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TABLE OF CONTENTS

Preface xiii 2.4 Value Maximization and the Cost of Capital 50

Value Maximization 50
PART1 The Opportunity Cost of Capital 51

INTRODUCTION 1 2.5 The Crisis of 2007-2009 52

2.6 Summary 54
CHAPTER 1
Goals and Governance of the Firm 1 CHAPTER 3
Accounting and Finance 57
1.1 Investment and Financing Decisions 2
The Investment (Capital Budgeting) Decision 4 3.1 The Statement of Financial Position
The Financing Decision 6 or Balance Sheet 58
Book Values and Market Values 64
1.2 What Is a Corporation? 8
3.2 The Statement of Comprehensive Income
1.3 Other Forms of Business Organization 10
Sole Proprietorships 11 or Income Statement 66
Partnerships 11 Consolidated Statement of Changes in Equity 67
Hybrid Forms of Business Organization 11 Profits Versus Cash Flow 69
3.3 The Statement of Cash Flows 72
1.4 Who Is the Financial Manager? 12
1.5 Goals of the Corporation 13 3.4 Cash Flow from Assets, Financing Flow,
Shareholders Want Managers to Maximize and Free Cash Flow 74
Market Value 13 3.5 Accounting Practice and Accounting
Agency Problems, Executive Compensation, Malpractice 76
and Corporate Governance 14
Ethics and Management Objectives 18 3.6 Taxes 78
Ethical Disputes 20 Corporate Tax 78
Personal Tax 80
1.6 Careers in Finance 22
3.7 Summary 84
1.7 Preview of Coming Attractions 24
Snippets of History 25 CHAPTER4
1.8 Summary 28 Measuring Corporate Performance 93
4.1 How Financial Ratios Relate to
CHAPTER 2 Shareholder Value 94
Financial Markets and Institutions 33
4 .2 Measuring Market Value and Market
2.1 The Importance of Financial Markets and Value Added 95
Institutions 34
4 .3 Economic Value Added and Accounting
2.2 The Flow of Savings to Corporations 36 Rates of Return 98
The Stock Market 38 Accounting Rates of Return 100
Other Financial Markets 39 Problems with EVA and Accounting Rates of
Financial Intermediaries 41 Return 101
Financial Institutions 43
Total Financing of Canadian Corporations 45 4.4 Measuring Efficiency 102

2.3 Functions of Financial Markets 4.5 Analyzing the Return on Assets:

and Intermediaries 47 The DuPont System 103
Transporting Cash Across Time 47 The DuPont System 104
Risk Transfer and Diversification 47 4.6 Measuring Financial Leverage 105
Liquidity 48 Leverage and the Return on Equity 107
The Payment Mechanism 48
4.7 Measuring Liquidity 108
Information Provided by Financial Markets 48
 Table of Contents vi i

4 .8 Interpreting Financial Ratios 110 6 .6 The Determinants of the Yield Curve 190
Expectations Theory 191
4.9 The Role of Financial Ratios-and a Final
The Liquidity Preference Theory 191
Note on Transparency 113
Besides Financial Ratios... 114 6.7 Corporate Bonds and the Risk of Default 191
Transparency 114 Variations in Corporate Bonds 193
4 .10 Summary 115 6 .8 International Bond Market
Variations-Sukuk 196
PART2 6.9 Summary 198
VALUE 123 Appendix GA: A More Detailed Look at the Yield
Curve 204
CHAPTER 5
Appendix GB: Duration: Measuring the Life of a
The Time Value of Money 123
Bond (Online)
5.1 Future Values and Compound Interest 124
5.2 Present Values 128 CHAPTER7
Finding the Interest Rate 132 Valuing Stocks 207
Finding the Investment Period 134 7.1 Stocks and Stock Markets 208
5.3 Multiple Cash Flows 135 Reading Stock Market Listings 210
Future Value of Multiple Cash Flows 135 7.2 Market Values, Book Values,
Present Value of Multiple Cash Flows 137 and Liquidation Values 211
5.4 Level Cash Flows: Perpetuities and Annuities 138 7.3 Valuing Common Stocks 214
How to Value Perpetuities 138 Valuation by Comparables 214
How to Value Annuities 140 Price and Intrinsic Value 215
Annuities Due 145 The Dividend Discount Model 217
Future Value of an Annuity 146
Cash Flows Growing at a Constant Rate-Variations 7.4 Simplifying the Dividend Discount Model 220
on Perpetuities and Annuities 148 Case 1: Zero-Growth Model 220
Case 2: Constant-Growth Model 221
5.5 Inflation and the Time Value of Money 151 Case 3: Non-Constant-Growth Model 224
Real Versus Nominal Cash Flows 151
Inflation and Interest Rates 153 7.5 Growth Stocks and Income Stocks 226
Valuing Real Cash Payments 154 7.6 Valuing a Business by Discounted Cash
Real or Nominal? 156 Flow 229
5.6 Effective Annual Interest Rates 156 Valuing the Concatenator Business 229
Repurchases and the Dividend Discount Model 230
5.7 Summary 158
7.7 There Are No Free Lunches on Bay Street 231
CHAPTER 6 Method 1: Technical Analysis 232
Valuing Bonds 171 Method 2: Fundamental Analysis 235
A Theory to Fit the Facts 236
6.1 The Bond Market 173
Bond Characteristics 173 7.8 Market Anomalies and Behavioural Finance 237
Market Anomalies 237
6 .2 Interest Rates and Bond Prices 175
Behavioural Finance 238
How Bond Prices Vary with Interest Rates 177
Interest Rate Risk 179 7.9 Summary 239

6.3 Current Yield and Yield to Maturity 181

Calculating the Yield to Maturity 182
6 .4 Bond Rate of Return 182
Taxes and Rates of Return 186
Multiperiod Rates of Return 187
6 .5 The Yield Curve 188
Nominal and Real Rates of Interest 189
CHAPTERS
Net Present Value and Other Investment
Criteria 249
8 .1 Net Present Value 251
A Comment on Risk and Present Value 252
Valuing Long-Lived Projects 252
Using the NPV Rule to Choose Among Projects 256
viii Table of Contents
8 .2 Other Investment Criteria 257
Payback 257
Discounted Payback 258
Internal Rate of Return 260
A Closer Look at the Rate of Return Rule 260
Calculating the Rate of Return for Long-Lived
Projects 261
A Word of Caution 264
Some Pitfalls of the IRR Rule 264
8 .3 More Examples of Mutually Exclusive
Projects 268
The Investment Timing Problem 269
The Choice Between Long- and Short-Lived
Equipment 270
Replacing an Old Machine 271
8.4 Capital Rationing 272
Soft Rationing 272
Hard Rationing 273
Pitfalls of the Profitability Index 274
8 .5 A Last Look 274
8 .6 Summary 275
CHAPTER 9
Using Discounted Cash Flow Analysis to Make
Investment Decisions 285
9.1 Identifying Cash Flows 286
Discount Cash Flows, Not Profits 286
Discount Incremental Cash Flows 288
Include All Indirect Effects 289
Forget Sunk Costs 289
Include Opportunity Costs 289
Recognize the Investment in Working Capital 290
Remember Shutdown Cash Flows 291
Beware of Allocated Overhead Costs 291
Discount Nominal Cash Flows by the Nominal
Cost of Capital 291
Separate Investment and Financing Decisions 293
9.2 Calculating Cash Flows 293
Capital Investment 293
Investment in Working Capital 293
Operating Cash Flow 294
9.3 Business Taxes in Canada and
the Capital Budgeting Decision 297
Depreciation and Capital Cost Allowance 297
The Asset Class System 297
Sale of Assets 299
Termination of Asset Pool 300
Accelerated Investment Incentive 301
Present Values of CCA Tax Shields 302
9.4 Example: Blooper Industries 304
Calculating Blooper's Project Cash Flows 305
Calculating the NPV of Blooper's Project 307
Further Notes and Wrinkles Arising from Blooper's
Project 308
9.5 Summary 311
Appendix 9A: Deriving the CCA Tax Shield (Online)
CHAPTER 10
Project Analysis 319
10.1 How Firms Organize the Investment
Process 320
Stage 1: The Capital Budget 320
Stage 2: Project Authorizations 321
Problems and Some Solutions 321
10.2 Some "What If" Questions 323
Sensitivity Analysis 324
Scenario Analysis 326
10.3 Break-Even Analysis 327
Accounting Break-Even Analysis 327
NPV Break-Even Analysis 329
Operating Leverage 331
10.4 Real Options and the Value of Flexibility 333
The Option to Expand 333
A Second Real Option: The Option to Abandon 335
A Third Real Option: The Timing Option 337
A Fourth Real Option: Flexible Production
Facilities 337
10.5 Summary 338
PART3
RISK 345
CHAPTER 11
Introduction to Risk, Return, and the
Opportunity Cost of Capital 345
11.1 Rates of Return: A Review 346
11.2 Five Decades of Capital Market History 348
Marketindexes 348
The Historical Record 349
Using Historical Evidence to Estimate
Today's Cost of Capital 352
11.3 Measuring Risk 353
Variance and Standard Deviation 355
Risk and Diversification 359
11.4
Diversification 359
Asset Versus Portfolio Risk 359
Covariance and Correlation 362
Correlation and Portfolio Diversification 363
Market Risk Versus Unique Risk 369
 Table of Contents ix

11.5 Thinking About Risk 371 13.6 Interpreting the Weighted-Average

Message 1: Some Risks Look Big and Dangerous but
Really Are Diversifiable 371
Message 2: Market Risks Are Macro Risks 372
Message 3: Risk Can Be Measured 373
11.6 Summary 373
CHAPTER 12
Risk, Return, and Capital Budgeting 379
12.1 Measuring Market Risk 380
Measuring Beta 381
Betas for BlackBerry and Enbridge 384
Total Risk and Market Risk 384
Portfolio Betas 386
The Portfolio Beta Determines the Risk
of a Diversified Portfolio 387
12.2 Risk and Return and Capital Asset
Pricing Model, CAPM 389
Why the CAPM Makes Sense 391
The Security Market Line 392
How Well Does the CAPM Work? 393
Using the CAPM to Estimate Expected Returns 396
12.3 Capital Budgeting and Project Risk 396
Company Risk Versus Project Risk 397
Determinants of Project Risk 398
Don't Add Fudge Factors to Discount Rates 399
12.4 Summary 400
CHAPTER 13
The Weighted-Average Cost of Capital and
Company Valuation 408
13.1 Geothermal's Cost of Capital 409
13.2 The Weighted-Average Cost of Capital 411
Calculating Company Cost of Capital
as a Weighted Average 411
Use Market Weights, Not Book Weights 414
Taxes and the Weighted-Average Cost
of Capital 414
What If There Are Three (or More) Sources of
Financing? 416
Wrapping Up Geothermal 416
Checking Our Logic 417
13.3 Measuring Capital Structure 417
13.4 Calculating Required Rates of Return 419
The Expected Return on Bonds 419
The Expected Return on Common Stock 420
The Expected Return on Preferred Stock 421
13.5 Calculating the Weighted-Average
Cost of Capital 422
Real Company WACC 422
Cost of Capital 423
When You Can and Can't Use WACC 423
Some Common Mistakes 423
How Changing Capital Structure Affects WACC
When the Corporate Tax Rate Is Zero 424
How Changing Capital Structure Affects Debt and
Equity When the Corporate Tax Rate Is Zero 425
What Happens If Capital Structure Changes
and the Corporate Tax Rate Is Not Zero? 426
Revisiting the Project Cost of Capital 427
13.7 Valuing Entire Businesses 428
Calculating the Value of the Concatenator
Business 429
13.8 Summary 431
PART4
FINANCING 439
CHAPTER 14
Introduction to Corporate Financing and
Governance 439
14.1 Creating Value with Financing Decisions 441
14.2 Common Stock 441
Book Value Versus Market Value 443
Dividends 443
Ownership of the Corporation 443
Voting Procedures 444
Classes of Stock 445
Corporate Governance in Canada and Elsewhere 446
14.3 Preferred Stock 448
14.4 Corporate Debt 450
Debt Comes in Many Forms 451
Innovation in the Debt Market 455
14.5 Convertible Securities 457
14.6 Patterns of Corporate Financing 458
Do Firms Rely Too Heavily on Internal Funds? 458
External Sources of Capital 459
14.7 Summary 461
Appendix 14A: The Bond Refunding Decision 465
CHAPTER 15
Venture Capital, IPOs, and Seasoned
Offerings 472
15.1 Venture Capital 474
Venture Capital Companies 475
15.2 The Initial Public Offering 476
Arranging a Public Issue 477
x Table of Contents

15.3 The Underwriters 482 CHAPTER 17

Who Are the Underwriters? 483 Leasing 541
15.4 Listing on the Stock Market 484 17.1 What Is a Lease? 542
15.5 Rights Issues and General Cash Offers by Public Leasing Industry 543
Companies 485
Leasing and the Canada Revenue Agency (CRA) 543
Rights Issues 485 17.2 Why Lease? 544
General Cash Offers 487 Sensible Reasons for Leasing 544
Costs of the General Cash Offer 487 Some Dubious Reasons for Leasing 545
Market Reaction to Stock Issues 488 Who Really Owns the Leased Asset? 548
15.6 The Private Placement 489 17.3 Valuing Leases 549
15.7 Summary 490 Operating Leases 549
Financial Leases 550
Appendix 15A: The Financing of New and Small Cash Flows of a Financial Lease 550
Enterprises 495 First Pass at Valuing a Financial Lease 552
Appendix 15B: Hotch Pot's New Issue Prospectus 501 Equivalent Loan, and Borrow and Buy 553
Financial Lease Evaluation 555
Using Formulas to Evaluate Financial Leases 555
PARTS
17.4 When Do Financial Leases Pay? 557
DEBT AND PAYOUT POLICY 506
17.5 Summary 558
CHAPTER 16
Debt Policy 506 CHAPTER 18
Payout Policy 564
16.1 How Borrowing Affects Value
18.1 How Dividends Are Paid 565
in a Tax-Free Economy 507
MM's Argument 508 Cash Dividends 565
Some Legal Limitations on Dividends 566
How Borrowing Affects Earnings per Share 509
Stock Dividends, Stock Splits, and Reverse
How Borrowing Affects Risk and Return 511
Debt and the Cost of Equity 513 Splits 567
Dividend Reinvestment Plans and Share Purchase
16.2 Capital Structure and Corporate Taxes 515 Plans 568
Debt and Taxes at River Cruises 515
18.2 Share Repurchase 568
How Interest Tax Shields Contribute to the Value
of Shareholders' Equity 517 Why Repurchases Are Like Dividends 568
Corporate Taxes and the Weighted-Average Cost of Repurchases and Share Valuation 569
Capital 518 18.3 How Do Companies Decide on How Much
The Implications of Corporate Taxes for Capital to Pay Out? 570
Structure 519 The Role of Share Repurchase Decisions 572
16.3 Costs of Financial Distress 519
The Information Content of Dividends and
Bankruptcy Costs 520 Repurchases 572
Evidence on Bankruptcy Costs 521 18.4 Why Payout Policy Should Not Matter 574
Direct Versus Indirect Costs of Bankruptcy 522 Payout Policy Is Irrelevant in Efficient Financial
Financial Distress Without Bankruptcy 522 Markets 574
Costs of Distress Vary with Type of Asset 524 The Assumptions Behind Dividend-
16.4 Explaining Financing Choices 525 Irrelevance 575
The Trade-Off Theory 525 18.5 Why Dividends May Increase Firm Value 577
A Pecking-Order Theory 526 Market Imperfections 577
The Two Faces of Financial Slack 527
18.6 Why Dividends May Reduce Firm Value 578
16.5 Bankruptcy Procedures 529 Why Pay Any Dividends at All? 579
The Choice Between Liquidation and Dividends Versus Capital Gains 579
Reorganization 532 Dividend Clientele Effects 580
16.6 Summary 533 18.7 Summary 580
 Table of Contents xi

PART6 PART7
FINANCIAL PLANNING 588 SHORT-TERM FINANCIAL
DECISIONS 653
CHAPTER 19
Long-Term Financial Planning 588 CHAPTER 21
19.1 What Is Financial Planning? 589 Cash and Inventory Management 653
Financial Planning Focuses on the Big Picture 589 21.1 Managing Cash Balances 654
Why Build Financial Plans? 590 Cheque Handling and Float 655
19.2 Financial Planning Models 591 Other Payment Systems 658
Components of a Financial Planning Model 591 Electronic Funds Transfer 659
Percentage-of-Sales Models 592 International Cash Management 660
An Improved Financial Planning Model 594 21.2 Managing Inventories 660
19.3 Tips for Planners 600 Inventory Management Models 661
Pitfalls in Model Design 600 Just-in-Time Inventory Management 664
The Assumption in Percentage-of-Sales Models 600 21.3 Managing Inventories of Cash 665
Forecasting Interest Expense 602 Uncertain Cash Flows 666
The Role of Financial Planning Models 603 Cash Management in Practice- Now and Then 668
19.4 External Financing and Growth 603 21.4 Investing Idle Cash: The Money Market 668
19.5 Summary 607 Yields on Money Market Investments 671
21.5 The International Money Market 671
CHAPTER 20
Short-Term Financial Planning 615 21.6 Summary 672

20.1 Links Between Long-Term and Short-Term CHAPTER 22

Financing 617 Cred it Management and Collection 676
20.2 Working Capital 619 22.1 Terms of Sale 677
The Components of Working Capital 620
22.2 Credit Agreements 680
Net Working Capital, Operating Cycle, and
the Cash Conversion Cycle 622 22.3 Credit Analysis 680
The Working Capital Trade-Off 625 Financial Ratio Analysis 681
Numerical Credit Scoring 681
20.3 Tracing Changes in Cash and Working
When to Stop Looking for Clues 684
Capital 626
22.4 The Credit Decision and Revisiting
20.4 Cash Budgeting 628
the Terms of Sale 685
Forecast Sources of Cash 628
Credit Decisions with Repeat Orders 686
Forecast Uses of Cash 630
Evaluating a Credit Policy Switch 688
The Cash Balance 630
Some General Principles for the Credit
20.5 A Short-Term Financing Plan 632 Decision and Credit Terms 688
Dynamic Mattress's Financing Plan 632
22.5 Collection Policy 690
Evaluating the Plan 634
22.6 Summary 691
20.6 Sources of Short-Term Financing 635
Bank Loans 635
Secured Loans 635 PARTS
Factoring 639 SPECIAL TOPICS 698
Commercial Paper 640
Banker's Acceptance 641 CHAPTER 23
20.7 The Cost of Bank Loans 641 Mergers, Acquisitions, and Corporate
Simple Interest 641 Control 698
Discount Interest 642 23.1 Sensible Motives for Mergers 700
Interest with Compensating Balances 642 Economies of Scale 702
20.8 Summary 643 Economies of Vertical Integration 703
xii Table of Contents

Combining Complementary Resources 704 24.4 International Capital Budgeting 742

Merging to Reduce Taxes 704 Net Present Value Analysis 742
Mergers as a Use for Surplus Funds 704 The Cost of Capital for Foreign Investment 744
Eliminating Inefficiencies 704 Political Risk 744
Industry Consolidation 705 Avoiding Fudge Factors 748
23.2 Dubious Reasons for Mergers 705 24.5 Summary 748
Diversification 705
The Bootstrap Game 706 CHAPTER 25
23.3 The Mechanics of a Merger 707 Options 755
The Form of Acquisition 707 25.1 Calls and Puts 757
Mergers, Antitrust Law, and Popular Opposition 708 Selling Calls and Puts 759
23.4 Evaluating Mergers 710 Payoff Diagrams Are Not Profit Diagrams 760
Mergers Financed by Cash 710 Financial Alchemy with Options 761
Mergers Financed by Stock 712 Some More Option Magic 762
Some Tax Issues 712 25.2 What Determines Option Values? 763
A Warning 713 Upper and Lower Limits on Option Values 763
Another Warning 713 The Determinants of Option Value 764
23.5 The Market for Corporate Control 713 Option-Valuation Models 766
Ownership Structure and the Effectiveness 25.3 Spotting the Option 769
of the Market for Corporate Control 714 Options on Real Assets 769
23.6 Method 1: Proxy Contests 715 Options on Financial Assets 770
23.7 Method 2: Takeover Bids 716 25.4 Summary 774
Takeover Bid Tactics 716 Appendix 25A: The Black-Scholes Option Valuation
23.8 Method 3: Leveraged Buyouts 718 Model (Online)
Barbarians at the Gate? 720
23.9 Method 4 : Divestitures, Spin-Offs, and Equity CHAPTER 26
Carve-Outs 721 Risk Management 780
23.10 The Benefits and Costs of Mergers 722 26.1 Why Hedge? 781
The Evidence on Risk Management 783
23.11 Summary 724
26.2 Reducing Risk with Options 783
CHAPTER 24 26.3 Futures Contracts 784
International Financial Management 729 The Mechanics of Futures Trading 787
24.1 Foreign Exchange Markets 730 Commodity and Financial Futures 788
Spot Exchange Rates 730 26.4 Forward Contracts 789
Forward Exchange Rates 733
26.5 Swaps 790
24.2 Some Basic Relationships 734
26.6 Innovation in the Derivatives Market 793
Exchange Rates and Inflation 734
Inflation and Interest Rates 736 26.7 Is "Derivative" a Four-Letter Word? 793
Interest Rates and Exchange Rates 737
26.8 Summary 794
The Forward Rate and the Expected
Spot Rate 739 Appendix A: Present Value Tables A-1
Some Implications 740
Glossary GL-1
24.3 Hedging Exchange Rate Risk 741
Sources S0-1
Transaction Risk 741
Economic Risk 742 Index IN-1
PREFACE
This book is about corporate finance. It focuses on how com-
panies invest in real assets and how they raise the money to
pay for these investments. It also provides a broad introduc-
tion to the financial landscape, discussing, for example, the
major players in financial markets, the role of financial insti-
tutions in the economy, and how securities are traded and
valued by investors. It offers a framework for systematically
thin king about most of the important financial problems
that both firms and individuals are likely to confront.
Fin ancial management is important, interesting, and
challenging. It is important because today's capital invest-
ment decisions may determine the businesses that the firm
is in 10, 20, or more years ahead. Also, a firm's success or
failure depends in large part on its ability to find the capital
that it needs.
Finance is interesting for several reasons. Financial deci-
sions often involve huge sums of money. Large investment
projects or acquisitions may involve billions of dollars. Also,
the financial community is international and fast-moving,
with colourful heroes and a sprinkling of unpleasant villains.
Fin ance is challenging. Financial decisions are rarely cut
and dried, and the financial markets in which companies
operate are changing rapidly. Good managers can cope with
rou tine problems, but only the best managers can respond
to change. To handle new problems, you need more than
rules of thumb; you need to understand why companies
and financial markets behave as they do and when common
practice may not be best practice. Once you have a consistent
framework for making financial decisions, complex prob-
lems become more manageable.
This book provides that framework. It is not an encyclo-
pedia of finance. It focuses instead on setting out the basic
principles of financial management and applying them to the
main decisions faced by the financial manager. It explains
why the firm's owners would like the manager to increase
firm value and shows how managers choose between invest-
ments that may pay off at different points of time or have dif-
ferent degrees of risk. It also describes the main features of
financial markets and discusses why companies may prefer a
particular source of finance.
We organize the book around the key concepts of modern
finance. These concepts, properly explained, make the sub-
ject simpler, not more difficult. They are also more practical.
The tools of financial management are easier to grasp and
use effectively when presented in a consistent conceptual
framework. Modern finance provides that framework.
Modern financial management is not "rocket science." It
is a set of ideas that can be made clear by words, graphs, and
nu merical examples. The ideas provide the "why" behind
the tools that good financial managers use to make invest-
ment and financing decisions.
Why Use Our Book
We wrote this book to make financial management clear,
useful, interesting, and fun for the beginning student. We set
out to show that modern finance and good financial practice
go together-even for the financial novice. The key to this is
a thorough understanding of the principles and mechanics
of the time value of money. This material underlies almost
all of this text, and we spend a lengthy Chapter 5 providing
extensive practice with this key concept.
The second component of our approach is the extensive
use of numerical examples. Each chapter presents detailed
numerical examples to help the reader become familiar and
comfortable with the material. We have peppered the book
with real-life illustrations of the chapters' topics. Some of
these are excerpts from the financial press found in Finance
in Action boxes; others are built into the text as examples. By
connecting concepts with practice, we strive to give students
a working ability to make financial decisions.
We have streamlined the treatment of most topics to
avoid getting bogged down in unnecessary detail that can
overwhelm a beginner. We don't assume users will have a lot
of background knowledge.
We have written the book in a relaxed and informal writ-
ing style. We use mathematical notation only where neces-
sary. Even when we present an equation, we usually write
it in words before using symbols. This approach has two
advantages: it is less intimidating and it focuses attention on
the underlying concept rather than just the formula.
Ways to Use Our Book
Because there are about as many effective ways to organize
a course in corporate finance as there are teachers, we have
ensured that many topics can be introduced in different
orders. For example, (1) we have made sure that Part Six
(Financial Planning) can easily follow Part One (Introduc-
tion); (2) although we discuss working capital after the basic
principles of valuation and financing, we have made it pos-
sible for instructors to reverse that order (as many prefer to
do); and (3) although the opportunity cost of capital depends
on project risk, the chapters on project valuation and those
on risk and return are written in such a way that the two
groups can be presented in any order.
xiv Preface
Changes in the Seventh
Canadian Edition
This seventh Canadian edition of Fundamentals includes
many updates. We have enhanced the analytical tools used
with the book: spreadsheet boxes are integrated into the
chapters; end-of-chapter problems include exercises that
ask students to use a variety of Internet resources to solve
financial problems and integrative mini cases. In addi-
tion, we have rewritten, rearranged, and added material to
improve readability and update coverage across chapters.
The following are some examples of the changes that we
have made.
Chapter 1 (Goals and Governance of the Firm) has been
updated to improve readability and interest. This chapter
includes the real-life case of Tim Hortons and its founders
Ron Joyce and Tim Horton, illustrating how financial mar-
kets help infant enterprises grow into healthy adults. The
section on business organizations has new material on pri-
vate corporations and the pros and cons of being a public
corporation. Examples of investment and financial deci-
sions of well-known companies are used to illustrate the
main activities of financial managers, the role of financial
markets, and the goals of a corporation. Keeping in mind the
currency of certain themes, the chapter includes expanded
discussion of agency issues, including additions on corpo-
rate raiders, creative accounting and tax avoidance. There
is also updated content on the ethical issues that confront
managers and new discussion on the global financial crisis.
Chapter 2 (Financial Markets and Institutions) opens
with the history of Apple Computer. It introduces block-
chains and cryptocurrencies. There is updated coverage of
prediction markets and also of the financial crisis and its
spillover to the sovereign debt crisis in the eurozone.
Chapter 3 (Accounting and Finance) has extensive
updates and discussions on financial statements of a well-
known Canadian company. The discussion of profits ver-
sus cash flow includes examples of how accrual accounting
impacts cash flows. The federal and provincial tax rates on
individual and corporate income have also been updated.
Chapter 4 (Measuring Corporate Performance). This
chapter starts with a discussion on how financial ratios
related to shareholder value and explains various finan-
cial ratios for measuring corporate performance with clear
definitions of various concepts. The chapter discusses how
different summary performance indicators (NO PAT for oper-
ating activities, ROA for investing activities, and the equity
multiplier for financing activities) are interrelated and how
they provide an overall performance indicator, the ROE. It
also provides a comparative analysis of financial ratios with
a competitor.
Chapter 5 (The Time Value of Money) has updated
examples.
Chapter 6 (Valuing Bonds) has updated market-based
bond data and institutional information. It also shows how
students can solve bond valuation problems using a financial
calculator or an Excel spreadsheet. In discussing the inter-
est rate risk on bond prices, the concept of bond convexity is
introduced. Also covered are the income tax effects on rate
of return on bond investment.
Chapter 7 (Valuing Stocks). Updated marked-based data.
Using the similar concepts to stock valuation, a new section
about corporate valuation has been added.
Chapter 8 (Net Present Value and Other Investment Cri-
teria) has some updated examples.
Chapter 9 (Using Discounted Cash Flow Analysis to
Make Investment Decisions) has been updated to include
new information on capital cost allowance (CCA) and
the accelerated investment incentive. The chapter works
through a realistic comprehensive example of capital bud-
geting analysis. An appendix showing how the CCA tax
shield is derived is available to the reader on Connect.
Chapter 10 (Project Analysis). The updated chapter
includes coverage of real options and explains how those
options are integrated into a firm's longer-term strategic
considerations. The chapter also includes new Finance in
Action material.
Chapter 11 (Introduction to Risk, Return, and the
Opportunity Cost of Capital) starts with an updated histor-
ical survey of returns on bonds and stocks and goes on to
distinguish between the unique risk and market risk of indi-
vidual stocks using updated market-based data. This chapter
includes more examples and formulas for calculating mean,
standard deviation, and covariance of stocks and portfolios.
Chapter 12 (Risk, Return, and Capital Budgeting) shows
how to measure market risk of a stock and a portfolio
and discusses the relationship between risk and expected
return, and now uses updated market data and spreadsheet
approach to problem solving.
Chapter 13 (The Weighted-Average Cost of Capital and
Company Valuation). Market data has been updated. There
is a discussion of the choice of the risk-free security, Trea-
sury bill, or long-term government bond when implement-
ing CAPM.
Chapter 14 (Introduction to Corporate Financing and
Governance) has been extensively updated, and features
an extended treatment of corporate governance. The chap-
ter includes updated discussion on innovations in the bond
market.
Chapter 15 (Venture Capital, IPOs, and Seasoned Offer-
ings). The chapter introduces alternative fundraising meth-
ods for startups such as crowdsourcing. The chapter also has
updated material on the IPO market and on underwriters.
An appendix to the chapter discussing the financing of new
and small enterprises has been extensively updated to reflect
changes in the venture capital industry and other sources of
small business financing in Canada.
 Preface
Chapter 16 (Debt Policy) has been updated with Cana-
dian examples and statistics in the discussions on costs of
financial distress and explaining financing choices, and also
includes new Finance in Action material.
Chapter 17 (Leasing) now has updated information on
the leasing industry. A new Finance in Action has been
added providing an overview of Canadian finance and leas-
ing market. The concept of competitive leasing has been
added along with an example of borrow and buy versus
leasing.
Chapter 18 (Payout Policy) has been updated with a
revamped treatment of the trade-offs governing the use
of dividends versus share repurchases. A new Finance in
Action box discusses share repurchases by companies in the
Canadian oilpatch.
Chapter 19 (Long-Term Financial Planning). The finan-
cial planning model has been updated. The use of Excel
spreadsheets, a crucial aspect of long-term planning, is an
important part of this chapter.
Chapter 20 (Short-Term Financial Planning) has been
significantly updated with new examples. A new Finance in
Action has been included that explains why loan syndication
is risky.
xv
Chapter 21 (Cash and Inventory Management). The sec-
tion on managing cash balances has been updated. More
information is included on yields on money market invest-
ments and the international money market.
Chapter 22 (Credit Management and Collection) has
updated material on numerical credit scoring. The general
principles for the credit decision are updated with a discus-
sion of the "five Cs" that determine credit terms.
Chapter 23 (Mergers, Acquisitions, and Corporate Con-
trol) contains numerous updates to reflect merger news in
recent years, and a Finance in Action has been added featur-
ing Mizuho bank to reflect elusive synergies.
Chapter 24 (International Financial Management) has
extensive updates and new discussion on the global financial
crisis, including a Finance in Action box on the effects of the
crisis on Italy. Another new Finance in Action discusses pos-
sible scenarios pertaining to Brexit.
Chapter 25 (Options) has updated market data on option
prices and examples on call and put option valuations. There
is also a new Excel Spreadsheet box for the Black-Scholes
option pricing model.
Chapter 26 (Risk Management) includes updated
examples.
xvi Preface

Walk-Through ====:~·=~=!i"~
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To provide guidance and insights

throughout the text, we include a
number of proven pedagogical aids:
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LOl.2 Investment and Financing Decisions
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NUMBERED EXAMPLES
Numbered and titled examples are extensively integrated into the chapters to provide detailed
applications and illustrations of the text material.

FINANCE IN ACTION BOXES

Almost every chapter includes at least one Finance
in Action box. The boxes present excerpts, usually
from th e financial press, providing real-life illus-
trations of the chapter's topics.
FINANCE IN ACTION
Working in Finance
Susan Webb, Research Analyst, Mutual Fund Group
After majoring i n biochemistry, I j oined the research department
or a large mutual fund group. Because of my background. I was
assigned to work with the senior pha rmaceuticals analyst. I start
the day by reading the business sections of The Globe and Moil
and Notional Posr and reviewing 1he analyses thal come In each
day from stockbroking firms. Sometimes we need to revise our
earnings forecasts and meet w ith the portfolio managers to dis-
cuss possible trades. The remainder of my day is spent mainly in
analyzing companies and developing forecasts of revenues and
earnings. I meet freQuently with pharmaceutica l analysts In stock-
broking firms, and we regularly visit company management. In the
evenings I study for the Chartered Financial Analyst (CFA) exam.
Since I did not study finance at university. this is Quite challeng-
ing. I hope eventually to move from a research role to become a
portfolio manager.
was viable. We had to check that the contracts with the builders,
operators, suppliers, and so on were all in place before we could
arrange bank financing for the project.
Albert Rodriguez, Emerging Markets Group, Major
Toronto Bank
I joined the bank after majoring In finance. I spent the first six months
In the bank"s training program. rotating between departments. I was
assigned to the European markets team just before the 2010 Greek
crisis when worries about a possible default caused interest rates
on Greek government debt to jump to more than 4% above the
rate on comparable German government debt. There was a lot of
activity. with everyone trying to figure out whether Greece might be
forced to abandon the euro and how It would affect our business
My Job is largely concerned with analyzlng economies and assess--
ing the prospects for bank business. There are p lenty of opportuni-

INTERNATIONAL ICON
A distinctive icon (shown here) appears where the authors discuss
global issues.

• ETHICS ICON
A distinctive icon (shown here) appears where the authors discuss
ethical issues or the implications of unethical practices.
- -0
Cash retained and
reinvested in the firm's
operations is cash
KEY POINTS saved and invested
These marginal boxes, identified with the icon shown below at right, sum- on behalf of the firm's
marize the adjoining material, at the same time helping students focus on shareholders.
the most critical content.
 Preface xvi i

CHECK POINT QUESTIONS Rhonda and Reggie Hotspur are working hard to save fOI' their children's university educa-
tions. They don·t need more cash for current consumption but will face big tuition bills in 2020.

Numbered Check Point boxes with questions are provided in Should they therefore avoid investing in stocks that pay generous current cash d ividends?
Explain briefly.

each chapter to enable students to check their understanding

as they read. Both conceptual and calculation-type questions
have been included in this edition. Answers are provided at
the end of each chapter.

KEY FORMULAS
Key mathematical formulas, identified by a number, are called out in the text.
A summary of these key formulas can be found by visiting Connect.

KEY TERMS
Key terms, when introduced, appear in colour and bold in the main text and
are defined in the margin. A glossary made up of all these definitions is also
available at the back of the book and on Connect.

CALCULATOR BOXES
AND EXERCISES
In a continued effort to help students grasp the
critical concept of time value of money, many
pedagogical tools have been added throughout the
text. Financial Calculator boxes provide examples
An Introduction to Financial Calculators
Financial cak.ulators are des~ned with present value and future Why does the minus sign appear? Most calculators treat cash
value formul.iis <'lln~iidy progr<'!mmed. Therefore. you ~n re<tdily floW5 as either infl~ (shown ,'IS positive numbers) or outflows
solve many problems simply by entering the inputs for the problem
and punching a key for the solution
(neg11tlve numbers). For eJ1ample. If you borrow $100 today at an
intereM rate of 12%, you receive money now (a positive cash flow),

of solving a variety of problems with directions for Thebasicfinancial calculatorusesfivekeysthatcorrespondto but you will have to pay back $112 in a yetu. 11 negative cash flow at

•••••
the inpuls for common problems involving the time value of money. that time. Therefore, the calcula tor displays FV as a negative num~

the three most popular financial calculators. ber. The following time line of cash flows shows the reasoning
employed. The final negative cash flow of $112 has the same pres-
ent value as the $100 bofro~ today.
Each key represents the following input:
PV • $100
n is the number of periods. f:Ne have been using t to denote
the length of time, or number of periods. Most calculators use Year:O~-----~
n for the same concept.)
I is the interest rate per penod, eJ1pressed as 11 percentage
(not a decimal). For eJ111m~e. if the interest rate is 8%, you FV= $112

EXCEL SPREADSHEETS AND

EXHIBITS
Excel Spreadsheet boxes are integrated into many EXCEL SPREADSHEET

chapters and provide the student with detailed Interest-Rate Functions

examples of how to use spreadsheets in applying
1 Findin g t h e future value o f $24 u sing a spread sh eet
financial concepts. They give students a valuable
3 Presentvalue (p'o')
introduction to financial modelling. We show 4 lnterest rate(rote) o.os
S Payment(pmt)
how spreadsheets can be used in time-value-of- 6 Periods(nperJ 390

money and security valuation problems, in capital S Futu1evalue $260.301.027.017,969

budgeting, and in long- and short-term planning 10

11 The formula in cell BS is • FV(B4.B6.BS- B3). Notice that we enter the present value
12 as the negative o f the value in cell 83, since the "pu rchase price" is a cash outflow.
applications. Questions that apply to the spread- 13
14 You can confirm for yoursetf that changing the entry In cell B4 to .035 w~I reduce
sheet are included. These spreadsheets are also 15 lhe value to $16,104.515.

available on Connect. Selected Exhibits are set as Just as financial calculators largely replaced Interest rate tables In The Interest rate Is entered as a decimal In cell 84. The formula for

Excel Spreadsheets. the 1980s. these calculators are today giving way to spreadsheets
Like financial calculators, spreadsheets provide built·i n functions
future val ue In cell 88 takes as Its last Input lhe negative of cell 83.
because the $24 purchase price Is treated as cash outflow. Note
xviii Preface
END-OF-CHAPTER FEATURES Questions and Problems
The end-of-chapter features offered to support Basic
the concepts presented are Summary, Key Terms, I. Corporate Fi.na ncing. Ilow can a small. private
Questions and Problems, Solutions to Check
Points, and Mini Cases. To help students achieve
the stated learning objectives, the LO numbers
are included in both the Summary and the Ques-
tions and Problems. The Questions and Problems
incorporate questions requiring Internet access,
questions with guided steps, integrative questions,
qualitative/conceptual questions, and questions
requiring the use of Excel or an equivalent spread-
sheet program. Questions are grouped according
to level of difficulty.
Internet Problems
Many problems are provided that are meant to be solved using the
wealth of material available on the Internet.
Excel Questions
Excel questions, identified by an arrow icon in the margin, are available
for download on Connect.
Mini Cases
Integrative mini cases end many chapters. These allow students to
apply their knowledge to relatively complex, practical situations.
Several new such cases have been added for this edition.
Award-Winning Technology
McGraw-Hill Connect® is an award-winning digital teach-
ing and learning solution that empowers students to achieve
better outcomes and enables instructors to improve effi-
ciency with course management. Within Connect, students
have access to SmartBook®, McGraw-Hill's adaptive learn-
ing and reading resource. SmartBook prompts students with
questions based on the material they are studying. By assess-
ing individual answers, SmartBook learns what each student
knows and identifies which topics they need to practice,
giving each student a personalized learning experience and
path to success.
Connect's key features are analytics and reporting, sim-
ple assignment management, smart grading, the opportu-
nity to post your own resources, and the Connect Instructor
Library, a repository for additional resources to improve stu-
dent engagement in and out of the classroom.
2. Corporate Financing. Is ii possible for an indi·
vidual to save and invest in a corporation wilhout
firm finance ilS capital investments? Give a couple of
lending money to it or purchasing additional shares?
Explain. (LOI)
examples. (LOI)
Intermediate
l2. True or false? (LOI)
a. Financing for public corporations m ust flow
through financial markets.
b. Financing for private corporations must flow
through fi nancial intermediaries.
c. The sale of policies is a source of fina ncing for
insurance companies.
d. Almost all foreign-exchange trading occu rs on the
floors of the FOREX exchanges in New York and
London.
c. The opportunity cost of capital is the capital
outlay requ ired to u ndertake a real invesLment
opportunity.
The cost of capital is the interest rate paid on bor-
rowing from a ban k or other financial institution.
Challenge
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Instructor resources for Fundamentals of Corporate
Finance, 7th Canadian Edition, are as follows:
• Instructor's Manual (with chapter problem solutions)
• Computerized Test Bank
• Microsoft®PowerPoint®Slides
INSTRUCTOR'S MANUAL
This supplement, completed by our authors, includes a
descriptive preface containing alternative course formats
and case teaching methods, a chapter overview and outline,
and key terms and concepts. Complete solutions to all end-
of-chapter problems are included.
COMPUTERIZED TEST BANK
For the Computerized Test Bank, David Roberts of South
Alberta Institute of Technology has adapted true/false, mul-
tiple-choice, and short-answer questions. These are identi-
fied by level of difficulty, and complete answers are provided
for all questions and problems, along with reference to the
relevant learning objective of the chapter.
 Preface
MICROSOFT® POWERPOINT® SLIDES
Prepared by Humayun Qadri, MacEwan University, these
visually stimulating slides can be edited or manipulated to fit
the needs of a particular course.
Acknowledgments
We take this opportunity to thank all those who helped us
prepare this edition. We want to express our appreciation to
the instructors whose insightful comments and suggestions
were invaluable to us during this revision.
We also want to extend much gratitude to you, the stu-
dent using this textbook. Your criticisms and comments have
made each subsequent edition so much better. It is our hope
that, one day in the not-too-distant future, one or several of
you will be inspired to adapt a Brealey/Myers text for Cana-
dian students.
We owe much to our colleagues at the University of New
Brunswick, in particular, Professors Muhammad Rashid and
Eben Otuteye for useful suggestions.
We would like to express our appreciation to Justin Feng,
University of New Brunswick, and Sabina Thapa for adept
research and computational assistance. Additional thanks
go out to Justin Feng and Aiden Best for work on some end-
of-chapter problem solutions.
We would like to particularly thank Justin Taheri, Cen-
tennial College, for his diligent review of all the chapters
and end-of-chapter solutions. In addition, we would like to
thank our supplement authors David Roberts, Lois King,
xix
and Humayun Qadri, whose efforts will help students and
instructors alike.
We are also grateful to the talented staff at McGraw-Hill
Ryerson, especially Jade Fair, Portfolio Manager; Krisha
Escobar, Content Developer; and Jessica Barnoski, Supervis-
ing Editor. We want to thank copy editor Rodney Rawlings
for his energetic attention to the details.
Finally, we cannot overstate our indebtedness to Koumari
Mitra, to Anusha Mitra, Devashis' daughter, and to Sabina
Thapa, and to Samarpan Gajurel and Diluv Gajurel, Dinesh's
sons. They supported us and forgave us when we were very
absorbed in the project.
PRELIMINARY REVIEW
Keith C.K. Cheung, Odette School of Business,
University of Windsor
Bob Chow, Kwantlen Polytechnic University
Bill Dawson, University of Western Ontario
Larbi Hammami, McGill University
Dave Jailal, Seneca College
Audrey Lowrie, MacEwan University
H. Semih Yildirim, York University
Don Smith, Georgian College
PRE-WRITING REVIEW
Barb Bloemhof, McMaster University
Raad Jassim, McGill University
Keith Cheung, University of Windsor
Nancy Bower Martin, University of Guelph
W. Fraser Wilson, MacEwan University
Effective. Efficient. Easy to Use. Impact of Connect on Pass Rates

McGraw-Hill Co nnect is an award-winning dig ital teach-

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achieve better o utcomes and enables instructors to
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Chapter© Goals and Governance of the Firm
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
L01 Give examples of the investment and financing decisions that financia l
managers make.
L02 Dist inguish between real and financial assets.
L03 Cite some of the advantages and disadvantages of organizing a business as
a corporation.
L04 Describe the responsibilities of t he CFO, the treasure r, and the controller.
LOS Explain why maximizing market va lue is the logical fi nancial goal of the
corporation.
LOG Explain why value maximization is usually consistent with ethical behaviour.
L07 Explain how corporat ions mit igate conflicts and encou rage coope rat ive
behaviou r.
LOS Give examples of career paths in finance.

For an organization to g row from small beginnings to a major cor-
poration, good investment and financing decisions need to be made.
Frank Kovalcheck via Alaskan D ude/ Flickr/CC BY 2.0
To carry on business, a corporation needs an almost end-
less variety of assets. Some are tangible assets such as
plant and machinery, office buildings, and vehicles; oth-
ers are intangib le assets such as brand names and pat-
ents. Corporations finance these assets by borrowing, by
reinvesting profits back into the firm, and by selling addi-
tional shares to the firm's shareholders. Therefo re, the
firm's financia l managers face two broad questions: First,
what investments should the corporation make? Second,
how should it pay for those investments? The investm ent
decision involves spending money; the financing decision
involves raising it.
We start this chapter with examples of recent investment
and financing decisions by major U.S. and foreign corpora-
tions. We review what a corporation is and describe the roles
of its top financial managers. We then turn to the financial goal
of the corporation, which is usually expressed as maximizing
value, or at least adding value. Financial managers add value
whenever the corporation can invest to earn a higher return
than its shareholders can earn for themselves.
But is maximizing value rea lly a sound and realistic goal?
If a corporation maximizes value for its shareholders, can
it also be a good corporate citizen? If we ask managers to
increase firm value, won't they be tempted to cut corners
and try dishonest t ricks? Will the managers really focus
on increasing value, or will they pursue their own narrow,
selfish interests? We consider the conflicts of interest that
arise in large corporations and the mechanisms t hat help
to align the interests of managers and stockho lders.
Final ly, we look ahead to the rest of this book and look
back to some entertain ing snippets of financial history.

L01, 2 1.1 Investment and Financing Decisions

The history of the Tim Hortons chain can be traced back to May 1964, when the first Tim Hortons
coffee and donut shop was opened in Hamilton, Ontario, by Tim Horton, a National Hockey
League All-Star defenceman. In 1967, Ron Joyce, who at that time operated three Tim Hortons
restaurants, partnered with Tim Hortons to open 37 restaurants over the next seven years. After
the passing of Horton in 1974, Joyce took over as sole owner and continued the chain's expansion
within Canada and abroad. The chain's focus on top quality, fresh products, high service stan-
dards, and community leadership has enabled it to grow into the largest quick-service restaurant
chain in Canada specializing in always fresh coffee, baked goods, and home-style lunches.
The first stores offered only coffee and two donut selections, the Apple Fritter and the Dutchie.
While these items were popular in the 1960s, with evolving consumer taste the company intro-
duced Timbits in 1976 (bite-sized pieces or "donut holes")-available today in 35 varieties-
muffins and cookies (1981), croissants (1983), soups and chilli (1985), and sandwiches (1993).
Over the years, the company has come out with a variety of other food and beverage items,
catering to a wide range of tastes: healthy-choice meals such as chicken salad wraps, yogurt and
berries, a full slate of breakfast and lunch sandwiches, cinnamon rolls, and a wide array of bever-
ages including flavoured coffee, cappuccino, iced coffee, and smoothies. To date, however, the
chain's biggest draw remains its legendary Tim Hortons coffee.
In 2014, U.S. fast-food chain Burger King Worldwide, Inc. has acquired Tim Hortons Inc.
for C$12.5 billion. Both companies agreed to retain their business separately with Tim Hortons
remaining her headquarters in Oakville, Ontario, and Burger King in Miami, Florida. The two
big chains of Canada and USA merged under the new parent company Restaurant Brands
International (RBI) which is majority-owned by Brazilian investment firm 3G Capital. As of
December 31, 2017, Tim Hortons has 4,722 restaurants across Canada and the United States.

2
Chapter 1 Goals and Governance of the Firm 3

Tim Hortons has come a long way because it is well managed.

© Ra dharc lmages/ Alamy Stock Photo

They have 126 stores in the Middle East and their coffee and donuts self-serve kiosks operate
in SPAR convenience stores and full-service restaurants in Ireland, U.K. On June 12, 2018, the
company opened a branch in the famous Mall of the Emirates.
In the years since the first shop in 1964, Tim Hortons has become one of Canada's big corporate
success stories. According to The Globe and Mail, it ranked 59th out of the 1,000 most profitable
companies in 2012, with annual sales of $3.12 billion and a stock market value of $7.4 billion. In
2017, its annual sales were at $24.35 billion and net assets at $11.64 billion. However, problems
associated with deteriorating relations with its franchisees may have been costly for the company.
In the annual report of Canada's most admired companies released by Leger and National Public
Relations in 2017, Tim Hortons slipped to No. 50 from No. 4 in the previous year.
In retrospect, this success was hardly a sure thing. Horton and Joyce's ideas were inspired,
but their implementation was complex and difficult. It took time and considerable effort to
build a customer base. Beyond the challenges posed by its product innovation, the firm had
to make good investments. In the beginning, such decisions were constrained. Contracts had
to be carefully vetted for their chances of working out. Given the company's scarce resources,
every new contract it undertook might have led to the demise of the entire firm if it had failed.
As the company grew, the investment decisions became more complex. When should it expand
outside Canada into other countries? How many unique menu items should it develop? Which
companies should it acquire as it expanded its range of products and services?
Here are just a few examples of investment decisions made by the firm in recent years:
• In 2001, the company formed a joint venture with a subsidiary of IAWS Group plc for the
construction of Maidstone Bakeries, in Brantford, Ontario, to manufacture donuts, Timbits,
and selected breads. That same year, the company acquired a Maidstone Coffee facility in
Rochester, New York, to roast coffee for about 42% of the company's coffee requirements.
Later, in November 2008, the company announced the construction of a coffee-roasting
plant in Hamilton, Ontario, at a cost of $30,000,000.
• In 2004, the company purchased 42 coffee and donut restaurants that formerly operated
under the Bess Eaton name in three U.S. states, namely Rhode Island, Connecticut, and
Massachusetts, for over $60 million.
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temper. I was proud and sullen, and—ungrateful.”
“Not always that.”
“I think I hated almost everybody. I did not want to be governed or
counseled. And Stephen was so—rigid and prompt. He treated me
like a little boy—”
“Oh, hush!” I interrupted.
“Some of it is true. He admits it. And when that awful affair
happened I expected he would disown me. He is so proud, then he
never did anything bad in all his life. So I felt that I had no mercy to
expect from him.”
“But you were mistaken,” I said eagerly.
“I couldn’t have gone there and in that way but for you. Perhaps he
has told you—” and his eyes questioned mine.
“No,” I answered, glad that we had not discussed it.
“I went to him. I believe it was the first manly step of my life. But,
oh, I felt so forlorn and miserable—I can’t tell you! If he had been
cold and cross I believe I should have gone and thrown myself in the
river.”
“He was not.”
“Oh, Rose, it was like the story of the prodigal son. ‘Fell upon his
neck and kissed him.’ I remember his kissing me the day father was
buried, and I do not believe any one ever did since till then. It melted
all my soul. Somehow I think he is wonderfully changed. His
goodness is so tender.”
“And you love him?”
“Love isn’t any word. I absolutely adore him! I did not think it was
in me, or in him. And all through the weeks that followed, for I was
very ill and miserable, he was so good. I never talked to any one
before, except you, somehow I could not. But he found his way to my
heart and said he would help me, that we would both try together, for
he had many faults to correct, that God had given us the tie of
brotherhood for a high and holy purpose, that we were to help and
strengthen each other; as if, Rose—as if I could do anything for him!”
“Yes, you can,” I replied. “You can keep him tender and cordial and
brotherly.”
“So he said. We did not come to this all at once, and Mrs.
Whitcomb’s cheerfulness helped. I had to try hard to be patient. I
was so used to flying out at everything. You see, at uncle’s they all
knew that I had a bad temper, they expected me to explode or sulk
on the slightest provocation, and only laughed or tormented me. If I
had been taught to control myself, it would never have been so
dreadful.”
“It is good to have the lesson learned now.”
“I never can forget it, never! I am not an angel yet, Rose, cherubim
or seraphim, I suppose Miss Fanny would say;” and he smiled oddly,
“but I am trying. I do not disdain the helps as I used to. I do not feel
that patience and self-control are exclusively girlish virtues.”
“No,” I returned, “we girls will not rob you of them.”
“You are generous. But then you always were. I am beginning to
learn that the grand corner-stones for the human soul are truth and
love, the truth that leads us to be fair and just to others, and the love
to our neighbor.”
“Here we are,” I said. “Do you want to come in?”
He followed me and we did our errand.
“I could not understand last summer why you loved to do these
things;” he began when we were homeward-bound.
“You considered it an evidence of a depraved taste?”
He smiled rather sadly.
“I supposed people consulted their own pleasure first. Doing any
rather distasteful deed and hunting around until you found a bright
side to it was like so much Sanscrit to me.”
“He came not to please—Himself;” I said solemnly.
 “I understand a little now. Yet when He had redeemed the world
there must have been a great joy in His own mind, as well as in
heaven.”
“We cannot do anything like that,” I said. “But as He loved us, so
we are to love the brethren, the whole world.”
“To be willing to do for them. To seek not our own pleasure
altogether. It is very hard, Rose, and sometimes I get discouraged.
Then Stephen tells me of his failures. It doesn’t go on continually. It
is a little doing all the time, work and healing, and he says it will have
to be so in this world.”
“Yes,” I answered. “We cannot hinder nor change. God sets the
work before us, and though the pleasant fields are all about us, we
have no right to choose our own paths. He knows best in what ways
He wants us to walk.”
“I talked to your father yesterday. I did not think I could talk to
anybody but you and Stephen. I was sorry for all the pain and
anxiety I had caused him—and—it was almost like having a father of
one’s own. I don’t wonder that you all have such sweet pleasant
natures.”
We met Lily and Tim taking a walk, their hands full of grasses and
wild flowers, so we turned them about and all went home together.
The visit proved a very delightful one. We went to the Cascade
one day, taking a lunch with us, and on another day the Churchills
sent their family carriage over and we had a royal time, crowding it
full, and taking turns in driving.
We all noticed the great change in Louis. Not that he was perfect
or saintly. In fact I think he was more of a boy, when it came to that,
than the summer before. He still had a dangerous tendency to
quickness of temper, sometimes he would flush deeply when
annoyed, but he always spoke afterward in a low, even tone of voice,
as if he had gained the mastery within. His feelings were more
healthy-toned, he had a heartsomeness that was genuine. You never
mistrusted it as you did Stuart’s.
 We ended the festivities with a croquet and tea-party on Saturday
afternoon, asking in a half dozen young people who all enjoyed
themselves amazingly. To the surprise of everybody, right in the
midst of the gayety who should drop down upon us but Stephen
Duncan.
“I was homesick to see you all,” he began, with a comically
lugubrious face.
“If you think you are going to be purely ornamental you are much
mistaken;” declared Fanny. “Here is a mallet and here is a place.”
“If you will excuse me—”
“But I will not. No running away to the study to talk with papa, or to
play with Edith. If you will come uninvited to a party you must take
the consequences.”
“Can I not soften your heart, if like the old man I should ‘sit on the
stile and continue to smile?’”
“Not any smiles. I am obdurate.”
He pretended to be much aggrieved, but in reality he was very
gay. I had never seen him so amusing and entertaining.
“I don’t see how you get acquainted with such loads of nice
people;” said Allie West. “And you always have such good times
here.”
The good times came without any trying. There are numberless
gates called Beautiful all along life, at which you give such as you
have, and find it more precious than silver or gold.
It was a lovely moonlight night, so after supper we walked part of
the way with the merry crowd. It did not seem to me that I had ever
been so happy in my life. I could not tell why but I felt as if I must
have wings somewhere that were lifting me off the ground at every
step.
We rambled around under the trees and by the way side. Louis
came back to my vicinity and we fell into a rather grave talk about
the future.
 “I never thought I should want to stay here so much,” he said. “I
was glad enough to get away last summer. I cannot forgive myself
for being such a boor! Now I shall want to come again and again.”
“Well why not?” I returned.
“I am afraid you will become tired of me.”
“Try us and see. We are not easily wearied.”
“You are all so generous with yourselves.”
I smiled a little. “Why not give of your best?”
“True.” Then there was a silence. We reached the gate presently.
“Do not go in just yet;” he pleaded, so we remained in the silvery
light that was flooding the whole earth. Moonlight always stirs the
tender and thoughtful side of one’s soul.
“I am glad that to-morrow will be Sunday. I can just think how I
shall enjoy going to church and hearing your father preach.”
This from him who had despised religion and sneered at sermons.
It did startle me.
“And to have Stephen here.”
“I am rejoiced that you feel so kindly toward one another,” I replied.
“You are getting to be brothers indeed.”
“And then will come weeks and weeks of study,” he went on in a
musing tone. “I like it. Books seem to me—well, better than some
people. Only—if you could all come down in the winter. Stephen and
Mrs. Whitcomb were planning for it, but there! it was a secret and I
have betrayed it.”
“I can keep secrets;” and I smiled up into his remorseful face.
“Yes; I have proved that. Rose”—after a pause—“I have half a
mind to tell you another, to ask some—advice; at least, I would like
to know how it appears to you.”
“Will it be of any real avail?” I asked, noting the perplexed lines on
his countenance. “I am not as wise as you think. Because I just
happened to stumble into one matter without making a mess of it—”
 “This is only an idea. I cannot ask Stephen. I think it would please
him and he might judge wrongfully.”
“If I can help you;” I replied encouragingly.
“It is about the future. It may never come to anything to be sure,
and perhaps I never can be good enough. Stuart will go into
business. He does not love study and he needs an active life. He
wanted Stephen to put him in a store this Autumn. But I—”
I knew then what he meant. Somehow I could not help laying my
hand on his arm with a touch of confidence.
“Whether I ever could so govern my temper and my impatient
desires;” bowing his head humbly. “But if I had some guard about
me, if I felt that I must try continually—would it be wrong to think of
it?”
“Surely not;” I returned warmly. “Nor to do it if God gives the
strength and the grace.”
“I like to think of that grand, earnest Saint Paul, with his ‘thorn in
the flesh.’ Perhaps it was some giant temper or desire. I fancy it
must have been, for you know how he persecuted the Christians
unto death. And though God would not take it away, there was the
promise of His grace being sufficient.”
“As it is, always.”
“There are some years to live before I decide positively. But if they
were spent in a worthy manner, and I mean them to be, with God’s
help.”
“Oh, you could, surely. And papa would be your best friend;” I
rejoined eagerly.
“Keep my secret—I have your promise,” he said in a hurried
manner, for a step sounded on the walk.
“It is sacred to me until you wish to take others into your
confidence.”
Stephen spoke and we turned, walking slowly up to the house.
Louis sat down on the step beside papa. I stood undecided whether
to go in or not, when Stephen took my arm and drew me around the
corner of the porch. There was a long grape arbor whose gloom was
made a pleasant twilight by the silver sifted through the openings
between the leaves, and we took a turn up and down.
“I want to tell you,” he began almost abruptly, and his voice had a
hard, strained sound, “that I heard—the last of what you said. I could
not help it. And I know your secret.”
I was a trifle annoyed, but I controlled myself.
“Oh,” I said, “then you will be tender and helpful and do all in your
power to strengthen Louis. He feels so humble. I would hardly have
thought it of him. And there are so few young men who have any
desire to take such a life upon them. With his means and his talents
he can do so much good.”
He stopped suddenly. “Rose, what are you talking about?” he
asked. “Did not Louis—”
“He confessed to me his desire—no, it was hardly that, as he is
afraid he can never be good enough for a clergyman. But you will
assist him—you do not disapprove of it?”
“Louis! Ah, I understand. It would be the delight of my heart. But I
thought—I knew he liked you so much. Oh, my little darling!”
He turned and gathered me in his arms. My heart beat and my
cheeks were in a blaze as the whole story came to me, dazing me
with its strange, sweet suddenness. I believe I cried and then I
laughed hysterically, but somehow the cool, steady voice quieted me
and made me feel the truth and earnestness of what he was saying,
so presently I grew still with a great awe.
“You will come,” he was saying. “We both need you. We want just
this steady, cheerful, loving influence. I think I have a tendency to be
impatient when people cannot see my ways, perhaps requiring a
little too much, and your sweetness will temper this. Then we can
both help him.”
Could I? How strange that any one should care for me alone. Not
for mamma, or Fanny, but to want me!
 “Mr. Duncan,” I began as we were going back to the porch—“have
you forgotten that my hair is—red?”
“Well, what of that?” in a gay tone.
“I do not believe you—like it.”
“You foolish little girl, set your heart at rest. Do you remember
when I came upon you suddenly last summer? You were standing on
the porch in a tiny glint of sunshine, and looked like some of the old
pictures! Why, I believe it was your hair that I fell in love with first of
all.”
“I am glad it was, for I am not half as good as you imagine I am.”
“Children,” mamma said, standing on the porch step. “Do you
realize how late it is?”
I felt that she knew all, perhaps had known it long before, indeed.
But I was glad that the knowledge had come to me so suddenly, and
not any sooner. Even now I was half afraid of it. Her kiss and tender
clasp re-assured me.
“Mother!” Stephen Duncan said with reverent sweetness.
 CHAPTER XVII.

WISHED there could be no such thing as breakfast the

next morning, but there was, and I had to go through
with it, feeling that I was no longer I, that Rosalind
Endicott was some dream-girl of the past. Stephen was
very good and did not notice me much, and Fan
appeared wonderfully pre-occupied. Mamma helped me over the
trying places, and papa just said with his tender morning kiss,—“And
this little girl, too.”
When I was all dressed for church I opened a little drawer to get
my gloves. There lay the box containing Stephen’s gift. I had never
worn it, but it seemed to me as if I ought to put it on now. He liked
me and the misunderstandings were at an end. I had accepted a
share of his burthens, his crosses, whatever they might be, so I
clasped it around my neck. It was so beautiful. I did not envy the
queen her diadem.
We walked to church together. Louis glanced back now and then. I
believe he began to suspect.
It was quite different from the Sunday when I had gone to church
with that strange sense of Fan’s new love. I felt quiet and restful, yet
it was such a great thing to have another’s heart in one’s keeping, to
take in a new life beside the old.
They both left us on Monday. Stephen was to come up soon
again. In the meanwhile, letters.
“I have one of yours to begin with,” he whispered.
It was a silent day for us. No one appeared to care about talking,
yet we were not gloomy. Indeed, I think mother, Fan and I
understood as we never had before, how much we loved one
another.
 I went on wearing my cross. In the first letter there came a pearl
ring for me. Fan had a handsome diamond but she seldom wore it
except when she was going to the Churchills. I slipped mine on my
finger with a slight presentiment that I should turn the pearl inside if
any one looked at me.
Richard Fairlie and Jennie came home bright and happy as birds.
They took possession of the great house, altered a little, re-arranged
to their liking and had Mrs. Ryder in their midst. There was no grand
party, but some pleasant tea-drinkings and hosts of calls. No one
could afford to slight Mrs. Fairlie, and people began to realize what a
noble girl Jennie Ryder had always been.
I am almost ashamed to confess how much talking it took to settle
our affairs. Stephen wanted to be married in the Spring. That was
too soon, mamma and I thought. But there were so many good
reasons.
Miss Churchill heard of it presently and came over to have a
consultation with mamma.
“It will have to be sometime,” she said. “It will make a little
confusion, a break, and no end of strangeness in adapting
yourselves to the new order. But here are Nellie and Daisy right
behind.”
“I don’t want to lose all my girls in this fashion,” said mamma.
Miss Churchill smiled and then admitted that she had a plan to
propose.
They wanted Fanny. The murder was out then.
“Kenton and I have discussed the matter a good while. Winthrop
will have the farm when we are done with it—he is the only nephew.
Kenton has been sorry for some years that we did not take him when
his father died. He is very fond of country life, and surely there are
enough to toil and moil in the cities. Then, although Lucy was
improved by her summer trip, we can understand that it is not
permanent. She wears out slowly. I should like her to have a happy
year or two with Fanny, and I should like the marriage well out of the
way of any sad memories.”
 “You are very thoughtful,” returned mamma.
“And it will hardly be like parting with Fanny, for you—as you can
see her every day. One thing and another has brought us so near
together. Kenton and I are growing old and the presence of these
young people will keep us from getting too queer and whimsical.”
It was settled some time in January.
“We shall have to do the best we can,” said mamma. “The
wardrobes must be simple. It is our station that they go out of, and
we never have been ashamed of our poverty.”
“What does a few clothes signify,” commented papa. “If the young
men are not satisfied we will give them a double portion of dry-goods
and keep our girls.”
Fan laughed over the idea.
So it was arranged that she and Fanny should go to New York. I
did not desire to accompany them, and I was sure they could choose
as well for me as if I hunted the whole town over. Besides, I wanted
the nice quiet time with papa, since I was the one who would have to
go away.
“Isn’t it funny!” said Fan. “I feel like the heroine of some hundred
year old novel, going up to town to buy wedding clothes, instead of a
girl of the period of puffs, paniers, chignons, Grecian bends, and all
that! Why Rose, think of it! We have never had a silk dress in all our
lives, except that once we had one ruffled with an old one of
mamma’s; and we have been very tolerably happy.”
“Yes, just as happy as one need be. All that could be crowded into
our small lives.”
“I dare say we should be absolute curiosities to some people.
Everybody now-a-days has a silk walking-suit, and some handsome
thread lace, and I don’t believe there are any poor people but just us.
But then we have had the love and comfort and enjoyment and no
time to worry about our rich neighbors. It has been a life full of
pleasantness and peace.”
 That was true enough. There were many, many things beside
raiment, if one could only get at the real completeness and harmony,
the secret of soul life.
Jennie Fairlie would help us sew. With their good servant she
declared she had nothing to do. Miss Churchill sent us both an
elegant poplin suit, or at least the materials. It was a simple
wardrobe to be sure. One pretty light silk dress, one dark silk with a
walking-jacket. We made morning robes and some inexpensive
house garments. Then it would be summer so soon, and there was
nothing equal to fresh, cool white. We were not used to crying for the
moon, we had found early in life that it was quite a useless
proceeding.
Altogether we kept our secrets pretty well, and when the truth
leaked out at last, everybody was so surprised that they could only
exclaim. Aunt Letty Perkins was brave enough to come and see if it
was really so.
“Well, I am beat!” she declared. “And doing well, too! I always said
there never was anyone like Mis’ Endicott for luck. Girls often do
hang on so where there is a lot, and you’ve enough left. Fanny is the
flower of the family to be sure, but she is making a big step to get in
with the Churchills. Ain’t afraid she’ll be puffed up with pride and
vanity, are you?”
“I think I can trust her,” replied mamma with a funny smile in the
corners of her mouth.
I remember the morning as one recalls a half dream, the misty
impression between sleeping and waking. The peculiar confusion
pervading the house, the strange mislaying of handkerchiefs and
gloves, the voices that were so full of tears and gay little laughs, the
half sentences, the clasp of hands as one went in or out of a room,
the long, loving glances as if each would fain garner all the past into
one sweet remembrance. Winthrop and Stephen, one rather grave
but very tender to mamma and the little ones, the other full of life and
vivacity, the happiest of the happy.
Fan had one little say though her eyes were bright with tears.
 “I hope I can be as good and sweet in my life as mamma has been
in hers. And I will not ask any higher happiness.”
We walked up the church aisle. The children stood around, back of
them Louis, Nelly and mamma, and then a host of eager parish
faces. Does any one take it all in then, the solemn questions, the still
more solemn promises?
Mr. Churchill gave us both away. Papa’s voice had a little falter in
it, and I dared not look up. “For better, for worse,” “till death do us
part,” rang clearly in heart and brain. The forever of human love,
when it is love and no base counterfeit.
A little kissing, a few tears, some tremulous whispers and sad, sad
good-byes. We whose farthest journey had been the brief sojourn at
Martha’s Vineyard, took up the great pilgrimage of a new life.

I cannot tell you anything about it, or Stephen. It was a happy

confusion of strange places and watchful care, bits of affection
shining out of the tiniest rift. Honeymoons, I suppose, are much
alike, but it is right for each to think his and hers the best and most
delightful.
One afternoon the carriage set us down in so quiet a street that I
could hardly believe it was New York. And when I entered the house,
my new house, I doubted more than ever, for everybody was there.
One kissed me until I thought the breath of life was surely gone, then
another took me up. I have a dim suspicion that my sleeves were
worn threadbare, and if my hair had not been all fast in my head, I
am afraid the difference would have been discoverable.
“Why you are rounder and rosier than ever!” declared Fan,
inspecting me.
She was elegant as a princess, and had her light silk dress
trimmed with applique lace.
 It seemed as if I never could get done looking at mamma, and
papa hovered around me as if I was indeed an unusual sight.
Somehow I managed to get up-stairs to my own pretty room, to
wash my face, what there was left of it, and straighten my gown. And
there was Beauty, my lovely half-grown kitten that some one had
brought from the old home.
I heard Stuart’s voice outside the door and called him in.
“Stuart,” I said with much dignity, “this is Miss Beauty Endicott, a
nice, orderly, well brought-up kitten, and mine. I want you to respect
her and treat her with the courtesy of a gentleman.”
“Oh, fudge!” he returned. “What are you doing with a kitten when
you are married? I thought it was only old maids who were death on
cats.”
“It is boys who are death on cats,” I replied severely. “And then—I
never did expect to be married. I always supposed—”
“Oh, you couldn’t have been an old maid! your nose never can be
sharp, and your chin has that great dimple in it, and you are such a
funny little dumpling altogether! If you say much I’ll put you in my
pocket and carry you off. No doubt Stephen would feel immensely
relieved, but what could the cat do?”
“You are an incorrigible boy!”
“But we will have jolly times for all that,” and he whistled to Tim,
who put her head within the door.
“Fan,” I exclaimed with remorseful tenderness as I was going
down stairs with her arm over my shoulder; “I have Mrs. Whitcomb.
But you know you half gave her to Stephen. And as you are not to
keep house—”
“I will lend her to you a little while longer.”
We had such a merry, enjoyable supper, such a lovely long
evening, and were brimfull of happiness.
But the next morning papa gathered up his flock, “what there was
left of them,” he said with a certain comical grimace.
 “I don’t know as you need lament,” answered Stephen. “I think the
sons are coming in pretty rapidly.”
“And if there should be seven! Mother what would we do with them
all?”
Mamma smiled a little as Stephen went around and kissed her.
“Remember that I am the first one; I will never be crowded out of
my place.”
“No,” she answered softly.
They all went away that noon, and left us to begin our home life.
We had talked it over, what we were to do for the boys, what for
ourselves, and what for the world outside. For the true life is not
bounded with a narrow—thou and I. The world takes us in, and over
and above all, God takes us in. His vineyard, His day, and first and
always His everlasting love.
 Young Folks’ Heroes of the Rebellion.
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is to be found in this series of historical biography, it is difficult to imagine. This
volume is written in a most sprightly manner; and the life of its hero, Fernan
Magellan, with its rapid stride from the softness of a petted youth to the sturdy
courage and persevering fortitude of manhood, makes a tale of marvellous
fascination.”—Christian Union.

MARCO POLO:
HIS TRAVELS AND ADVENTURES.
“The story of the adventurous Venetian, who six hundred years ago penetrated
into India and Cathay and Thibet and Abyssinia, is pleasantly and clearly told; and
nothing better can be put into the hands of the school boy or girl than this series of
the records of noted travellers. The heroism displayed by these men was certainly
as great as that ever shown by conquering warrior; and it was exercised in a far
nobler cause,—the cause of knowledge and discovery, which has made the
nineteenth century what it is.”—Graphic.

RALEGH:
HIS EXPLOITS AND VOYAGES.
“This belongs to the ‘Young Folks’ Heroes of History’ series, and deals with a
greater and more interesting man than any of its predecessors. With all the black
spots on his fame, there are few more brilliant and striking figures in English
history than the soldier, sailor, courtier, author, and explorer, Sir Walter Ralegh.
Even at this distance of time, more than two hundred and fifty years after his head
fell on the scaffold, we cannot read his story without emotion. It is graphically
written, and is pleasant reading, not only for young folks, but for old folks with
young hearts.”—Woman’s Journal.

DRAKE:
THE SEA-LION OF DEVON.
Drake was the foremost sea-captain of his age, the first English admiral to send
a ship completely round the world, the hero of the magnificent victory which the
English won over the Invincible Armada. His career was stirring, bold, and
adventurous, from early youth to old age.

Sold by all Booksellers, and sent by mail, postpaid, on receipt of

price.

LEE & SHEPARD, Publishers BOSTON.

 Transcriber’s Notes

pg 64 Changed: She smiled in her irresistable fashion,

to: She smiled in her irresistible fashion,
pg 128 Changed: papa would say,” was my rejoiner
to: papa would say,” was my rejoinder
pg 150 Changed: And she enjoys everything so thorougly.
to: And she enjoys everything so thoroughly.
pg 168 Changed: our engagements and geting everything
to: our engagements and getting everything
pg 183 Changed: Here were sandwitches dripping with jelly
to: Here were sandwiches dripping with jelly
pg 185 Changed: great double lucious blossoms
to: great double luscious blossoms
pg 208 Changed: with a certain funny lugubriouness
to: with a certain funny lugubriousness
pg 238 Changed: Dosn’t she take care of sick people
to: Doesn’t she take care of sick people
pg 264 Changed: nothing but complaint and discouragment
to: nothing but complaint and discouragement
pg 264 Changed: went to neigboring towns
to: went to neighboring towns
pg 274 Changed: I struck out blindy
to: I struck out blindly
pg 284 Changed: I have gussed
to: I have guessed
pg 285 Changed: It is not—Winthop Ogden.
to: It is not—Winthrop Ogden.
pg 287 Changed: bound by a promise of secresy
to: bound by a promise of secrecy
pg 300 Changed: no expensive trosseau
to: no expensive trousseau
pg 317 Changed: spoken of the probabilty
to: spoken of the probability
pg 337 Changed: It was the begining
to: It was the beginning