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FI N AN C I AL
MAN AGE M E N T
Raymond M. Brooks C RE C NCEPTS
FOURTH EDITION
AB OU T THE AUTHOR
RAYMOND M. BROOKS is Emeritus

P rofessor of Finance at Oregon State
University. He taught a variety of f inance
courses, including introduction to financial
management, investments, advanced
corporate finance, financial institutions,
financial planning, and risk management.
Previously, he taught at Washington
University in St. Louis; the University of
Southern Illinois, Edwardsville; and the
University of Missouri–Columbia. Profes-
sor Brooks authored a variety of articles
on topics from dividends to when-issued trading. He twice won best paper
awards at financial conferences.
vii
A01_BROO0417_04_SE_FM.indd 7 30/11/17 10:33 AM

B RI E F CONTENTS
PART 1 Fundamental Concepts and Basic Tools of Finance 1

CHAPTER 1 Financial Management 2
CHAPTER 2 Financial Statements 27
CHAPTER 3 The Time Value of Money (Part 1) 55
CHAPTER 4 The Time Value of Money (Part 2) 82
CHAPTER 5 Interest Rates 115
PART 2 Valuing Stocks and Bonds and Understanding Risk

and Return 145
CHAPTER 6 Bonds and Bond Valuation 146
CHAPTER 7 Stocks and Stock Valuation 181
CHAPTER 8 Risk and Return 213
PART 3 Capital Budgeting 257

CHAPTER 9 Capital Budgeting Decision Models 258
CHAPTER 10 Cash Flow Estimation 298
CHAPTER 11 The Cost of Capital 327
PART 4 Financial Planning and Evaluating Performance 357

CHAPTER 12 Forecasting and Short-Term Financial Planning 358
CHAPTER 13 Working Capital Management 387
CHAPTER 14 Financial Ratios and Firm Performance 425
PART 5 Other Selected Finance Topics 461

CHAPTER 15 Raising Capital 462
CHAPTER 16 Capital Structure 495
CHAPTER 17 Dividends, Dividend Policy, and Stock Splits 525
CHAPTER 18 International Financial Management 556
APPENDIX 1 Future Value Interest Factors 589

APPENDIX 2 Present Value Interest Factors 591
APPENDIX 3 Future Value Interest Factors of an Annuity 593
APPENDIX 4 Present Value Interest Factors of an Annuity 595
APPENDIX 5 Answers to Prepping for Exam Questions 597
GLOSSARY 607
INDEX 615
viii

C ONTENTS
The First Component: Cash Flow from

PART 1 Assets 35
The Second Component: Cash Flow to
Fundamental Concepts and Basic Creditors 37
Tools of Finance 1 The Third Component: Cash Flow to Owners 37
1
Putting It All Together: The Cash Flow
Financial Management 2 Identity 38
The Statement of Cash Flows 38
1.1 The Cycle of Money 3
Free Cash Flow 40
1.2 Overview of Finance Areas 4
2.3 Financial Performance Reporting 40
1.3 Financial Markets 5
Regulation Fair Disclosure 41
1.4 The Finance Manager and Financial Notes to the Financial Statements 41
Management 6
2.4 Financial Statements on the Internet 41
1.5 Objective of the Finance Manager 8
PUTTING FINANCE TO WORK Look Before You
Profit Maximization 8
Leap 44
1.6 Internal and External Players 10
1.7 The Legal Forms of Business 11 Key Terms 45
Sole Proprietorship 11 Questions 46
Partnership 12 Prepping for Exams 46
Corporations 13 Problems 48
Hybrid Corporations 13 Advanced Problems for Spreadsheet
Not-for-Profit Corporations 14 Application 51
1.8 The Financial Management Setting: MINI-CASE Hudson Valley Realty 53
The Agency Model 14
■ Summary Card at end of text
1.9 Corporate Governance and Business

Ethics 17
FINANCE FOLLIES The Financial Meltdown
3 The Time Value of Money (Part 1) 55
of 2008 19 3.1 Future Value and Compounding Interest 56

1.10 Why Study Finance? 20 The Single-Period Scenario 56
Employability 20 The Multiple-Period Scenario 56
Methods of Solving Future Value Problems 58
PUTTING FINANCE TO WORK Now Hiring 21
3.2 Present Value and Discounting 61
Key Terms 23 The Single-Period Scenario 62
Questions 23 The Multiple-Period Scenario 62
Prepping for Exams 24 The Use of Time Lines 64
MINI-CASE Richardses’ Tree Farm 3.3 One Equation and Four Variables 64
Grows Up 26 3.4 Applications of the Time Value of Money

■ Summary Card at end of text Equation 66
PUTTING FINANCE TO WORK Sports Agent 71
2 Financial Statements 27 3.5 Doubling of Money: The Rule of 72 72
2.1 Financial Statements 28 Key Terms 74
The Balance Sheet 29 Questions 74
The Income Statement 31 Prepping for Exams 74
Statement of Retained Earnings 34 Problems 76
2.2 Cash Flow Identity and the Statement of Advanced Problems for Spreadsheet
Cash Flows 34 Application 80
ix

C O N TENTS
MINI-CASE Richardses’ Tree Farm, Inc.: 5.4 Nominal and Real Interest Rates 127
The Continuing Saga 81 5.5 Risk-Free Rate and Premiums 129

■ Summary Card at end of text Maturity Premiums 131
5.6 Yield Curves 133
4 The Time Value of Money (Part 2) 82 5.7 A Brief History of Interest Rates and Inflation
in the United States 134
4.1 Future Value of Multiple Payment
Streams 83 Key Terms 137
4.2 Future Value of an Annuity Stream 84 Questions 138
Future Value of an Annuity: An Application 86 Prepping for Exams 138
4.3 Present Value of an Annuity 88 Problems 140
4.4 Annuity Due and Perpetuity 91 Advanced Problems for Spreadsheet
PUTTING FINANCE TO WORK Modeling the Application 143
Future with Actuarial Science 92 MINI-CASE Sweetening the Deal: Povero
Perpetuity 94 Construction Company 144
4.5 Three Loan Payment Methods 95
Interest and Principal at Maturity of Loan

(Discount Loan) 95 PART 2
Interest as You Go, Principal at Maturity of Loan
(Interest-Only Loan) 96 Valuing Stocks and Bonds and
Interest and Principal as You Go (Amortized Understanding Risk and Return 145
Loan) 96
4.6 Amortization Schedules 97
4.7 Waiting Time and Interest Rates for 6 Bonds and Bond Valuation 146
Annuities 99 6.1 Application of the Time Value of Money Tool:
4.8 Solving a Lottery Problem 101 Bond Pricing 147
4.9 Ten Important Points about the TVM Key Components of a Bond 147
Equation 104 Pricing a Bond in Steps 149
6.2 Semiannual Bonds and Zero-Coupon
Key Terms 104
Bonds 152
Questions 105
Pricing Bonds after Original Issue 154
Prepping for Exams 105
Zero-Coupon Bonds 156
Problems 107
Amortization of a Zero-Coupon Bond 157
Advanced Problems for Spreadsheet
Application 113
6.3 Yields and Coupon Rates 158
The First Interest Rate: Yield to Maturity 159
MINI-CASE Fitchminster Injection Molding,
The “Other” Interest Rate: Coupon Rate 160
Inc.: Rose Climbs High 114
Relationship of Yield to Maturity and Coupon

Rate 161
5 Interest Rates 115

6.4 Bond Ratings 162
6.5 Some Bond History and More Bond
5.1 How Financial Institutions Quote Interest Features 165
Rates: Annual and Periodic Interest Rates 116 6.6 U.S. Government Bonds 169
5.2 Effect of Compounding Periods on the Time Pricing a U.S. Government Note or Bond 169
Value of Money Equations 119 PUTTING FINANCE TO WORK Municipal
5.3 Consumer Loans and Amortization Manager 170
Schedules 123 Pricing a Treasury Bill 171
x

C ONTENTS
Key Terms 173 Advanced Problems for Spreadsheet

Questions 174 Application 211
Prepping for Exams 174 MINI-CASE Lawrence’s Legacy: Part 1 212
Problems 175
Application 178
MINI-CASE Bay Path Cranberry Products 180
8 Risk and Return 213
8.1 Returns 214

Dollar Profits and Percentage Returns 214
7 Stocks and Stock Valuation 181

Converting Holding Period Returns to Annual
Returns 215
Extrapolating Holding Period Returns 217
7.1 Characteristics of Common Stock 182
Ownership 182 8.2 Risk (Certainty and Uncertainty) 218
Claim on Assets and Cash Flow (Residual FINANCE FOLLIES “Dangerous to Your
Claim) 182 Wealth”: Is Investing Just Gambling? 218
Vote (Voice in Management) 183 8.3 Historical Returns 219
No Maturity Date 183 8.4 Standard Deviation as a Measure of Risk 223
Dividends and Their Tax Effect 183 Normal Distributions 225
Authorized, Issued, and Outstanding Shares 183 8.5 Returns in an Uncertain World (Expectations
Treasury Stock 184 and Probabilities) 227
Preemptive Rights 184 FINANCE FOLLIES “Scam of the Century”:
7.2 Stock Markets 184 Bernie Madoff and the $50 Billion
Primary Markets 185 Fraud 228
Secondary Markets: How Stocks Trade 186 Determining the Probabilities of All Potential
Bull Markets and Bear Markets 186 Outcomes 230
7.3 Stock Valuation 187 8.6 The Risk-and-Return Trade-Off 232
The Constant Dividend Model with an Infinite Investment Rules 233
Horizon 189 8.7 Diversification: Minimizing Risk or
The Constant Dividend Model with a Finite Uncertainty 234
Horizon 191 When Diversification Works 235
The Constant Growth Dividend Model with an Adding More Stocks to the Portfolio:
Infinite Horizon 193 Systematic and Unsystematic Risk 238
The Constant Growth Dividend Model with a 8.8 Beta: The Measure of Risk in a Well-
Finite Horizon 195 Diversified Portfolio 239
Nonconstant Growth Dividends 196 8.9 The Capital Asset Pricing Model and the
FINANCE FOLLIES Irrational Expectations: Security Market Line 240
Bulbs and Bubbles 197 The Capital Asset Pricing Model 241
7.4 Dividend Model Shortcomings 198 Application of the SML 243
7.5 Preferred Stock 201
Key Terms 245
7.6 Efficient Markets 203 Questions 245
Operational Efficiency 203 Prepping for Exams 246
Informational Efficiency 203 Problems 248
Key Terms 204 Advanced Problems for Spreadsheet
Questions 205 Application 254
Prepping for Exams 205 MINI-CASE Lawrence’s Legacy: Part 2 255
Problems 207
xi

C O N TENTS
Opportunity Costs 302

PART 3
Erosion Costs 302
Synergy Gains 304
Capital Budgeting 257
Working Capital 305
9 Capital Budgeting Decision Models 258

FINANCE FOLLIES Boston’s “Big Dig” Gets
Dug Under 307
9.1 Short-Term and Long-Term Decisions 259 10.3 Capital Spending and Depreciation 307
9.2 Payback Period and Discounted Payback Straight-Line Depreciation 308
Period 261 Modified Accelerated Cost Recovery System 309
Payback Period 261 10.4 Cash Flow and the Disposal of Capital
FINANCE FOLLIES IBM Exits the Consumer Equipment 311
Software Market: Misreading Future Cash 10.5 Projected Cash Flow for a New Product 312
Flows 261 Key Terms 317
Discounted Payback Period 263 Questions 317
9.3 Net Present Value 265 Prepping for Exams 318
Mutually Exclusive versus Independent Problems 319
Projects 267 Advanced Problems for Spreadsheet
Unequal Lives of Projects 269 Application 323
Net Present Value Example: Equation and MINI-CASE BioCom, Inc.: Part 2, Evaluating
Calculator Function 270 a New Product Line 325
9.4 Internal Rate of Return and Modified Internal
Rate of Return 272
Internal Rate of Return 272
PUTTING FINANCE TO WORK Marketing and
11 The Cost of Capital 327
Sales: Your Product = Your Customer’s

11.1 The Cost of Capital: A Starting Point 328
Capital Budgeting Decision 277 11.2 Components of the Weighted Average Cost
of Capital 331
Modified Internal Rate of Return 280
Debt Component 331
9.5 Profitability Index 283
Preferred Stock Component 333
9.6 Overview of Six Decision Models 284
Equity Component 333
Capital Budgeting Using a Spreadsheet 286
Retained Earnings 335
Key Terms 288 The Debt Component and Taxes 336
Questions 288 11.3 Weighting the Components: Book Value or
Prepping for Exams 288 Market Value? 336
Problems 290 Book Value 337
Advanced Problems for Spreadsheet Adjusted Weighted Average Cost of Capital 338
Application 296 Market Value 338
MINI-CASE BioCom, Inc.: Part 1 296 11.4 Using the Weighted Average Cost of Capital

■ Summary Card at end of text in a Budgeting Decision 340
The Weighted Average Cost of Capital for
10
Individual Projects 341
Cash Flow Estimation 298 11.5 Selecting Appropriate Betas for Projects 343
10.1 The Importance of Cash Flow 299 11.6 Constraints on Borrowing and Selecting
10.2 Estimating Cash Flow for Projects: Projects for the Portfolio 345
Incremental Cash Flow 301 Key Terms 347
Sunk Costs 301 Questions 347
xii

C ONTENTS
Prepping for Exams 347 Average Payment Cycle 392

Problems 350 Putting It All Together: The Cash Conversion
Advanced Problems for Spreadsheet Cycle 393
Application 354 13.2 Managing Accounts Receivable and Setting
MINI-CASE BioCom, Inc.: Part 3, A Fresh Look Credit Policy 394
at the WACC 355 Collecting Accounts Receivable 394

■ Summary Card at end of text Credit: A Two-Sided Coin 395
Qualifying for Credit 396
PART 4 Setting Payment Policy 398
Collecting Overdue Debt 401
Financial Planning and Evaluating 13.3 The Float 402
Performance 357 Speeding Up the Collection Float (Shortening
the Lag Time) 403
12 Forecasting and Short-Term Financial

Extending the Disbursement Float
(Lengthening the Lag Time) 404
Planning 358 13.4 Inventory Management: Carrying Costs and
12.1 Sources and Uses of Cash 360 Ordering Costs 404
ABC Inventory Management 405
12.2 Cash Budgeting and the Sales Forecast 361
Redundant Inventory Items 406
Cash Inflow from Sales 364
Economic Order Quantity 406
Other Cash Receipts 365
Just in Time 410
12.3 Cash Outflow from Production 366
12.4 The Cash Forecast: Short-Term Deficits 13.5 The Effect of Working Capital on Capital
Budgeting 411
and Short-Term Surpluses 367
Funding Cash Deficits 368
PUTTING FINANCE TO WORK Operations
Investing Cash Surpluses 370
Management 412
Inventories and Daily Operations 413
12.5 Planning with Pro Forma Financial
Statements 370 Key Terms 415
Pro Forma Income Statement 371 Questions 416
Pro Forma Balance Sheet 373 Prepping for Exams 416
PUTTING FINANCE TO WORK Information Problems 418
Technology 375 Advanced Problems for Spreadsheet
Application 421
Key Terms 377
MINI-CASE Cranston Dispensers, Inc.:
Questions 377
Part 1 422
Problems 379

Application 383 14 Financial Ratios and Firm
MINI-CASE Midwest Properties: Quarterly Performance 425
Forecasting 384
14.1 Financial Statements 426

Benchmarking 427
13 Working Capital Management 387

14.2 Financial Ratios 431
Short-Term Solvency: Liquidity Ratios 432
13.1 The Cash Conversion Cycle 388 Long-Term Solvency: Financial Leverage
Average Production Cycle 391 Ratios 434
Average Collection Cycle 391 Asset Management Ratios 435
xiii

C O N TENTS
Profitability Ratios 437 The Marketing Process: Road Show 479

Market Value Ratios 438 The Auction 479
DuPont Analysis 440 The Aftermarket: Dealer in the Shares 479
14.3 External Uses of Financial Statements and PUTTING FINANCE TO WORK Corporate
Industry Averages 441 Law 482
Cola Wars 442 15.6 Other Borrowing Options for a Mature
Industry Ratios 445 Business 482
FINANCE FOLLIES Cooking the Books at 15.7 The Final Phase: Closing the Business 485
Enron and WorldCom 446 Straight Liquidation: Chapter 7 485
Reorganization: Chapter 11 486
Key Terms 448
Questions 448 Key Terms 486
Prepping for Exams 448 Questions 487
Problems 450 Prepping for Exams 487
Advanced Problems for Spreadsheet Problems 489
Application 456 Advanced Problems for Spreadsheet
MINI-CASE Cranston Dispensers, Inc.: Application 492
Part 2 456 MINI-CASE AK Web Developers.com 493

PART 5 16 Capital Structure 495

16.1 Capital Markets: A Quick Review 496
Other Selected Finance Topics 461 16.2 Benefits of Debt 498
Earnings per Share as a Measure of the
15 Raising Capital 462 Benefits of Borrowing 499
16.3 Break-Even Earnings for Different Capital
15.1 The Business Life Cycle 463 Structures 500
15.2 Borrowing for a Start-Up and a Growing 16.4 Pecking Order 503
Business 463
Firms Prefer Internal Financing First 504
Personal Funds and Family Loans 464
Firms Choose to Issue the Cheapest Security
Commercial Bank Loans 464
First and Use Equity as a Last Resort 504
Commercial Bank Loans through the Small
Business Administration 464
16.5 Modigliani and Miller on Optimal Capital
Structure 506
Angel Financing and Venture Capital 465
Capital Structure in a World of No Taxes and No
15.3 Borrowing for a Stable and Mature Business: Bankruptcy 507
Taking Out Bank Loans 469
Capital Structure in a World of Corporate Taxes
Straight Loans 470 and No Bankruptcy 510
Discount Loans 470 Debt and the Tax Shield 511
Letters of Credit or Lines of Credit 471
16.6 The Static Theory of Capital Structure 514
Compensating Balance Loans 471
Bankruptcy 514
15.4 Borrowing for a Stable and Mature Business: Optimal Capital Structure 515
Selling Bonds 472
FINANCE FOLLIES Hedge Funds: Some Really
15.5 Borrowing for a Stable and Mature Business: Smart Guys Get into Big Trouble 515
Selling Stock 474
Initial Public Offerings and Underwriting 475 Key Terms 518
Registration, Prospectus, and Tombstone 477 Questions 518
xiv

C ONTENTS

Problems 520 18 International Financial
Advanced Problems for Spreadsheet Management 556
Application 523
18.1 Managing Multinational Operations 557
MINI-CASE General Energy Storage
Cultural Risk 557
Systems: How Much Debt and How Much
Business Risk 560
Equity? 524
Political Risk 560

FINANCE FOLLIES Rino International 561
17 Dividends, Dividend Policy, and Stock

18.2 Foreign Exchange 563
Purchasing Power Parity 563
Splits 525 Currency Exchange Rates 565
17.1 Cash Dividends 526 Cross Rates 566
Buying and Selling Stock 526 Arbitrage Opportunities 568
Declaring and Paying a Cash Dividend: Forward Rates 569
A Chronology 527 Using Forward Rates 571
Different Types of Dividends 529 Changing Spot Rates 573
17.2 Dividend Policy 531 18.3 Transaction, Operating, and Translation
Dividend Clienteles 531 Exposures 574
Dividend Policy Irrelevance 532 Transaction Exposure 574
Reasons Favoring a Low- or No-Dividend- Operating Exposure 574
Payout Policy 536 Translation Exposure 576
Reasons Favoring a High-Dividend-Payout 18.4 Foreign Investment Decisions 576
Policy 536
Key Terms 580
Optimal Dividend Policy 537
Questions 580
17.3 Selecting a Dividend Policy 537
Some Further Considerations in the Selection
Problems 582
of a Dividend Policy 540
17.4 Stock Dividends, Stock Splits, and Reverse Application 586
Splits 540
MINI-CASE Scholastic Travel Services,
Reasons for Stock Splits 541
Inc. 587
Reverse Splits 543

17.5 Specialized Dividend Plans 543
Stock Repurchase 543
Dividend Reinvestment Plans 546 Appendix 1 Future Value Interest Factors 589
Key Terms 548 Appendix 2 Present Value Interest Factors 591
Questions 548 Appendix 3 Future Value Interest Factors of an
Prepping for Exams 549 Annuity 593
Problems 550 Appendix 4 Present Value Interest Factors of an
Advanced Problems for Spreadsheet Annuity 595
Application 553 Appendix 5 Answers to Prepping for Exam
MINI-CASE East Coast Warehouse Questions 597
Club 554 Glossary 607

■ Summary Card at end of text Index 615
xv

PREFACE
New to This Edition

Many updates and enhancements are featured in this fourth edition of Financial
Management: Core Concepts, including the following key material:
■■ We have updated the material that was time-related. For example, the interest
rates now reflect the historically low levels of the twenty-first century.
■■ We have continued to strengthen Chapter 16 on helping the student have a
better understanding on valuing firms. We have added the distinction be-

tween the value of a firm as a whole and the value of the firm to the owner.
■■ We have used the helpful suggestions of reviewers to clarify topics, present
enhanced examples, and arrange the order of topic presentations.

■■ We have provided additional insight on ratio analysis in Chapter 14 by ex-
panding the horizon for analysis with data comparisons over an extended
time frame.
■■ The fourth edition MyLab Finance course includes an enhanced eText with
animated figures and author-created solutions videos for in-text examples.

■■ The chapter-ending Advanced Problems for Spreadsheet Application are
now offered in MyLab Finance as auto-graded Excel Projects. Using proven,

f ield-tested technology, auto-graded Excel Projects allow instructors to seam-
lessly integrate Microsoft Excel® content into their course without having to
manually grade spreadsheets. Students have the opportunity to practice im-
portant finance skills in Excel, helping them to master key concepts and gain
proficiency with the program.
We began with a simple concept. When a student takes an introductory
f inance class, he or she may encounter a wonderful instructor with great
teaching talent and insight. But outside of class, it is the book and the sup-
port materials with which the student forms a learning partnership. Therefore,
the book and support materials need to put the student front and center. They need to
present the information in such a way that it connects directly to the student’s
experiences. So our goal in this book is to introduce the core concepts of
finance in a way that reconnects the student to his or her personal financial
experiences, provides student-centered feedback in a timely and understand-
able fashion, and then uses such experiences as a springboard into the world
of corporate finance.
The introductory finance class is the first and last class in finance for the
vast majority of college students. The perspective of these students often dif-
fers from that of students majoring in finance. They need a book that demon-
strates why finance matters across disciplines and that builds from the basics
to more complex topics in an organic approach. Our purpose throughout the
presentation of topics has been to make the material as simple as possible, but
not overly simplified. It is this balance that we hope creates a solid foundation
for the fundamental concepts of finance for all students.
The student is at the heart of this book. Our hope is that we have made the
path easier and finance more transparent.
xvi

S O LVI NG TEACHING
AND LEARNI NG CHAL L E NGE S
The evolution of technical support for finance has been amazing. Students now
have advanced calculators and spreadsheet software that can provide solutions to
many of the basic financial problems. However, understanding finance is more
than just solving a financial problem with the aid of these technological tools.
These different tools are all interconnected, and students who can move seam-
lessly from one to another gain a better understanding of the basics behind the
answer. So the book presents three methods to solve many financial problems:
the equation approach, the calculator approach, and the spreadsheet approach. In
this way, students see that there are different roads to the same destination.
Designed for the nonfinance major, Financial Management: Core Concepts
structures a student-centric learning environment built around three major
3.4 • Applications of the Time Value of Money Equation 67
competencies:
Example 3.4 illustrates a future value problem3.4 that•atApplications of the
first looks like Time Value of Money Equation
a present 67
■■ Using the tools of finance value problem. It shows how important it is to understand where the unknown
Example
amount 3.4 illustrates
is in relation a future value problem that at first looks like a present
to time.
■■ Making connections value problem. It shows how important it is to understand where the unknown
amount is in relation to time. 3.4 • Applications of the Time Value of Money Equation 67
■■ Studying for success EXAMPLE 3.4
3.4 • Applications of the Time Value of Money Equation
Let’s make a deal! (future value)
MyLab67Finance Video
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rate
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= $2,389,278,156
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PV = $7,200,000 ? 148
(1.04)
p resented and the problem is solved mathematically. METHOD 1 Using the equation
METHOD
METHOD 1 Using the2equation
Using the = TVM keys × 313.8442 = $2,389,278,156
$7,200,000
FV = PV × (1 + r)n = $7,200,000 × (1.04)148
FV = PV ×Input
(1 + r)n =
METHOD 2 148
Using the
$7,200,000 4.0×TVM (1.04)-7,200,000
keys
148 0 ?
= $7,200,000 × 313.8442 = $2,389,278,156
Key = $7,200,000
N I/Y× 313.8442 PV = $2,389,278,156 PMT FV
Input
METHOD 2 148 Using the 4.0TVM keys -7,200,000 0 ?
METHOD 2 Using
CPT the TVM keys 2,389,278,156
Method two is using a calculator with time value of Input
Key
Input
148METHOD
N
148
4.03 Using
I/Y
4.0
-7,200,000 0
PV
-7,200,000 0
?
PMT
? FV
a spreadsheet
money keys: The problem is solved using a financial Key N
CPT
Key
I/Y
N
PV
I/Y
PMT
PV PMT
FV
2,389,278,156
FV
B6 METHOD 3 Using a spreadsheet fx 5FV(B1,B2,B3,B4,B5)

calculator, explaining the key strokes. The answer is CPT
CPT
Use the future value function 2,389,278,156
2,389,278,156
to find the price of
B6 METHOD 3 Using a spreadsheet
displayed in red on the appropriate calculator key. METHOD 3 Using a spreadsheet
fx
Alaska if purchased
Use thefx future
5FV(B1,B2,B3,B4,B5)
today instead of 148 years ago.
B6 A Bvalue function to findCthe price of
5FV(B1,B2,B3,B4,B5) D E
B6 fx 5FV(B1,B2,B3,B4,B5) today instead of 148 years ago.
Alaska if purchased
1 Rate Use the future value function
0.04 to find the price of
Use theAfuture value function
Alaska B the
to find
if purchased of of 148Cyears ago.
priceinstead
today D E
2 Alaska if A
Nper purchased today instead of B 148 years148 ago. C D E
1 Rate 0.04
Method three is using a spreadsheet: For some A
31
2
Pmt
Rate
Nper
B C
0.04 0
148
D E
e xamples, an Excel solution is added. Basic spreadsheet1 Rate

42
3
Pv
Nper
Pmt
0.04
($ 7,200,000.00)
148
0
2 Nper 148
variables are explained as well as how to set up the 3 Pmt
53
4
Pmt
Type
Pv
00
0 ($ 7,200,000.00)
application. 4 Pv
64
5
5
Pv
Fv
Type
Type
($ 7,200,000.00)
($$2,389,278,156
7,200,000.00)
0
0
5 Type 6 Fv 0 $2,389,278,156
6 Fv $2,389,278,156
6 Fv $2,389,278,156
M03_BROO0417_04_SE_C03.indd 67
xvii 25/10/17 12:0
M03_BROO0417_04_SE_C03.indd 67 25/10/17 12:

M03_BROO0417_04_SE_C03.indd 67 25/10/17 12:05 PM
M03_BROO0417_04_SE_C03.indd 67 25/10/17 12:05 PM

90 Chapter 4 • The Time Value of Money (Part 2)
Appendix 4 provides PVIFAs for a set of payments (n) and interest or discount
rates (r).
The annuity equations for present value and future value are straight-
150 forward.
Chapter 6 • Bonds and BondJust as in Chapter 3, we have one equation and four variables, and
Valuation
Figure 6.2
to solve for any one of the four variables, we must know the other three.
How to price a Example 4.2 shows a present value problem solved with the three methods
1. Lay out the 2. Determine 3. Find the 4. Add the
Making Connections
bond. introduced
timingin Chapter 3. the appropriate
and present value present
amount of the discount rate
of the value of the
future cash for the cash
lump-sum lump-sum
flows promised. flows. principal and principal and
the annuity the present
MyLab Finance Video EXAMPLE 4.2 Making retirementstream golden of (present value
value of the
coupons. coupons to get
of an annuity) the price or
value of the
Problem Ben and Donna determine that upon retirement theybond.
will need to
withdraw $50,000 annually at the end of each year for the next thirty years. They
know that they can earn 4% each year on their investment. What is the present
value of We
theirtion
thiscan
annuity?
retirement
price aIn other
bond words,
using how much
the same methodswillfrom
Benearlier
and Donna need
chapters: theinequa- Early TVM Tools. The key concepts of finance
method,account
the TVM(at themethod,
keys beginning
andof their
the retirement)
spreadsheet to generate
method. thiswith
Let’s start
future
thecash flow?method.
equation are identified as “tools.” Students first need to
Solution In this problem, we assume that Ben and Donna need to have the learn how to use these tools of finance before
Method
present value 1: Using
of the the equation
thirty-year annuityLet’s now proceed
in their accountthrough the four
at the start main
of their
steps in even
retirement, pricing
the discussion.
a bond.
though Youwill
they may want
not maketo refer to Figure
the first 6.2 as you
withdrawal read through
of $50,000 until they can apply them to larger problems. The
the end of the first year of retirement. They will make thirty withdrawals from
Step 1 is to lay out the timing and amount of the future cash flow promised. The first
this account during retirement. The investment rate is 4%. It is the same as the
future cash flow we need to determine is the annual interest payment. Here it is
material drills down to basics quickly, developing
discount rate for the future payments of $50,000 that will come at the end of
150
the coupon rate of 6.5% times the par value of the bond. We will use $1,000 as the
eachpar
year for the
Chapter 6 • Bondsvalue
next
of this
and Bond
thirty years. The known variables are r = 4%, n = 30, and
bond:
Valuation
time value of money (TVM) concepts and inter-
PMT = $50,000. Solve for PV.
annual coupon or interest payment = $1,000 × 0.065 = $65.00 est rates early in the course.
Figure 6.2 How to price aMETHOD 1 Using the equation
The second1. Lay outcash
future the flow that2.weDetermine
need to determine is3.the Find the of the par4. Add the
payment
bond.
First, timingthe
value calculate and
or principal—in PVIFA
this value the nappropriate
= 30par
for$1,000
case, the and r =of4%:
value present
the bond—atvalue
the matu- present
rity date amount
of July 15,of2018.
the Recall from
discount rate4 that this of
Chapter the method of payingvalue of the
is one
future cash for the cash lump-sum lump-sum
back a loan: interest as you go 30
flows and principal repaid at maturity.
1 − 3promised.
1>(1 + 0.04) 4flows.1 − 0.308319 principal and principal and
We can set out the future cash=flow as shown in = Figure
the 6.3. Note that in the present
annuity
17.292033
0.04
the time line, T0 represents 0.04date of July
the original issue of and T1 is thevalue of the
15, 2008,
stream
first annual coupon payment date of July 15, 2009. Thecoupons. annual payments con-coupons to get
tinue multiply
Then for ten years, with T10payment
the annuity being thebylast factor: on July 15, 2018. This pointthe price or
payment
this
is a moment of recognition in which we can apply previously learned con- value of the
bond.
cepts: the coupon payments constitute an annuity stream, the same amount
PV = The
at regular intervals. $50,000 × 17.292033
principal or par value= of
$864,601.67
$1,000 also pays out at matu-
rity. Here we recognize another key concept: the final amount is a lump-sum
payment. So we now have the promised set of future cash flows for the Merrill
We can price a bond using the same methods from earlier chapters: the equa-
Lynch bond.
METHOD 2 Using the TVM keys
tion method, the TVM keys method, and the spreadsheet method. Let’s start with
Step 2 is to determine the appropriate discount rate for the cash flow. We will
Again, the
the calculatormethod.
must be in the END mode so that you treat the pay-
jump to theequation
answer now and use the yield of 5.30% from the bond data in
ments as an ordinary annuity. Set the calculator to the END mode. Then
Table 6.1. Later we will develop the concepts behind an appropriate discount
rate. Method 1: Using the equation Let’s now proceed through the four main
Mode = ENDwe now apply two of the time value of money equations to find
Forsteps in pricing a bond. You may want to refer to Figure 6.2 as you read through
step 3,
the present
Input thevalue of 30
the lump-sum principal
discussion. 4.0 and the annuity
? stream
−of50,000
coupons. Because
0
Step 1N is to lay outI/Y
the timing andPVamount of thePMT
future cash flow promised. The first
Figure 6.3 Future cash flow
Key
T0 future
T1 cashTflow weTneed to Tdetermine
. . . is the
T8 annual
T9interest
FV
Later Application and Visual Links. Students
payment. Here it is
T10
2 3 4
of the Merrill Lynch bond. CPT the coupon rate of 6.5% times864,601.67
soon begin to see just how powerful these tools
the par value of the bond. We will use $1,000 as the
par value of this bond:
$65 annual
$65 coupon$65 or interest
$65 ...
payment
$65 = $1,000
$65 × 0.065
$65 = $65.00
are. They learn to forge links between basic
$1,000
The second future cash flow that we need to determine is the payment of the par
principles and new applications.
value or principal—in this case, the $1,000 par value of the bond—at the matu- A tool icon alerts students when a
rity date of July 15, 2018. Recall from Chapter 4 that this is one method of paying
M04_BROO0417_04_SE_C04.indd 90 back a loan: interest as you go and principal repaid at maturity. new tool is introduced and when
25/10/17 3:40 PM
M06B_BROO0417_04_SE_C06.indd 150
We can set out the future cash flow as shown in Figure 6.3. Note that in
the time line, T0 represents the original issue date of July 15, 2008, and T1 is the
a tool can be applied in a new
08/08/17 6:59 PM
first annual coupon payment date of July 15, 2009. The annual payments con- situation.
tinue for ten years, with T10 being the last payment on July 15, 2018. This point
is a moment of recognition in which we can apply previously learned con-
cepts: the coupon payments constitute an annuity stream, the same amount
at regular intervals. The principal or par value of $1,000 also pays out at matu-
rity. Here we recognize another key concept: the final amount is a lump-sum
payment. So we now have the promised set of future cash flows for the Merrill
Lynch bond.
Step 2 is to determine the appropriate discount rate for the cash flow. We will
jump to the answer now and use the yield of 5.30% from the bond data in
Table 6.1. Later we will develop the concepts behind an appropriate discount
rate.
For step 3, we now apply two of the time value of money equations to find
the present value of the lump-sum principal and the annuity stream of coupons. Because
Figure 6.3 Future cash flow T0 T1 T2 T3 T4 ... T8 T9 T10

of the Merrill Lynch bond.
$65 $65 $65 $65 ... $65 $65 $65

$1,000
xviii
M06B_BROO0417_04_SE_C06.indd 150 08/08/17 6:59 PM

1.9 • Corporate Governance and Business Ethics 19
explanations as to why this implosion occurred and what we should do about

it. Here we will look at the broad outlines of the story, which is, in part, a lesson
of failed corporate governance. As you read these boxes throughout the book,
remember that there are many opinions about what went wrong in these vari-
ous scenarios and that no one definitive answer can explain it all for each one.
Instead, these features are designed to pique your curiosity about how things can
go wrong in the world of finance and explore what alternative viewpoints exist
about why they occurred and what we can do to correct them.
FINANCE FOLLIES
The Financial Meltdown of 2008

Between October 2007 and October 2008, financial continue lending through conventional loans to quali-
markets in the United States lost more than 40% of fied applicants or lower the qualifying standards with
their value, and several financial institutions collapsed new, unconventional loans and risk higher defaults.
or were swallowed up by healthier firms. This “perfect Because mortgage originators could eliminate most
storm” of mortgage defaults, a housing market col- risk by selling off the mortgages—which they repack-
lapse, a lack of appropriate regulation and oversight, aged and sold as securities—they naturally chose the
and a major international credit freeze led to the worst latter course.
Connections with the Real World. “Finance financial meltdown since the Great Depression of the
1930s.
With relaxed loan qualifications, red-hot demand
heated up the residential housing market. Many
Follies” capture some fascinating examples We can find the seeds of this financial debacle in
the housing market, but the soil in which they were
individuals found themselves in the middle of the
American dream that they thought they might never
of current and historical scandals and manias planted had been prepared for a long time. In the 1980s,
a new philosophy that the capital markets worked best
realize—a new home—but the new home often
brought with it an unconventional loan. The industry
and give the student context for the necessity of

when regulations were removed became the prevail- collectively called these unconventional loans “sub-
ing paradigm. Over the next twenty years, a slow and prime” loans because the initial monthly payment on
deliberate dismantling of regulations surrounding the the loan in the first few years was well below that of
studying finance. financial markets took place. The central idea behind a conventional mortgage loan. The interest rate on
these deregulation efforts was that government is the subsequent payments, however, would increase well
problem rather than the solution and that if we remove above that of a standard loan. So a new homeowner
the government from the market, free competition will might enjoy relatively low mortgage payments in the
efficiently allocate resources for a stronger economy. first couple of years only to face a large increase when
A key catalyst for the meltdown was the disman- the financial institution reset the interest rate. In many
tling of the Glass-Steagall Act (officially called the of these loans, the cost jumped by more than $500 per
Banking Act of 1933). In 1999, the Gramm-Leach- month.
Bliley Act overturned segments of Glass-Steagall that When the loan payments jumped, many mortgage
prevented investment banks from competing with holders could no longer afford to stay in their homes.
commercial banks in areas like mortgage lending. The default rate rose to over 20% on these loans, which
Later the SEC would relax requirements on investment is much higher than the typical 1% to 3% default rate on
banks regarding the amount of borrowing in which conventional loans. Normally, the bank would simply
they could engage, and the race was on to sell more and repossess the home, sell it, and recover the loan. But
more mortgages. with a glut of houses on the market, the housing mar-
Historically, commercial banks financed home ket collapsed, and prices fell. The banks could not sell
Studying for Success

mortgages with funds from their depositors—a limited these houses at any price near the value of the loan.
supply of money. Banks rationed credit to customers In addition, knowing that the potential for default
CHAPTER 3
with higher incomes and solid credit histories. Most
individuals or couples who could qualify for a standard
was higher on these subprime loans, many banks par-
ticipated in so-called collateral debt contracts, which
174 Chapter 6 • Bondsmortgage
and Bond Valuation
could get a conventional loan to buy a house, were designed as insurance against falling housing
and defaults were low. With new competition and prices and mortgage defaults. These contracts eventu-
The Time Value of Money (Part 1)
looser regulations, mortgage originators faced a choice: ally wound up nearly worthless as insurance against
QUESTIONS Continued
AT A GLANCE
For the Student on the Go. Tear-out Summary Today
1. What is a bond? What determines the price of this financial asset?
Future date (n)
Cards for every chapter provide instantaneous 2. What is the primary difference between an annual bond and a semiannual
bond? What changes do you need to make in finding the price of a semian-
mini-reviews. In addition to summarizing the main PV 19
M01B_BROO0417_04_SE_C01.indd nualpresent
bond versus
value an annual
3 (1 + growth bond?
rate)n = FV 29/07/17 1:45 PM
points of the chapter, these portable study aids 3. When we talk about the yield of a bond, we usually mean the yield to matu-
rity of the bond. Why?
include mathematical notation, calculator keys,
PV = 4. Does a zero-coupon bond pay FV interest?
future value
and key equations, all great to read over right (1 + discount rate)n
5. If a zero-coupon bond does not pay coupons each year, why buy it?
before an exam! 6. How does the potential for default of a bond affect the yield of the bond?
LO1 Calculate future values and understand compounding.
7.isWhy
Future value are
the value some
of an asset atbonds
a specificsold attime
point in a premium,
to the futuresome at parvalues
point. Future value,
grow and some
faster and fasterat a to
due
in the future that is equivalent in value to a specific amount interest earning interest, a phenomenon called compounding
today. There isdiscount?
a direct relationship between the future value of interest.
8. How does collateral impact the price of a bond?
of an asset and the asset’s present value, growth rate, and time
9. What role do Moody’s, Standard & Poor’s, and Fitch’s bond ratings play in
LO2 Calculate present values and understand discounting.
Present value isthe pricing
the value oftomorrow’s
today of a bond?cash flow. You dollars by discounting the future value back to the present.
can determine the equivalent value of a future value in today’s
10. What must happen for us to call a bond a “fallen angel”?
LO3 Calculate implied interest rates and waiting time from the time value of money
equation.
PREPPING FOR EXAMS
The time value of money equation is robust in that it can be
arranged to find each of the four different variables (future
To find the interest rate, you need the present value, the future
value, and the number of periods. To find the waiting time,
For Students with Test Anxieties. “Prepping value, present value, waiting time or time to maturity, and
1.and
interest rate) Five
thusyears
answer ago
a seriesThompson Tarps,
of different questions.
you need the present value, the future value, and the interest
Inc.
rate. issued twenty-five-year 10% annual
for Exams” is designed for those students who coupon bonds with a $1,000 face value. Since then, interest rates in general
LO4 Apply therisen,
have time value of money
and the equation
yield to using
maturity on equation, calculator,
the Thompson Tarpsandbonds
spreadsheet.
is now
worry about how well they will do on the finance There are four ways to find solutions to time value of money
12%. Given this information, whatare isproblems with tables due to rounding and limited values
the price today for a Thompson Tarps
problems, using the different formats of the equation, TVM for combinations of interest rate and time.
exam. To build confidence and expose students bond?
keys on a calculator, a spreadsheet function, or tables. There
a. $843.14
to the types of problems they will see on some LO5 Explain the Rule of 72, a simple estimation of doubling values.
b. $850.61
exams, multiple-choice questions at the end of The Rule of 72 allows you to determine how long it takes to
c. $1,181.54
double your money at a specific interest rate. It is a simple
approximation method in which 72 is divided by the interest
rate to find the number of years it takes to double your money.
d. $1,170.27
each chapter are pulled directly from the test
2. Endicott Enterprises, Inc. has issued thirty-year semiannual coupon
bank. Answers are printed in the back of the book bonds with a face value of $1,000. If the annual coupon rate is 14% and
in Appendix 5. the current yield to maturity is 8%, what is the firm’s current price per
bond?
a. $578.82 xix
b. $579.84
c. $1,675.47
d. $1,678.70
3. Benson Biometrics, Inc. has outstanding $1,000 face value 8% coupon bonds
that make semiannual payments and have fourteen years remaining to matu-17/11/17 1:59 pm
M03C_BROO0417_04_SE_C03SUM.indd 5
M03C_BROO0417_04_SE_C03SUM.indd 5
rity. If the current price for these bonds is $1,118.74, what is the annualized 28/11/17 10:27 AM
yield to maturity?
a. 6.68%
178 Chapter 6 • Bonds and Bond Valuation
Treasury notes and bonds. For Problems 19 through 23, use the information in
the following table.
Today Is February 15, 2008
Key Terms 173
Issue Coupon Maturity Current
Type Date Price Rate Date YTM Yield Rating
Then, using the simple interest approach, we annualize the result:
Note Feb 2000 —
Problems 6.50% 175
2-15-2010 3.952% 6.199% AAA
365
BEY = 0.002034129 × = 0.026516328 or ≈ 2.65% Bond Aug 2005 100.00 4.25% 8-15-2018 — 4.250% AAA
28 similar bonds is 7.5%. What is the expected price of this bond using the semi-
annual convention? Bond Aug 2003 — 7.25% 8-15-2023 4.830% 5.745% AAA
Another way to find the BEY is to use the formula
a. $25.19 Bond Feb 1995 126.19 8.50% 2-15-2015 — 6.736% AAA
365 × discount yield b. $250.19
BEY = c. $750.00
360 -days to maturity × discount yield
d. $1,000.00 19. What is the price in dollars of the February 2000 Treasury note if its par value
is $100,000? Verify the current yield of this note.
365 × 0.0261 5. From 1980 to 2013, the default risk premium differential between Aaa-rated
= = 0.026516328 ≈bonds
2.65% 6.5 has averaged between
and Aa-rated bonds 20.. What is the yield to maturity of the August 2005 Treasury bond? Compare the
360 − 28 × 0.0261 yield to maturity and the current yield. How do you explain this relationship?
a. 5 and 10 basis points
b. 11inand
We have another name for the BEY, one we have met earlier
the annual percentage rate (APR).
the23text.
basisItpoints
is
c. 24 and 35 basis points For the Student Who Wants
21. What is the price of the August 2003 Treasury bond (assume a $100,000 par
value) with the yield to maturity from the table? Verify the current yield.
d. 36 and 50 basis points
Why pay so much attention to the Treasury bill? The yield on the Treasury
6. Which of the following
Practice. The book features ap-
Why is the current yield higher than the yield to maturity?
bill is a nominal risk-free rate. The U.S. government guarantees it. Its default pre- bond types may the issuer buy back before
22.maturity?
What is the yield to maturity of the February 1995 Treasury bond based on
a. Callable
mium is essentially zero, and we determine its interest at purchase as abond
discount proximately 400 end-of-chapter prob-
the price in the table? Verify the current yield. Why is the current yield higher
bond. Thus, we know at purchase the guaranteed or risk-freeb.return
Putableforbond
buying a than the yield to maturity?
c. Convertible bond
Treasury bill. In future chapters, when we need a risk-free rate, we will often use lems and 180 conceptual questions.
23. What pattern do you see in the yield to maturity of these Treasury notes and
d. Zero-coupon bond
the yield on a Treasury bill.
7. Bonds that pay interest tied to a company’s earnings are
bonds?
Advanced spreadsheet problems
Treasury bills. For Problems 24 through 28, use the information in the following
table. A face value appear
of $10,000 isat theforend
theseof most bills.chapters
bonds.
a. income assumed Treasury
To review this chapter, see the Summary Card at theb.end of the text.
exotic
c. floating-rate
for
Maturity more flexibility
Days to Maturity in assigning
Bank Discount prob-
d. variable earnings
lems for individuals or teams and are
Mar 30 28 1.20
8. The U.S. Treasury bill is currently selling at a discount basis of 4.25%. The
174 Chapter 6 • Bonds and Bond Valuation
KEY TERMS par value of the bill is $100,000, and it will mature in ninety days. What is the also offered59 in the fourth
Apr 30 2.00
edition as
price of this Treasury bill? Jun 30 120 2.45
basis point, p. 163 QUESTIONS junk bond, p. 162a. $95,750.00 auto-graded
Aug 30 181
Excel Projects
?
in MyLab
maturity date, p.b.147
$98,937.50
bearer bond, p. 165
bond, p. 147
1. What is a bond? What determines the price of this financial asset?
c. $98,952.05
mortgaged security, p. 166
Finance.
2. What is the primary difference d. $99,952.78
between 24. What is the price for the March 30 Treasury bill?
bond equivalent yield (BEY), municipal bond (muni), p.an annual bond and a semiannual
169
p. 172 bond? What changes do p.
par value, you
147 need to make in finding the price of a semian- 25. What is the price for the April 30 Treasury bill?
callable bond, p. 167 nual bond versuspar an annual
value bond, bond?
p. 161 26. What is theThesepriceproblems
for theare
June 30 Treasury bill?
3. When we talk about the
PROBLEMS
yield of a bond, we usually mean the yield to matu- in MyLab Finance.
collateral, p. 166 premium bond, p. 161 27. Determine available
the bank discount rate of the August 30 Treasury bill if it is cur-
convertible bond, p. 168 rity of the bond. Why?
prime rate, p.Bond
169prices. For Problems 1 through 4, use the information in the following table.
rently selling for $9,841.625. What is the bond equivalent yield?
corpus, p. 165 protective
4. Does a zero-coupon bond covenant, p. 166
pay interest? 28. What are the bond equivalent yields of the March 30, April 30, and June 30
Coupon Years to Yield to
coupon, p. 147 putable bond, p. 168
5. If a zero-coupon bond does not pay coupons each year, why buy it?
Par Value Rate Maturity Maturity Price Treasury bills?
coupon rate, p. 147 security of a bond, p. 166
current yield, p. 148 6. How does the senior
potential forp.default
debt, 166 of a bond affect the yield of the bond?
$1,000.00 8% 10 6% ?
debentures, p. 166 7. Why are somesinking

bonds sold
fund,atp.a 166
premium, some at par6%
$1,000.00 value, and some
10 Theseat a problems
8% ?
deed of trust, p. 166 discount? state bond, p. 169 $5,000.00 9% available20in MyLab Finance.
7%
are
ADVANCED
?
PROBLEMS FOR SPREADSHEET APPLICATION
discount bond, p. 161 STRIPS,
8. How does collateral p. 156the price$5,000.00
impact of a bond? 12% 30 5% ? 1. Bond ladder. Mathew and Anna are setting up a retirement payout account
exotic bond, p. 169 Treasury Standard
9. What role do Moody’s, bill, p. 169& Poor’s, and Fitch’s bond ratings play in for the next twenty years. They have decided to buy government bonds that
fallen angel, p. 165 the pricing of aTreasury
bond? bond, 1. p. 169the bonds from the table with annual coupon payments.
Price
floating-rate bond, p. 169 Treasury note, p.Price 169 the bonds from the table with semiannual coupon payments.
10. What must happen for us to2.call a bond a “fallen angel”?
foreign bond, p. 169 yield to call, p.3.167Price the bonds from the table with quarterly coupon payments.
income bond, p. 169 yield to maturity (YTM) or yield,
4. Price the bonds from the table with monthly coupon payments.
indenture, p. 166 p. 147
junior debt, p. 166 PREPPING FOR zero-coupon
EXAMS bond, p. 156 M06B_BROO0417_04_SE_C06.indd 178 08/08/17 7:01 PM
1. Five years ago Thompson Tarps, Inc. issued twenty-five-year 10% annual
coupon bonds with a $1,000 face value. Since then, interest rates in general
For the Visual Student. Illustrations with a Purpose
64 Chapter 3 • The Time Value of Money (Part 1)
have risen, and the yield to maturity on the Thompson Tarps bonds is now
M06B_BROO0417_04_SE_C06.indd 175
help students visualize important financial concepts. 08/08/17 7:01 PM
12%. Given this information, what is the price today for a Thompson Tarps
Figure 3.1 Time lines
of growth rates (top) and
bond? Today Future date (n)The time line is given special treatment in the all-
discount rates (bottom) a. $843.14
illustrate present value and b. $850.61
important time value of money and capital budget-
future value. c. $1,181.54 PV present value 3 (1 + growth rate)n = FV
ing chapters. To depict movement, present value is
d. $1,170.27
2. Endicott Enterprises, Inc. has issued thirty-year semiannual coupon always in a lighter shade and future value in a darker
bonds with a face value of $1,000. If the annual coupon rate is 14% and
the current yield to maturity is 8%,
future what is the firm’s current price per
value
shade, and PV is always on the left and FV always
bond?
PV =
(1 + discount rate)n
FV
on the right. This setup makes it easier to see com-
a. $578.82
b. $579.84
or, rounded to the nearest cent, $228.19. pounding from the present into the future and dis-
c. $1,675.47
counting “back from the future” to the present.
The nice feature about using the equation with a calculator is that the calcula-
d. $1,678.70
tor does not round the PVIF. As problems get more complicated, the rounding of
PVIFs
3. Benson from a table
Biometrics, Inc.becomes more problematic.
has outstanding $1,000 faceTherefore, our choice
value 8% coupon is to use the
bonds
thattable
makemethod only payments
semiannual as a check and
and have
not asfourteen
a standardyearsmethod to solve
remaining time value of
to matu-
58
rity.money problems. Chapter 3 • The Time Value of Money (Part 1)
If the current price for these bonds is $1,118.74, what is the annualized
yield to maturity?
The Use of Time Lines Methods of Solving Future Value
a. 6.68%
Another useful tool for solving present value and future value problems
b. 6.67% Problems
is a time
line, a linear representation of the timing of cash flows over a period ofEquation
c. 6.12% time. 3.2 is a basic tool for valuing all future lump-
Figure 3.1 illustrates two time lines that can help us visualize the two key
d. 6.00%
cepts of present value and future value.
sum con-
Graphic illustrations are occasionally presented
payments. All we need to know are the initial
4. Delagold Corporation is issuing a zero-coupon bond that will have a matu-deposit or present value of the account (PV), the interest
Each time line shows today at the left and the stopping or future point (matu- as another way of “seeing” a concept. All illustra-
rity of fifty years. The bond’s par value is $1,000, and the current yield on rate (r), and the length of time the money will remain
rity date) at the right. The time line displays the present value dollar amount in the account (n). The interest rate is the growth rate,
at the left and the future dollar value at the right. The distance betweenor tions say something about finance.
thethe annual percentage increase on an investment.
endpoints represents the total elapsed time and is reflected by n, the number of
The growth rate raised to the power of the number of
periods between PV and FV. The top time line depicts the growth rate. It gradates(1 + r)n, is the future value interest factor
periods,
from lighter in the present to darker in the future, indicating an increase in value.
(FVIF): as n (the time, or the number of periods)
Yakobchuk Vasyl/Shutterstock
The bottom time line depicts the discount rate. It gradates “back from the future,”the FVIF increases; and as r (the interest rate)
increases,
M06B_BROO0417_04_SE_C06.indd 174 from darker to lighter, indicating a decrease in value. increases,08/08/17 7:01 PM
the FVIF increases. Thus, the future value is
Using a time line to lay out a time value of money problem will become more of both the interest rate and the number of
a function
and more valuable as our problems become more complex. To help minimize time periods.
input errors, you should get into the habit of using a time line to set up these We can determine future values by using any of four
problems prior to using the equation, calculator, or spreadsheet. The time line (1) equation, (2) financial functions on a calcula-
methods:
can become one Theof your mostofuseful
compounding interest tools.
over time accelerates the growth of tor, (3) spreadsheet, and (4) FVIF table. We’ve just looked
money.
at the equation method, which we will call Method 1. Now
3.3 One Equation and Four Variables let’s walk through the methods for calculating future value
using the college fund account example from the chapter opener. The original
xx Our time value of money equation has considerable deposit firepower
(birthday ingift)
thatiseach vari-(the present value, PV), and the annual interest
$15,000
able can answer different questions. By rearranging rate isthe
5%equation,
(r) over thewenext
can eighteen
isolate years (n). How much will you have in your
the four different variables on the left side of theaccount
equation. Of end
at the course, we will years?
of eighteen
need to know the values of the variables remaining on the right side of the equa-
tion before we can solve for the variable of concern. Method 1: The equation This method for calculating future values uses a
The first form of the equation, FV = PV × standard (1 + r)n (Eq. 3.2), isolates
calculator and the the vari- value equation. We already know that we can
future
able FV at a specific future point in time. This form find ofthethe equation
solution by can answer
solving a
the equation
question such as “How much money will I have in my account at a specific point
in the future given a specific interest rate?” FV = PV(1 + r)n
A01_BROO0417_04_SE_FM.indd 20 The second form of the equation, PV = FV × 3 1>(1 + r)n 4 (Eq. 3.3), iso-= $15,000.00 × (1.05)18 30/11/17 10:33 AM
lates the variable PV. Present value is the same as the current price of an asset,
M YLAB F I NANCE
Reach Every Student by Pairing This Text with MyLab Finance

MyLab is the teaching and learning platform that empowers you to reach every
student. By combining trusted author content with digital tools and a flexible
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teach multiple sections, or set prerequisites, MyLab gives you the flexibility to
easily create your course to fit your needs.
Improve Student Results

When you teach with MyLab, student performance improves. That’s why instruc-
tors have chosen MyLab for over 15 years, touching the lives of over 50 million
students.
Just as the evolution of technical support has been great for students, it has
also been great for the instructor. MyLab Finance provides the extra support
that time constraints often prevent an instructor from providing to students.
With every end-of-chapter problem formatted in MyLab Finance, an instruc-
tor can assign a text-related problem that students solve online with technical
support. The problem’s solution is available to students, and the marking of
student homework assignments is completed by MyLab Finance. In addition,
MyLab Finance includes features such as Help Me Solve This, which leads stu-
dents step by step through the problem with a different set of numbers.
New to the fourth edition, MyLab Finance now offers auto-graded Excel
Projects for the Advanced Problems for Spreadsheet Application in Chapters 2
through 18. These data-intensive problems offer more flexibility in assigning
problems and provide students with the opportunity to practice important
finance skills in Excel.
xxi

DEVELOPING EMPLOYABIL IT Y
SKILLS
One of the major objectives of all students is to develop and improve those skills
that increase their employability. Regardless of a student’s major, there are certain
common skills that employers seek from their new hires across all facets of the
business. In Financial Management: Core Concepts, students are challenged to hone
these skills by learning which of the factors in a decision are relevant and which
are irrelevant. They learn how to properly weigh different factors so that the solu-
tion is driven by the most important facts, not the minor or marginal facts that
often lead to poor solutions.
Additionally, students develop technical skills with calculators and spread-
sheets. This book teaches not only how to manipulate input for calculators
and spreadsheets, but also what the reasoning is behind the inputs that pro-
duce the desired solution. For example, we use a three-method approach to
problems, with the starting method being the basic equation that forms the
theoretical understanding of the problem. We then help translate this equa-
tion directly into a calculator that solves the problem efficiently. Finally, we
translate the problem so it can be solved using a spreadsheet. In fact, this book
provides many problems that utilize spreadsheet applications. Job seekers who
are able to translate a problem from its original setting into either a calcula-
tor or a spreadsheet problem are more employable because they can work
with large sets of information and find correct answers more quickly and
efficiently.
Lastly, Financial Management: Core Concepts helps develop analytical skills—
increasing students’ ability to analyze performance and make decisions based
on this analysis. Students learn how to compare performance over time and
with competitors. By analyzing differences in performance over time or across
companies, students can make decisions about what actions will be beneficial
to their future employers’ business. Employees who can understand what ac-
tions influence performance in either a positive or a negative direction and can
then advocate for actions that will increase performance are the most critical
employees in a business.
xxii

ASSETS Amount Percentage LIABILITIES Amount Percentage
Current assets Current liabilities
Cash $ 150 2.26% Accounts payable $ 331 5.00%

Taxes payable $ 265 4.00%
Accounts receivable $ 305 4.60%
Total current liabilities $ 596 9.00%
Inventories
Long-term debt $ 2,902 43.78%
Raw materials $ 240 3.62%
Total liabilities $3,498 52.78%
Finished goods $ 480 7.24% OWNERS’ EQUITY
Total inventory $ 720 10.86% Common stock $ 62 0.94%
Total current assets $1,175 17.72% Retained earnings $ 3,068 46.29%
Net fixed assets $ 5,453 82.27% Total owners’ equity $3,130 47.23%
TOTAL LIABILITIES AND
TOTAL ASSETS $6,628 100.00% OWNERS’ EQUITY $6,628 100.00%
Figure 12.6
So for the balance sheet to balance, long-term debt must be $2,902,000

($6,628 − $331 − $265 − $62 − $3,068 = $2,902). Therefore, the long-term
debt account needs to increase by $200,000 ($2,902,000 − $2,702,000). To
complete the $500,000 funding for the project, the company will need outside
funding of $200,000. The other funding will come from internal funding sources.
PUTTING FINANCE TO WORK
Information Technology
Careers. “Putting Finance to Work” answers a The quality of short-term financial
plans and forecasts depends com-
that handles thousands of transac-
tions a minute in every corner of
question students often ask: “Why do I need to take a pletely on the quality of informa-
tion that goes into them. The cash
the globe, an apparently simple
question such as “How much cash
finance course, anyway?” These snapshots of widely flow forecast requires us to know
what inventory we have on hand,
do we have on hand?” is not that
simple.
varied careers show that specific finance concepts where it is, how long we expect
to hold it before we sell it, and
These data requirements pres-
ent a challenge even for relatively
how long it takes us to replace it. uncomplicated businesses that
are used in many different career paths. It requires us to know how much manufacture just a few products
money our customers owe us and like furniture or that retail a single
when we expect them to pay. The product like automobiles. For a
sales forecast requires data on what we sold recently, company such as Procter and Gamble that manufac-
what we sold in the same period last year, and what tures an array of consumer products from many dif-
trends are developing. For a company like McDonald’s ferent raw materials in many locations or for a retailer
Continued
26 Chapter 1 • Financial Management

MINI-CASE
This mini-case is available
Richardses’ Tree Farm Grows Up in MyLab Finance.
Jake Richards is surprised to hear from Paul Augus- corporation, and a limited liability company, or LLC.
tus, his accountant for many years, that income from He asks Jake to look them over and get back to him in
his tree farm is just over $150,000 for the year and a week or two.
that his land and other assets are valued at almost
Questions
Different Kinds of Businesses. “Mini-Cases” at the $2,000,000. The $600,000 he owes to the bank is not
a surprise. 1. Major financial management decisions involve capi-
tal budgeting, capital structure, and working capital
end of every chapter put abstract concepts to work
Twenty years ago Jake realized that with seven
management. Give an example of each that relates to
long days of backbreaking labor a week, his western
Richardses’ Tree Farm.
Massachusetts dairy farm was just about breaking
in the types of organizations for which students will even. Without his wife’s income as a high school
science teacher and the health insurance that
2. Should the Richardses form a regular corporation
or choose one of the hybrid forms? Whichever form
later work. The cases feature small businesses, large came with it, the young family would have been
struggling.
they use, they intend to distribute ownership equally
among Jake, his wife, and their two children so that
corporations, town organizations, and start-ups. Along the way, Jake sold the dairy herd, but he
did want to keep the land that had been farmed by
each party will own 25% of the shares. Consider the
tax consequences of their decision.
his family for three generations. At the time, his plan 3. How does incorporating affect the family’s overall
was to repurpose the farm and some of its equipment risk exposure?
by boarding horses, selling hay bales to construction 4. How does incorporating affect the ability of the
companies, starting a small landscaping business, business to expand?
and plowing snow in the winter. Almost on a whim,
he planted a few acres with seedling-size blue spruces 5. Jake is concerned that if the business gets much
bigger or if he should just decide to slow down and
and Fraser firs, expecting to sell them as Christmas
enjoy life a little more, he will need to hire profes-
trees. He quickly found that he could use them more
sional management and possibly lose control over
profitably in his landscaping business and that he
key business decisions. Are his concerns justified?
could sell them to local nurseries and other landscap-
ers. Gradually, he added plantings of other popular 6. Jake occasionally hires day workers, who may or
landscape trees: arborvitae, yew, dogwood, red maple, may not be in the United States legally. What are
ornamental crabapple, pear, and cherry. Demand his legal and ethical obligations with respect to this
grew so rapidly that he gave up his other activities to decision?
concentrate on tree farming. He now has three full- 7. The Richardses are deeply concerned with environ-
time employees along with his wife, two college-age mental issues and know that the best practices for
children, and several of their friends working for him pesticide and fertilizer usage increase production
in the summer. He also owns and leases some rather costs. Will incorporating affect their ability to give
expensive specialized equipment for planting, digging, up a small amount of profit in exchange for protect-
and preparing the trees for shipping. ing the environment?
Because the business has grown so rapidly and 8. How does incorporating affect the Richardses’ abil-
almost accidentally, Jake has not thought much ity to transfer ownership of the tree farm to their
about its organization. His accountant suggests that children?
it is time to consider converting from an informal
9. Suppose this business has an opportunity to
partnership with his wife and children to a more
become much larger at some point in the future.
formal type of organization. Paul hands Jake some
How might it obtain more equity funding and per-
brochures on forming a regular corporation and
two alternatives: a subchapter S corporation, or S haps create considerable wealth for the Richards
family in the process?
M01B_BROO0417_04_SE_C01.indd 26 23/10/17 10:41 AM
xxiii

TA B L E OF CONTENTS OV E RV IE W
Part 1 Fundamental Concepts and Basic Tools of Finance

Ch. 1: Financial Management Introduces the movement of money from lender to borrower and back, the main areas
of finance, and the setting of finance in a paradigm know as agency theory.
Ch. 2: Financial Statements Introduces the four key financial statements and the cash flow identity to prepare
students for analyzing cash flow.
Ch. 3: The Time Value of Money Presents the time value of money for single (lump sum) payments and the four
(Part 1) variables; time, interest rate, present value, and future value.
Ch. 4: The Time Value of Money Expands time value of money with multiple payment streams and the annuity concept.
(Part 2) Introduces different loan formats and amortization schedules.
Ch. 5: Interest Rates Discusses the various ways interest rates are quoted and introduces the components
of interest rates.
Part 2 Valuing Stocks and Bonds and Understanding Risk and Return
Ch. 6: Bonds and Bond Introduces the terminology of bonds, bond pricing, bond ratings, and the relationship
Valuation between coupon rates and yields.
Ch. 7: Stocks and Stock Explains the characteristics of stocks, primary and secondary stock markets,
Valuation and values stocks based on historical dividends of the individual stock.
Ch. 8: Risk and Return Calculates profits and returns using the holding period and converts the holding period
return to annual return. Defines risk and ways to measure risk using standard deviation
and beta.
Part 3 Capital Budgeting
Ch. 9: Capital Budget Decision Introduces capital budgeting and six models: pay-back, discounted pay-back, net
Models present value, internal rate of return, modified internal rate of return, and profitability
index for capital budgeting decision making.
Ch. 10: Cash Flow Estimation Introduces incremental cash flow for capital budgeting and how to calculate deprecia-
tion and cost recovery using an accelerated depreciation method.
Ch. 11: The Cost of Capital Presents the different types of funding available for companies, the calculation of
weighted average cost of capital, and the application of the cost of capital to individual
projects of the company.
Part 4 Financial Planning and Evaluating Performance
Ch. 12: Forecasting and Short Introduces the sources and uses of cash and the use of forecasting to predict cash flow,
Term Financial Planning timing of production costs, potential cash excess or cash short-fall, and the preparation
of pro forma statements.
Ch. 13: Working Capital Models the cash conversion cycle, introduces issues with credit, and introduces
Management inventory management models.
Ch. 14: Financial Ratios Introduces financial ratios and provides ways to interpret the ratios across time for
and Firm Performance individual companies and between competitors.
Part 5 Other Selected Finance Topics
Ch. 15: Raising Capital Introduces the life cycle of a business and how that impacts the different funding
sources of a business. Explains the process to legally end a business.
Ch. 16: Capital Structure Explains different borrowing rates based on the ability to repay and introduces optimal
capital structure through a combination of debt and equity financing.
Ch. 17: Dividends, Dividend Explains the process for paying dividends, individual preferences for different types of
Policy, and Stock Splits dividends, and how a company determines dividend policy and stock splits.
Ch. 18: International Financial Introduces the cultural, business, and political differences for a multinational business.
Management Explains exchange rates, cross-rates, and forward rates and their impact on business
profits.
xxiv
A01_BROO0417_04_SE_FM.indd 24 30/11/17 11:26 PM

Another random document with
no related content on Scribd:
The Project Gutenberg eBook of Formula for
murder
This ebook is for the use of anyone anywhere in the United States
and most other parts of the world at no cost and with almost no
restrictions whatsoever. You may copy it, give it away or re-use it
under the terms of the Project Gutenberg License included with this
ebook or online at www.gutenberg.org. If you are not located in the
United States, you will have to check the laws of the country where
you are located before using this eBook.
Title: Formula for murder
Author: Milton A. Rothman
Illustrator: Richard Kluga
Release date: October 4, 2023 [eBook #71800]
Language: English
Original publication: New York, NY: Royal Publications, Inc, 1957
Credits: Greg Weeks, Mary Meehan and the Online Distributed

Proofreading Team at http://www.pgdp.net
*** START OF THE PROJECT GUTENBERG EBOOK FORMULA

FOR MURDER ***
Formula For Murder
By LEE GREGOR
It's easy to get away with murder: just prove insanity.

But make sure you hide the method in your madness!
[Transcriber's Note: This etext was produced from

Infinity November 1957.
Extensive research did not uncover any evidence that
the U.S. copyright on this publication was renewed.]
CHAPTER I
The figure of Professor Glover slipped from the surface of the space
station and twinkled away among the stars. Jim Britten stared at it as
though he could call it back by the ferocity of his gaze. He stood
paralyzed by helplessness while the spacesuited body plummeted off
into the void, until he could no longer follow its motion towards the
dazzling sun. Seized by an uncontrollable shaking, he dropped the
radiophone antenna which he had ripped from Glover's back and
flung himself down flat upon the surface of the station, where he
clung while catching his breath.
A vast doughnut, twenty-five miles in diameter, the space station
stood with no apparent motion a thousand miles above the surface of
the earth. It floated in a sea of scintillating stars like diamonds
scattered upon the blackest velvet.
"Jim, what's the matter?" John Callahan's voice grated in Britten's
headpiece.
"Glover's line broke loose," Britten gasped. "He's gone."
"What!"
"I'm coming back in. Give me a hand."
Britten began the long crawl back to the entrance port, his nerves too
shattered to attempt it standing up. He was several yards away when
another spacesuited figure emerged from the port and helped him
stagger the rest of the way. Inside the airlock he collapsed.
In a small room within a large hospital the two men sat talking. It was
a featureless room with pale green walls, containing a desk, two soft
chairs, and a leather couch. The doctor, middle-aged, inconspicuous,
wearing glasses, a small moustache, and a gray suit, sat in one chair.
Facing him in the other chair, Jim Britten, young, lean, and visibly
depressed, wore pajamas and a hospital robe.
"You've been a sick boy," Morris Wolf told Jim Britten in a
conversational tone.
"I guess so." Britten scratched at the arm of his chair and fingered the
sleeve of his gown.
"You're coming along, though. When you arrived at the hospital a
week ago, you had to be wheeled in and fed like a baby. Now you've
pulled out of the hole and we're ready to do some real talking."
"But, doc, I don't know what happened. Honestly. One minute Glover
was starting to climb down into the ion-source chamber and the next
minute his magnet line came loose, and when I grabbed after him I
caught his phone antenna and ripped it off. Then I got the shakes and
the next thing I knew I was back on Earth in the hospital."
The psychiatrist reached for his pipe and began to fill it from a large
can on the desk.
"It's a great shock to have the person next to you snuffed out like
that," he said. "Some people can take it standing up. When you fall
apart like that we want to know the reason, so that it won't happen
again."
Britten shrugged. "What's the difference? I'll never work in a
laboratory again, let alone the Lunatron. I'll never finish my research
and I'll never get my degree."
His voice trailed off in a discouraged whisper.
Wolf watched him for a moment.
"That kind of talk is the reason you are still here. You'll work in a
laboratory again and you'll get your degree. You're still not quite well.
I'm here to help you get well."
Britten shrugged again. "Okay. Bring on the dancing girls," he said, in
a resigned tone.
There were no dancing girls, however, only a tall, blonde, squarish
doctor in a white dress, who waited for them in the therapy room. Her
cigarette made a cocky angle with the firm line of her mouth as she
made final adjustments on the bank of electronic equipment that lined
one whole wall.
"Jim, this is Dr. Heller," Wolf told him as they walked into the room.
"She will work with us in here. Now suppose you get up on this table."
The two husky attendants who were always in the background helped
Britten onto the table and strapped him down. As Wolf fastened the
electrodes to Britten's head, he said, conversationally, "In the old
days we would have just sat and talked to each other. It would have
taken months to get to first base. Now we have ways of aiding the
memory, of triggering associations, of lowering resistances to
thoughts. It makes psychotherapy a much less tedious process than it
used to be."
As he spoke, he slipped a hypodermic needle into Britten's arm.
"Now, suppose we see how much we can remember. Let's begin the
day before Glover was killed. I want you to think back to that day and
remember everything that happened, how you felt, what you thought
about. We want to go through this traumatic experience of yours, and
relate it to the elements in your life which caused such a profound
shock."
And in addition—Wolf thought bleakly to himself—a good many
people were anxious to know other things. For example: was Glover's
demise at this particular time a coincidence? The Atomic Energy
Commission, though cagy about their reasons, had given top priority
to the answers to their questions.
The strength of official interest in this case was further evidenced by
the assignment of Bill Grady and Calvin Jones as attendants to Jim
Britten. For some time Morris Wolf had wondered vaguely why two
such clean-cut and alert young men should follow the low-paid calling
of hospital attendant, until recently he had become aware that their
pay checks actually came from the U. S. Treasury by way of the
Federal Bureau of Investigation.
"Now," Wolf said, as Alma Heller switched on the tape recorder, "tell
us what you remember."
After a year of being stationed on the Lunatron, Jim Britten had the
feeling of being fed up. Lunatics they call us, he thought. Real crazy.
Looking out of the ports, he saw a black, starry space in which the
only thing that ever changed was the view of the earth, a thousand
miles below, and the moon which was sometimes on one side and
sometimes on the other. The stars were incredible jewels, and the
sun was something that one never looked at with mortal eyes.
There was bitterness in his heart as he thought of his initial thrill at
being chosen to do his thesis research on the Lunatron. He had been
an envied boy, but now, after a year, he would have given the chance
to the first bidder. But there was no way to back out, short of breaking
his contract or breaking his neck. Passage to and from Earth was too
costly to be used on weekend vacations.
Many people on Earth would have been excited by the chance to
work for two years with Professor Glover on the ten-thousand-billion-
volt proton synchrotron which they called the Lunatron. Most
physicists thought they were lucky if they could spend a few months
with the fifty-billion-volt antique at Brookhaven.
But at Brookhaven you are only a few minutes from New York. Up on
the space laboratory Britten was a year from any place, and every
day that went by made it a day less.
"Johnny, what's the first thing you're going to do when you get back to
Rhodesia?" he asked his roommate.
Britten sat, twanging half-heartedly at his guitar, while Johnny lay
undressed on his bunk, his body hard and black against the white
sheet.
"Oh, I have a good job lined up in a brand new research institute in
Salisbury."
"I don't mean that," Britten said, impatiently. Johnny was such a
serious boy. "I mean don't you think of all the fun you're going to have
when you get back to Earth? Don't you think of getting a girl friend
and living like everybody else lives?"
But Johnny's deep brown eyes remained serious, and he said,
"Coming up here has been a great opportunity to learn something so
that I will be able to do good work when I get back. Everybody down
there does not get such a chance."
Well, Britten thought, that's how it had been with him at first. Now he
could think of nothing but walking arm in arm with a pretty girl—his
girl—down the street of a big city at night, drinking in the excitement,
the feeling of being with other people among the bright lights, under a
sky that would be dark blue instead of black, that might have clouds
in it, that might even send down rain, instead of being the stark
changeless interstellar space that existed up above.
Scientists aren't supposed to have thoughts like these. But Britten
was young, he was homesick, and he was bored. A young, homesick
scientist cannot remain a solemn, dedicated, single-minded scientist.
The next day at work he absentmindedly switched on some pieces of

apparatus in the wrong order and burned out a minor piece of
electronics.
"Damn it, Britten," Professor Glover shouted at him. "Where are your
brains? Replacements are expensive up here. Time is expensive!"
Britten began shaking with rage. Words rushed to his tongue which
he choked down unsaid because Glover had the power of life or
death over his degree and these two years must not be torn out of his
life for nothing.
"I'm sorry," he said, in an unsteady voice. "I guess I'm not all here
today. It won't take long to repair the damage."
"Never mind," Glover said. "You're coming off the project, anyway."
Britten stood still. The anger roared back into his head.
"I'm coming off the project? What happens to the year I've just
spent?"
Glover suddenly seemed more embarrassed than angry.
"I'm sorry, Britten," he said, "but it's for your own good. This project
has just become classified and you'd never get a publishable thesis
out of it."
Britten stood there looking at Glover. "This is a hell of a time to tell
me," he exploded, finally. "What's become so secret about this
experiment?"
"Obviously, I can't tell you. I'm sorry, but we'll make it up to you
somehow. We'll think of something you can do while you're here, and
if necessary you can stay a little longer."
Stay longer! Outraged, Britten fled to his room. It was all he could do
to stick out the remainder of his two years.
He could not sleep that night. Little teeth of anger nibbled into his
mind, while the basic question repeated itself in endless circles. Why
had his experiment been pulled out from under him?
Fundamental experiments in high-energy particle physics were not
generally classified secret. What were they doing which had suddenly
become so important?
The general purpose of the space laboratory was to gather basic
information about the laws of nature. The optical telescopes studied
the planets as well as the farthest nebulae, unimpeded by
atmospheric disturbances. The tremendous twenty-five-mile-diameter
radiotelescope pinpointed short-wave radio vibrations from all parts of
space. The solid-state group could study the properties of matter in a
vacuum chamber of rarity unattainable anywhere on Earth.
In Jim Britten's group, known variously as the Elementary Particle
Division, the Lunatron group, or simply as the Lunatics, the topic of
investigation was the meson. A long time ago people had considered
atoms the most elementary particles. Then they found out about
protons and neutrons, which were the bricks that made up the atomic
nuclei. A little later, when scientists learned how to build atom
smashers such as the two-billion-volt proton synchrotron, they found
that they could knock mesons out of the nucleus, and they decided
that the protons and neutrons were not so simple after all.
Year after year the atom smashers had become bigger and bigger.
There came a time when they could not be built on the surface of the
Earth any longer, so a space laboratory was conceived, built around
the doughnut of the ten-thousand-billion-volt proton synchrotron.
Protons, whirling around for thousands of cycles in this vast
doughnut, eighty miles in circumference, could acquire energies
equal to those of the most powerful cosmic rays. Even mesons
shattered at this energy.
By inspecting the remnants of these broken mesons, scientists could
begin to get some idea as to the ultimate structure of matter and
energy.
Now, Jim Britten thought, what was there about this work that should
suddenly become too secret to be published? Peace had reigned on
Earth for many years, and it was once more fashionable to think of
science as being free and unbound by security regulations.
But not, apparently, here in Glover's private domain. Rephrase the
question, Britten thought. What was there about this work which had
suddenly made it desirable for Professor Glover to take Britten off the
project? Was there more to this experiment than Britten had seen up
to the present?
Sitting through the night, Britten thought and calculated, filling his
desk top with paper, feeling the frustration of a scientist who spends
day after day with the details of an experiment, pushing buttons,
reading meters, soldering wires, until he begins to lose sight of the
ultimate aim of the project.
As he fell asleep, long towards morning, his anger was still at a
furious temperature, filling his mind with dreams of a tormented,
violent nature, which he forgot promptly upon awakening.
Professor Glover stopped by to see him as he ate a late breakfast.

"We have a job to do today," Glover said, his voice tinged with an
impersonal annoyance that was not directed at Britten.
Britten stared up at Glover with a hostility that made no impression
upon the scientist.
"The ion source has gone bad and has to be replaced," Glover
continued. "The spacesuits are being readied in the airlock."
"Why us?" Britten complained. "What's the matter with the
maintenance crew?"
Glover's frown deepened. "They're busy with other things. You're free
for the moment, and so am I."
Then his face cleared, and he slapped Britten on the back.
"Come on, fella, snap out of it. It'll do us both good to put on the suits
and get out in free space."
Britten uttered grumbling noises about "a guy can't even finish a cup
of coffee," and followed Glover out to the maintenance lock nearest
the ion source.
As he climbed out of the airlock, there again came the sensation of
vertigo which he felt every time he stood on this island suspended in
nothingness. The circumference of the doughnut stretched its great
arc away from him in both directions, while twelve miles away, at the
center of the circle, was the spherical shape of the radiotelescope
receiver. The long, slender girders which bound the station together
had a fragile, spidery appearance.
Britten and Glover walked clumsily to the linear accelerator which
projected one-billion-volt protons into the initial lap of their long
journey around the doughnut. At the far end of the hundred-foot tube,
within a shielded chamber, was the glass bottle of the ion source.
Normally, a brilliant crimson flame glowed within this bottle as
numberless protons were stripped from their electrons, to be hurled
down the accelerator tube. Now there was nothing but the blackened,
dead glass.
As they approached the chamber that surrounded the ion source,
Britten found that the resentment left over from the previous night had
a new object upon which to fasten. Why should he be doing the work
that belonged to the technicians? In his anger he lost sight of the fact
that Professor Glover was out there doing the same thing.
Damned slave labor, he thought. A PhD candidate was at the bottom
of the heap, the lowest form of existence, pushed around by
everybody else. Glover thought he was being clever, pushing him off
the project, making excuses about security, when probably his aim
was to keep for himself the Nobel Prize that the experiment was
going to receive some day. Thought he could keep his poor stupid
student in the dark about the outcome of the experiment—but the
poor student wasn't as stupid as he thought.
Glover reached the hatch that opened into the ion-source chamber
and started undoing the fastenings. Suddenly he turned and stared at
Britten.
"Where's the new ion source?" he snapped. "Don't tell me you left it in
the airlock!"
Britten stammered wordlessly, shocked out of his reverie.
"Well, of all the stupid—Go back and get it! I'll remove the old
source."
Glover turned his back and continued to unfasten the hatch.
Rage came into full bloom instantly. Without an instant's thought,
Britten reached out both hands, wrenched the antenna rod from
Glover's back, tore his anchoring lines from their snaps, and pushed
the struggling body out into space, where it soon dwindled away into
a tiny speck.
CHAPTER II
Dr. Morris Wolf leaned back in his chair after Jim Britten was
wheeled, asleep, from the therapy room. In a random fashion he let
his mind wander over the story he had just heard, savoring not only
the facts, but the feelings behind them and the intuitions which they
built up in his own mind.
"Well, Alma, what do you think?" he said, swiveling his chair to look at
the other doctor across his desk.
She hesitated. "The story seems satisfactory, up to a point. That is,
we've broken through the memory block and have determined that
Glover's death was not really an accident—which of course we
suspected all along. And we have a motive—of a sort."
Wolf sighed. "Yes—the motive. The boy feels that Glover is cutting
him out of the credit for an important experiment, so in a burst of
anger he disposes of the professor. There are just two things that
bother me about that. Look."
He switched on his desk projector and ran through the microfilm card
of Britten's record until he came to the examinations which Britten
had taken to get the post on the space station.
"Here we have the standard Jameson test for paranoid personality.
Obviously an important item in an examination of this sort. You
wouldn't send even an incipient paranoid into close quarters with a
group of people for two years. And so in the case of Jim Britten the
Jameson test gives a negative result—no evidence of any paranoia,
and in fact no evidence of any neurosis except the drive to do
research."
Alma Heller lit a cigarette thoughtfully. "I see. No paranoia predicted,
yet the story he tells us now is a typical textbook example of
persecution psychosis. Of course...." She paused for a moment. "He
might be making up this story to hide his real motive."
Wolf shook his head vigorously. "No dice. Not under deep therapy. He
has to tell us the truth."
"So we have a paradox." Dr. Heller's methodical mind ticked off the
possibilities systematically. "Either the early exam was wrong, in
which case he was paranoid all the time, or the exam was right and
he turned paranoid later. Neither of which things are supposed to
happen."
"Or," Wolf presented the third possibility, "he is withholding
information while in deep therapy. Also something that is not
supposed to happen. So this leads us to the second point that
bothers me. Britten talks about sitting up all night trying to figure out
what his experiment was leading to. Yet he never mentioned what
conclusion he came to. Apparently this is a crucial point which is
buried in his mind so deeply that we didn't touch it with our first try."
"Could be." Alma Heller seemed skeptical. "There are a lot of very iffy
questions running around in my head which could be settled simply if
we could get some concrete information. Do you think you could buzz
the AEC and ask them why Britten's project became classified? That
would settle a number of obscure points and at the same time give us
a handle with which to pry Jim open a little more."
Wolf shrugged. "We might get our heads chopped off, but we can try.
My contact at the AEC is Charles Wilford. He's the one who was so
anxious to know what Britten did the night of the 15th. Maybe he can
trade us some information."
Wolf pushed the button for an outside line and asked for the Atomic
Energy Commission, extension 5972. Wilford's image appeared on
the phone screen, the picture of a large, powerful face with a great
mass of gray hair. Wolf knew him only as someone high up in the
personnel department of the AEC.
"Good morning, Dr. Wolf," he said. "Find anything out?"
Wolf shrugged. "Britten killed Glover, if that's what you want to know.
But why? That's what really interests us. You can tell us one thing
that will help us find out. And that is—did Glover really take Britten off
his project for security reasons? If so, what were those reasons?"
Wilford's face froze slightly. "Obviously, Dr. Wolf, if security were
involved, it is a matter I cannot discuss with you, especially over the
phone. You may write me a full, confidential report, and we will
consider what is to be done."
Wolf cut the connection in exasperation and pushed his chair away
from the desk.
"Well, there's a bureaucratic mind for you!" he exclaimed. "He wants
a problem solved and then refuses to give you the information
necessary to solve the problem."
Slowly he filled his thinking pipe and lit it. "The hell with them," he
said, finally. "We'll see this thing through ourselves. We'll have
another session with Britten tomorrow and get to the bottom of his
story."
"I hope," Alma Heller added, "that there is a bottom to be found."
As the attendants strapped Jim Britten on the table, the next morning,
Dr. Wolf thought how often the formula for murder repeated itself in
this psychiatric age. Knock off the victim, prepare a real sick motive,
and be sure you'll go to a hospital for treatment, to be released after a
"cure." Under these circumstances the psychiatrist must become a
detective—required to dig deep for the real motive, which generally
resolved itself into the classical ones to love-hate-money.
From his point of view as a doctor, any murder was a sick act, but the
authorities were interested only in the legal question of whether the
murderer knew what he was doing, and why.
In this case, the question of the motive had a fascination to Wolf even
from a purely academic point of view.
"Let's face it," he told Britten. "We both know you killed Glover. You've
heard the play-back of yesterday's session, so you can no longer fall
back on the old excuse of 'everything went black and when I came to
he was dead.' Nobody gets away with that any more."
Britten maintained a sullen silence.
"Just for the record," Wolf continued, "I want to fill in an important gap
in the story. You told us that you sat up half the night figuring out what
discovery your experiment was aiming at, but you glossed over what
you actually decided at that time. Suppose we return to that night and
go over the story once more in a little more detail."
Britten continued his silence, and beyond a single hostile glare from
beneath half-lidded eyes, gave no expression of emotion. Wolf, as he
checked the connections and slipped Britten the hypodermic, was
thankful that his technique did not depend upon a friendly rapport
between doctor and patient.
Presently Britten began to talk.
"You're being taken off the project because it has become classified
secret," Glover had said, and at a blow an entire year of work had
been struck out from beneath Jim Britten's feet. As he sat in his room,
he picked raucous chords on his guitar and allowed the anger to
wash deliciously through his consciousness.
Not for a minute did he believe the security classification story. He
knew that the project was beginning to strike gold in an unexpected
direction, and he knew what that direction was.
There was a discovery in the making. A discovery so precious that for
every diamondlike star out there beyond the porthole there could be a
bucket of diamonds accruing to the discoverer.
And Glover was after the profit himself, pushing Britten out of the way.
This was the thought that clawed little furrows in his mind. Then,
pushing their way into those little furrows came other thoughts such
as: "Suppose Glover should have an accident. I'd have his
notebooks, and...."
Then he began thinking of returning to Earth, and the vision of
spending a life dedicated to research in a laboratory became clouded
over; instead there arose a picture of himself riding in an expensive
car, with beautiful, expensive women.
He ripped a full chord out of his guitar and began to sing.
In the morning, Glover stopped at Britten's breakfast table, annoyed
with word of the ion-source burnout.
"Now how are we going to get it fixed?" he demanded, in
exasperation. "Gamp cut his hand yesterday, Williams had his
appendix out a week ago, Langsdorf is busy with the kicksorter, and
—"
"Why don't we do it ourselves?" Britten interrupted, eagerly. "It'll do us
good to get into spacesuits again."
It would do Jim Britten some good, he thought to himself. If genius
was measured by the ability to spot an opportunity, then his success
was assured. The plan of action was in his mind, completely formed
in that instant.
On the outer skin of the satellite, the two of them alone, any one of a
number of accidents could occur. Holding them down against the pull
of centrifugal force would be only the magnetic shoes and a thin line.
From that beginning, his mind went precisely to its conclusion.
"Alma," Morris Wolf said, "I'm beginning to feel very uneasy. What do
we have here?"
He poured coffee into the cups on his desk.
Alma Heller looked at him shrewdly, and stirred sugar into her cup.
"I think we have a bear by the tail," she said. "We seem to peel off
layers of Jim Britten's mind, and each time there's something different
underneath. Every time he tells his story there is something new and
contradictory in it. And there is no clue as to whether he is getting
nearer or farther from the truth."

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(Original PDF) Financial Management:

Core Concepts 4th Edition by Raymond

RAYMOND M. BROOKS is Emeritus

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PART 1 Fundamental Concepts and Basic Tools of Finance 1

PART 2 Valuing Stocks and Bonds and Understanding Risk

PART 3 Capital Budgeting 257

PART 4 Financial Planning and Evaluating Performance 357

PART 5 Other Selected Finance Topics 461

APPENDIX 1 Future Value Interest Factors 589

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The First Component: Cash Flow from

1.9 Corporate Governance and Business

of 2008 19 3.1 Future Value and Compounding Interest 56

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Interest and Principal at Maturity of Loan

5 Interest Rates 115

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Key Terms 173 Advanced Problems for Spreadsheet

7 Stocks and Stock Valuation 181

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Opportunity Costs 302

9 Capital Budgeting Decision Models 258

Sales: Your Product = Your Customer’s

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Prepping for Exams 347 Average Payment Cycle 392

12 Forecasting and Short-Term ­Financial

Advanced Problems for Spreadsheet

13 Working Capital Management 387

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Profitability Ratios 437 The Marketing Process: Road Show 479

PART 5 16 Capital Structure 495

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Prepping for Exams 519

17 Dividends, Dividend Policy, and Stock

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A01_BROO0417_04_SE_FM.indd 22 30/11/17 10:33 AM

PART 2 Valuing Stocks and Bonds and Understanding Risk

12 Forecasting and Short-Term Financial

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