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-by-stephen-a-ross/
Contents vii
Executive Summary 78 CHAPTER 6

4.1 THE FIN A NC IA L MA R K E T
E C O N OMY 79 How to Value Bonds and Stocks 136
The Anonymous Market 79
Executive Summary 136
Market Clearing 80
Concept Questions 80 6.1 DE FI N I T I ON AN D E X AMP L E O F
A B ON D 13 6
4.2 MA K I NG C ON SU MPT IO N C H OI C E S
OV ER TI ME 81 6.2 H OW TO VAL U E B ON DS 13 6
Concept Questions 82 Pure Discount Bonds 136
Level-Coupon Bonds 137
4.3 THE CO MPE TI TI V E MA R KE T 83
Consols 139
How Many Interest Rates Are There in a
Concept Questions 140
Competitive Market? 84
Concept Questions 84 6.3 B ON D C ON C E P T S 140
Interest Rates and Bond Prices 140
4.4 THE BA S IC P R IN CI PL E 84
Yield to Maturity 141
Concept Question 84
Current Yield 141
4.5 PR ACT IS IN G TH E PR I N C I P L E 85
Holding-Period Return 141
A Lending Example 85
The Present Value Formulas for Bonds 141
A Borrowing Example 86
6.4 T H E P RE S E N T VAL U E OF C O M MO N
4.6 ILLU ST R AT IN G TH E IN V E S T ME N T S TOC KS 142
D E CI SI ON 87
Dividends Versus Capital Gains 142
Valuation of Different Types of Stocks 143
4.7 C O R PO R AT E IN V ES TME N T
6.5 E S T I MAT E S OF PARAME T E RS I N THE
D E CI SI ON MA K IN G 90
DI VI DE N D DI S C OU N T MO DE L 146
Concept Question 92
Where Does g Come From? 146
4.8 SUM MA RY A N D CO NC L U S I ON S 93 Where Does r Come From? 147
A Healthy Sense of Skepticism 148
CHAPTER 5 6.6 G ROW T H OP P ORT U N I T I ES 148
The Time Value of Money 96 NPVGOs of Real Companies 149
Growth in Earnings and Dividends
Executive Summary 96 Versus Growth Opportunities 151
5.1 THE ON E- PE R IO D CA SE 96 Dividends or Earnings: Which to Discount? 151
Concept Questions 99 The No-Dividend Firm 151
5.2 THE MULT IP ER I OD CA S E 99 6.7 T H E DI VI DE N D G ROW T H M O DE L AND
Future Value and Compounding 99 T H E N PVG O MODE L ( ADVAN C E D) 152
The Power of Compounding: The Dividend Growth Model 152
A Digression 103 The NPVGO Model 152
Present Value and Discounting 103 Summary 154
Finding the Number of Periods 107 6.8 C OMPARAB L E S 154
The Algebraic Formula 108 Price–Earnings Ratio 154
Concept Questions 108 Concept Questions 155
5.3 C O M PO UN DI NG P ER I OD S 108 6.9 VAL U I N G T H E E N T I RE FIRM 155
Compounding Over Many Years 110 6.10 S TOC K MARKE T RE P ORTI N G 157
Continuous Compounding (Advanced) 111 6.11 S U MMARY AN D C ON C L U SI O N S 157
Concept Questions 113 Minicase: Stock Valuation at Ragan Engines 165
5.4 SIMPL IF ICATI ON S 113 Appendix 6A The Term Structure of Interest Rates 166
Perpetuity 113 Concept Question 168
Growing Perpetuity 114
Annuity 116
Mortgages 118 CHAPTER 7
Using Annuity Formulas 119
Net Present Value and Other Investment Rules 176
Growing Annuity 122
Concept Questions 123 Executive Summary 176
5.5 WHAT I S A F IR M WORT H ? 1 23 7.1 W H Y U S E N E T P RE S E N T VAL UE ? 176
5.6 SUM MA RY A N D CO NC L U S I ON S 1 24 Concept Questions 178
Minicase: The MBA Decision 135 7.2 T H E PAY BAC K P E RI OD RUL E 178
Appendix 5A Using Financial Calculators Defining the Rule 178
(Available on Connect) Problems With the Payback Method 179
viii Contents
Managerial Perspective 179 The Tax Shield Approach 218

Summary of Payback 180 Conclusion 218
Concept Questions 180 8.5 AP P LY I N G T H E TAX S H I E L D
7.3 TH E D ISC O UN TE D PAY BAC K AP P ROAC H TO T H E MAJ E S T I C
PE R IO D RU LE 1 80 MU LC H AN D C OMP OS T
7.4 TH E AV E R AG E AC CO UN TI NG C OMPAN Y P ROJ E CT 218
R E TUR N 1 81 Present Value of the Tax Shield on Capital
Defining the Rule 181 Cost Allowance 219
Analyzing the Average Accounting Total Project Cash Flow Versus Tax Shield
Return Method 182 Approach 220
7.5 TH E IN TE RN A L R AT E OF R E TU R N 1 83 8.6 I N VE S T ME N T S OF U N E Q UAL L I VE S:
T H E E Q U I VAL E N T AN N UAL C OST
Concept Question 185
ME T H OD 221
7.6 PRO B LE MS W IT H TH E IN TE R N A L The General Decision to Replace (Advanced) 222
R ATE O F R E TU R N A PP ROACH 1 85
Definition of Independent and Mutually
Exclusive Projects 185 8.7 S U MMARY AN D C ON C L U S I ON S 226
Two General Problems Affecting Both Minicase: Beaver Mining Company 233
Independent and Mutually Exclusive Projects 186 Minicase: Goodweek Tires Inc. 234
Problems Specific to Mutually Exclusive Appendix 8A Capital Cost Allowance 235
Projects 189 Appendix 8B Derivation of the Present Value of
Redeeming Qualities of the Internal the Capital Cost Allowance Tax Shield Formula 240
Rate of Return 193
A Test 194 CHAPTER 9
7.7 TH E PRO FITA B I LI TY IN DE X 1 94 Risk Analysis, Real Options, and Capital Budgeting 242
7.8 TH E PR ACTI CE O F CA P ITA L 9.1 DE C I S I ON T RE E S 242
B U DGE TIN G 196 Concept Questions 244
7.9 SU M MA RY A ND C ON CL US IO N S 1 97 9.2 S E N S I T I VI T Y AN ALYS I S,
Minicase: BC Copper Mining 205 S C E N ARI O AN ALYS I S, AN D
B RE AK-E VE N AN ALYS I S 244
CHAPTER 8 Sensitivity Analysis and Scenario Analysis 244
Break-Even Analysis 247
Net Present Value and Capital Budgeting 206
Executive Summary 206 Break-Even Analysis, Equivalent Annual
8.1 IN C R E ME N TA L CA SH F LOW S 20 6 Cost, and Capital Cost Allowance 250
Cash Flows—Not Accounting Income 206 9.3 MON T E CARLO S I MU L AT I ON 2 50
Sunk Costs 207 Step 1: Specify the Basic Model 251
Opportunity Costs 207 Step 2: Specify a Distribution for Each
Side Effects 207 Variable in the Model 251
Allocated Costs 208 Step 3: The Computer Draws One Outcome 253
Concept Questions 208 Step 4: Repeat the Procedure 253
8.2 TH E MA JE S TI C MULCH A N D Step 5: Calculate Net Present Value 254
C OM PO ST C OMPA N Y : 9.4 RE AL OP T I ON S 2 54
A N E X A MPLE 20 8 The Option to Expand 255
An Analysis of the Project 210 The Option to Abandon 256
Which Set of Books? 211 Timing Options 258
A Note on Net Working Capital 212 Real Options in the Real World 259
Interest Expense 212 Concept Questions 260
Concept Questions 213 9.5 S U MMARY AN D C ON C L U S I ON S 2 60
8.3 IN FLATIO N A N D CA PI TA L Minicase: Bunyan Lumber, LLC 265
B U DGE TIN G 21 3
Interest Rates and Inflation 213 PA RT 3
Cash Flow and Inflation 214
Discounting: Nominal or Real? 215
RISK 267
8.4 A LTE R N ATI V E DE FIN IT IO NS O F CHAPTER 10
OPE R ATIN G CA S H FLOW 21 7
Risk and Return: Lessons From Market History 267
The Bottom-Up Approach 217
The Top-Down Approach 218 Executive Summary 267
Contents ix
10.1 R E TUR N S 268 11.6 DI VE RS I FI CAT I ON : AN E X AM P L E 3 06

Dollar Earnings 268 Risk and the Sensible Investor 309
Percentage Returns or Rate of Return 269 Concept Questions 309
Concept Questions 271 11.7 RI S K-FRE E B ORROW I N G
10.2 HO LD IN G- PE R IO D R ET U R N S 27 1 AN D L E N DI N G 3 09
Concept Questions 275 The Optimal Portfolio 311
10.3 R E TUR N S TAT IS TI CS 27 5 Concept Questions 312
Concept Question 276 11.8 MARKE T E Q U I L I B RI U M 3 13
10.4 AV E R AGE S TO CK R E TU R N S Definition of the Market Equilibrium Portfolio 313
A N D R I SK-F R EE R E TU R N S 27 6 Definition of Risk When Investors Hold
Concept Questions 278 the Market Portfolio 313
10.5 R ISK STATI ST IC S 27 8 The Formula for Beta 315
Variance and Standard Deviation 279 A Test 316
Normal Distribution and Its Implications Concept Questions 316
for Standard Deviation 279 11.9 RE L AT I ON S H I P B E T W E E N
Value at Risk 280 RI S K AN D E X P E CT E D RE TURN
Further Perspective on Returns and Risk 281 ( CAP I TAL AS S E T P RI C I NG M O DEL) 3 16
Concept Questions 281 Expected Return on Market 316
Expected Return on Individual Security 317
10.6 MO RE O N AV E R AGE R E T U R N S 282
Arithmetic Versus Geometric Averages 282
Calculating Geometric Average Returns 282 11.10 S U MMARY AN D C ON C L U SI O N S 320
Arithmetic Average Return or Geometric Minicase: A Job at Deck Out My Yacht,
Average Return? 283 Part 2 327
Concept Question 284 Appendix 11A Is Beta Dead? (Available on Connect)
10.7 200 8: A Y E A R O F F IN A N C I A L
C R ISI S 284 CHAPTER 12
10.8 SUM MA RY A N D CO NC L U S I ON S 285 An Alternative View of Risk and Return:
Minicase: A Job at Deck Out My Yacht
The Arbitrage Pricing Theory 328
Corporation 287
Appendix 10A The U.S. Equity Risk Premium: Executive Summary 328
Historical and International Perspectives 12.1 FACTOR MODE L S :
(Available on Connect) AN N OU N C E ME N T S, S U RP RI SE S,
AN D E X P E CT E D RE T U RNS 328
CHAPTER 11 12.2 RI S K: SYS T E MAT I C AN D
U N SYS T E MAT I C 330
Risk and Return: The Capital Asset
Pricing Model 290
12.3 SYS T E MAT I C RI S K AN D BE TAS 331
Executive Summary 290 Concept Questions 333
11.1 IN D I V ID UA L SE CU R IT IE S 290 12.4 P ORT FOL I OS AN D FACTOR
11.2 E X PECTE D R ET UR N , VA R I A N C E , MODE L S 333
A N D C OVA R I A NC E 291 Portfolios and Diversification 335
Expected Return and Variance 291 Concept Questions 337
Covariance and Correlation 293 12.5 B E TAS AN D E X P E CT E D RE TURNS 337
Concept Questions 295 The Linear Relationship 337
11.3 THE R IS K A ND R E TU R N FOR The Market Portfolio and the Single Factor 338
PO RT FOL IO S 296 Concept Question 339
The Example of Supertech and Slowpoke 296 12.6 T H E CAP I TAL AS S E T P RIC I N G
The Expected Return on a Portfolio 296 MODE L AN D T H E ARB I T RAG E
Variance and Standard Deviation of a P RI C I N G T H E ORY 339
Portfolio 297 Differences in Pedagogy 339
Concept Questions 300 Differences in Application 339
11.4 THE EF FIC IE NT S ET F OR T WO Concept Questions 340
A SS ET S 30 0 12.7 PARAME T RI C AP P ROAC H E S TO
Application to International Diversification 303 AS S E T P RI C I N G 3 41
Concept Questions 303 Empirical Models 341
11.5 THE EF FIC IE NT S ET F OR MA N Y Style Portfolios 342
SE CU R IT IE S 30 4 Concept Questions 342
Variance and Standard Deviation in a 12.8 S U MMARY AN D C ON C L U SI O N S 3 42
Portfolio of Many Assets 305 Minicase: The Fama–French Multifactor
Concept Questions 306 Model and Mutual Fund Returns 346
x Contents
CHAPTER 13 14.1 CAN FI N AN C I N G DE C I S I ON S

C RE AT E VAL U E ? 383
Risk, Return, and Capital Budgeting 348 Concept Question 385
14.2 A DE S C RI P T I ON OF E FFI C I E N T
CAP I TAL MARKE T S 385
13.1 TH E C O ST OF E QU IT Y CA P ITA L 349 Foundations of Market Efficiency 387
13.2 E STIMATIO N OF B E TA 351 14.3 T H E DI FFE RE N T T Y P E S OF
Concept Question 353 E FFI C I E N CY 388
Beta Estimation in Practice 353 The Weak Form 388
Stability of Beta 354 The Semistrong and Strong Forms 388
Using an Industry Beta 354 Some Common Misconceptions About the
Concept Questions 355 Efficient Market Hypothesis 390
13.3 D E TE R MIN A NT S OF B E TA 356 Concept Questions 391
Cyclicality of Revenues 356 14.4 T H E E VI DE N C E 3 91
Operating Leverage 356 The Weak Form 391
Financial Leverage and Beta 358 The Semistrong Form 392
Concept Questions 359 The Strong Form 395
13.4 E XT E N SIO N S OF T HE BA SI C Concept Questions 396
M OD E L 359 14.5 T H E B E H AVI OU RAL C H AL L E N G E
The Firm Versus the Project: TO MARKE T E FFI C I E N CY 3 96
Vive la différence 359 Concept Question 397
The Cost of Debt 360 14.6 E MP I RI CAL C H AL L E N G E S TO
The Cost of Preferred Stock 360 MARKE T E FFI C I E N CY 3 97
The Weighted Average Cost of Capital 360 Concept Question 401
The Capital Structure Weights 361 14.7 RE VI E W I N G T H E DI FFE RE N C E S 402
Taxes and the Weighted Average In Their Own Words: A random talk
Cost of Capital 361 with Burton Malkiel 403
14.8 I MP L I CAT I ON S FOR C ORP ORATE
13.5 E STIMATIN G TH E CO ST O F FI N AN C E 404
CA P ITA L F O R SU NC OR EN ERGY 36 5 Accounting and Efficient Markets 404
Concept Question 367 The Timing Decision 405
13.6 F LOTATIO N CO ST S A ND T HE Speculation and Efficient Markets 407
W E IGHTE D AV E R AGE C OS T Information in Market Prices 407
OF CA PITA L 367
The Basic Approach 367
14.9 S U MMARY AN D C ON C L U S I ON S 409
Flotation Costs and Net Present Value 368
Minicase: Your Retirement Plan at Deck
Internal Equity and Flotation Costs 369
Out My Yacht 412
13.7 R E D UC IN G TH E CO ST O F
CA P ITA L 36 9 CHAPTER 15
What Is Liquidity? 370
Liquidity, Expected Returns, and the Long-Term Financing: An Introduction 414
Cost of Capital 370
Liquidity and Adverse Selection 371 Executive Summary 414
What the Corporation Can Do 371 15.1 C OMMON S TOC K 41 4
Concept Questions 371 Authorized Versus Issued Common Stock 415
13.8 SU M MA RY A ND C ON CL US IO N S 372 Retained Earnings 415
Minicase: The Cost of Capital for Goff Market Value, Book Value, and
Communications Inc. 378 Replacement Value 416
Shareholders’ Rights 416
Appendix 13A Economic Value Added and the
Measurement of Financial Performance 379 Dividends 417
Classes of Shares 418
In Their Own Words: Shares climb as
PA RT 4 Stronach to give up voting control 419
Capital Structure and Dividend Policy 383 Concept Questions 420
15.2 C ORP ORAT E LON G -T E RM DE BT :
CHAPTER 14 T H E BAS I C S 42 0
Interest Versus Dividends 420
Corporate Financing Decisions and Efficient Is It Debt or Equity? 420
Capital Markets 383 Basic Features of Long-Term Debt 420
Different Types of Debt 421
Executive Summary 383 Repayment 421
Contents xi
Seniority 422 CHAPTER 17

Security 422
Indenture 422 Capital Structure: Limits to the Use of Debt 459
15.3 PR E F ER R E D SH A R ES 423
17.1 C OS T S OF FI N AN C I AL DI STRE SS 459
Stated Value 423
Bankruptcy Risk or Bankruptcy Cost? 459
Cumulative and Non-Cumulative Dividends 423
Are Preferred Shares Really Debt? 423
Preferred Shares and Taxes 424 17.2 DE S C RI P T I ON OF C OS T S 461
Beyond Taxes 425 Direct Costs of Financial Distress:
Legal and Administrative Costs of
Liquidation or Reorganization 462
15.4 IN C O ME TRUS TS 425 Indirect Costs of Financial Distress 462
Income Trust Income and Taxation 425 Agency Costs 463
15.5 PAT T ER N S OF LON G-T E R M Concept Questions 465
FIN A NC IN G 426
17.3 CAN DE BT C OS T S B E REDUC E D? 465
Protective Covenants 465
15.6 SUM MA RY A N D CO NC L U S I ON S 427 Consolidation of Debt 467
CHAPTER 16 17.4 I N T E G RAT I ON OF TAX
Capital Structure: Basic Concepts 430 E FFE CT S AN D FI N AN C I AL
DI S T RE S S C OS T S 467
Executive Summary 430 Pie Again 468
16.1 THE CA PI TA L ST RU CT U R E Concept Questions 470
QUES TI ON A N D TH E PI E MODE L 430 17.5 S I G N AL L I N G 470
Concept Question 431 Concept Questions 471
16.2 MA X IMI Z IN G FIR M VA L U E 17.6 SHIRKING, PERQUISITES, AND
V E RS US MA X I MIZ I NG BAD INVESTMENTS: A N OT E
SHA R EH OL DE R I NT ER E S T S 431 ON AG E N CY C OS T OF E QUI TY 472
Concept Question 432 Effect of Agency Costs of Equity on
16.3 FIN A NC IA L L EV E R AGE A N D Debt-to-Equity Financing 473
FIR M VA L UE : A N EX A M P L E 433 Free Cash Flow 473
Leverage and Returns to Shareholders 433 Concept Questions 474
The Choice Between Debt and Equity 434 17.7 T H E P E C KI N G -ORDE R T HE O RY 474
A Key Assumption 437 Rules of the Pecking Order 475
Concept Questions 437 Implications 476
16.4 MO D IG LI A NI A N D MIL L E R : Concept Questions 477
PRO P OS IT IO N II ( NO TA X E S ) 437 17.8 G ROW T H AN D T H E DE BT-TO -
Risk to Equityholders Rises With Leverage 437 E Q U I T Y RAT I O 477
Proposition II: Required Return to No Growth 477
Equityholders Rises With Leverage 438 Growth 478
Modigliani and Miller: An Interpretation 443 Concept Question 479
In Their Own Words: Merton Miller on 17.9 P E RS ON AL TAX E S 479
the MM results 444
The Miller Model 480
16.5 TA X ES 445
17.10 H OW FI RMS E S TAB L I S H CAP I TAL
The Basic Insight 445 S T RU CT U RE 48 3
Taxation of Corporate Income 445 Concept Questions 487
Present Value of the Tax Shield 446
17.11 S U MMARY AN D C ON C L U SI O N S 48 7
Value of the Levered Firm 447
Minicase: McKenzie Restaurants
Expected Return and Leverage Under Capital Budgeting 491
Corporate Taxes 449
The Weighted Average Cost of Capital Appendix 17A Some Useful Formulas of
and Corporate Taxes 450 Financial Structure (Available on Connect)
Stock Price and Leverage Under Appendix 17B The Miller Model and the
Corporate Taxes 450 Graduated Income Tax (Available on Connect)
16.6 SUM MA RY A N D CO NC L U S I ON S 452 CHAPTER 18
Minicase: Stephenson Real Estate
Valuation and Capital Budgeting
Recapitalization 458
for the Levered Firm 493
xii Contents
Executive Summary 493 19.4 RE P U RC H AS E OF S TOC K 52 0

18.1 A D JUSTE D PR E SE NT VA LU E Dividend Versus Repurchase:
A PPROAC H 49 3 Conceptual Example 521
Concept Questions 495 Dividends Versus Repurchases:
18.2 F LOW TO EQ UI TY A PP ROACH 49 5 Real-World Considerations 522
Step 1: Calculating Levered Cash Flow 495
Step 2: Calculating rS 496 19.5 P E RS ON AL TAX E S, I S S UAN C E
C OS T S, AN D DI VI DE N DS 52 3
Step 3: Valuation 496
Firms Without Sufficient Cash to
Pay a Dividend 523
18.3 W E IGHTE D AV E R AGE C OS T OF Firms With Sufficient Cash to Pay a Dividend 524
CA P ITA L ME TH OD 49 6
Summary of Personal Taxes 525
18.4 A C O MPA RI SO N OF T HE A D JU S T E D
19.6 RE AL-WORL D FACTORS FAVOU RI N G
PR E SE N T VA LU E, FLOW TO EQ U I T Y,
A H I G H -DI VI DE N D P OL I CY 52 6
A N D WE IGH TE D AV E R AGE C OS T
OF CA PITA L A PP ROACH ES 497 Desire for Current Income 526
Caveat: Adjusted Present Value, Flow to Behavioural Finance 526
Equity, and Weighted Average Cost of Capital Agency Costs 527
Do Not Always Yield the Same Results 498 Information Content of Dividends and
A Guideline 498 Dividend Signalling 528
Concept Questions 500 Concept Question 530
18.5 A D JUSTE D PR E SE NT VA LU E 19.7 T H E C L I E N T E L E E FFE CT :
E XAMPLE 50 0 A RE S OL U T I ON OF RE AL-WORLD
Concept Question 502 FACTORS ? 53 0
18.6 CA P ITA L B U DG ET IN G WH EN
TH E D ISC O UN T R AT E MUS T In Their Own Words: Why Amazon.com
B E E STIMAT ED 50 2 Inc. pays no dividend 532
Concept Question 504 Why Rogers Communications pays
dividends 532
18.7 B E TA A N D L EV E R AGE 50 4
19.8 W H AT W E KN OW AN D DO N OT
The Project Is Not Scale Enhancing 505
KN OW AB OU T DI VI DE N D P OL I CY 53 2
Corporate Dividends Are Substantial 532
18.8 SU M MA RY A ND C ON CL US IO N S 50 6 Fewer Companies Pay Dividends 533
Minicase: The Leveraged Buyout of Corporations Smooth Dividends 533
Cheek Products Ltd. 510
Some Survey Evidence on Dividends 534
Appendix 18A The Adjusted Present Value 19.9 P U T T I N G I T AL L TOG E T H E R 53 5
Approach to Valuing Leveraged Buyouts
19.10 S TOC K DI VI DE N DS AN D
(Available on Connect)
S TOC K S P L I T S 53 6
Some Details on Stock Splits and
CHAPTER 19 Stock Dividends 536
Value of Stock Splits and Stock Dividends 537
Dividends and Other Payouts 512 Reverse Splits 538
19.11 S U MMARY AN D C ON C L U S I ON S 53 8
19.1 D IFFE R E N T T Y PE S OF
D IV ID E N D S 51 2 Minicase: Electronic Timing Ltd. 544
19.2 STA N DA R D MET HO D OF CA S H
D IV ID E N D PAY ME NT 51 3 PA RT 5
Concept Questions 515 Long-Term Financing 545
19.3 TH E B E N C HMA R K CA S E:
A N ILLUSTR AT IO N OF T HE
IR R E LE VA N CE O F D IV I DE ND CHAPTER 20
POL ICY 51 5
Current Policy: Dividends Set Equal to Issuing Equity Securities to the Public 545
Cash Flow 515
Alternative Policy: Initial Dividend
Is Greater Than Cash Flow 516 20.1 T H E P U B L I C I S S U E 545
The Indifference Proposition 516 20.2 T H E BAS I C P ROC E DU RE FOR
Homemade Dividends 516 A NEW ISSUE 546
A Test 519 The Prompt Offering Prospectus System 547
Dividends and Investment Policy 519 Alternative Issue Methods 548
Contents xiii
20.3 THE CA SH O FFER 548 21.5 S OME DI FFE RE N T T Y P E S

Types of Underwriting 548 OF B ON DS 58 3
The Selling Period 549 Zero-Coupon Bonds 583
The Overallotment Option 549 Floating-Rate Bonds 584
Investment Banks 549 Financial Engineering and Bonds 585
The Offering Price and Underpricing 550 Concept Questions 586
The Decision to Go Public 550 21.6 DI RE CT P L AC E ME N T C OM PARE D
Pricing Initial Public Offerings 550 TO P U B L I C I S S U E S 58 6
Underpricing: A Possible Explanation 551 Concept Questions 586
In Their Own Words: Jay Ritter on 21.7 LON G -T E RM SY N DI CAT E D
IPO underpricing around the world 552 BAN K LOAN S 58 6
20.4 THE A NN OU NC EME NT O F N E W 21.8 S U MMARY AN D C ON C L U SI O N S 58 7
E QUI TY A ND T HE VA LU E OF Minicase: Financing the Expansion of
THE FIR M 553 East Coast Yachts With a Bond Issue 590
20.5 THE CO ST O F I SS UI NG
SE CU R IT IE S 554
The Costs of Going Public: A Case Study 556
CHAPTER 22
Concept Questions 556 Leasing 592
20.6 R IGHT S 556
The Mechanics of a Rights Offering 556 Executive Summary 592
Subscription Price 557 22.1 T Y P E S OF L E AS E S 592
Number of Rights Needed to Purchase a Share 557 The Basics 592
The Value of a Right 558 Operating Leases 593
Ex-Rights 560 Financial Leases 594
Value of Rights After Ex-Rights Date 560 Concept Questions 594
The Underwriting Arrangements 561 22.2 AC C OU N T I N G AN D L E ASI N G 595
Effects on Shareholders 561 Concept Questions 596
Cost of Rights Offerings 561 22.3 TAX E S AN D L E AS E S 597
20.7 THE PR I VATE E QU IT Y M A R KE T 562 22.4 T H E CAS H FLOW S OF FI N AN C I AL
Private Placement 562 L E AS I N G 597
The Private Equity Firm 562 The Incremental Cash Flows 597
Venture Capital 563 Concept Questions 599
Suppliers of Venture Capital 563 22.5 A DE TOU R ON DI S C OU N TI N G
Stages of Financing 564 AN D DE BT CAPAC I T Y W I TH
Some Venture Capital Realities 564 C ORP ORAT E TAX E S 599
Concept Questions 564 Present Value of Risk-Free Cash Flows 599
20.8 SUM MA RY A N D CO NC L U S I ON S 565 Optimal Debt Level and Risk-Free Cash
Minicase: East Coast Yachts Goes Public 567 Flows (Advanced) 600
CHAPTER 21 22.6 N E T P RE S E N T VAL U E AN ALYSI S
OF T H E L E AS E -VE RS U S -B UY
Long-Term Debt 569 DE C I S I ON 601
The Discount Rate 601
Asset Pool and Salvage Value 602
21.1 LO NG -TE R M D EBT: A R E V I E W 569
22.7 DE BT DI S P L AC E ME N T AN D
21.2 THE PU B LI C IS SU E OF B ON DS 57 0 L E AS E VAL UAT I ON 602
The Basic Terms 570 The Basic Concept of Debt Displacement
Security 572 (Advanced) 602
Seniority 573 Optimal Debt Level in the TransCanada
Protective Covenants 573 Taxis Example (Advanced) 603
The Sinking Fund 573 22.8 DOE S L E AS I N G E VE R PAY?
The Call Provision 574 T H E BAS E CAS E 606
Concept Questions 574 22.9 RE AS ON S FOR L E AS I N G 607
21.3 B O N D R EF UN DI NG 574 Good Reasons for Leasing 607
Should Firms Issue Callable Bonds? 575 Bad Reasons for Leasing 610
Calling Bonds: When Does It Make Sense? 577 Leasing Decisions in Practice 610
21.4 B O N D R AT IN GS 580 22.10 S OME U N AN S W E RE D Q U E STI O NS 611
Junk Bonds 581 Are the Uses of Leases and of
Concept Questions 583 Debt Complementary? 611
xiv Contents
Why Are Leases Offered by Both Executive Summary 655

Manufacturers and Third-Party Lessors? 611 24.1 E X E C U T I VE S TOC K OP T I ON S 655
Why Are Some Assets Leased More Why Options? 655
Commonly Than Others? 611 Executive Compensation: Where Are
22.11 SU M MA RY A ND C ON CL US IO N S 612 We Now? 656
Minicase: The Decision to Lease or In Their Own Words: Jim Middlemiss on
Buy at Warf Computers Ltd. 615 options backdating 657
Appendix 22A Adjusted Present Value Approach Valuing Executive Compensation 658
to Leasing (Available on Connect) Concept Question 660
24.2 VAL U I N G A S TART-U P 660
PA RT 6 Concept Questions 663
Options, Futures, and Corporate Finance 617 24.3 MORE AB OU T T H E B I N OMI AL
MODE L 663
Heating Oil 663
CHAPTER 23
24.4 S H U T DOW N AN D RE OP E N I N G
Options and Corporate Finance: Basic Concepts 617 DE C I S I ON S 668
Valuing a Gold Mine 668
Executive Summary 617 The Abandonment and Opening Decisions 669
23.1 OPT IO N S 617 Valuing the Simple Gold Mine 669
23.2 CA L L O PTIO N S 618 24.5 S U MMARY AN D C ON C L U S I ON S 673
The Value of a Call Option at Expiration 618 Minicase: Exotic Cuisines Employee
Concept Questions 619 Stock Options 675
23.3 PU T O PTIO NS 6 20
The Value of a Put Option at Expiration 620 CHAPTER 25
Warrants and Convertibles 676
23.4 SE LLIN G OP TI ON S 6 21
23.5 STOC K O PT IO N QU OTATI ON S 6 22 Executive Summary 676
Long-Term Equity Anticipation Securities 622 25.1 WARRAN T S 676
23.6 C OM B IN AT IO NS O F O PT IO NS 6 24 Concept Question 678
Concept Questions 627 25.2 T H E DI FFE RE N C E B E T W E E N
23.7 VA LUIN G O PT IO NS 6 27 WARRAN T S AN D CAL L
OP T I ON S 678
Bounding the Value of an American Call 627
How the Firm Can Hurt Warrant Holders 680
The Factors Determining Call Option Values 627
A Quick Discussion of Factors Determining
Put Option Values 630 25.3 WARRAN T P RI C I N G AN D T H E
Concept Questions 631 B L AC K–S C H OL E S MODE L
( ADVAN C E D) 68 0
23.8 A N O PTIO N P R IC IN G FOR MU L A 6 31
A Two-State Option Model 632
25.4 C ON VE RT I B L E B ON DS 68 1
The Black–Scholes Model 634
25.5 T H E VAL U E OF C ON VE RT I B L E
23.9 STOC KS A ND B O ND S
B ON DS 68 2
A S O PTIO N S 6 38
Straight Bond Value 683
The Firm Expressed in Terms of Call Options 639
Conversion Value 683
The Firm Expressed in Terms of Put Options 640
Option Value 684
A Resolution of the Two Views 641
A Note on Loan Guarantees 642
Concept Questions 643 25.6 RE AS ON S FOR I S S U I N G
WARRAN T S AN D
23.10 IN V E STME NT I N R EA L P RO JE CT S C ON VE RT I B L E S 68 5
A N D O PTIO NS 6 43
Convertible Debt Versus Straight Debt 685
Convertible Debt Versus Common Stock 686
23.11 C ON TIN GE NT VA LU E R IG HT S, The “Free Lunch” Story 686
M E RGE R S, A N D CO R PO R AT E
The “Expensive Lunch” Story 687
D E C ISIO N S 6 45
A Reconciliation 687
23.12 SU M MA RY A ND C ON CL US IO N S 6 46
25.7 W H Y ARE WARRAN T S AN D
Minicase: Clissold Industries Options 653
C ON VE RT I B L E S I S S U E D? 68 8
Matching Cash Flows 688
C H A P T E R 24 Risk Synergy 688
Options and Corporate Finance: Agency Costs 689
Backdoor Equity 689
Extensions and Applications 655
Contents xv
25.8 C O NV E R SI ON P OL ICY 689 Concept Questions 728

Concept Questions 690 27.3 T H E OP E RAT I N G CYC L E AN D
25.9 SUM MA RY A N D CO NC L U S I ON S 690 T H E CAS H CYC L E 72 8
Minicase: S&S Air’s Convertible Bond 694 Interpreting the Cash Cycle 730
CHAPTER 26 27.4 S OME AS P E CT S OF S H O RT-TE RM
FI N AN C I AL P OL I CY 73 0
Derivatives and Hedging Risk 695 The Size of the Firm’s Investment in Current
Assets 731
Alternative Financing Policies for Current
26.1 D E R IVAT IV E S, H ED GI NG , Assets 733
A N D R I SK 695
Current Assets and Liabilities in Practice 735
The Impact of Financial Risk:
The Credit Crisis of 2007–09 696
27.5 CAS H B U DG E T I N G 73 6
26.2 FO RWA R D CO NT R ACTS 696
Cash Outflow 737
The Cash Balance 738
26.3 FUTUR E S CO NT R ACTS 697
27.6 T H E S H ORT-T E RM FI N ANC I AL
26.4 HE DG IN G 701 P L AN 73 8
Hedging With Futures Versus Hedging Short-Term Planning and Risk 738
With Options 703
Short-Term Borrowing 739
In the Absence of Short-Term Borrowing 741
26.5 IN TE R ES T R AT E FUT UR E S Concept Questions 741
C O NT R ACTS 703
27.7 S U MMARY AN D C ON C L U SI O N S 742
Pricing of Government of Canada Bonds 703
Minicase: Keafer Manufacturing Working
Pricing of Forward Contracts 703
Capital Management 750
Futures Contracts 705
Hedging in Interest Rate Futures 705 CHAPTER 28
26.6 D UR AT IO N HE DG IN G 709 Cash Management 751
The Case of Zero-Coupon Bonds 709
The Case of Two Bonds With the Same
Maturity but With Different Coupons 710 28.1 RE AS ON S FOR H OL DI N G CASH 751
Duration 711 The Speculative and Precautionary Motives 751
Matching Liabilities With Assets 712 The Transaction Motive 752
Duration in Practice 714 Costs of Holding Cash 752
Concept Questions 715 Cash Management Versus Liquidity
Management 752
26.7 SWAP C ON TR ACT S 715
Interest Rate Swaps 715
Currency Swaps 716 28.2 MAN AG I N G T H E C OL L E CTI O N
AN D DI S B U RS E ME N T OF CASH 753
Electronic Data Interchange:
Credit Default Swaps 717
The End of Float? 755
Exotics 718
Accelerating Collections 756
Movement Toward Exchange Trading
Controlling Disbursements 759
for Swaps 718
Ethical and Legal Questions 759
26.8 ACTUA L U SE O F D ER I VAT I V E S 719
26.9 SUM MA RY A N D CO NC L U S I ON S 720
28.3 I N VE S T I N G I DL E CAS H 760
Minicase: Williamson Mortgage Inc. 723
Seasonal or Cyclical Activities 761
Planned Expenditures 761
PA RT 7 Characteristics of Short-Term Securities 761
Financial Planning and Short-Term Finance 724 Some Different Types of Money
Market Securities 763
CHAPTER 27 In Their Own Words: Credit crisis made
in Canada 764
Short-Term Finance and Planning 724 Concept Questions 765
28.4 S U MMARY AN D C ON C L U SI O N S 765
Executive Summary 724 Minicase: Cash Management at
27.1 TR ACI NG CA S H A ND N E T Richmond Ltd. 767
WO RK IN G CA PI TA L 725
27.2 D E FIN IN G CA SH I N TE R MS OF CHAPTER 29
OTHE R E LE MEN TS 725
The Sources and Uses of Cash Statement 727 Credit Management 768
xvi Contents
Executive Summary 768 30.4 DE T E RMI N I N G T H E SY N E RGY

29.1 TE R MS O F T HE S A LE 769 FROM AN AC Q U I S I T I ON 792
Why Trade Credit Exists 769 30.5 S OU RC E S OF SY N E RGY FROM
The Basic Form 770 AC Q U I S I T I ON S 792
Credit Period 770 Revenue Enhancement 792
Cash Discounts 771 Cost Reduction 793
Credit Instruments 773 Tax Gains 795
Concept Questions 773 Lower Cost of Capital 796
29.2 TH E D E C IS IO N TO G R A NT C R E DI T : Concept Question 796
R ISK A N D I NF OR MATI ON 773 30.6 CALC U L AT I N G T H E VAL U E OF TH E
The Value of New Information About FI RM AFT E R AN AC Q U I S I T I ON 796
Credit Risk 774 Avoiding Mistakes 797
Future Sales 775 30.7 A C OS T TO S H ARE H OL DE RS
Concept Question 776 FROM RE DU CT I ON I N RI S K 797
29.3 OPT IMA L CR E DI T PO LI CY 776 The Base Case 798
Credit Insurance 777 The Case Where One Firm Has Debt 799
Concept Question 778 How Can Shareholders Reduce Their Losses
From the Coinsurance Effect? 799
29.4 C R E D IT A NA LYS IS 778
Credit Information 778
Credit Evaluation and Scoring 778 30.8 T WO “ BAD” RE AS ON S FOR
ME RG E RS 8 00
Earnings Growth 800
29.5 C OL LE CTIO N P OL ICY 779
Diversification 800
Average Collection Period 779
Aging Schedule 780
30.9 T H E N E T P RE S E N T VAL U E OF
Collection Effort 780
A ME RG E R 8 01
Cash 801
29.6 OTHE R A SP ECTS O F C R ED IT Common Stock 802
POL ICY 7 81
Cash Versus Common Stock 803
Factoring 781
How to Finance Trade Credit 781
Defensive Tactics 804
Divestitures 804
29.7 SU M MA RY A ND C ON CL US IO N S 7 82 The Control Block and the Corporate Charter 806
Minicase: Credit Policy at Braam Industries 784 Standstill Agreements 807
Appendix 29A Inventory Management Exclusionary Offers and Non-Voting Stock 807
(Available on Connect) Going Private and Leveraged Buyouts 807
Other Defensive Devices 808
PA RT 8 Concept Question 809
SPECIAL TOPICS 786 30.10 S OME E VI DE N C E ON
AC Q U I S I T I ON S 8 09
CHAPTER 30 Do Acquisitions Benefit Shareholders? 809
The Managers Versus the Shareholders 811
Mergers and Acquisitions 786 Real Productivity 813
30.11 S U MMARY AN D C ON C L U S I ON S 813
30.1 TH E BA SIC FOR MS O F
Minicase: The Birdie Golf–Hybrid
AC Q UISITIO N S 7 86
Golf Merger 819
Merger or Consolidation 786
Acquisition of Stock 787
CHAPTER 31
Acquisition of Assets 788
A Classification Scheme 788 Financial Distress 821
A Note on Takeovers 788
30.2 TH E TA X FO R MS O F 31.1 W H AT I S FI N AN C I AL DI S T RE S S ? 821
AC Q UISITIO N S 790 Concept Questions 824
Determinants of Tax Status 790 31.2 W H AT H AP P E N S I N FI N AN C I AL
Taxable Versus Tax-Free Acquisitions 790 DI S T RE S S ? 8 24
30.3 AC C O UN TIN G FOR 31.3 BANKRUPTCY LIQUIDATION AND
AC Q UISITIO N S 790 REORGANIZATION 826
The Acquisition Method 790 Bankruptcy Liquidation 826
Concept Questions 791 Bankruptcy Reorganization 828
Contents xvii
Agreements to Avoid Bankruptcy 830 32.4 I N T E RE S T RAT E S AN D

Concept Questions 830 E XC H AN G E RAT E S 8 42
31.4 C UR R EN T IS SU ES I N FI N A N C I AL The Dollar Investment 843
D IST R ES S 830 The Euro Investment 843
Private Workout or Bankruptcy: The Forward Discount and Expected
Which Is Better? 830 Spot Rates 844
Holdouts 830 Exchange Rate Risk 844
Complexity 831 More Advanced Short-Term Hedges 845
Lack of Information 831 The Hedging Decision in Practice 846
Prepackaged Bankruptcy 831 Concept Questions 846
Concept Questions 831 32.5 I N T E RN AT I ON AL CAP I TAL
31.5 THE DE CI SI ON TO SE EK C OU RT B U DG E T I N G 8 46
PROT ECTI ON : TH E CA S E OF Foreign Exchange Conversion 847
CA NW ES T GLOBA L Unremitted Cash Flows 847
C O M MUN ICATI ON S The Cost of Capital for International Firms 848
C O R PO R AT IO N 832 Concept Questions 850
Concept Questions 832 32.6 I N T E RN AT I ON AL FI N AN C I N G
31.6 SUM MA RY A N D CO NC L U S I ON S 833 DE C I S I ON S 8 50
Appendix 31A Predicting Corporate Bankruptcy: Short-Term and Medium-Term Financing 851
The Z-Score Model (Available on Connect) International Bond Markets 851
In Their Own Words: Merkel:
Europe faces historic test in euro crisis 853
CHAPTER 32 Concept Questions 854
International Corporate Finance 835 32.7 RE P ORT I N G FORE I G N
OP E RAT I ON S 8 54
Executive Summary 835 Concept Question 855
32.1 TE R M IN OLOGY 835 32.8 P OL I T I CAL RI S K 8 55
Concept Question 836 32.9 S U MMARY AN D C ON C L U SI O N S 8 55
32.2 FO RE IG N EXC HA N GE M A R KE T S Minicase: East Coast Yachts Goes
A N D E XCH A NG E R AT ES 837 International 859
Exchange Rates 837 Appendix A Mathematical Tables
Types of Transactions 840 (Available on Connect)
Concept Questions 840 Appendix B Answers to Selected
32.3 THE LAW OF O NE P R IC E A N D End-of-Chapter Problems (Available on Connect)
PURC HA S IN G POW ER PA R I T Y 840
Concept Questions 842 Glossary GL- 1
Index IN- 1
P R E FAC E
The teaching and practice of corporate finance in Canada are more challenging and exciting
than ever before. The last decade alone has seen fundamental changes in financial markets and
financial instruments. In the early years of the twenty-first century, announcements in the finan-
cial press about takeovers, junk bonds, financial restructuring, initial public offerings, bank-
ruptcy, and derivatives are still commonplace. In addition, there is the new recognition of “real”
options (Chapter 9), private equity and venture capital (Chapter 20), and the reappearing divi-
dend (Chapter 19). The world’s financial markets are more integrated than ever before. Both the
theory and practice of corporate finance have been moving ahead with uncommon speed, and our
teaching, as always, must keep pace.
These developments place new burdens on the teaching of corporate finance. On the one hand,
the changing world of finance makes it more difficult to keep materials up to date. On the other
hand, the teacher must distinguish the permanent from the temporary and avoid the temptation to
follow fads. Our solution to this problem is to emphasize the modern fundamentals of the theory
of finance and make the theory come to life with contemporary examples. All too often, the novice
student views corporate finance as a collection of unrelated topics that are unified largely because
they are bound together between the covers of one book. As in the previous editions, our aim is
to present corporate finance as the collaboration of a small number of integrated and powerful
institutions.
This book has been written for the introductory courses in corporate finance at the MBA level
and for the intermediate courses in many undergraduate programs. Some instructors will find this
text appropriate for the introductory course at the undergraduate level as well.
It is assumed that most students either will take, or will be concurrently enrolled in, courses in
accounting, statistics, and economics. This exposure will help students understand some of the more
difficult material. However, the book is self-contained, and prior knowledge of these areas is not
essential. The only mathematics prerequisite is basic algebra.
NEW TO THE EIGHTH CANADIAN EDITION

• Executive summaries have been updated.
• Minicases have been reviewed and replaced where necessary to ensure that each is related to the
material covered in the corresponding chapter.
• Practice problems have been updated and new ones have been added.
• Tables, figures, and examples have been updated throughout the text.
• New and recent Canadian examples have been added.
• Concept questions have been updated and new ones have been added.
• End-of-chapter material has been substantially updated and refreshed.
• New highlighted concepts have been added.
• The discussion on taxes in Chapter 1 has been updated.
• The discussion on capital cost allowance in Chapter 8 has been streamlined and special cases have
been introduced.
• New examples on real options have been added in Chapter 9.
• Capital market data have been updated through 2016 in Chapter 10.
PEDAGOGY
Keeping the theory and concepts current is only one phase of developing our corporate finance text.
To be an effective teaching tool, the text must present the theory and concepts in a coherent way that
can be easily learned. With this in mind, we have included the following study features.
Executive Summary
Each chapter begins with a road map that describes the objectives of the chapter and how it connects
with concepts already learned in previous chapters. Real company examples that will be discussed
are highlighted in this section.
Ch a p t er 1
Introduction to Corporate Finance Preface xix
E XE CUTIV E S UMMA RY
Barrick Gold Corporation has long been known as the largest gold mining company in the world. With the recent recession,
gold prices and Barrick’s share price increased as investors sought a safe investment. However, in 2013 Barrick’s shares
plunged in value by 54 percent to a 20-year low. While the accompanying fall in the value of gold was beyond the compa-
ny’s control, the poor performance was attributed primarily to the failure of key projects, misallocation of capital resources,
and the legal mess associated with the Pascua-Lama mine in Chile. Accompanying this poor performance, the company’s
proxy circular revealed that six executives were to be compensated for a combined $47.4 million and board chair Peter
Munk was to receive $4.3 million. In addition, the company awarded a US$11.9 million signing bonus to John Thornton for
joining the company as co-chair.1 Consequently, several major shareholders of Barrick Gold Corporation invoked a “say
on pay” vote, which rejected the pay packages and led to the appointment of new independent directors and to Munk
stepping down as board chair. Recent events at Barrick Gold Corporation illustrate both the importance of governance
issues and the need for management to make key corporate finance decisions relating to the following questions:
1. What long-term investment strategy should a company take on?
2. How can cash be raised?
In Their Own Words Boxes

3. How much short-term cash flow does a company need to pay its bills?
These are not the only questions of corporate finance. For example, another important question covered in this
Located
14 threethroughout
text is: How should a
Part 1 on the chapters,
company
Overview this unique
divide earnings between series
payoutsconsists of articles
to shareholders written
(dividends) by distinguished
and reinvestment? The
questions our list are among the most important, however, and, taken in order, they provide a rough outline
scholars or book.
of our practitioners onwekey
In Section 1.1 topics.
introduce the basic ideas of corporate finance.
One way that companies raise cash to finance their investment activities is by selling or issuing securities. The
securities, sometimes called financial instruments or claims, may be roughly classified as equity or debt, loosely called
IN THEIR OWN WORDS
stocks or bonds. The difference between equity and debt is a basic distinction in the modern theory of finance. All
securities of a firm are claims that depend on or are contingent on the value of the firm.2 In Section 1.2 we show how
B. ESPEN ECKBO on corporate governance
debt and equity securities depend on the firm’s value, and we describe them as different contingent claims.
In Section 1.3 we discuss different organizational forms and the pros and cons of the decision to become a corporation.
The In Section growth
substantial 1.4 we take a close
in equity indexlook at the over
investing goalstheof the corporation
easily swamps and discuss returns.
investment why maximizing shareholder
As a result, they no
wealth is likely
past twenty yearstohasbelowered
its primary goal.
average Throughout
shareholder the rest
incen- of the
longer book,
show up we assume
to annual that theand
meetings firm’s performance
either vote with
depends
tives to on the value
monitor it creates for of
the management its individual
shareholders. Shareholders
portfolio are made
management or better
simplyoff when the value
throw proxyofform
theirinshares
the
is increasedThe
companies. by the firm’sshareholder
resulting decisions. absenteeism effec- wastebasket. The resulting combination of voluntary
tivelyA transfers
company raises cashcontrol
corporate by issuing securities
rights in the financial
to increasingly markets. In
shareholder Section 1.5 we
absenteeism anddescribe
strong some of theinsid-
corporate basic
features
powerful of the financial
corporate markets.
executives and Roughly speaking,
other insiders. there ers
Today, are creates
two types of financial
a problem thatmarkets:
lies at money markets
the heart and
of many
capital markets.
an important counterweight to this massive shift in the bal- of today’s governance controversies. An important his-
anceSection
of power 1.6between
covers trends in financial
the firm’s owners andmarkets and management,
managers and the
is torical lesson last the
is that section of this shareholder
absentee chapter (Section
system1.7)
outlines
a small settheofrest of the
active book. who occasionally decide to can breed arrogance on the part of corporate insid-
investors
bear the cost of challenging incumbent management teams. ers. A vigorous Chaptercorporate
1 Introduction
governance to Corporate
system isFinance
thus 7
In countries with highly developed financial systems, required to prevent shareholder rights being expropri-
much of the governance 1 debate focuses on this shift in ated by insiders.
the balance of power between Risk of Cash Flows
Theresa Tedesco, “Barrick Gold could have avoided say-on-pay public backlash,” Financial Post, April 23, 2013. http://business
shareholders, boards, and A major task of the board is to hire and fire top manag-
.financialpost.com/news/fp-street/barrick-gold-executive-compensation-wednesday
top executives in widely Theheld
2 public
firm
We tend to use companies.
mustthe words firm,The
consider risk.
company, anders
bal- The andinterchangeably.
amount
business to and
set their
timing compensation.
of cash
However, Therefore,
there isflows notcorporate
are between
a difference usually
these andknown with
ance is affected by four major factors,
certainty.
a corporation. Wewhich
Most tend
investors
discuss tohave
differin
this difference insiders
anSection 1.3. come
aversion with an inherent conflict of interest when
to risk.
greatly across countries: (1) The cost of taking legal action they sit on boards. Nevertheless, corporate insiders sit
and the strength of law enforcement. (2) The efficiency of on boards in major developed countries. In the United
the director election process EXandAMPL 1.3
the costE of challeng- States, until twenty years ago, it was even common for the
ing and replacing directors. (3) The cost of shareholder chief executive officer (CEO) to occupy the post of board
activism and of transacting in the market for corporate chair. Several companies have since voluntarily replaced
The Midland
control. (4) The political strength
ros70114_ch01_001-029.indd 1 Company
of employee is considering
unions. thisexpanding
practice operations overseas.role
with a split-chair It is(using
evaluating Europe and
a combination Japan
12/3/18 5:45 as
PM
possible
Early in a firm’s lifecycle, when sites.
shareEurope
ownershipis considered
is of toCEO
be relatively
chair and safe, whereas
a “lead” Japan or
director) is seen as very risky.
a complete In both cases
separa-
highly concentrated, this balance of power
the company would is close
hardly tion of the
an operations
down roles
after oneofyear.
CEO and chair.
issue. However, as the company Aftergrows
doing aand prospers,
complete In Europe,
financial analysis, the tradition
Midland has come hasup been
withnot thetofollowing
place thecashCEOflows of the
and founders diversify their initial investment by bring- in the chair, in some countries by statute. However, while
alternative plans for expansion under three scenarios: pessimistic, realistic, and optimistic.
ing in new and smaller owners, the balance starts to non-executive members make up a clear majority of direc-
change. Corporate insiders, who themselves have much tors in the United States, there is a tradition in Europe for
of their human capital invested in the firm, increasingly placing a greater portion of employees on boards, which
Pessimistic Realistic Optimistic
view shareholders as a remote constituency and even as also raises conflict of interest issues.
irrelevant for the company on a daily basis.Europe By choosing $75,000
The typical defence of$100,000
having insiders on $125,000
boards is one
to diversify, shareholders for their part agree Japan to play a of efficiency: 0 the board requires
150,000CEO and200,000 other manage-
diminished role in the company’s affairs. ment input to make proper decisions. What this defence
For shareholders who diversify their investment leaves unanswered, however, is why the CEO needs a
across a broad portfolio of Ifcompanies,we ignore the thepessimistic vote onperhaps
cost of scenario, the boardJapan(letisalone the chair)
the better in order
alternative. to supply
When we take the pes-
actively monitoring the performance
simistic scenario of into account, thethe
management board
choice with his Japan
is unclear. or herappears
information.
to be riskier, but it may also offer a
Concept Questions
higher expected level of cash flow. What is risk and how can it be defined? We must try to answer this
important question. Corporate finance cannot avoid coping with risky alternatives, and much of our book
Included after each major issection
closely devoted toindeveloping
a chapter,
held corporations. Concept
methods
However, Questions
for evaluating
shareholders risky
have point
control to
opportunities.
several essential
devices material
(some more effectiveand
allow students to test their recalltoand
than others) bondcomprehension before moving
management to the self-interest forward.
of shareholders:
CONCEPT • What are three basic questions of corporate finance?

QUESTIONS 1. Shareholders determine the membership of the board of directors by voting. Thus, share-
• Describe capital structure.
holders control the directors, who in turn select the management team.
• List three reasons why value creation is difficult.
2. Contracts with management and arrangements for compensation, such as stock option
plans, can be made so that management has an incentive to pursue shareholders’ goals.
Similarly, management may be given loans to buy the firm’s shares.
1.2 C O R P O R ATE SE CUR ITIE S A S CO N TIN GE N T
3. If the price of a firm’s stock drops too low because of poor management, the firm may
Figures Cand
L A ITables
be acquired by a group of shareholders, another firm, or an individual. This is called a
M S O N TOTA L FIR M VA L UE
takeover. In a takeover, top management of the acquired firm may find itself out of a job.
This text makes extensive use For of
example, the CEO
real data andof Chapters
presentsInc.them
lost his
injob when thefigures
various bookseller wastables.
and taken over by
Explana-
WhatIndigo
is theinessential
2001. This pressures
difference management
between to make
debt and decisions
equity? in the can
The answer shareholders’ inter-
be found by thinking about
tions in the narrative, examples,
whatests.
andof
Fear
happens
end-of-chapter
a takeover
to the payoffsgives
problems
managers
to debt
will refertake
an incentive
and equity
to many
when thetovalue actions of these
that
of the firm
exhibits.
will maximize
changes.
stock prices.feature of debt is that it is a promise by the borrowing firm to repay a fixed dollar
The basic
amount by a certain date. The shareholders’ claim on firm value at the end of the period is the amount
that remains after the debtholders are paid. Of course, shareholders get nothing if the firm’s value is
equal to or less than the amount promised to the debtholders.
ate payment is known with certainty, whereas the later inflows can only be estimated. Thus, we need to know the
relationship between a dollar today and a (possibly uncertain) dollar in the future before deciding on the project.
This relationship is called the time value of money concept. It is important in such areas as capital budgeting,
xx Preface
lease-versus-buy decisions, accounts receivable analysis, financing arrangements, mergers, and pension funding.
The basics are presented in this chapter. We begin by discussing two fundamental concepts: future value and
present value. Next, we explore simplifying formulas such as perpetuities and annuities.
Examples
Separate called-out examples are integrated throughout the chapters. Each example illustrates
an intuitive or mathematical application in a step-by-step format. There is enough detail in the
5.1 THEexplanations
O NE -PE RIO Ddon’t
that students CASE
have to look elsewhere for additional information.
EX A M PLE 5.1
Antony Robart is trying to sell a piece of land in Saskatchewan. Yesterday, he was offered $10,000 for the
property. He was ready to accept the offer when another individual offered him $11,424. However, the
second offer was to be paid a year from now. Antony has satisfied himself that both buyers are honest,
10 soPart
he 1has no
Overview
fear that the offer he selects will fall through. These two offers are pictured as cash flows in
Figure 5.1. Which offer should Antony choose?
It is very difficult for large business organizations to exist as sole proprietorships or
partnerships. The main advantage is the cost of getting started. Afterward, the disadvantages,
FIGURE which
5.1 may become severe, are (1) unlimited liability, (2) limited life of the enterprise, and
Cash Flow(3)
fordifficulty
Antony’s of transferring
Sale ownership. These three disadvantages lead to (4) the difficulty of
raising cash.
Alternative $10,000 $11,424

saleThe
pricesCorporation
Of the many forms of business enterprise, the corporation is by far the most important. Most large
Canadian firms, such as Bank of Montreal and Bombardier, are organized as corporations. As a
distinct legal entity, a corporation can have a name and enjoy many of the legal powers of natural
persons. For example, corporations can acquire and exchange property. Corporations may enter into
contracts and may sue and be sued. For jurisdictional purposes, the corporation is a citizen of its
Year province of incorporation. (It cannot vote, however.) 0 1
Starting a corporation is more complicated than starting a proprietorship or partnership. The
incorporators must prepare articles of incorporation and a set of bylaws. The articles of incorporation
must include
Equations 1. Name of the corporation.

2. Business purpose.
Key equations are numbered and highlighted
3. Number of shares that thefor easy reference.
corporation is authorized to issue, with a statement of limitations
and rights of different classes of shares.
Highlighted Concepts 4. Nature of the rights granted to shareholders.

5. Number of members of the initial board of directors.
Throughout the text, important ideas are pulled out and presented in a box—signalling to students
that this material is particularly relevant and critical to their understanding.
A Comparison of Partnerships and Corporations

Corporation Partnership
Liquidity and Common stock can be listed on a stock exchange. Units are subject to substantial restrictions on
marketability transferability. There is no established trading market for
partnership units.
Voting rights Usually each share of common stock entitles each holder Limited partners have some voting rights. However,
to one vote per share on matters requiring a vote and general partners have exclusive control and management
on the election of the directors. Directors determine top of operations.
management.
Taxation Corporate income is taxable at the corporate tax rate. Partnership income is taxed as personal income to the
Dividends to shareholders are also taxable with partial partners.
integration through use of the dividend tax credit.
Reinvestment and Corporations have broad latitude on dividend payout Partnerships are generally prohibited from reinvesting
dividend payout decisions. partnership cash flow. All net cash flow is distributed
to partners.
Liability Shareholders are not personally liable for obligations of the Limited partners are not liable for obligations of
corporation. partnerships. General partners may have unlimited
liability.
Continuity of existence Corporations have a perpetual life. Partnerships have a limited life.
The bylaws (the rules to be used by the corporation to regulate its own existence) concern its
shareholders, directors, and officers. Bylaws for the corporation’s management range from the brief-
End-of-Chapter Material est possible statement of rules to hundreds of pages of text.
In its simplest form, the corporation comprises three sets of distinct interests: the
The end-of-chapter material reflects
shareholders (the and builds
owners), upon theand
the directors, concepts learned
the corporation in the(the
officers chapter.
top management).
Traditionally, the shareholders control the corporation’s direction, policies, and activities.
The shareholders elect a board of directors, who in turn select top management who serve as
corporate officers.
ros70114_ch01_001-029.indd 10 12/3/18 5:45 PM

tain or expand the current asset base. (We return to free cash flow in Chapter 17.)
CONCEPT • How is cash flow different from changes in net working capital? Preface xxi
QUESTIONS • What is the difference between the operating cash flow and the total cash flow of the
firm?
Summary and Conclusions • What is free cash flow?
The numbered summary provides a quick review of key concepts in the chapter.
2.5 S UMMA RY A N D C O N C L U S I O N S
Besides introducing you to corporate accounting, the purpose of this chapter was to teach you how
to determine cash flow from the accounting statements of a typical company.
1. Cash flow is generated by the firm and paid to creditors and shareholders. It can be
classified as
a. Cash flow from operations.
b. Cash flow from changes in long-term assets.
c. Cash flow from changes in working capital.
2. There is a cash flow identity that says that cash flow from assets equals cash flow to bondhold-
ers and shareholders.
3. Calculations of cash flow are not difficult, but they require care and particular attention to
detail in properly accounting for non-cash expenses such as depreciation and deferred taxes. It
is especially important that you do not confuse cash flow with changes in net working capital
and net income.
List of Key Terms

ros70114_ch02_030-059.indd 38 12/3/18 8:51 PM
A list of the boldfaced key terms in the text with page numbers is included for easy reference.
Questions and Problems

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oughly reviewed and checked for accuracy. Problems have been grouped according to the concepts
they test, with the concept headings listed at the beginning of each group.
Additionally, we have tried to make the problems in the critical “concept” chapters—such
as those on value, risk, and capital structure—especially challenging and interesting. We provide
answers to selected problems in Appendix B, available on Connect.
Microsoft Excel Problems

Indicated by the Microsoft Excel icon in the margin, these Microsoft Excel problems
can be found at the end of almost all chapters. Located on Connect, Microsoft Excel
templates have been created for each of these problems, where students can use the
data in the problem to work out the solution using Microsoft Excel skills.
Minicases
These Minicases, located in most chapters, apply what is learned in a number of chapters to a real-
world scenario. After presenting the facts, the case gives students guidance in rationalizing a sound
business decision.
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Instructor Resources
• Instructor’s Manual. Prepared by Larbi Hammami, Desautels Faculty of Management,
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St. Mary’s University.
Preface xxiii
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ACKNOWLEDGMENTS
Many people have contributed their time and expertise to the development and production of this
text. I extend my thanks and gratitude for their contributions.
A special thank-you must be given to our technical checker, Larbi Hammami of the Desautels
Faculty of Management at McGill University. Thank you for your vigilant efforts reviewing this text
and its solutions. Your keen eye and attention to detail have contributed greatly to the quality of the
final product.
Much credit must go to a first-class group of people at McGraw-Hill Education who worked on
the eighth Canadian edition. Leading the team were senior product managers Alwynn Pinard and
Sara Braithwaite, and content developer Tammy Mavroudi. Copy editing and proofreading of the
manuscript was diligently done by Laurel Sparrow, with in-house supervision by Janie Deneau. And
many thanks to Alison Lloyd Baker for overseeing permissions for this project.
Through the development of this edition, our team has taken great care to discover and eliminate
errors. Our goal is to provide the best Canadian textbook available on this subject. Please send com-
ments and feedback to:
Professor Hamdi Driss

Sobey School of Business, Saint Mary’s University
923 Robie Street
Halifax, Nova Scotia
B3H 3C3
Email: hamdi.driss@smu.ca.
Sincerely,
Hamdi Driss
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resultant manganese dioxid is to be filtered into a gooch, ignited and
weighed as Mn₃O₄.
Lime.—Reacidify the filtrate from the manganese sulfid with
acetic acid, heat to boiling and add ammonium oxalate: Allow to
stand over night, filter through a gooch and wash with water
containing acetic acid. The calcium oxalate can be weighed as such,
but it is preferable to dry thoroughly and then heat in a small bunsen
flame until a change can be noted passing over the precipitate. If this
is carefully done the residue will be calcium carbonate. In any case
the result is to be checked by igniting over the blast lamp to constant
weight and weighing the lime thus obtained.
Magnesia.—In the filtrate the magnesia can be determined by
sodium phosphate in the usual manner. In very accurate work the
calcium oxalate obtained as directed above can be dissolved and
reprecipitated, and the magnesia in the filtrate added to that in the
first filtrate.
Iron.—For iron another aliquot portion of the original solution is
taken, acidified with sulfuric evaporated to drive off hydrochloric acid,
rediluted and passed through the Jones reductor described in
paragraph 112. The filtrate is titrated with potassium permanganate
solution in the usual manner.
Alkalies.—For the alkalies another aliquot portion is taken and
precipitated while hot, with barium chlorid and barium hydrate,
filtered, and ammonia and ammonium carbonate added to remove
the excess of barium salt. Refilter, evaporate to dryness in a
platinum dish, and ignite gently to expel all ammonia salts, repeat
this operation after taking up with water and finally heat to constant
weight. The weight obtained represents a mixture of potassium and
sodium chlorids, with usually carbon derived from impurities in the
ammonia. A little magnesia is often present. The potassium is
estimated by means of platinum solution, and the potassium chlorid
found deducted from the total weight gives the sodium chlorid. The
carbon is usually unweighable, though it often looks as if present in
considerable quantity. It may be estimated, however, by dissolving
the mixed chlorids in weak hydrochloric acid and filtering through a
gooch before making the potassium estimation. The estimation of
the magnesia remaining with the mixed chlorids may be effected by
evaporating the alcoholic solution remaining after the precipitation of
the potassium to dryness, redissolving in water, placing the solution
in a flask provided with gas tubulures, introducing hydrogen, and
placing in the sunlight. The platinum is soon reduced, leaving the
liquid colorless. Heating facilitates the reaction. Displace the
hydrogen by a current of carbon dioxid, filter, concentrate the
solution and precipitate the magnesia by sodium phosphate in the
usual manner.
Phosphoric Acid.—It is best to determine the phosphoric acid
directly in an aliquot part of the first filtrate from the hydrochloric acid
solution of the ash obtained as described under the determinations
of sand, silica and carbon. When there is not enough of the material
for this, the precipitate of ferric phosphate may be dissolved and the
phosphoric acid determined after separation with ammonium
molybdate.
Sulfuric Acid.—Fifty cubic centimeters of the original hydrochloric
acid filtrate, obtained as described under the determinations of sand,
silica and carbon, are heated to boiling, and the sulfuric acid thrown
out by the gradual addition of barium chlorid. During the precipitation
the mixture is kept at the boiling temperature, but taken from the
lamp and the precipitate allowed to settle from time to time until it is
seen that an additional drop of the reagent causes no further
precipitate. The barium sulfate is collected, dried, and weighed in the
usual manner.
Chlorin.—Dissolve from one to five grams of the ash in nitric acid
in very slight excess, or in water. If the solution be made in nitric acid
the excess must be neutralized if the chlorin be determined
volumetrically; and if the solution be in water, nitric acid must be
added if the determination be gravimetric.
The volumetric determination is accomplished in the usual
manner with a standard silver nitrate solution, using potassium
chromate as indicator. The gravimetric determination is effected by
precipitation with silver nitrate, collecting, washing, and drying at
150° the silver chlorid obtained.
Carbon Dioxid.—The carbon dioxid is most conveniently
estimated in from one to five grams of the ash, according to its
richness in carbonates, by the apparatus described in volume first, or
some similar device.[252]
298. Official Method for Determinations of the Alkalies.—
Evaporate the filtrate and washings from the sulfuric acid
determination, paragraph 297, in a porcelain dish to dryness,
redissolve in about fifty cubic centimeters of water and add milk of
lime, or barium hydroxid solution, which must be perfectly free from
alkalies, until no further precipitation is produced, and it is evident
there is an excess of calcium hydroxid or barium hydroxid present;
boil for two or three minutes, filter hot, and wash thoroughly with
boiling water, precipitate the lime and baryta from the filtrate with
ammonia and ammonium carbonate, filter, evaporate the filtrate to
dryness in a porcelain dish, and drive off the ammonia salts by heat
below redness.[253] When cold, redissolve in fifteen or twenty cubic
centimeters of water, precipitate again with a few drops of ammonia
and ammonium carbonate solution, let stand a few minutes on the
water-bath and filter into a tared platinum dish and evaporate to
dryness, expel the ammonia salts by heating to just perceptible dull
redness, weigh the potassium and sodium chlorids obtained and
determine the potassium chlorid with platinic chlorid as usual.
The potassium may also be determined by the perchlorate
method, or the total chlorin be determined volumetrically, and the
relative percentages of potassium and sodium chlorids calculated by
the usual formula: Or multiply the weight of chlorin in the mixture by
2.1035, deduct from the product the total weight of the chlorids and
multiply the remainder by 3.6358. The product expresses the weight
of the sodium chlorid contained in the mixed salts. The indirect
method is only applicable when there are considerable quantities of
alkalies present and where they exist in approximately molecular
proportions. It is therefore a process rarely to be recommended in
ash analysis.
299. Statement of Results.—The bases which are found
present in the ashes of wood and other vegetable tissues exist
without doubt before incineration, chiefly in combination with
inorganic acids. Even the phosphorus and sulfur which after ignition
appear as phosphates and sulfates, have previous thereto existed in
an organic form to a large extent. The silica itself is profoundly
modified in the organism of the growing plant and doubtless does not
exist there in the purely mineral form in which it is found in the ash.
During the progress of incineration, with proper precautions, all the
phosphorus and sulfur are oxidized and appear as phosphoric and
sulfuric acids. The silica is reduced to a mineral state, and if a high
heat be employed silicates are formed. The organic salts of lime,
magnesia and other bases at a low temperature are converted into
carbonates, and if a higher temperature be used, may appear as
oxids. The organic compounds of alkalies will be found in the ash as
carbonates. It would be useless, therefore, to try to state the results
of ash analysis in forms of combination similar to those existing in
the original vegetable tissues. It is not certain even that we can in all
cases judge of the form of combination in which the different
constituents exist in the ash itself. It is therefore to be preferred in a
statement of ash analysis to give the bases in the form of oxids, and
the sulfur and phosphorus in the form of anhydrids, and the chlorin in
its elementary state. In this case an equivalent amount of oxygen to
the chlorin found must be subtracted from the total. If an attempt be
made to combine the acid and basic elements the chlorin should first
be united with sodium, and any excess thereof with potassium, and
the amount of base so combined calculated to oxid and deducted
from the total of such base or bases present. The carbonic acid
present should be combined first with alkalies after the chlorin has
been supplied. The phosphoric acid should be combined first with
the iron and afterwards with lime or magnesia. In all cases the
percentages should be based upon the ash, after the carbon and
sand have been deducted, or it is also convenient at times to throw
out of the results the carbon dioxid and to calculate the other
constituents to the ash free of that substance. In determining the
quantities of mineral matters removed from soil by crops, the ash
should be determined with great care, freed of carbon and sand, and
the calculations made on the percentage thus secured. In all
statements of percentages of the essential constituents of ash, as
regards fertilizing materials, it should be specified whether the
percentage is calculated on a crude ash, the pure ash, that is free of
carbon and sand, or upon a basis excluding the carbon dioxid. For
the purpose of fertilizer control, the analyst and dealer will be
satisfied, as a rule, with the determination of the percentages of
phosphoric acid and potash alone. To the other constituents of an
ash is not assigned any commercial value.
AUTHORITIES CITED IN
PART FOURTH.
[239] Compiled for author by Mr. K. P. McElroy.
[240] Volume First, pp. 356 et seq.
[241] Volume First, pp. 337 and 390.
[242] Volume Second, p. 81.
[243] Day: Mineral Resources of the United States, 1893, p. 713.
[244] Frankland: Agricultural Analysis, p. 240.
[245] Volume Second, p. 9.
[246] Annual Report Connecticut Agricultural Experiment Station,
1888, Part 1, p. 80.
[247] Rapport addressé par le Comté des Stations Agronomiques,
1887, p. 34.
[248] Agricultural Science, Vol. 8, pp. 2 and 3, 1894, and
Massachusetts Agricultural Station, 12th Annual Report, pp. 285
et seq.
[249] North Carolina Agricultural Experiment Station, Bulletin No.
3.
[250] Bulletin No. 43, Chemical Division, U. S. Department of
Agriculture, p. 390.
[251] Compiled for author by Mr. K. P. McElroy.
[252] Volume First, p. 337.
[253] Vid op. cit. 12, p. 391.
INDEX.
Page.
A
Acid phosphates, definition, 150, 151
Albuminoid nitrogen, separation, 225
Alkalies, determination in ashes, 320, 321
official method for determination in ashes, 322
Alkaline earths in wood ashes, 317
Amid nitrogen, separation, 225, 228
Ammonia, preparation for washing precipitates, 17
Ammoniacal nitrogen, 166
separation, 226
Ammonium citrate, influence of
acidity and alkalinity on solvent power, 137, 138
movement on solvent power, 141
quality of sample on solvent power, 136
temperature on solvent power, 134
time on solvent power, 133
preparation, 44
solvent for phosphoric acid, 132
nitrate solution, preparation, 45
Animal débris, treatment, 11
Aqueous vapor, measurement of tension, 180, 181
Arsenic, error, 54
Asboth, method for nitrogen, 212
Ashes, analysis, statement of results, 323, 324
composition, 252
fertilizing value, 254
percentage in various woods, 253
Authorities cited in Part First, 156-160
Fourth, 324
Second, 246, 247
Third, 300, 301
B
Barium oxalate, reagent for potash determination, 281
Barometer, method of use, 178, 179
Basic phosphatic slags, technical analysis, 123
slags, Dutch method for analysis, 77
Halle method for analysis, 76
Berzelius, method of estimating fluorin, 35, 36
Blood, dried, 165
Brown, separation of iron and alumina in phosphates, 131
C
Calcium carbonates, function in manufacture of superphosphates, 152
fluorids, reactions, 152
Carbon dioxid, determination in ashes, 322
phosphates, 19
estimation, 19
in wood ashes, 315, 319
Carnallit, 260
method for analysis, 274-277
Cave deposits, 312
Chatard, modification of Berzelius method, 35-37
Glaser-Jones process, 30, 31
organic matters in phosphates, 18
Chile saltpeter, 168, 235
adulteration, 234
analysis, 234
application, 240
commercial forms, 233
consumption, 245
Gantter’s method, 236-238
method of difference, 239, 240
French sugar chemists, 236
percentage of nitrogen, 233
quantity applied, 244
zinc-iron method, 234, 235
Chlorin, determination in ashes, 322
Chromium, occurrence in phosphates, 128
Citrate and molybdate methods, comparative accuracy, 69
insoluble phosphoric acid, 41
method, 57-59
applicability, 145, 146
Swedish modification, 66, 67
soluble phosphoric acid, 44
direct precipitation, 147
Dutch method, 68
Coloration of distillate, 187
Combustion furnace, 175
Copper oxid combustion, 170
Cottonseed hulls and meal, composition, 251
Crispo, method of estimating iron and alumina, 29, 30
D
Dilute ammonia, preparation, 45
Distillate, coloration, 187
Distillation apparatus, 208
Dudley and Pease, determination of
phosphoric acid in the presence of iron, 113
F
Factors for calculating potash analysis, 270
phosphoric acid analysis, 17
Ferric phosphate in wood ashes, 317, 318
Ferrous sulfate, analysis, 310, 311
uses, 310
Fertilizers, cost of transportation, 2
definition, 1
drying samples, 12
German methods, 13
official methods, 13
natural, 1
objects of analysis, 1
sampling mixed, 6
French method, 7
method of French sugar chemists, 7
treatment of samples in laboratory, 10
Fertilizing ingredients, trade values, 3
valuation, 2
materials, minerals containing, 5
sampling organic, 8
Fish scrap, 134
Fluorin, estimation in phosphates, 35-38
occurrence in bones, 130
G
German experiment stations,
methods for determining phosphoric acid, 45, 46
Glaser method for estimating iron and alumina, 24, 25, 27
Gooch distillation method, 19
Green vitriol, analysis, 310, 311
uses, 310
Grinding apparatus for fertilizers, 6
Guanos, 312
analysis, 313
nitrogen content, 166
origin, 167
Gunning method, 216, 217
adapted to nitrates, 220
official, 219
for nitrates, 220
process, reactions, 218
Gypsum, 307
amount used, 307
analysis, 308, 309
use for composting, 307, 308
H
Halle method for potash, 270, 271
Hen manure, 312
Hess, method for estimating iron and alumina in phosphates, 25, 26
Holleman, silver method for phosphoric acid, 117
Horn, hoof, and hair, 165
Huston, calcium chlorid method, 282
digestion apparatus, 142, 143
mechanical stirrer, 144, 145
solubility of reverted phosphoric acid, 132, 139
I
Immendorff, method for estimating lime, 23
Indicator for nitrogen determination, 204
Iodin, determination in phosphates, 127
Iron, acetate method, 24
determination in ashes, 320
estimation in phosphates, 24-26, 28-31
J
Jodlbaur method, Dutch variation, 213, 214
for nitrogen, 212, 213
Halle modification, 214
Johnson and Jenkins, method for nitrogen, 177
citrate method, 59
comparison of citrate and molybdate methods, 69, 70
Jones modification of Glaser method, 28
reductor, 115
Jüptner, tartaric acid solution, 17
K
Kainit, 259
methods for analysis, 274-277
Kieserit, 263
methods for analysis 274-277
Kjeldahl method, 192-216
Dutch process, 200
Halle process, 200-204
modifications, 209-216
official for nitric nitrogen, 215
process, 204-207
original process, 193-196
preparation of reagents, 167-199
theory of reactions, 197
Knorr apparatus for carbon dioxid, 19
Kreider, perchlorate process, 296
Krug and McElroy, estimation of iron and alumina
in phosphates, 32, 33
Krugit, 262
L
Land plaster, 317
Leather waste, 314
Lime, action, 303-305
analysis, 305
application, 303
as a fungicide and insecticide, 305
compounds used as fertilizer, 302
determination, in ashes, 320
of state of combustion, 306, 307
estimation in basic slags, 80, 81
phosphates, 21-23, 35
of caustic, 81
preparation of sample, 306
Mc
McElroy, method of analysis for wood ashes, 319-322
separation of iron and alumina from phosphoric acid, 33, 34
M
Manganese, determination in ashes, 320
Magnesia, determination in wood ashes, 320
error due to occluded, 54
estimation in phosphates, 35
mixture, preparation, 17, 45
removal in perchlorate process, 298
Magnesium compounds, action in manufacture of superphosphates, 154
nitrate, preparation, 45
pyrophosphate, color, 55, 56
Manure, definition, 1
sampling barnyard, 9
Marioni and Fasselli, modification of Glaser’s method, 31, 32
Mercury pump, 173, 174
Mills for crushing fertilizing minerals, 5
Minerals containing fertilizing materials, 5
Moist combustion process, historical, 192
Moisture, determination in ashes, 219
in monocalcium phosphates, 13, 14
Molybdate and citrate methods, comparative accuracy, 69
method, adopted by Brussels congress, 67
sources of error, 53
Molybdedum precipitate, direct weighing, 150
Molybdic solution, preparation, 17, 45
Morgen, citrate method, 60-65
N
Neubauer, investigation of error, 54, 55
Nitric nitrogen, 168
estimation, 227
Krüger’s method, 231
Schlöesing-Wagner method, 228, 229
Schmitt’s modification, 230
Ulsch method, 227
separation, 226
Nitrifiable solution, 243
Nitrogen analysis, calculation of results, 177
table for calculating results, 183
as ammonia, 221, 222
determination by Boussingault, 222, 223
cost per pound, 3, 4
forms of occurrence, 161, 162
kinds in fertilizers, 161
method of volumetric determination in laboratory, 175, 176
methods of analysis, classification, 169
official methods, 170
volumetric method, 171, 172
qualitative determination of form, 162, 163
Nitrogenous fertilizers, source, 163, 169
Norwegian methods, 45, 47
Noyes and Royse, determination of phosphoric acid
in the presence of iron, 113, 114
O
Official method for phosphoric acid, 16
volumetric method, rarely used, 173
Ogilvie, separation of alumina from phosphoric acid, 31, 32
Organic fertilizing materials, sampling, 8
matters, destruction, 255
by moist combustion, 256
sulfuric acid, 56, 57, 147, 148
in phosphates, 39
ignition with sulfuric acid, 255
in phosphates, 18
P
Patrick, distilling flask, 209
Pemberton method, comparison with official, 109
of preparing reagents, 107, 108
volumetric method for phosphoric acid, 106
Perchlorate process, accuracy, 300
applicability, 299
comparison of results, 298
method of Kreider, 296, 297
Perchloric acid, composition, 295
keeping properties, 295
preparation, method of Caspari, 290, 291
Kreider, 292-294
reagent for potash, 286
Phosphates, constituents to be determined, 15
insoluble matter, 20
low cost, 3
moisture in monocalcium, 13, 14
natural manurial value, 4
preparation of solution, 20
soluble matter, 19
Phosphatic fertilizers, availability, 148, 149
slags, adulteration, 81
detection, 82-86
analysis, 75-81
manufacture, 71, 72
solubility, 74
Phosphomolybdic acid, reagent for potash, 289
Phosphoric acid, condition in superphosphates, 101
cost per pound, 3
determination as stannic phosphate, 40
by official method, 16
titration of yellow
precipitate, 106-110
in ashes, 321
basic slag, 51
bone meal, 51
fish-guano, 51
mineral phosphates, 51, 53
superphosphates, 50
direct estimation, 15
Dutch method of determination, 51-53
error due to volatility, 54
estimation as a lead compound, 110
in presence of iron, 112
molybdenum technical method, 120, 121
preparation of reagents for technical
determination, 118, 119
separation in wood ashes, 319
silver method, 116, 117
sources, 39
Swedish methods of determining, 49, 50
technical determination, 118-125
volumetric uranium method, 121, 122
time required for precipitation, 126
typical solution, 95
used for superphosphate manufacture, 156
volumetric determination, 86-118
Platinic chlorid, method for potash, 267
official, 267, 268
Platinum method, sources of error, 284, 285
waste, recovery, 287-289
weighing metallic precipitate, 283, 284
Polyhalit, 261
Potash analysis, classification of methods, 266
consumption, 265, 266
cost per pound, 4
Dutch method for analysis, 272
estimation as perchlorate, 289-300
table of factors, 287
forms found in fertilizers, 249
Halle method for analysis, 270, 271
in molasses, 254
winery residues, 255
methods of analysis, 266-300
occurrences in mineral deposits, 256, 257
official alternate method, 269
recovered from factory residues, 265
salts, changes in situ, 257
control method for analysis, 283
effect of concentration on accuracy of
analysis, 285, 286
geological occurrence, 258
methods for analyzing concentrated, 278-280
solution from organic compounds, 270
sources, 248
Swedish method for analysis, 273
Potassium hydroxid solution, tension of vapor, 182
magnesium carbonate, 265
platinochlorid, differences in crystalline form, 286
sulfate, grades as fertilizers, 264
Pyrophosphate, examination, for impurities, 126
R
Reverted phosphates, reversion by ammonium citrate, 103, 104
phosphoric acid, arbitrary determination, 139
definition, 139, 140
determination by uranium method, 102
Robinson, sources of error in platinum method, 284, 285
Roode, de, method for kainit, 281
Ross, direct precipitation of citrate soluble phosphoric acid, 147
Ruffle method, 188
Boyer’s modification, 190, 191
official, 188-190
S
Salt, 309
analysis, 310
Samples, directions for taking bulk, 243
French method of preparation, 10
German method of preparation, 10
official method of preparation, 10
special cases, 12
taking, 4
Sanborn, method of filtering phosphoric acid, 42
Sand in wood ashes, 315, 316, 319
Schönit, 264
Schweitzer and Lungwitz, method for potash, 281
Scovell, method for nitrogen, 215
Seeds and seed residues, 163
Shaking apparatus, 78, 79
Silica, error due to occluded, 53
in wood ashes, 315, 316, 319
Slags, basic phosphate, 70
composition, 72, 73
manufacture, 71, 72
Soda-lime process, 183, 184
French method, 186
hydrogen method, 187
official method, 184-186
preparation of samples, 187
Sodium nitrate, functions, 231, 232
value, 246
Soluble phosphoric acid, determination by uranium method, 102
German method of estimating, 47, 48
Spencer, silver method for phosphoric acid, 116
Stall manures, 311
Stannic chlorid, reagent for determining phosphoric acid, 40
Sterilized tubes, for sampling, 241
Stone and Scheuch, estimation of caustic lime, 81
Sulfuric acid, determination in ashes, 321
quantity used in the manufacture of superphosphates, 154, 155
removal in perchlorate process, 298
Superphosphates, action of iron and alumina compounds in manufacture, 153
chemical reactions in manufacture, 151
definition, 150, 151
determination by uranium method, 102
manufacture, 150-156
with phosphoric acid, 156
quantity of sulfuric acid used in manufacture, 154, 155
technical analysis, 124, 125
Sylvin, 262
Sylvinit, 263
methods for analysis, 274-277
T
Tankage, 165
Tartaric acid, use, in molybdenum solution, 17
Tetracalcium phosphate, molecular structure, 73
Thiocyanates in fertilizers, determination, 224
Tobacco stems, 250
and waste, composition of ash, 250
waste, 250
Total phosphoric acid, treatment, 42, 43
U
Uranium method for phosphoric acid, 88-101
preparation of standard solution, 94
process, causes of errors, 98, 99
correction, 97
titration of sample of phosphate, 100
solution, titration, 96
V
Vanadium, methods of estimation, 128, 129
Van Slyke, reactions of gunning method, 218
Voorhees, method for nitrates, 220
W
Waste matters as fertilizers, 2
Water, determination in phosphates, 18
soluble phosphoric acid, 41
volumetric estimation, 111
Wells, citrate method, 59
Wilfarth, method for nitrogen, 211
Winton and Voorhees, gunning method for nitrates, 220
potash analysis, 285, 286
Wood ashes, 251, 315
composition, 252
Wyatt, method for determining iron and alumina in phosphates, 34
estimating fluorin, 37, 38
lime, 22
Transcriber’s Notes:
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Executive Summary 78 CHAPTER 6

Managerial Perspective 179 The Tax Shield Approach 218

10.1 R E TUR N S 268 11.6 DI VE RS I FI CAT I ON : AN E X AM P L E 3 06

CHAPTER 13 14.1 CAN FI N AN C I N G DE C I S I ON S

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20.3 THE CA SH O FFER 548 21.5 S OME DI FFE RE N T T Y P E S

Why Are Leases Offered by Both Executive Summary 655

25.8 C O NV E R SI ON P OL ICY 689 Concept Questions 728

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