. The Australian laws are in line with similar moves in the United States, Norway, Sweden and the
United Kingdom, which have all responded to public outrage about executive pay levels.
When shareholders in Australia were unhappy with executive pay at oil and gas company Santos, 23.4% of them voted against the remuneration report at the AGM in May
2015, just short of the 25% first strike rule. In 2014, 45% of Newcrest Mining’s shareholders voted against the company’s remuneration report sending a strong message of
their concern to management. However, for UGL Limited the indications are that, after receiving one strike already against its remuneration report (28% against the report in
2014), the company’s largest shareholder is considering voting against the remuneration report in 2015 which, combined with other shareholders, could deliver the two strikes
trigger.
Understanding how a corporation sets executive pay, and the role of shareholders in that process, takes us into issues involving the corporate form of organisation, corporate
goals and corporate control, all of which we cover in this chapter.

To begin our study of financial management, we address two central issues. First, what is corporate, or business, finance and what is the role of the financial
manager? Second, what is the goal of financial management?

FINANCE: A QUICK LOOK 1.1

BEFORE WE PLUNGE into our study of ‘corp.fin.’ we think a quick overview of the finance field might be a good idea. Our goal is to make you aware of some of
the most important areas in finance and some of the career opportunities available in each. We also want to illustrate some of the ways finance fits in with other
areas, such as marketing, management and accounting.

Check out the companion website for this text at www.mcgrawhillconnect.com .

THE FOUR BASIC AREAS

Traditionally, financial topics are grouped into four main areas:
1. corporate finance
2. investments
3. financial institutions
4. international finance.
We discuss each of these next.

For job descriptions in finance and other areas, visit www.cpa.com.au and look at the ‘Careers’ section.

CORPORATE FINANCE
The first of these four areas, corporate finance, is the main subject of this book. We begin covering this subject in our next section, so we will wait until then to get
into any details. One thing we will note is that the term corporate finance seems to imply that what we cover is relevant only to corporations, but the truth is that
almost all of the topics we consider are much broader than that. Maybe business finance would be a little more descriptive, but even this is too narrow because at
least half of the subjects we discuss in the pages ahead are really basic financial ideas and principles that are applicable across all the various areas of finance and
beyond.

INVESTMENTS
Broadly speaking, the investments area deals with financial assets, such as shares and debt. Some of the more important questions to consider here include:
1. What determines the price of a financial asset such as a share?
2. What are the potential risks and rewards associated with investing in financial assets?
3. What is the best mixture of the different types of financial assets to hold?
Students who specialise in the investments area have various career opportunities. Being a stockbroker is one of the most common. Stockbrokers often work
for large companies, such as Bell Potter Securities, advising customers on what types of investments to consider and helping them make buy and sell decisions.
Financial advisers play a similar role, but are not necessarily brokers.
Portfolio management is a second investments-related career path. Portfolio managers, as the name suggests, manage money for investors. For example,
individual investors frequently buy into managed funds. Such funds are simply a means of pooling money, which is then invested by a portfolio manager.
Portfolio managers also invest and manage money for superannuation funds, insurance companies and many other types of institutions.
Security/share analysis is a third area. A security/share analyst researches individual investments, such as shares in a particular company, and makes a
determination as to whether the price is right. To do so, an analyst delves deeply into company and industry reports, along with a variety of other information
sources. Frequently, brokers and portfolio managers rely on analysts for information and recommendations.
These investment-related areas, like many areas in finance, share an interesting feature. If they are done well, they can be very rewarding financially
(translation: you can make a lot of money). The bad news, of course, is that they can be very demanding and very competitive careers, so they are definitely not
for everybody.

FINANCIAL INSTITUTIONS
Financial institutions are basically businesses that deal primarily in financial matters. Banks and insurance companies would probably be the most familiar to you.
Institutions such as these employ people to perform a wide variety of finance-related tasks. For example, a commercial loan officer at a bank would evaluate
whether a particular business has a strong enough financial position to warrant extending them a loan. At an insurance company, an analyst would decide whether
a particular risk was suitable for insuring and what the premium should be.

INTERNATIONAL FINANCE
International finance is not so much an area as it is a specialisation within one of the main areas we described above. In other words, careers in international
finance generally involve international aspects of corporate finance or investments or financial institutions. For example, some portfolio managers and security
analysts specialise in non-Australian companies. Similarly, a growing number of Australian businesses have extensive overseas operations and need employees
familiar with such international topics as exchange rates and political risk. Banks are frequently asked to make loans across country lines, so international
specialists are needed there as well.

WHY STUDY FINANCE?

Who needs to know finance? In two words, you do. In fact, there are many reasons for needing a working knowledge of finance even if you are not planning a
finance career. We explore some of these next.

MARKETING AND FINANCE

If you are interested in marketing, you need to know finance because, for example, marketers constantly work with budgets, and they need to understand how to
get the greatest payoff from marketing expenditures and programs. Analysing costs and benefits of projects of all types is one of the most important aspects of
finance, so the tools you learn in finance are vital in marketing research, the design of marketing and distribution channels, and product pricing, just to name a few
areas.
Financial analysts rely heavily on marketing analysts, and the two frequently work together to evaluate the profitability of proposed projects and products. As
we will see in a later chapter, sales projections are a key input in almost every type of new product analysis, and such projections are often developed jointly
between marketing and finance.
Beyond this, the finance industry employs marketers to help sell financial products such as bank accounts, insurance policies and managed funds. Financial
services marketing is one of the most rapidly growing types of marketing, and successful financial services marketers are very well compensated. To work in this
area, you obviously need to understand financial products.

ACCOUNTING AND FINANCE

For accountants, a detailed understanding of finance is a necessity. In smaller businesses, in particular, accountants are often required to make financial decisions
as well as perform traditional accounting duties. Further, as the financial world continues to grow more complex, accountants have to know finance to understand
the implications of many of the newer types of financial contracts and the impact they have on financial statements. Beyond this, cost accounting and business
finance are particularly closely related, sharing many of the same subjects and concerns.
Financial analysts make extensive use of accounting information; they are some of the most important end users. Understanding finance helps accountants
recognise what types of information are particularly valuable and, more generally, how accounting information is actually used (and abused) in practice.

MANAGEMENT AND FINANCE

One of the most important areas in management is strategy. Thinking about business strategy without simultaneously thinking about financial strategy is an
excellent recipe for disaster, and, as a result, management strategists must have a very clear understanding of the financial implications of business plans.
In broader terms, management employees of all types are expected to have a strong understanding of how their jobs affect profitability, and they are also
expected to be able to work within their areas to improve profitability. This is precisely what studying finance teaches you: what are the characteristics of activities
that create value?

YOU AND FINANCE

Perhaps the most important reason to know finance is that you will have to make financial decisions that will be very important to you personally. Today, for
example, when you go to work for almost any type of company, you will be asked to decide how you want the contributions to your superannuation fund to be
invested. We will see in a later chapter that what you choose to do can make an enormous difference to your future financial well-being. On a different note, is it
your dream to start your own business? Good luck if you do not understand basic finance before you start: you will end up learning it the hard way. Want to know
how big your HECS payments are going to be before you decide to pay up-front or pay them off through tax? Maybe not, but we will show you how to calculate
them anyway.
These are just a few of the ways that finance will affect your personal and business lives. Whether you want to or not, you are going to have to examine and
understand financial issues, and you are going to have to make financial decisions. We want you to do so wisely, so keep reading.

CONCEPT QUESTIONS
1.1a What are the major areas in finance?
1.1b Besides wanting to pass this subject, why do you need to understand finance?

LO 1.1 BUSINESS FINANCE AND THE FINANCIAL MANAGER 1.2

NOW WE PROCEED to define business finance and the financial manager’s job.

WHAT IS BUSINESS FINANCE?

Imagine you were to start your own business. No matter what type of business you started, you would have to answer the following three questions in some form
or another:
1. What long-term investments should you take on? That is, what lines of business will you be in and what sorts of buildings, machinery and equipment will you
need?
2. Where will you get the long-term financing to pay for your investment? Will you retain some profits for re-investment, bring in other owners or borrow the
money?
3. How will you manage your everyday financial activities, such as collecting payment from customers and paying suppliers?
These are not the only questions, but they are among the most important. Business finance, broadly speaking, is the study of ways to answer these three
questions. We will be looking at each of them in the chapters ahead.

THE FINANCIAL MANAGER

The financial management function is usually associated with a senior position within the firm, often titled the chief financial officer (CFO) or vice-president of
finance. Figure 1.1 is a simplified organisational chart that depicts the finance activity in a large firm. As shown, the CFO or vice-president of finance coordinates
the activities of the treasurer and the accountant/controller. The accountant’s office handles cost and financial accounting, tax payments and management
information systems. The treasurer’s office is responsible for managing the firm’s cash and credit, its financial planning and its capital expenditures. These
treasury activities are all related to the three general questions raised above, and the chapters ahead deal primarily with these issues. Our study thus bears mostly
on activities usually associated with the treasurer and treasury staff, but in a smaller firm the treasurer and accountant might be the same person.

For current issues facing CFOs, see www.finance-treasury.com

FIGURE 1.1 A simplified organisational chart. The exact titles and organisation differ from company to company

FINANCIAL MANAGEMENT DECISIONS

As our discussion above suggests, the financial manager must be concerned with three basic types of questions. We consider these in greater detail next.

CAPITAL BUDGETING
The first question concerns the firm’s long-term investments. The process of planning and managing a firm’s long-term investments is called capital budgeting . In
capital budgeting, the financial manager tries to identify investment opportunities that are worth more to the firm than they cost to acquire. Loosely speaking, this
means that the value of the cash flow generated by a project exceeds the cost of undertaking the project.
capital budgeting The process of planning and managing a firm’s long-term investments.
Regardless of the specific investment project under consideration, financial managers must be concerned with how much cash they expect to receive, when
they expect to receive it, and how likely they are to receive it. Evaluating the size, timing and risk of future cash flows is the essence of capital budgeting. In fact,
whenever we evaluate a business decision, the size, timing and risk of the cash flows will be, by far, the most important things we will consider.

CAPITAL STRUCTURE
The second question for the financial manager concerns how the firm obtains the financing it needs to support its long-term investments. A firm’s capital structure
(or financial structure) refers to the specific mixture of long-term debt and equity the firm uses to finance its operations. The financial manager has two
capital structure The mixture of debt and equity maintained by a firm.
concerns in this area. First, how much should the firm raise? Second, what are the least expensive sources of funds for the firm?
In addition to deciding on the financing mix, the financial manager has to decide exactly how and where to raise the money. The expenses associated with
raising long-term financing can be considerable, so different possibilities must be carefully evaluated. One possible source of funds is retained earnings, which
raises the question of what dividends to pay shareholders. If the business is to raise funds externally, then they can come in a variety of forms from a large number
of potential suppliers. Choosing among these suppliers and among funding types is another job handled by the financial manager.

WORKING CAPITAL MANAGEMENT

The third question concerns working capital management. The term working capital refers to a firm’s short-term assets, such as inventory, and its short-term
liabilities, such as money owed to suppliers. Managing the firm’s working capital is a day-to-day activity that ensures the firm has sufficient resources to continue
its operations and avoid costly interruptions. This involves a number of activities related to the firm’s receipt and disbursement of cash.
working capital A firm’s short-term assets and liabilities.
Some questions about working capital that must be answered are:
1. How much cash and inventory should we keep on hand?
2. Should we sell on credit to our customers?
3. How will we obtain any needed short-term financing?
4. If we borrow in the short term, how and where should we do it?
These questions represent just a small sample of the issues that arise in managing a firm’s working capital.

CONCLUSION
The three areas of corporate financial management we have described—capital budgeting, capital structure and working capital management—are very broad
categories. Each includes a rich variety of topics, and we have indicated only a few of the questions that arise in the different areas. The chapters ahead contain
more detail.

CONCEPT QUESTIONS
1.2a What is the capital budgeting decision?
1.2b What do you call the specific mixture of long-term debt and equity that a firm chooses to use?
1.2c Into what category of financial management does cash management fall?

LO 1.3 FORMS OF BUSINESS ORGANISATION 1.3

LARGE FIRMS IN Australia, such as Woolworths and Woodside Petroleum, are almost all organised as corporations. We examine the three different legal forms of
business organisation—sole proprietorship, partnership and corporation—to see why this is so.

SOLE PROPRIETORSHIP
A sole proprietorship is a business owned by one person, sometimes called a sole trader. This is the simplest type of business to start and is the least regulated
form of organisation. For this reason, there are more sole proprietorships than any other type of business, and many businesses that later become large
corporations start out as sole proprietorships.
sole proprietorship A business owned by a single individual.
The owner of a sole proprietorship keeps all the profits. That’s the good news. The bad news is that the owner also has unlimited liability for business debts.
This means that creditors can look to the proprietor’s personal assets for payment. Similarly, there is no distinction between personal and business income, so all
business income is taxed as personal income.

For more information on forms of business organisation, see the ‘Business topics’ section at www.business.gov.au .

The life of a sole proprietorship is limited to the owner’s life span, and, importantly, the amount of equity that can be raised is limited to the proprietor’s
personal wealth. This limitation often means that the business is unable to exploit new opportunities because of insufficient capital. Ownership of a sole
proprietorship may be difficult to transfer, since this requires the sale of the entire business to a new owner.

PARTNERSHIP
A partnership is similar to a sole proprietorship, except that there are two or more owners (partners). In a general partnership, all the partners share in gains or
losses, and all have unlimited liability for all partnership debts, not just some particular share. The way partnership gains (and losses) are divided is described in
the partnership agreement. This agreement can be an informal oral agreement, such as ‘Let us start a lawn mowing business’, or a lengthy, formal written
document.
partnership A business formed by two or more individuals or entities.
In a limited partnership, one or more general partners will run the business and have unlimited liability, but there will be one or more limited partners (silent
partners) who do not actively participate in the business. A limited partner’s liability for business debts is limited to the amount that partner contributes to the
partnership. This form of organisation is common in real estate ventures, for example.
The advantages and disadvantages of a partnership are basically the same as those for a sole proprietorship. Partnerships based on a relatively informal
agreement are easy and inexpensive to form. General partners have unlimited liability for partnership debts, and the partnership terminates when a general partner
wishes to sell out or dies. All income is taxed as personal income to the partners, and the amount of equity that can be raised is limited to the partners’ combined
wealth. Ownership by a general partner is not easily transferred, because a new partnership must be formed. A limited partner’s interest can be sold without
dissolving the partnership, but finding a buyer may be difficult.
Because a partner in a general partnership can be held responsible for all partnership debts, having a written agreement is very important. Failure to spell out
the rights and duties of the partners frequently leads to misunderstandings later on. Also, if you are a limited partner, you must not become deeply involved in
business decisions unless you are willing to assume the obligations of a general partner. The reason is that, if things go badly, you may be deemed to be a general
partner, even though you say you are a limited partner.
Based on our discussion, the primary disadvantages of sole proprietorships and partnerships as forms of business organisation are (1) unlimited liability for
business debts on the part of the owners, (2) limited life of the business and (3) difficulty of transferring ownership. These three disadvantages add up to a single,
central problem: the ability of such businesses to grow can be seriously limited by an inability to raise cash for investment.

CORPORATION
The corporation is the most important form (in terms of size) of business organisation in most developed economies, such as Australia and New Zealand. A
corporation is a legal ‘person’, separate and distinct from its owners, and it has many of the rights, duties and privileges of an actual person. Corporations can
borrow money and own property, can sue and be sued, and can enter into contracts. A corporation can even be a general partner or a limited partner in a
partnership, and a corporation can own shares in another corporation.
corporation A business created as a distinct legal entity owned by one or more individuals or entities.
Not surprisingly, starting a corporation is somewhat more complicated than starting the other forms of business organisation. Forming a corporation involves
preparing a constitution (or a charter). The constitution consists of rules describing how the corporation regulates its own existence and must contain a number of
things, including the corporation’s name, its intended life (which can be forever), its business purpose, how directors are elected and the number of shares that
can be issued. The constitution may be amended or extended from time to time by the shareholders. In Australia, this information must be supplied to the
Australian Securities and Investments Commission (ASIC); in New Zealand, it is supplied to the New Zealand Companies Office.
In a large corporation, the shareholders and the managers are usually separate groups. The shareholders elect the board of directors, who then select the
managers. Management is charged with running the corporation’s affairs in the shareholders’ interests. In principle, shareholders control the corporation because
they elect the directors.
As a result of the separation of ownership and management, the corporate form has several advantages. Ownership (represented by shares) can readily be
transferred, and so the life of the corporation is not limited. The corporation can borrow money in its own name. As a result, the shareholders in a corporation have
limited liability for corporate debts. The most they can lose is what they have invested.
The relative ease of transferring ownership, the limited liability for business debts and the unlimited life of the business are the reasons that the corporate form
is superior when it comes to raising cash. If a corporation needs new equity, it can sell new shares and attract new investors. The number of owners can be huge:
larger corporations have many thousands of shareholders. For example, at the time of writing BHP Billiton had about 576 220 shareholders, Westpac about 595 900
and Telstra about 1 398 935 shareholders.
In the late 1990s, company law was changed to allow the formation of a one-share-one-director company, so individuals or sole traders could take advantage of
the limited liability provisions of company law.
The corporate form has a significant disadvantage. Since a corporation is a legal person, it must pay taxes. Moreover, under a classical tax system, money paid
out to shareholders in the form of dividends is taxed again as income to those shareholders. As a consequence under this system corporate profits are taxed twice:
at the corporate level when they are earned and again at the personal level when they are paid out. Australia had a classical tax system until 1987, when a dividend
imputation system was introduced. In a dividend imputation tax system, such as Australia’s, shareholders get a tax credit for the Australian tax paid by the
company, effectively removing the double taxation of corporate profits (see Chapter 2 ). A similar imputation system tax was introduced in New Zealand in 1988.

A CORPORATION BY ANOTHER NAME . . .

The corporate form has many variations around the world. Exact laws and regulations differ, of course, but the essential features of public ownership 1 and limited
liability remain. These firms are often called joint stock companies, public limited companies or limited liability companies.
Table 1.1 gives the names of a few well-known international corporations, their country of origin and a translation of the abbreviation that follows the company
name.
TABLE 1.1 International corporations

COMPANY COUNTRY OF ORIGIN TYPE OF COMPANY TRANSLATION

Bayerische Motoren Werke (BMW) AG Germany Aktiengesellschaft Corporation
Dornier GmbH Germany Gesellschaft mit beschränkter Haftung Company with limited liability
Rolls-Royce plc United Kingdom Public limited company Public limited company
Shell UK United Kingdom Limited Corporation
Unilever NV Netherlands Naamloze Vennootschap Limited liability company
Fiat SpA Italy Società per Azioni Public limited company
Saab AB Sweden Aktiebolag Joint stock company
Peugeot SA France Société Anonyme Joint stock company
Microsoft Corporation United States of America Company Public company

CONCEPT QUESTIONS
1.3a What are the three forms of business organisation?
1.3b What are the primary advantages and disadvantages of sole proprietorships and partnerships?
1.3c What is the difference between a general and a limited partnership?
1.3d Why is the corporate form superior to sole proprietorships and partnerships when it comes to raising cash?

LO 1.2 THE GOAL OF FINANCIAL MANAGEMENT 1.4

TO STUDY FINANCIAL decision making, we first need to understand the goal of financial management. Such an understanding is important because it leads to
an objective basis for making and evaluating financial decisions.

PROFIT MAXIMISATION
Profit maximisation would probably be the most commonly cited business goal, but this is not a very precise objective. Do we mean profits this year? If so, then
actions such as deferring maintenance, letting inventories run down and other short-run, cost-cutting measures will tend to increase profits now, but these
activities are not necessarily desirable.
The goal of maximising profits may refer to some sort of ‘long-run’ or ‘average’ profits, but it is unclear exactly what this means. First, do we mean something
like accounting net income or earnings per share? As we will see, these numbers may have little to do with what is good or bad for the firm. Second, what do we
mean by the long run? As a famous economist once remarked, in the long run we are all dead! More to the point, this goal does not tell us the appropriate trade-off
between current and future profits.

THE GOAL OF FINANCIAL MANAGEMENT IN A CORPORATION

The financial manager in a corporation makes decisions for the shareholders of the firm. Given this, instead of listing possible goals for the financial manager, we
really need to answer a more fundamental question: from the shareholders’ point of view, what is a good financial management decision?
If we assume shareholders buy shares because they seek to gain financially, then the answer is obvious: good decisions increase the value of the firm’s
shares, and poor decisions decrease it.
Given our observations, it follows that the financial manager acts in the shareholders’ best interests by making decisions that increase the value of the shares
and so the wealth of the shareholders. The appropriate goal for the financial manager in a corporation can thus be stated quite easily:
The goal of financial management is to maximise the current value of the existing shares.

The goal of maximising the value of the shares avoids the problems associated with the different goals we discussed above. There is no ambiguity in the
criterion, and there is no short-run versus long-run issue. We explicitly mean that our goal is to maximise the current share value. Of course, maximising share
value is the same thing as maximising the market price per share.
A MORE GENERAL FINANCIAL MANAGEMENT GOAL
Given our stated goal to maximise the value of the shares, an obvious question comes up: what is the appropriate goal when the firm has no shares traded?
Corporations are certainly not the only type of business, and shares in many corporations rarely change hands, so it is difficult to say what the value per share is
at any given time.
As long as we are dealing with for-profit businesses, only a slight modification is needed. The total value of the shares in a corporation is simply equal to the
value of the owners’ equity. Therefore, a more general way of stating our goal is:
Maximise the market value of the existing owners’ equity.

With this goal in mind, it does not matter whether the business is a sole proprietorship, a partnership or a corporation. For each of these, good financial
decisions increase the market value of the owners’ equity and poor financial decisions decrease it.
Finally, our goal does not imply that the financial manager should take illegal or unethical actions in the hope of increasing the value of the equity in the firm.
What we mean is that the financial manager best serves the owners of the business by identifying investment projects that add value to the firm because they are
desired and valued in the free marketplace. The Finance Matters box discusses some recent ethical issues and problems faced by well-known corporations.

FINANCE MATTERS
CORPORATE ETHICS

LARGE COMPANIES ARE SOMETIMES GUILTY of unethical behaviour. Often this unethical behaviour takes the form of false or misleading
financial statements. In one of the largest corporate fraud cases in history, energy giant Enron Corporation was forced to file for bankruptcy in
December 2001 amid allegations that the company’s financial statements were deliberately misleading and false. Enron’s bankruptcy not only
destroyed that company, but its auditor, Arthur Andersen, as well.
Often unethical behaviour is also illegal. For example, consider insider trading, which is buying or selling shares or other exchange traded
securities based on private information not available to the public. In May 2012 the Australian Securities and Investments Commission (ASIC)
reported that there have been more breaches of insider trading in the past three years than in the preceding 10 years. During this period ASIC
had a number of successful prosecutions. Recently, in March 2015 two individuals, one an employee of the National Australia Bank (NAB) and
the other an employee of the Australian Bureau of Statistics (ABS), were convicted of insider trading and sent to jail for periods of seven and
three years respectively. The ABS employee was found to have provided price sensitive information to the NAB employee that enabled the two
to profit from dealing in foreign exchange derivative products. It was reported that over a nine month period the pair made a profit of $7 million.
The difference between ethical and unethical behaviour can sometimes be murky and complex. Most company transactions between
Australia and countries that provide tax havens are lawful international dealings, as they take advantage of tax benefits in other jurisdictions.
Many of Australia’s largest companies use tax havens to reduce their tax bill and many companies have even physically relocated to countries
that provide tax havens where they pay minimal taxes. The Tax Justice Network of Australia reported that Australia’s top 200 listed companies
pay on average a 23% tax rate when the corporate tax rate is 30%. If these companies were to pay the effective tax rate of 30% that would be an
additional $8 billion in revenue to the government. Many multinational companies use tax havens to reduce tax. Recently the Australian
Government has named companies such as Apple, Google and Facebook among others that use subsidiaries in low-tax nations as part of a
strategy that enables them to reduce their tax obligations by millions of dollars. Since the goal of the corporation is to maximise shareholder
wealth, this would seem like a good move, and the practice is entirely legal. But is it ethical? What are the issues?
Another recent corporate activity that has generated much controversy is the practice of outsourcing, or offshoring, jobs to other countries.
Australian companies engage in this practice when labour costs in another country are substantially lower than they are domestically. Again,
this is done to maximise shareholder wealth, but it does raise complex ethical questions. Many Australian workers lose jobs when offshoring
occurs. On the other hand, offshoring not only provides an opportunity for the company to reduce labour costs, it also creates employment in
countries where the offshoring activity takes place. In June 2013 the Financial Review reported that companies were not only offshoring IT jobs
but back office accounting positions, and companies such as Brambles and Perpetual were sending jobs offshore. One report indicated 25
000 jobs went to the Philippines alone in 2014.

CORPORATE GOVERNANCE
In response to corporate scandals in the United States involving companies such as Enron, WorldCom and Tyco, the US Government enacted the Sarbanes-Oxley
Act in 2002. The Act is intended to strengthen protection against corporate accounting fraud and financial malpractice. In response to problems not only in the
United States but also around the world, the governments and/or the stock exchanges in many other countries have introduced their own requirements. In 2003
the Australian Stock Exchange (ASX) established a Corporate Governance Council to develop guidelines on good corporate governance and establish best-
practice recommendations, which issued a set of guidelines in 2003. In 2013 the ASX released a revised set of Corporate Governance Principles and
Recommendations. In 2003 the New Zealand Stock Exchange (NZX) released its corporate governance regime, setting out good corporate governance and a best-
practice code; at the same time it amended the NZX Listing Rules to take these requirements into account.
All such procedures are designed to ensure that companies tell the truth in their financial statements. For example, the officers of a public corporation must
review and sign the annual report. They must attest that the annual report does not contain false statements or material omissions and also that the financial
statements fairly represent the company’s financial results. In essence, the requirements make management personally responsible for the accuracy of a
company’s financial statements. Compliance with the new rules can be very costly for public companies.

CONCEPT QUESTIONS
1.4a What is the goal of financial management?
1.4b What are some shortcomings of the goal of profit maximisation?

LO THE AGENCY PROBLEM AND CONTROL OF THE 1.5

1.4 CORPORATION
WE HAVE SEEN that the financial manager in a corporation acts in the best interests of the shareholders by taking actions that increase the value of the firm’s
shares. However, we have also seen that in large corporations ownership can be spread over a huge number of shareholders. This dispersion of ownership
arguably means that management effectively controls the firm. In this case, will management necessarily act in the best interests of the shareholders? Put another
way, might not management pursue its own goals at the shareholders’ expense? We briefly consider some of the arguments.

AGENCY RELATIONSHIPS
The relationship between shareholders and management is called an agency relationship. Such a relationship exists whenever someone (the principal) hires
another (the agent) to represent his or her interest. For example, you might hire someone (an estate agent) to sell your house when you are transferred interstate
by your employer. In all such relationships, there is a possibility of conflict of interest between the principal and the agent. Such a conflict is called an agency
problem .
agency problem The possibility of conflict of interest between the owners and management of a firm.
Suppose you hire an agent to sell your house and you agree to pay her a flat fee upon sale. The agent’s incentive in this case is to make the sale, not
necessarily to get you the best price. If you paid a commission of, say, 2% of the sales price instead of a flat fee, then the agent has an incentive to sell your house
at a higher price. This example illustrates how the way an agent is compensated can affect agency problems.

MANAGEMENT GOALS
To see how management and shareholder interests might differ, imagine that a corporation is considering a new investment. The new investment is expected to
affect the share price favourably, but it is also a relatively risky venture. The owners of the firm will wish to make the investment (because the share value will rise),
but management may not want to do so because there is the possibility that things will turn out badly and management jobs will be lost. If management does not
take the investment, then the shareholders may lose a valuable opportunity. This is one example of an agency cost .
agency cost When managers fail to take advantage of a valuable opportunity available to the firm.
It is sometimes argued that, left to themselves, managers would tend to maximise the amount of resources over which they have control or, more generally,
their business power or wealth. This goal could lead to an overemphasis on business size or growth. For example, cases where management is accused of
overpaying to buy another company just to increase the size of the business and/or to demonstrate their corporate power are not uncommon. Obviously, if
overpayment does take place, such a purchase does not benefit the owners of the purchasing company.
Our discussion indicates that management may tend to overemphasise organisational survival to protect job security. Also, management may dislike outside
interference, so independence and corporate self-sufficiency may be important goals.

DO MANAGERS ACT IN THE SHAREHOLDERS’ INTERESTS?

Whether managers will, in fact, act in the best interests of shareholders depends on two issues. First, how closely are management goals aligned with shareholder
goals? This question relates to the way managers are compensated. Second, can management be replaced if they do not pursue shareholder goals? This issue
relates to control of the firm. As we will discuss, there are a number of reasons to think that, even in the largest firms, management has a significant incentive to act
in the interests of shareholders.

MANAGERIAL COMPENSATION
Management will frequently have a significant economic incentive to increase share value for two reasons. First, managerial compensation, particularly at the top,
is usually tied to financial performance in general and often to share value in particular. For example, managers are frequently given the option to buy shares at a
fixed price. The higher the value of the share, the more valuable this option is to them. The second incentive managers have relates to job prospects. Better
performers within the firm will tend to get promoted. More generally, those managers who are successful in pursuing shareholder goals will be in greater demand in
the labour market and thus command higher salaries.
In fact, managers who are successful in pursuing shareholder goals can reap enormous rewards. For example, in 2015 the Australian Council of Superannuation
Investors calculated the top CEO remuneration for the ASX 200 companies. They reported Chris Rex, CEO of Ramsay Health, was the most highly remunerated
Australian executive. He received $30.8 million in wages and other incentives. Other highly paid CEOs were Louis Gries of James Hardie, who was paid $20.8
million, and Nicholas Moore of Macquarie Group, who was paid $13.1 million in wages and incentives. Australia’s top female executive was Gail Kelly of Westpac
with $12.9 million, and she was the seventh highest paid CEO. However, these numbers pale in comparison to what many US company executives earn. In 2015
Nick Woodman of GoPro received about US$284 million and in 2014 David M. Zaslav of Discovery Communications was paid about US$156 million.
However, not all CEOs have managed to pursue the shareholder goal of maximising shareholder wealth. Eddy Groves, the former CEO of ABC Learning Centres
who was sacked one month before the company collapsed, tried suing the company liquidator for unpaid salary of $3.3 million, even though shareholders had lost
their investment. Managers need to pursue the interest of their shareholders and the long-run benefit of their company and not their own short-term satisfaction.

CONTROL OF THE FIRM

Control of the firm ultimately rests with shareholders. They elect the board of directors, which in turn hires and fires management. The mechanism by which
unhappy shareholders can act to replace existing management is called a proxy fight . A proxy is the authority to vote on behalf of another shareholder. A proxy
fight develops when a group solicits proxies in order to replace the existing board, and thereby replace existing management.
proxy fight A mechanism whereby a group of unhappy shareholders solicit proxy votes to replace existing management.
Another way that management can be replaced is by takeover. Firms that are poorly managed are more attractive as acquisitions than well-managed firms
because a greater profit potential exists. Thus, avoiding a takeover by another firm gives management another incentive to act in the shareholders’ interests.
Information on executive compensation, together with plenty of other information, can be easily found on the internet for almost any public company. Our Work
the Web box on the following page shows you how to get started.
Sometimes it is hard to tell if a company’s management is really acting in shareholders’ best interests. For example, in the spring of 2008 web portal Yahoo! was
battling a $42 billion unsolicited takeover bid from software giant Microsoft. Yahoo!’s management argued that the bid significantly undervalued the company,
even though it was 62% higher than the then-current share price. In an effort to thwart Microsoft’s takeover attempt, Yahoo! entered into an advertising
agreement with internet search engine rival Google, and began discussions with other companies such as AOL about a possible merger. In fact, Yahoo! spent $79
million to fight off the Microsoft bid. In the aftermath, Yahoo! founder and CEO Jerry Yang was forced to step down, and Yahoo! shareholders were left saying
boo-hoo.

CONCLUSION
The available theory and evidence are consistent with the view that shareholders control the firm and that shareholder wealth maximisation is the relevant goal of
the corporation. Even so, there will undoubtedly be times when management goals are pursued at the expense of the shareholders, at least temporarily.
Agency problems are not unique to corporations: they exist whenever there is a separation of ownership and management. This separation is most
pronounced in corporations, but it certainly exists in partnerships and sole proprietorships as well.

STAKEHOLDERS
Our discussion thus far implies that management and shareholders are the only parties with an interest in the firm’s decisions. This is an oversimplification, of
course. Employees, customers, suppliers and even the government all have a financial interest in the firm.
These various groups are called stakeholders in the firm. In general, a stakeholder is someone other than a shareholder or creditor who potentially has a claim
on the cash flows of the firm. Such groups will also attempt to exert control over the firm, perhaps to the detriment of the owners.
stakeholders Someone other than a shareholder or creditor who potentially has a claim on the cash flows of the firm.
Another random document with
no related content on Scribd:
Even so judge—even so. Such is my theory, and I have been
abroad, I believe, to much purpose; for if men are to die by the law, I
would have them appear to die by the law. By the law, judge—not by
popular caprice, popular indignation or arbitrary power. I would leave
no ground for sorrow, none for self-reproach, none for misgiving,
either to the public or to that portion of the public who have
participated more immediately in the awful business of death. I would
have no such case on record as that of Mary Dyer.... I would have no
Elizabeth Hutchinson offered up—no such trials, no such graves, no
such names for the people to be afraid of and sorry for, ages and
ages after the death of a miserable infatuated woman—a prophetess
or a witch, forsooth—
George Burroughs!
—A prophetess or a witch I say!—after she has been put to death no
man is able to say wherefore.
George Burroughs!
Who speaks?
George Burroughs, beware! cried a female who stood in a dark part
of the house, with her head muffled up—a deep shadow was about
her and a stillness like death.
I know that voice—be of good cheer—I have nearly done, though not
being used to unprepared public-speaking, I have said little that I
meant to say, and much that I did not mean to say; hardly a word
however even of that which I have said or meant to say, as I would
say it, or as I could say it, if I had a little more experience—or as I
could say it now on paper. And if I feel this—I—who have grown up
to a habit if not of speaking, at least of reading before a multitude; I,
who have been used from my youth up to arrange my thoughts for
the public eye, to argue and to persuade; what must another, taken
by surprise, wholly without such practice and power, what must he—
or she—or that poor woman at the bar feel, were you to put her into
my place, and urge her to defend herself to a jury? Pity her ... I
implore you ... consider what I say and have mercy upon her!—
Before you sit down, brother B.... what if you give us a word or two of
the parallel you begun?—I see the drift of it now—a word or two, you
understand me—take a mouthful o’ water—and if you could manage
to slip in a remark or two about the nature of the proof required in
witchcraft, I’ll be after you in a crack, and we’ll tire ’em out, if we can’t
do anything better.
I will—be prepared though—for I shall say but a word or two—I am
weary; sick and weary of this—my throat is parched, and my very
soul in a maze of perplexity.
So much the better—they can’t follow you on t’other side.
Well, fathers! I pursued the inquiry. I found that even there, no
prisoner could have a compulsory process to bring a witness for him
into court, although such process could be had, backed by the whole
power of the country, to bring a witness against him. And I
discovered also, that if a witness for the accused were so obliging as
to appear, they would not suffer him to speak on oath. I turned to the
officer—I take it, Sir, said I, that in such a case, you have no
punishment for untruth, and of course, that the witnesses for the
wretched man at the bar are not so likely to be believed as the
witnesses against him ... the latter being on oath?... Precisely. But is
he a lawyer? said I.... Who! the prisoner at the bar.... Yes.... A lawyer
—no. Is he accustomed to public speaking? He ... no, indeed!... Nor
to close argument, perhaps? nor to a habit of arranging his ideas on
paper?... I dare say not, was the reply. It would be no easy matter for
a man to preserve his selfpossession ... so at least I should suppose,
however much he might be accustomed to public speaking ... if he
were on trial himself, and obliged to defend himself?
There’s an authority for you in the books, brother B.—The man who
appeareth for himself, (in a loud voice) for himself, saith my lord ...
Coke, hath a fool for his client....
Saith Lord Coke, hey?
Pooh, pooh, (in a whisper) pooh, pooh; never mind who says it; give
it for his, and let them show the contrary, if they are able.
But if it be a case of life and death—where great coolness and great
precision were needed at every step, he would be yet more
embarrassed? No doubt. And is not the prosecutor a very able man?
Very, Sir—very. Chosen for that office, out of a multitude of superior
men altogether on account of his ability? Very true, Sir—very true—
on account of his ability and experience at the bar. And yet, Sir, said
I—if I understand you, that poor fellow there, who is now in such
grevious trepidation, so weak that he can hardly stand—his color
coming and going with every breath, his throat and mouth and lips
dry with excessive anxiety, his head inclined as if with a continual
ringing in his ears—if I understand you, said I, he is now called up to
defend himself, to make speech for speech before a jury, against
one of your most able and eloquent speakers; a man whose
reputation is at stake on the issue—a man who—if he be thwarted in
his way, by a witness, or a fact, or a speech, or a point of law, will
appear to regard the escape of the prisoner, whatever he may be
charged with, and whether he be innocent or guilty, as nothing better
than a reproach to the law, and high treason to the state—a man, to
say all in a word, who dares to behave in a court of justice—in a
matter of life and death too—as if the escape of a prisoner were
disloyalty to the king—our father! and a disgrace to the king’s
Attorney-general—
Will you have done, Sir?
No ... no ... no!... You have no power to stop me. The jury could not
agree. Two of their number were unwilling to find the accused guilty.
They were sent back—it was in the dead of winter, and they were
allowed neither food, nor fire—and so, after a while they were
starved and frozen into unanimity—
Grant me patience! what would you have, Sir?—you appear to be
satisfied with nothing—I believe in my soul, George Burroughs, that
you are no better than a Reformer—
A shudder ran through the whole court.
Here was a pretty illustration of what I had been told by you, and by
such as you, and of what I believed before I went abroad, about the
humanity of the law—the humanity of British law! of that very law that
ye are now seeking to administer here, in this remote corner of the
earth. Ye are amazed—ye do not believe me—and yet every word I
have spoken is true; and that which is law there, ye would make law
here. The judges, we are told, are of counsel for the prisoner—God
preserve me from such counsel, I say!...
Five and one are six—six-and-sixpence, muttered a voice.
They never interfered while I was there, in favor of the prisoner; but
they did interfere two or three times, and with great acuteness too,
for it was a trial of wit among three, to his disadvantage, even as ye
have this day. The accused are held to be innocent there, even as
they are here, till they are proved to be guilty—so say the lawyers
there, and so say the judges, and so say all the writers on the law,
and so they believe, I dare say. And yet ... there as here, the man
who happens to be suspected of a crime is held to be ... not innocent
of the charge, but guilty, and is called upon to prove his innocence;
which if he fail to do, judgment follows, and after two or three days, it
may be, death. He had no counsel permitted to him where his life
was at stake, though he might have had the best in the whole empire
in a civil case affecting property to the value of a few pounds. He had
no power to bring witnesses ... the law would not allow him
witnesses therefore ... and if they appeared in spite of the law, that
law put a disqualification upon whatever they said in favor of the
prisoner. And after all this.... O the humanity of the law! ... the jury, a
part of whom believed him to be innocent were starved into finding
him guilty. What was I to think of all this? what of British law—that
very law by authority whereof, ye are now trying that woman for her
life—what of the—
Here Burroughs dropped into a chair completely out of breath.
Have you done Sir? said the chief judge.
He signified by a motion of the head that he must give up.
Very well Sir—You cannot say that we have not heard you patiently;
nor that we have hurried the case of the prisoners at the bar,
whatever else you may think proper to say. You have had such
liberty as we never granted before, as we shall never grant again;
you have had full swing Sir—full swing, and would have been
stopped a good hour ago but for the deplorable situation of the
accused. To tell you the plain truth however—I did hope—I did hope I
say, that we should hear something—something to the purpose,
before you gave the matter up—
Something to the purpose, judge!—Have a care—you know me—
Silence!
Judge—judge—I have said more than you six will ever be able to
answer, though you keep your heads together to all eternity—How
can you answer what I say?
How—in five words....
In five words!
I ask no more to satisfy all that hear me—my brethren of the bench,
the bar, and the people—but five words, I tell you.
And what are they, I do beseech you?...
The—wisdom—of—our—ancestors.
 CHAPTER X.
Here the lawyer started up, and after prevailing upon Burroughs to
forbear and be still, argued (with his face to the jury) five or six points
of law, as he called them, every one of which had been argued over
and over again at every trial of a serious charge that he had ever
been occupied with in the whole course of a long life at the bar ...
four being about the propriety of capital punishments in general, and
two about the propriety of capital punishments in the particular case
of the prisoner at the bar—whom he protested before God (for which
he had to pay thirteen-pence more) he believed to be innocent of the
charge—and what was that charge?—nothing more nor less than the
charge of sorcery and witchcraft!—a crime, the very possibility of
which, he proceeded to deny, in the very language he had used
about a twelvemonth before, while arguing about the impossibility of
marriage in a particular case.
Brother—brother—we do not sit here to try the possibility of such a
thing as witchcraft—please to consider where you are, and what we
are.
Speech after speech followed; and it was near midnight, when the
chief judge, after consulting with his brethren, proceeded to address
the jury.
Ye have heard much that in our opinion does not need a reply, said
he, after taking a general view of the case, with much that a brief
reply may be sufficient for, and a very little, which, as it may serve to
perplex you, if we pass it over without notice, we shall say a few
words upon, though it has little or nothing to do with the case before
you.
The law you have nothing to do with ... right or wrong, wise or
foolish, you have nothing to do with the law. So too ... whatever may
be the practice abroad or in this country, and whatever may be the
hardship of that practice, you have nothing to do with it. One is the
business of the legislature ... of the law-makers; the other the
business of the courts, and the judges ... the law-expounders. You
are to try a particular case by a particular law; to that, your whole
attention is to be directed. If the law be a bad law, that is neither your
business nor our business. We and you are to do our duty, and leave
theirs to the sovereign legislature.
I propose now to recapitulate the evidence, which I have taken notes
of—should I be wrong, you will correct me. After I have gone through
with the evidence, I shall offer a few brief remarks in reply to the
arguments which have been crowded into the case—I will not say for
show—and which, idle as they are, would seem to have had weight
with you.
The afflicted, you observe, do generally testify that the shape of the
prisoner doth oftentimes pinch them, choke them, and otherwise
afflict them, urging them always to write in a book she bears about
with her. And you observe too, that the accusers were struck down
with a fit before you, and could not rise up till she was ordered to
touch them, and that several of their number have had fits whenever
she looked upon them.
But we are to be more particular, and I shall now read my notes, and
I pray you to follow me.
1. Deliverance Hobbs, who confessed herself a witch, testified that
the prisoner tempted her to sign the book again, and to deny what
she had confessed; and that the shape of the prisoner whipped her
with iron rods to force her to do so, and that the prisoner was at a
general meeting of witches at a field near Salem village, and there
partook of the sacrament with them.
2. John Cook testified that about five or six years ago, he was
assaulted with the shape of the prisoner in his chamber, and so
terrified that an apple he had in his hand flew strangely from him into
his mother’s lap, six or eight feet distance.
3. Samuel Gray testified that about fourteen years ago, he waked
one night and saw his room full of light and a woman between the
cradle and bed-side; he got up but found the doors fast, and the
apparition vanished—however the child was so frighted, that it pined
away and in some time died. He confessed that he had never seen
the prisoner before, but was now satisfied that it was her apparition.
4. John Bly and his wife testified that he bought a sow of the
prisoner’s husband, but being to pay the money to another, she was
so angry that she quarrelled with Bly, and soon after the sow was
taken with strange fits, jumping, leaping and knocking her head
against the fence which made the witnesses conclude the prisoner
had bewitched it.
5. Richard Coman testified that eight years ago, he was terrified with
the spectre of the prisoner and others, who so oppressed him in his
bed that he could not stir hand nor foot, but calling up somebody to
come to his assistance, as soon as the people of the house spoke,
the spectre vanished and all was quiet.
6. Samuel Shattock testified that in 1680 (twelve years before the
trial) the prisoner often came to his house on frivolous errands, soon
after which his child was taken with strange fits, and at last lost his
understanding; the fits were manifestly epileptic, but the witness
verily believed it was bewitched by the prisoner.
7. John Londor testified that upon some little controversy with the
prisoner about her fowls, going well to bed, he awoke in the night
and saw the likeness of this woman greviously oppressing him.
Another time he was troubled with a black pig, but going to kick it, it
vanished. Another time as he was sitting in his room, a black
hobgobling jumped in the room, which spoke to him these words—I
understand you are troubled in mind: Be ruled by me and you shall
want nothing in this world. But when he endeavored to strike it, there
was nothing. After this he ran out of his house and saw the prisoner
in her orchard, but had no power to speak to her, but concluded his
trouble was all owing to her.
8. William Stacy testified that the spectre of the prisoner had played
him several pranks of the same nature as the former; for example—
having received some money of the prisoner for work, he had not
gone above three rods from her when it was gone from him; some
time after, discoursing with the prisoner about grinding her grist, he
had not gone above six rods from her with a small load in his cart,
before the off-wheel sunk into a hole in plain ground, so that the
deponent was forced to get help for the recovery of it, but stepping
back to look for the hole, there was none to be found. Another time,
as he was going home on a dark night, he was lifted up from the
ground and thrown against the stone wall, and after that, he was
hoisted up, and thrown down a bank at the end of his house.
9. John and William Bly testified that being employed by the prisoner
to take down her cellar-wall, they found several poppets made of
rags and hog’s bristles, with headless pins in them, the points being
outwards.
In addition to all this, continued the chief-judge, you have the
testimony of Mr. Park, the magistrate, who says that when her
Paris’s daughter and two other children accused the prisoner at the
bar of afflicting them, by biting, pricking, strangling, &c. saying that
they saw her likeness in their fits, coming toward them and bringing
them a book to sign, he asked her why she afflicted those poor
children—to which she replied that she did not; and that when he
asked her who did then? she answered she did not know—
Burroughs groaned aloud.
—You will observe her answer, gentlemen of the jury ... she did not
know, but thought they were poor distracted creatures, whereupon
the afflicted said that the Black man was whispering in her ear and
that a yellow-bird which used to suck between her fingers was now
there; and orders being given to see if there was any sign, a girl said,
it is now too late for she has removed a pin and put it on her head;
and upon search there was found a pin sticking upright there. He
testifies too that when Mrs. Cory had any motion of her body the
afflicted would cry out, when she bit her lip they would cry out of
being bitten, and if she grasped one hand with the other they would
cry out of being pinched.
You will observe too that a jury of women who were empanelled to
search her body, testify one and all that they found a preternatural
teat upon her body; but upon a second search three or four hours
after, there was none to be found.
Thus much for the evidence, gentlemen of the jury; I proceed now to
remark on what has been urged for the—officer—officer ... look to
your prisoner!
O, I am so tired and so sleepy! said Martha a getting up, and trying
to pass the sheriff, who stood by her with a drawn sword. Let me go,
will you!—get out o’ the way and let me go—what’s the use o’
keeping me here; I’ve told you all ’t I know o’ the job. Do let poor
Martha go!
Gracious God!—Father of Love! cried Burroughs, what an appeal to
the executioners of the law! Did you not hear it, ye judges? Do you
not see her now, tottering away ... the poor bewildered creature.
Have done Sir.
Dear brother—if we are wise we shall be not be strict with him here
—let us give the world nothing to complain of, our duty require it,
policy requires it—ah!
Prisoner at the bar—go back to your seat: Officer—officer—
She don’t hear a word you say, Mr. Judge.
Martha Cory—Martha!
Well, here I be, Mister Capun Sewall; what d’ye want o’ me?
Go back to your seat, Martha.
Back there?—I shall not—
Officer!
The officer took her by the arm to lead her back.
Gently there—gently—gently.
There now! cried Martha, in a peevish, querulous tone—There now;
dropping into the seat with her arms a-kimbo, and poking out her
chin at the officer. There now; I hope that’ll satisfy you—
Gentlemen of the jury, pursued the judge; You have now the
evidence before you. You have gone through the whole proof with
me, step by step—it is for you to say what is the value of that proof—
Proof, cried Burroughs—proof! taking away his hands from his pale
face—and speaking through his shut teeth. Call you that proof which
proves nothing? that which relates to things that occurred, if they
ever occurred at all, years and years ago? that which is only a sort of
guess-work? that which relates to transactions which the poor soul
does not appear to have had either voice or part in?
Bravely said, George Burroughs—bravely put, cried a female, who
stood in the dark part of the house.
Such trivial matters too—so trivial that we should mock at them, but
for the life we lead here, surrounded by savages, and by death in
every shape, and by woods and waters that were never yet explored
by man; beset on every side by a foe that never sleeps; afar and
away from succor and liable to be surprised every hour of the day
and every hour of the night, and butchered among our babes and
our household-gods; Proof, say you?—can that be proof, I appeal to
you judges—that which, however false it may be, or however
mistaken by the witnesses, cannot, in the very nature of things, be
explained away nor contradicted; that which calls upon a poor
creature worn out with age and misery—an idiot—for of a truth she is
little better—I pray you judges—I pray you—on me let your
displeasure fall; not on her—I will abide your wrath—I see it in your
eyes—but I pray you—I beseech you—can that be proof, that which
calls upon a prisoner in such a case to go through the whole history
of her life—hour by hour—step by step. Nay, speak to me!—By your
oaths, answer me! By your oath here, and by your hope hereafter,
may you call upon her, in a matter of life and death, to do this? And
not only to do this, but to account for the epilepsy of a babe? for the
dreams, the diseases, the very night-mares of them that now accuse
her?——
If you do not stop Sir, we shall have to commit you.
Commit me if you dare! You have made me counsel for the prisoner,
and whatever may be the courtesy of the bar, whatever you may
expect—and whatever may become of me—or of you—I shall not
throw a chance away. He proceeded to review the whole of the
evidence with a vigor and propriety which after a while rose up in
judgment against him, as if it were supernatural; he then argued
upon the nature of the crime—saying it was a charge easily made
but hard to disprove, and that it would require one to be a witch to
prove that she was not guilty of witchcraft—
Beware of that man, said the chief judge, with a mysterious look.
Beware, I tell you; for whoever he may be, and whatever he may be,
he will be sure to lead you astray, if you are not upon your guard.
Lo, the counsel for the prisoner! Lo the humanity of the law! cried
Burroughs. Who could do more?—I appeal to you, ye men of
Massachusetts-Bay—could the prosecutor himself—could anybody
on earth—in aid of the prisoner at the bar?—Put upon your guard in
that way, against the power and art of another—if you are not men of
a marvellous courage indeed—of heroic probity—it would be
impossible for him to convince you, however true were his argument,
however conclusive his facts.
Very true, whispered the foreman of the jury, loud enough to be
overheard by a judge, who rebuked him with great asperity.
Whatever I might say, therefore—however true it might be, and
however wise, after that speech, you would not venture to heed me
—you could not—such a thing were too much to hope for—unless
you were indeed, every man of you, far, far superior to the race of
men that are about and above you——
Talk of art, said the chief judge, in dismay. Talk of address after that!
who ever heard of such art—who ever heard of such address
before?
What a compliment for your understandings!—But I do not give up in
despair—I shall say the little that I now have to say, and leave you to
decide between us—if I prevail, you may have courage enough
perhaps to acquit the prisoner, though you are sneered at by the
judges.
He proceeded with fresh vigor, and concluded the work of the day
with a speech that appears to have been regarded by the court and
the people as above the ability of man. He spoke to the multitude, to
the judges, to the bar, to the jury—man by man—saying to each with
a voice and a power that are spoken of still by the posterity of them
that were there.... You have heard the whole evidence—You—you
alone, Sir, that I speak to now, are to decide upon the life or death of
the prisoner. You alone, Sir! and mark me if ... though ... you are but
one of the twelve who are to decide ... if you decide for death ...
observe what I say ... if you so decide Sir, as one of the twelve ...
when, if you knew that her life depended upon you alone, you would
have decided otherwise, mark me ... her blood shall be upon your
head ... her death at your door! ... at yours—and yours—and yours—
though each of you be but one of the twelve.
Hear me. I address myself to you, John Peabody. Are you prepared
to say—would you say—guilty, if her life depended upon you, and
upon you alone?—if you were her only judge?—Think of your death-
bed—of the Judge whom you are to meet hereafter, you that have so
much need of mercy hereafter—ask yourselves what harm would
follow her acquittal, even though she were guilty. Then ask yourself
what would be your feelings if you should ever come to know that
you have put her to death wrongfully.... So say I to you, Andrew
Elliot.... Her life depends upon you—upon you alone! You are in fact
her only judge—for you—or you—or you—or either of you may save
her, and if you do not, her blood will be required hereafter at your
hands—at the hands of each of you——I have done.
 CHAPTER XI.
The chief judge would not reply—could not perhaps, till after he and
his brothers had prayed together; and when he did speak, he spoke
with a subdued voice, like one troubled with fear.
Gentlemen of the jury, said he; I have but a few words to urge in
reply.
1. You have been told that one should be a witch to prove that she is
not guilty of witchcraft. I admire the ingenuity of the speaker; but my
answer is, that by the same rule, a man should be a wizard to prove
that he is not a manslayer—he being proved a manslayer. And yet,
being proved a manslayer, we put him to death. So here—being
proved a witch, if you are satisfied by the proof, we put the prisoner
to death, even though it would require the exertion of diabolical
power to overthrow the proof.
2. You are told by one speaker that we are prone to believe in the
marvellous; and that, therefore, when a marvellous thing is related,
we ought to be on our guard against that proneness to belief, and
require more proof. Now it appears to me that if we are prone to a
belief in the marvellous, instead of requiring more proof to witchcraft,
we should require less. For why require much, if less will do?
3. But by another, it has been said that we are not prone to belief in
the marvellous; that on the contrary, so prone are we to disbelieve in
what may appear marvellous, that proof, which we would be satisfied
with in the ordinary affairs of life, we should pay no regard to, if it
were adduced in favor of what we consider preternatural; and that
therefore in the case you are now to try, you should require more
proof than you would in support of a charge not marvellous. To which
we reply—that where you have the same number of witnesses, of
the same character, in support of a marvellous charge, you actually
have more proof, than you would have in the like testimony of the
same witnesses, to a charge not marvellous. And why?—Because
by the supposition of the speaker, as they are prone to a disbelief in
the marvellous, they would have required much proof, and would not
have been persuaded to believe what they testify to, but upon
irresistable proof—more proof than would have satisfied them in the
ordinary affairs of life.
4. It has been said moreover—that the greater the crime charged,
the more incredible it is; that great crimes are perpetrated less
frequently than small ones; and that, therefore, more proof should be
required of parricide than of theft. Our reply to which is, that if a
witness declare to a parricide on oath, you have more proof than you
would have to a theft sworn to by the very same witness; that, if the
greater the crime, the less credible it is, you are bound to attach
more value to his testimony where he testifies to parricide than
where he testifies to theft. And why?—Because, the greater the
crime charged, the greater the crime of the witness if he charge
falsely; and therefore the less likely is it, by the supposition, that he
does charge falsely.
But here I would have you observe that proof is proof, and that after
all, the proof which at law or otherwise would be enough to establish
one charge, would be enough to establish any other. In every case
you are to be satisfied—you are to believe: and in the case now
before you, perhaps it may be well for you to look upon the two
improbabilities which I have now spoken of, as neutralizing each
other. If witchcraft is incredible—it is incredible also that one should
falsely charge another with witchcraft.
5. It has been said too that the witnesses contradict each other. Be it
so. I confess that I see no such contradiction—but if I did, I might be
called upon to say that perjured witnesses are remarkable for the
plausibility and straight-forwardness of their stories; and that such
plausibility and straight-forwardness are now regarded, like
unanimity, as a sign of bad-faith by judges of experience. You are to
be told moreover, that where slight contradictions appear in what
may be said by several witnesses to the same fact, such
contradictions are a sign of good-faith—showing that no
preconcerted story has been told. I might refer, and I may venture to
do so perhaps, in a matter of such awful moment, to the gospels in
proof. It is a mighty argument for their truth my friends, that no two of
them perfectly agree—no two of the whole as they could have
agreed, if, as there have been people wicked enough to say (though
not to believe) they had been prepared for deception by a body of
conspirators——
Brother—brother—put off thy shoes ... the ground is holy—said
Governor Phips.
I have.... I have—
The people groaned aloud.
——If you were called upon, each of you, five years from to-day, to
give a particular account of what you now see and hear, and if each
of you depended upon himself, your stories would be unlike; but if
you consulted together, your stories would be sure to approximate.
So much for this head.
6. I have gone so far as to say that proof is proof, whatever may be
the case; but I do not say that you are to require at any time, in any
case, more proof than the nature of the case will admit of. In other
words, you are not to insist upon the same sort and degree of proof
in every case. You are to be satisfied with such proof as you can get
—if you suppose that none better is left behind. So says the law—
Nonsense—for if that rule is good, you might prove any-thing—by
any thing, said Burroughs.
Be quiet Sir ... few people see spectres; and witches will do their
mischief, not in the light of day, and before a multitude, but afar and
apart from all but their associates. You are to be satisfied with less
proof therefore in such a case, than it would be proper and
reasonable for you to require in a case of property—
And if so—why not in murder? ... murders being perpetrated afar and
apart from the world—
Peace I bid you.... Having—
How dare you!
—Having disposed of what has been urged respecting the proof,
gentlemen of the jury, I should now leave the case with you, but for a
remark which fell from a neighbour a few minutes ago. Doctor
Mather will now touch upon what I would gladly pass over—the
growth and origin of the evil wherewith we are afflicted.
Here a man of majestic presence of about fifty years of age arose,
and laying aside his hat, and smoothing away a large quantity of
thick glossy hair, which parting on his forehead, fell in a rich heavy
mass upon his broad shoulders, prayed the jury and his brethren of
the church to bear with him for a few moments; he should try to be
very brief. Brother George—he did not question his motive he said,
but brother George Burroughs would have you believe that witches
and wizards are no longer permitted upon our earth; and that
sorcery, witchcraft, and spells are done with.
Whereto I reply.... First—that there has been hitherto throughout all
ages and among every people, and is now a general, if not a
universal, belief in witchcraft and so forth. Now if such universality of
belief respecting the appearance of departed souls after death, has
been, as it certainly has, a great argument for the immortality of the
soul with such as never heard of the Scriptures of Truth, I would ask
why a like universality of belief respecting witchcraft and sorcery
should be thought of no value, as an argument? Every where the
multitude believe in witchcraft or in that which is of a piece with it.
Spirits and fairies, goblins and wizards, prophets and witches,
astrologers and soothsayers are found mixed up with the traditionary
love and the religious faith of every people on earth, savage and
civilized—(so far as we know, I should say);—with that of people who
inhabit the isles of the sea, afar and apart from each other and from
all the rest of the world. I speak advisedly. They believe in spirits,
and they believe in a future state—in sorcery and immortality. The
wild Irish have what they call their banshees, and the Scotch their
second-sight, and the French their loup-garoux, or men turned into
wolves—and so also have the Irish; and a part of our jocular
superstition is the posterity of that which existed among the terrible
Goths. Maria—a word that we hear from the lips of the idle and
profane, before they have got reconciled to the wholesome severity
of our law, was in old Runic a goblin that seized upon the sleeper
and took away all power of motion. Old Nicka too—he that we are in
the habit of alluding to, in a grave way, as Old Nick, was a spright
who used to strangle such as fell into the water. Bo—was a fierce
Gothic captain, the warlike son of Odin, whose name was made use
of in battle to scare a surprised enemy. Every where indeed, and
with every people, earth sea and air have been crowded with
specters, and the overpeopled sky with mighty shadows—I do not
know a——
Here the great black horse which Burroughs had left underneath a
tree, trotted up to the very door, and stood still, with the reigns afloat
upon his neck, and thrust his head in over the heads of the people,
who gave way on every side, as he struck his iron hoofs on the step,
and for a second or two there was a dead quiet over the whole
house. The speaker stopped and appeared astonished, for the eyes
of the animal in the strong light of the torches, were like two balls of
fire, and his loose mane was blowing forward in the draught of the
door, so as actually to sound aloud.
Why do you stop—what are you afraid of, Doctor Mather? Not afraid
of old Pompey are you?
Hadn’t you better tie him up? asked a judge.
No—I have something else to do, but I desire that somebody at the
door will. But nobody would go near the creature.
—History abounds with proof, I say, respecting witchcraft and
sorcery, witches and wizards, magic, spells and wicked power. If we
put all trust in the records of history for one purpose, why not for
another? If a witness is worthy of belief in one thing—why is he not
another? If we find no treachery nor falsehood in a writer; if we meet
with nothing but confirmation of what he says, when we refer to other
writers of the same people and age, why disbelieve him when he
speaks of that which, being new to our experience, we cannot be
able to judge of? Able and pious men should be trusted, whatever
they may say, so long as they are not contradicted by other able and
pious men—
We are to believe not only in witches then, but in fairies and loups-
garoux—
Be quiet Sir—
Softly judge.... And we are to believe that he who in the course of a
tale about the ordinary affairs of ordinary life—
Have done Sir.
—Testifies to a miracle, should be credited as much for what he says
of the miracle as for the rest of the—
Be quiet Sir.
—As for the rest of the tale.... You cannot escape me brother—
Will you be quiet Sir?
No.
—The Bible is crowded with proof, continued the Doctor. Sooth-
sayers and sorcerers, interpreters of dreams, false-prophets, and a
witch with power to make the grave and the sea give up their dead;
men whose little rods became live serpents while they strove with
Aaron the High-priest, multitudes who were clothed with a
mischievous power ... all these are spoken of in the Bible.
It has been said here that credulity is a sign of ignorance. It may be
so, my dear friends—but you must know as well as I do, that
incredulity is everywhere found among the ignorant. Able men
believe much, because they are able men. The weak disbelieve
much because they are weak. Who are they that laugh when they
hear that our earth is a globe, and that once in every twenty-four
hours, it turns completely round underneath our feet—
Much whispering here, and a look of surprise on every side of the
speaker, encouraged him to a more emphatic delivery.
Who are they that refuse to believe much that the learned and the
wise, fortified in their wisdom by the beauty of holiness, and the
gravity of age, are steadfastly assured of? The truth is that
extraordinary minds have a courage that ordinary minds have not—
for they dare to believe what may expose them to ridicule. The
longer we live and the more we know, the more assured we are that
impossible things are possible—
To be sure Doctor, said a judge.
—That nothing is impossible therefore.... Now, my friends of the jury
—it appears to me that if witchcraft had been a common thing with
every people, and in all ages, we could not possibly have had more
evidence of it, than we have now. We have the records of History,
sacred as well as profane. We have a great body of laws, made year
after year, among the most enlightened people that ever inhabited
the earth, about conjurations, spells and witchcraft, and this, in all
parts of the globe and especially in the land of our Fathers; judgment
of death, day after day, and year after year, under that law;
confessions without number by people charged with sorcery and
witchcraft, not only in various parts of England, but by our very fire-
sides and at our very doors. Added to all this, we have the universal
faith of which I spoke, and altogether, a body of proof, which if it be
false—would be more wonderful than witchcraft is——
True ... true ... fearfully and wonderfully true, brother.
—But if such things are elsewhere why may they not be here? If they
have been heretofore, why may they not be now, and forever? We
do not know, worms that we are, how the Lord God of Heaven and
earth operates in His pavillion of thick darkness—we do not know
whether he will or will not work in a given way. We only know that he
may do whatever he will ... that for Him there is no such law as the
law of nature. And if so, why may not witches be employed as the
wicked are, as great warriors are, for scourging the nations of our
earth, and for the glory of our Father above.—Let us pray.
Prayer followed, and after the prayer, the multitude sung a psalm
together, and the jury withdrew.
They were not gone long, and when they came back there was but
just light enough to see their faces. Not a breath could be heard ...
not a whisper—and the foreman stood up and was about to speak in
the name of the twelve, when Burroughs, who could bear it no
longer, leaped upon his feet, and turned to the jury with tenfold
power, and gasping for breath, called upon each man by name, as
he hoped for mercy hereafter, to speak for himself.