Finance: Applications and Theory (Mcgraw Hill / Irwin Series in Finance, Insurance and Real Estate) 4th Edition, (Ebook PDF

Finance: Applications and Theory
(Mcgraw hill / Irwin Series in Finance,

Insurance and Real Estate) 4th Edition,
(Ebook PDF)
Visit to download the full and correct content document:
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es-in-finance-insurance-and-real-estate-4th-edition-ebook-pdf/
John Nofsinger Professor and William H. Seward Endowed Chair of International
Finance at the University of Alaska Anchorage. He earned his BS degree in electrical
engineering from Washington State University, his MBA degree from Chapman Univer-
sity, and his PhD degree in finance from Washington State University. Dr. Nofsinger has
written over 50 articles in the areas of investments, corporate finance, and behavioral
finance. These papers have appeared in the scholarly journals Journal of Finance, Jour-
nal of Business, Journal of Financial and Quantitative Analysis, Financial Management,
Journal of Corporate Finance, Journal of Banking and Finance, and Journal of Behav-
ioral Decision Making, among others. Dr. Nofsinger has also authored (or coauthored)
ten trade books, scholarly books, and textbooks that have been translated into eleven dif-
ferent languages. The most prominent of these books is the industry book, The Psychol-
ogy of Investing. Dr. Nofsinger is a leading expert in behavioral finance and is a frequent
speaker on this topic at industry conferences, universities, and academic conferences. He
is frequently quoted or appears in the financial media, including The Wall Street Journal,
Financial Times, Fortune, Bloomberg Business Week, Smart Money, The Washington
Post, and CNBC, and other media from The Dolans to The Street.com.

about the authors vii
a note from the authors
“There is a lot to cover in this course so I focus on the core concepts, theories, and
problems.”
“I like to teach the course by using examples from their own individual lives.”
“My students come into this course with varying levels of math skills.”
How many of these quotes might you have said while teaching the undergraduate corpo-
rate finance course? Our many years of teaching certainly reflect such sentiments, and as
we prepared to write this book, we conducted many market research studies that confirm
just how much these statements—or ones similar—are common across the country. This
critical course covers so many crucial topics that instructors need to focus on core ideas
to ensure that students are getting the preparation they need for future classes—and for
their lives beyond college.
We did not set out to write this book to change the way finance is taught, but rather
to parallel and support the way that instructors from across the country currently teach
finance. Well over 600 instructors teaching this course have shared their class experi-
ences and ideas via a variety of research methods that we used to develop the framework
for this text. We are excited to have authored a book that we think you will find fits your
classroom style perfectly.
KEY THEMES
This book’s framework emphasizes three themes. See the next section in this preface for
a description of features in our book that support these themes.
• Finance is about connecting core concepts. We all struggle with fitting so
many topics into this course, so this text strives to make it easier for you by
getting back to the core concepts, key research, and current topics. We realize
that today’s students expect to learn more in class from lectures than in closely
studying their textbooks, so we’ve created brief chapters that clearly lead stu-
dents to crucial material that they need to review if they are to understand how
to approach core financial concepts. The text is also organized around learning
goals, making it easier for you to prep your course and for students to study the
right topics.
• Finance can be taught using a personal perspective. Most long-term finance
instructors have often heard students ask “How is this course relevant to me?”
on the first day of class. We no longer teach classes dedicated solely to finance
majors; many of us now must teach the first finance course to a mix of business
majors. We need to give finance majors the rigor they need while not overwhelm-
ing class members from other majors. For years, instructors have used individual
examples to help teach these concepts, but this is the first text to integrate this per-
sonal way of teaching into the chapters.
• Finance focuses on solving problems and decision making. This isn’t to say that
concepts and theories aren’t important, but students will typically need to solve
some kind of mathematical problem—or at least understand the impact of different
viii
numerical scenarios—to make the right decision on common finance issues. If
you, as an instructor, either assign problems for homework or create exams made
up almost entirely of mathematical material, you understand the need for good
problems (and plenty of them). You also understand from experience the number
of office hours you spend tutoring students and grading homework. Students have
different learning styles, and this text aims to address that challenge to allow you
more time in class to get through the critical topics.
CHANGES IN THE FOURTH EDITION

Based on feedback from users and reviewers, we undertook an ambitious revision in order
to make the book follow your teaching strategy even more closely. Below are the changes
we made for this fourth edition, broken out by chapter.
Overall
• Simplified figures where appropriate and added captions to emphasize the main
“takeaways”
• Updated data, company names, and scenarios to reflect latest available data and
real-world changes
• Cross-referenced numbered examples with similar end-of-chapter problems and
self-test problems so students can easily model their homework
• Updated the numbers in the end-of-chapter problems to provide variety and limit
the transfer of answers from previous classes
Chapter 1: Introduction to Financial Management
• Updated the Personal Application with information on firms that have filed for
bankruptcy more recently
• Changed Learning Goal 1-9 to address the ramifications of China’s slowdown and
the drop in the price of oil
• Revised the Finance at Work—Markets box to discuss quantitative easing in the
United States and around the world
• Revised the Finance at Work—Corporate box to cover the proposed merger of AB
InBev and SABMiller
• Updated the data in Example 1-2 on executive compensation
• Replaced Section 1.7 on the financial crisis with a new Section 1.7: Big Picture
Environment, including discussions of the ramifications of plummeting oil prices
and China’s economic slowdown
• Revised the Research It! exercise to address environment, society,
and governance
• Changed the Mini-Case problem to cover Volkswagen’s emission test
cheating
Chapter 2: Reviewing Financial Statements
• Added a discussion of difference between EBIT and operating income

• Included extended definitions of net sales, cost of goods sold, and operating
expenses
• Added a discussion of the interpretation of a cash-based income statement
• Added a new Finance at Work box
• Added an Excel solution for the Integrated Mini-Case

a note from the authors ix
Chapter 3: Analyzing Financial Statements
• Added more discussion of debt ratios

Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
• Updated the data in Figure 4.5 on gold prices

• Added equation functions to Table 4.2 and Table 4.4
• Updated the gold return data in the Mini-Case
• Revised the data for the end-of-chapter Excel problem
• Added a new end-of-chapter Excel problem
Chapter 5: Time Value of Money 2: Analyzing Annuity Cash Flows
• Revised the chapter introduction to discuss Boeing

• Added equation functions to Tables 5.1, 5.2, 5.5, and 5.6
• Updated the present value of multiple annuities example to discuss the new David
Price contract with the Boston Red Sox
• Changed the Finance at Work—Behavioral box to address the record Powerball
jackpot of $1.5 billion on January 12, 2016
Chapter 6: Understanding Financial Markets and Institutions
• Updated all figures, tables, and values in the body of the chapter
• Added a section on the loanable funds theory/determination of equilibrium interest
rates
• Added new end-of-chapter problems
• Decreased the coverage of the financial crisis (detailed information is available in
the Web Appendix for Chapter 6 available in Connect or at mhhe.com/Cornett4e)
Chapter 7: Valuing Bonds
• Updated the Personal Application with new data

• Updated Figures 7.1–7.5 on bond issuance, interest rate path, yield to maturities,
new bond quotes, and a summary of the bond market
• Added equation functions to Tables 7.3 and 7.5
Chapter 8: Valuing Stocks
• Updated all table and figure values in the body of the chapter
• Updated the coverage of the stock market exchange in Section 8.2 to discuss the
changes that have occurred in the NYSE and elsewhere
• Revised Example 8-1 to include new Coca-Cola data
• Updated Example 8-4 with new P/E data for Caterpillar
• Updated the data in the Mini-Case problem
x a note from the authors

Chapter 9: Characterizing Risk and Return
• Revised the example that runs throughout the chapter to discuss Staples
• Updated all table and figure values in the body of the chapter
• Added equation functions to Table 9.3 and Table 9.5
• Updated Example 9-2 to include new Mattel data
• Updated the data in the Finance at Work—Markets box
• Updated the data in the Mini-Case problem
Chapter 10: Estimating Risk and Return
• Updated values and data in Tables 10.1–10.4

• Changed the Mini-Case to cover finding Disney’s beta
Chapter 11: Calculating the Cost of Capital
• Clarified and expanded the discussion of use of market values versus book values
in the calculation of WACC
• Expanded the discussion of when to use CAPM versus the constant-growth model
when estimating the cost of equity
• Expanded the discussion of computation of marginal tax rate for WACC
• Enhanced the discussion of use of firm versus project WACCs
• Enhanced the discussion of appropriateness of divisional WACCs
Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
• Clarified the definition of salvage value

• Expanded the discussion of substitutionary and complementary effects
• Enhanced the discussion of income tax shield from a project having taxable
losses
• Enhanced the discussion of NWC changes “leading” changes in sales
• Expanded the discussion of the half-year convention in depreciation
Chapter 13: Weighing Net Present Value and Other Capital Budgeting Criteria
• Clarified the discussion of the goal of capital budgeting decision rules and the
differing environments of investment and capital budgeting decisions
• Expanded the discussion of why using rate-based and time-based decision
statistics to choose across projects can be misleading with regards to NPV
Chapter 14: Working Capital Management and Policies
• Expanded the discussion of the rationale for NWC and the tradeoffs inherent in
having too little or too much
• Refined discussion of cash flows vs. the cash account
Chapter 15: Financial Planning and Forecasting
• Clarified the discussion of deseasonalizing sales

a note from the authors xi
Chapter 16: Assessing Long-Term Debt, Equity, and Capital Structure
• Refined the discussion of active versus passive capital structure changes

• Expanded the discussion of effects of no-taxation and no-bankruptcy assumptions
of M&M’s “perfect world” on optimal choice of capital structure
• Expanded the discussion of the effects of financial distress on capital structure
choices
Chapter 17: Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts
• Expanded the discussion of information effect on dividend policy

• Updated the example of real-world dividend policies
Chapter 18: Issuing Capital and the Investment Banking Process
• Updated all figures, tables, and values in the body of the chapter
• Added additional coverage of small business lending
• Added an Excel solution for the Mini-Case
Chapter 19: International Corporate Finance
• Revised the chapter introduction to include new data about Starbucks

• Updated all table and figure values and data in the body of the chapter
• Updated Example 9-1 to include new exchange rate data
• Revised the Mini-Case with new exchange rate data
Chapter 20: Mergers and Acquisitions and Financial Distress
• Added Herfindahl-Hirschman Index (HHI)

• Increased discussion of debtor in possession and cramdown
• New Finance at Work box on American Airline bankruptcy
• Added M&A calculation in Excel format
• Added new end-of-chapter problems
xii a note from the authors

value computations in the
previous chapter. Those
TVM equations covered moving a sin-
W ments through 2033 on money it
borrowed. The Boeing Company
(ticker: BA) paid a $0.42 per share
and semiannually for company debt).
How are we to value these payments
into common or comparable terms?
Unique Features
gle cash flow from one point in time to quarterly dividend to stockholders In this chapter, we illustrate how to
another. While this circumstance does for three straight years until 2012, value multiple cash flows over time,
describe some problems that busi- when it switched to a $0.44 dividend. including equal and uneven payments,
nesses and individuals face, most debt These examples require payments and how to incorporate different com-
and investment applications of time (and compounding) over different pounding frequencies.
CONNECTING CORE CONCEPTS value of money feature multiple cash
flows. In fact, most situations require
many equal payments over time. Since
these situations require a bit more Learning Goals
complicated analysis, this chapter con-
tinues the TVM topic for applications LG5-1 Compound multiple cash LG5-7 Explain the impact of com-
Learning Goals appear at thethat
beginning
require manyofequal
eachpayments
chapter over flows to the future. pound frequency and the dif-
ference between the annual
time. For example, car loans and home LG5-2 Compute the future value of
and are indicated throughout the text next to head- frequent, level cash flows. percentage rate and the effec-
mortgage loans require the borrower tive annual rate.
ings, examples, summary, andtoend-of-chapter
make the same monthlyproblems
payment LG5-3 Discount multiple cash flows
LG5-8 Compute the interest rate of
to the present.
to which they relate. These outcomes
for many months help instructors
or years. People save
LG5-4 Compute the present value
annuity payments.
for the future through monthly con-
structure their classes and assign readings and home- of an annuity. LG5-9 Compute payments and amor-
tributions to their pension portfolios. tization schedules for car and
work. The accompanying test bank
People provides
in retirement mustinstruc-
convert their
LG5-5 Figure cash flows and pres-
ent value of a perpetuity.
mortgage loans.
tors with hundreds of questions organized

savings by level
into monthly income.and
Com- LG5-6 Adjust values for beginning-
LG5-10 Calculate the number of pay-
ments on a loan.
panies also make regular payments.
learning goals to make customization even easier! of-period annuity payments.
Johnson & Johnson (ticker: JNJ) will
141
Confirming Pages
cor91411_ch05_140-177.indd 141 01/20/17 03:32 PM
Confirming Pages
finance at work markets

JP MORGAN ’S $2 BILLION BLUNDER
JP Morgan Chase & Co. is reeling after a huge trading bet basket, or index, of companies.” In April of 2012, these pro- Finance at Work boxes highlight current events
Per (common) share data:
Earnings per share (EPS) $ 6.335
and hot topics noted in the news. The Want to Know

backfired and left the bank with at least $2 billion in losses tection costs began to go up, which further contributed to the
Dividends per share (DPS) $ 1.975
from the bad trade. This may be the end of chief executive bank’s losses.
Book value per share (BVPS) $19.745
James Dimon’s run as the so-called “King of Wall Street.” The According to JP Morgan Chase company filings, Mr. Iksil’s
bank’s Chief Investment Office (CIO), responsible for manag-
ing the New York company’s risk, placed a series of risky bets
group had approximately $350 billion in investment securi-
ties, about 15% of the bank’s total assets, on December 31,
More? feature in each box contains suggested words
Market value (price) per share (MVPS) $26.850
to use for searching the Internet Care, Inc. for updates.

Industry These
and trades. In an article published last month, The Wall Street 2011. Mr. Dimon said the bank has an extensive review under Garners’ Platoon Mental Health
Journal reported that “large positions taken in that office by way of what went wrong. “These were grievous mistakes, Confirming
features are great to use for class discussion or as

a trader nicknamed ‘the London whale’ had roiled a sector of they were self-inflicted, we were accountable and we hap- Current ratio 2.00 times
the debt markets. The bank, betting on a continued economic pened to violate our own standards and principles by how we Quick ratio 1.20 times
recovery with a complex web of trades tied to the values of want to operate the company. This is not how we want to run
homework assignments.
Cash ratio 0.25 times
corporate bonds, was hit hard when prices moved against it a business.”
Inventory turnover (sales) 2.50 times
starting last month, causing losses in many of its derivatives Mr. Dimon held a conference call with investors and ana-
Days sales in inventory (sales) 146.00 days
positions. The losses occurred while J.P. Morgan tried to scale lysts on May 10, stating, “In hindsight, the . . . strategy was
Average collection period 91.00 days
back that trade.” flawed, complex, poorly reviewed, poorly executed, and
In April of 2012, The Wall Street Journal reported that poorly monitored. The portfolio has proven to be riskier, Average payment period 100.00 days
$205m − $111m
investors and hedge funds were trying to take advantage more volatile and less effective . . . than we thought.” Dimon Fixed asset
Quick ratio (acid-test ratio) = ________________ = 0.76 times Industry1.25
turnover times = 0.50 times
average
Sales to working capital $123m 4.00 times
of trades made by Chase’s London whale, Bruno Iksil, who resolves, “We will learn from it, we will fix it, we will move
worked out of the CIO, by making bets in the market on credit on, hopefully in the end, it will make us a better company.” $24m
_______
Cash ratio =
Total asset turnover = 0.20 times 0.50 times = 0.15 times
Industry average
default swaps (CDSs). The CIO group previously had stop- Though JP Morgan Chase came through the financial crisis Capital intensity $123m 2.00 times
gaps in place to protect and prevent the company from sig- better off than many other financial institutions, this trading Debt ratio 50.00%on its balance
All three liquidity ratios show that DPH Tree Farm, Inc., has more liquidity
nificant losses during periods of downturn in the economy. loss certainly tarnishes their reputation. Mr. Dimon reports that Debt-to-equity 1.00 an
times
sheet than the industry average (we discuss the process used to develop industry aver-
However, the Journal reports that earlier in 2012, “it began the loss is “slightly more than $2 billion” in the second quarter Equity multiplier (common
reducing that position, [taking] a bullish stance on the finan- of this year. age in section 3.8). equity) 2.00assets
Thus, DPH Tree Farm has more cash and other liquid times (or current
Times interestavailable
assets) earned to pay its bills (or current liabilities) as they come due7.25
thantimes
does the aver-
cial health of certain companies and selling protection that
Sources: Dan Fitzpatrick, Gregory Zuckerman, and Liz Rappaport, Cashage
coverage
firm in the tree farm industry. 8.00 times
would compensate buyers if those companies defaulted on “J.P. Morgan’s $2 Billion Blunder,” The Wall Street Journal Online, May 11,
debts. Mr. Iksil was a heavy seller of CDS contracts tied to a 2012. JP Morgan Chase & Co. Business Update Call, May 10, 2012.
Profit margin 18.75%
GrossSimilar to Problems 3-1, 3-2, Self-Test Problem 1
profit margin 49.16%
Key Words to Search for Updates: JPMorgan, London whale, derivative Operating profit margin 42.02%
! Want to Know More? trading losses Basic earnings power 19.90%
ROA 9.38%
ROE 18.75%
Dividend payout 35.00%
Derivative securities traders can be either users of derivative contracts (for hedging TIME OUT
Market-to-book ratio 1.30 times
and other purposes) or dealers (such as banks) that act as counterparties in customer PE ratio 4.10 times
3-1 What are the three major liquidity ratios used in evaluating financial statements?
trades for fees. An example of hedging involves commodities such as corn, wheat, or soy-
Time Out boxes, featured at the end of sections, test stu-
beans. For example, suppose you run a flour mill and will need to buy either soft wheat 3-2 How do the three major liquidity ratios used in evaluating financial statements differ?
Does a firm generally want to have high or low liquidity ratios? Why?
(Chicago) or hard red winter wheat (Kansas City) in the future. If you are concerned 3-3
dents’ understanding of the key terms and core concepts

that the price of wheat will rise, you might lock in a price today to meet your needs six
months from now by buying wheat futures on a commodities exchange. If you are correct
just presented. Answers to the Time Out questions appear
and wheat prices rise over the six months, you may purchase the wheat by closing out
3.2
ANSWERS TO TIME OUT
∙ Asset Management Ratios LG3-2
your futures positions, buying the wheat at the futures price rather than the higher market
at the end of each chapter. price. Likewise, if you know that you will be delivering a large shipment to, say, Europe,
3-1
Asset
The three most commonly used liquidity ratios are the current ratio, the quick (or acid-
test)management ratios
ratio, and the cash measure how efficiently a firm uses its assets (inventory,
ratio. asset managemen
in three months, you might take an offsetting position in euro futures contracts to lock accounts receivable, and fixed assets), as well as how efficiently the firm manages its ratios
in the exchange rate between the dollar and the euro as it stands today—and (you hope) 3-2 The current ratio measures the dollars of current assets available to pay each dollar of
accounts
currentpayable.
liabilities.The
Thespecific ratios
quick ratio allowthe
measures managers
dollars ofand investors
more to evaluate
liquid assets whether a
(cash and Measure how efficien
eliminate foreign exchange risk from the transaction.
firmmarketable
is holdingsecurities
a reasonable amountreceivable)
and accounts of each type of asset
available andeach
to pay whether
dollarmanagement
of current uses firm uses its assets (i
Derivative securities markets are the newest—and potentially the riskiest—of the tory, accounts receiv
eachliabilities.
type of Theasset to ratio
cash effectively
measures generate sales.
the dollars The and
of cash most frequently
marketable used asset
securities avail-manage-
financial security markets. Losses associated with off-balance-sheet mortgage-backed and fixed assets), as
mentableratios areeach
to pay listed in the
dollar following
of current sections, grouped by type of asset.
liabilities its accounts payable
securities created and held by FIs were at the very heart of the financial crisis. Signs of
significant problems in the U.S. economy first appeared in late 2006 and early 2007 when 3-3 The more liquid assets a firm holds, the less likely it is that the firm will experience
home prices plummeted and defaults began to affect the mortgage lending industry as a financial distress. Thus, the higher the liquidity ratios, the less liquidity risk a firm has.
Inventory Management
But liquid assets generate little, if any, profits for the firm. In contrast, fixed assets are
whole, as well as other parts of the economy noticeably. Mortgage delinquencies, particu-
larly on subprime mortgages, surged in the last quarter of 2006 through 2008 as home- As they decide
illiquid, the optimal
but generate inventory
revenue level
for the firm. to hold
Thus, on the
extremely highbalance sheet,
levels of managers
liquidity guard must
against
consider liquidity
the crises
trade-off but at the
between thecost of lower returns
advantages on assets.
of holding sufficient levels of inventory to
owners who had stretched themselves to buy or refinance a home in the early 2000s fell
keepThe
3-4 themajor
production process going
asset management versus
ratios theinventory
are the costs ofturnover,
holdingthelarge amounts
days’ sales inof inventory.
186 part four Valuing of Bonds and Stocks
Twoinventory,
frequentlytheused ratios
accounts are the inventory
receivable turnover, theturnover
averageand days’ sales
collection periodin(ACP),
inventory.
the
accounts payable turnover, the average payment period (APP), the fixed asset turn-
Sales orthecost of goods sold
______________________
Inventory
over, the salesturnover = capital,
to working total asset turnover, and the capital intensity. (3-4)
Inventory 107
The inventory turnover ratio measures the number of dollars of sales produced per dollar
cor91411_ch06_178-225.indd 186 01/20/17 03:45 PM
of inventory. Cost of goods sold is used in the numerator when managers want to empha-
size that inventory is listed on the balance sheet at cost, that is, the cost of sales generated
per dollar of inventory.
cor91411_ch03_072-109.indd 107 01/13/17 12:29 PM
Inventory × 365 days
Days’ sales in inventory = ______________________
Sales or cost of goods sold
365 days
= ________________
Inventory turnover
xiii
(3-5)
The days’ sales in inventory ratio measures the number of days that inventory is held before
the final product is sold.
In general, a firm wants to produce a high level of sales per dollar of inventory; that is, it
Confirming Pages
Research It! projects, perfect for individual assign-

ments or as group projects, are included at the end of research it! Analyzing Financial Statements
each chapter and require students to search the Web for Go to the website of Wal-Mart Stores, Inc., at www.walmartstores.com and get the latest
financial statements from the annual report using the following steps.
data and other information to answer the questions. Click on “Investors.” Click on “Annual Reports.” Click on the most recent date. This
will bring the file onto your computer that contains the relevant data.
Confirming Pages
Using the most recent balance sheet and income statement, calculate the financial
ratios for the firm, including the internal and sustainable growth rates.
PART TWO integrated mini-case Working with Financial Statements

Listed are the 2018 financial statements for Garners’ Platoon Mental Health Care, Inc.
Spread the balance sheet and income statement. Calculate the financial ratios for the
firm, including the internal and sustainable growth rates. Using the DuPont system of
3
analysis and the industry ratios reported, evaluate the performance of the firm.
Analyzing Financial GARNERS’ PLATOON MENTAL HEALTH CARE, INC.

Balance Sheet as of December 31, 2018
(in millions of dollars)
Statements
PERSONAL PERSPECTIVE
Assets
Current assets
Cash and marketable securities
Accounts receivable
$ 421
1,109
Liabilities and Equity
Current liabilities
Accrued wages and taxes
Accounts payable
$ 316
867
Inventory 1,760 Notes payable 872
Total $ 3,290 Total $ 2,055
Viewpoints, a unique feature presented at

Fixed assets Long-term debt $ 3,090
Gross plant and equipment $ 5,812 Stockholders’ equity
viewpoints
Less: Depreciation 840 Preferred stock (30 million
the beginning of each chapter, pose both a

Net plant and equipment $ 4,972
shares)
Common stock and paid-in
$ 60
Business Application business and a personal problem using key

Other long-term assets 892
surplus (200 million shares)
Retained earnings
637
3,312
The managers of DPH Tree Farm, Inc., have released public statements that the firm’s performance surpasses that of other
firms in the industry. They cite the firm’s liquidity and asset management positions as particularly strong. DPH’s superior
Total
Total assets
chapter topics. These Viewpoints scenarios
$ 5,864
$ 9,154
Total
Total liabilities and equity
$ 4,009
$ 9,154
performance in these areas has resulted in superior overall returns for their stockholders. What are the key financial ratios immediately set a context for the chapter and
GARNERS’ PLATOON MENTAL HEALTH CARE, INC.
that DPH Tree Farm, Inc., needs to calculate and evaluate in order to justify these statements? (See the solution at the end
of the chapter.) allow
Income instructors toDecember
Statement for Year Ending take 31,class
2018 discussion in
Personal Application Net sales multiple directions to make key concepts $ 4,980
clearer. Viewpoints Revisited at the end of

Less: Cost of goods sold 2,246
Chris Ryan is looking to invest in DPH Tree Farm, Inc. Chris has the most recent set of financial statements from DPH Tree Gross profits $ 2,734
the chapter show how these problems are

Farm’s annual report but is not sure how to evaluate them or measure the firm’s performance relative to other firms in the Less: Other operating expenses 125
industry. What are the financial ratios with which Chris should measure the performance of DPH Tree Farm, Inc.? How can Chris Earnings before interest, taxes, depreciation, and amortization (EBITDA) $ 2,609
solved. Viewpoints Extended leverage a

Less: Depreciation 200
use these ratios to evaluate the firm’s performance? (See the solution at the end of the chapter.)
Earnings before interest and taxes (EBIT) $ 2,409
Less: Interest 315
So how can these financial

Less: Taxes
variety of media to provide an extended look
Earnings before taxes (EBT) $ 2,094
764
at each personal application raised. These

ratios work in your life?
Net income $ 1,327
Less: Preferred stock dividends $ 60
are accessible online in Connect or at mhhe.
Net income available to common stockholders
Less: Common stock dividends
$ 1,297
395
com/Cornett4e.
Addition to retained earnings $ 872
106 (continued)
cor91411_ch03_072-109.indd 106 01/13/17 12:29 PM
Confirming Pages
PROBLEM-SOLVING AND LEARNING STYLES
Numbered examples in each chapter feature vari- LG4-3

EXAMPLE 4-1
ous
72 perspectives, so students gain practice in solving
Graduation Celebration Loan For interactive versions
problems in both business and individual contexts.

of this example, log in
Dominic is a fourth-year business student who wants to go on a graduation celebration/ to Connect or go to
mhhe.com/cornett4e.
vacation in Mexico but he has no money to pay for the trip. After the vacation, Dominic will
Each example contains a list of end-of-chapter prob- start his career. His job will require moving to a new town and buying professional clothes.
He asked his parents to lend him $1,500, which he figures he will be able to pay back in
lems that are similar, in order to better model the solu-
cor91411_ch03_072-109.indd 72 01/13/17 12:29 PM
three years. His parents agree to lend him the money, but they will charge 7 percent inter-
est per year. What amount will Dominic need to pay back? How much interest will he pay?
tion process. How much of what he pays is interest-on-interest?
SOLUTION: Dominic will have to pay:
FV 3 = $1,500 × (1.07) 3 = $1,500 × 1.225 = $1,837.56
Of the $1,837.56 he owes his parents, $337.56 (= $1,837.56 − $1,500) is interest. We can
illustrate this time-value problem in the following time line.
Period 0 7% 1 7% 2 7% 3 years
Cash flow PV = 1,500 FV = –1,837.56

CALCULATOR HINTS
Compare this compound interest with simple interest. Simple interest would be 7 percent N =3
of $1,500 (which is $105) per year. The three-year cost would then be $315 (= 3 × $105). The I =7
difference between the compound interest of $337.56 and the total simple interest of $315 PV = 1500
is the interest-on-interest of $22.56. PMT = 0
CPT FV = −1837.56
Similar to Problems 4-3, 4-4, 4-5, 4-6, 4-21, 4-22, 4-33, 4-34, Self-Test Problem 1
COMPOUNDING AT DIFFERENT INTEREST RATES OVER TIME LG4-4

Period 0 5% 1 6% 2 years
Cash flow PV = –100 FV = ?
We already know that the $100 deposit will grow to $105 at the end of the first
year. This $105 will then earn 6 percent in the second year and have a value of $111.30
(= $105 × 1.06). If we put the two steps together into one equation, the solution appears
as $111.30 = $100 × 1.05 × 1.06. From this you should not be surprised that a general
equation for future value of multiple interest rates is
Future value in N periods = Today’s value × Each period’s compounding

xiv Unique Features FVN = PV × (1 + iperiod 1) × (1 + iperiod 2)
× (1 + iperiod 3) × ⋅ ⋅ ⋅ 3 (1 + iperiod N) (4-3)
Note that the future value equation 4-2 is a special case of the more general equation 4-3.
If the interest rate every period is the same, we can write equation 4-3 as equation 4-2.
Each numbered example is accompanied by video guided
examples. These exciting, unique features detail the solution to
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students can click or tap within the eBook or follow the direct
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• A similar example is presented in a video format, which
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students to identify the next step. The video continues, Confirming Pages
explaining why the student is correct or incorrect, and con-

tinues solving the problem. This feature allows students to
EXAMPLE 5-2
apply and check their learning before doing homework.
LG5-2
Saving in the Company Pension Plan For interactive versions

of this example, log in
• The solution to the example in the book is demonstrated

You started your first job after graduating from college. Your company offers a retirement to Connect or go to
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plan for which the company contributes 50 percent of what you contribute each year. So,
if you contribute $3,000 per year from your salary, the company adds another $1,500. You
using multiple calculator formats—reducing the class time needed to teach stu-
get to decide how to invest the total annual contribution from several portfolio choices
that the plan administrator provides. Suppose that you pick a mixture of stocks and bonds
that is expected to earn 7 percent per year. If you plan to retire in 40 years, how big will
dents how to use their calculators.

you expect that retirement account to be? If you could earn 8 percent per year, how much
money would be available? CALCULATOR HINTS
N = 40
• The solution to the example in the book is demonstrated using Excel, to help you
SOLUTION: Every year, you and your employer will set aside a total of $4,500 for your
retirement. Using equation 5-2 shows that the future value of this annuity is I =7
PV = 0
(1 + 0.07) 40 − 1 PMT = −4500
and your students get a basic understanding of how to set up the spreadsheets.
FVA 40 = $4,500 × ______________ = $4,500 × 199.6351 = $898,358.00
0.07 CPT FV = 898,358.00
Note that you can build a substantial amount of wealth ($898,358) through your pension plan at
NOW CHANGE TO:
work. If you can earn just 1 percent more each year, 8 percent total, you could be a millionaire! I =8
(1 + 0.08) 40 − 1 Confirming
CPT FV = 1,165,754.33 Pages
FVA 40 = $4,500 × ______________ = $4,500 × 259.0565 = $1,165,754.33
0.08
Similar to Problems 5-3, 5-4, Self-Test Problem 1
Future Value of Multiple Annuities

MATH COACH Math Coach boxes are featured in many chapters to help avoid
At times, multiple annuities can occur in both busi-
key terms
ness and personal life. For example, you may find that
you can increase the amount of money you save each
ANNUITIES AND THE FINANCIAL CALCULATOR
In the previous chapter, the level payment button (PMT) in the
the most common mathematical mistakes in a particular problem.
add-on
year becauseinterest A calculation
of a promotion or a of
new theand
amount
better of
job.interest annuity
financial calculatordue An annuity
was always in because
set to zero which no cash flows
constant are paid at
pay-
Asdetermined at thereconsider
an illustration, beginningtheof annual
the loan anddeposits
$100 to the
then added ments werebeginning of each
made every period. Wetime
use theperiod. p. 152
PMT button to input the
the principal.
made p. 163
for five years at 8 percent per year. This time, the annuityconsols
amount. For calculators, theassets
Investment present structured
value is of the opposite
as perpetuities.
deposit can beloan
increased sign (positive versus negative) from the future value. This is also the
amortized A loantoin$150 for the
which the fourth and pays
borrower fifth inter- p. 152
case with annuities. The level cash flow will be of the opposite sign
years. How
est and can weover
principal use time.
the annuity
p. 159 equation to com- as the effective
future value,annual rate
as the time line(EAR) Anshows.
on page 143 interest rate that reflects
pute the future value
amortization when we
schedule have two
A table levels of
detailing thecash
periodic Youannualizing
would use the with compounding
financial calculator to solvefigured in. p.of156
the problem
flows? In this case, the cash flow can be categorized
loan payment, interest payment, and debt balance over as loan$100
depositing principal The
for five years balance
via the followingyet to Nbe= 5,
inputs: paid
I = 8,on a loan.
two
theannuities.
life of theThe first
loan. p.annuity
160 is a $100 cash flow for PV = 0,p.PMT
160= –100. In this case, the input for present value is zero
five years. The second annuity is a $50 cash flow for because no deposit is made today. The result of computing the
annual percentage rate (APR) The interest rate per perpetuity An annuity with cash flows that continue
two years. We demonstrate this as future value is 586.66.
period times the number of periods in a year. p. 156 forever. p. 152
annuity A stream of level and frequent cash flows paid
Period 0 1 2 8%
at the end of each time period—often referred to3 as an 4 5 years
ordinary annuity.0 p. 143 –100

Cash flow –100 –100 –100 –100
–50 –50
FV = ?
To determine the future value of these two annuities, compute the future value of each
self-test problems with solutions
one separately, and then simply add them together. The future value of the $100 annu-
Self-Test Problems with Solutions appear before the gradable

ity is the same as computed before, $586.66. The future value of the $50 annuity, using
the1TVM equation
Future Valueforand
the Annuity
future value of a cashChandler
Payments stream, is
and Monica are trying to decide if LG5-2, 5-9
they will have enough Confirming Pages
(1 +money to retire early in 12 years, at age 60. Their current assets are
problem sets so students can test themselves before diving into
0.08) 2 − 1
FVAN in
$300,000 $50 × ____________
= retirement plans and they have $100,000 in other investments. Together, they
0.08
contribute $28,000 per year to their retirement plans and another $6,000 to other investments.
their homework.
= $50
If their assets × 2.08
grow at 8 = $104 per year, how much money will they have when they turn
percent
60? After they retire, they will invest their wealth chapter
more5 conservatively and2:itAnalyzing
Time Value of Money will earnAnnuity Cash Flows 145
5 percent per year. Is this enough to fund a $100,000 per year retirement for 40 years?
Solution: research it! Analyzing Financial Statements

Chandler and Monica’s current assets of $400,000 will grow to $1,007,268
cor91411_ch05_140-177.indd 145 01/20/17 03:32 PM Go to the website of Wal-Mart Stores, Inc., at www.walmartstores.com and get the latest
(= $400,000 × 1.0812) in 12 years. Their annuity contributions of $34,000
(= $28,000 + $6,000) will add another financial statements from the annual report using the following steps.
Click on “Investors.” Click on “Annual Reports.” Click on the most recent date. This
(1 + 0.08) 12 − 1 will bring the file onto your computer that contains the relevant data.
FVA12 = $34,000 × ____________ = $34,000 × 18.977126 = $645,222
0.08 Using the most recent balance sheet and income statement, calculate the financial
ratios for the firm, including the internal and sustainable growth rates.
So their total retirement wealth is $1,652,490 (= $1,007,268 + $645,222). To deter-
mine the income this wealth generates over 40 years, compute the annual annuity CALCULATOR HINTS
payments as
Integrated Mini-Cases
Future wealth:
⎡ ⎤ at the end of each chapter N = 12
⎢ ⎥
PMT = $1,652,490 ×
0.05 ______________
= $1,652,490 × 0.058278
I =8 integrated mini-case Working with Financial Statements
combine the chapter’s (1 + 0.05) ⎦ key concepts into a more com-
40 PV = −400000
1 ___________
1− Listed are the 2018 financial statements for Garners’ Platoon Mental Health Care, Inc.
⎣
PMT = −34000
40
CPT FV = 1,652,490
Spread the balance sheet and income statement. Calculate the financial ratios for the
plex problem = $96,304
to help students understand how con- Income annuity: firm, including the internal and sustainable growth rates. Using the DuPont system of
N = 40 analysis and the industry ratios reported, evaluate the performance of the firm.
cepts
requirement.and methods
However, tie
a few years after they retire,together.
It appears that Chandler and Monica would not quite make their $100,000 income
they would be eligible for Social
I =5
PV = −1652490
FV = 0 GARNERS’ PLATOON MENTAL HEALTH CARE, INC.
Security. Though relatively meager, the Social Security payments will be enough to
CPT PMT = 96,304 Balance Sheet as of December 31, 2018
comfortably put their income over the $100,000 level.
167
Assets Liabilities and Equity
Current assets Current liabilities
Cash and marketable securities $ 421 Accrued wages and taxes $ 316
Accounts receivable 1,109 Accounts payable 867
cor91411_ch05_140-177.indd 167 01/20/17 03:32 PM
Inventory 1,760 Notes payable 872
Total $ 3,290 Total $ 2,055
Fixed assets Long-term debt $ 3,090
Gross plant and equipment $ 5,812 Stockholders’ equity
Less: Depreciation 840 Preferred stock (30 million
shares) $ 60
Net plant and equipment $ 4,972 Common stock and paid-in
surplus (200 million shares) 637
Other long-term assets 892 Retained earnings 3,312
Total $ 5,864 Total $ 4,009
Total assets $ 9,154 Total liabilities and equity $ 9,154
GARNERS’ PLATOON MENTAL HEALTH CARE, INC.

Income Statement for Year Ending December 31, 2018
Net sales $ 4,980

Less: Cost of goods sold 2,246

Unique Features xv Gross profits
Less: Other operating expenses
$ 2,734
125
Earnings before interest, taxes, depreciation, and amortization (EBITDA) $ 2,609
Less: Depreciation 200
Earnings before interest and taxes (EBIT) $ 2,409
Less: Interest 315
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acknowledgments
Development of the first edition of this book series started with a course survey that was
completed by 400 instructors across the country. The following is a list of the review-
ers that became part of the many review stages, focus groups, and class-testing for the
revisions that followed—all of which were invaluable to us during the development of
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acknowledgments xxi
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xxii acknowledgments
We are also indebted to the talented staff at McGraw-Hill Education for their exper-
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We hope you like the outcome of this text. Research and development is always ongo-
ing, and we are interested in your feedback on how this text has worked for you!
Marcia Millon Cornett

Troy A. Adair Jr.
John Nofsinger

acknowledgments xxiii
brief table of contents
PART ONE: INTRODUCTION 2
1 Introduction to Financial Management 2
PART TWO: FINANCIAL STATEMENTS 30

2 Reviewing Financial Statements 30
Appendix 2A: Various Formats for Financial Statements (located at
www.mhhe.com/Cornett4e)
3 Analyzing Financial Statements 72
PART THREE: VALUING OF FUTURE CASH FLOWS 110

4 Time Value of Money 1: Analyzing Single Cash Flows 110
5 Time Value of Money 2: Analyzing Annuity Cash Flows 140
PART FOUR: VALUING OF BONDS AND STOCKS 178

6 Understanding Financial Markets and Institutions 178
Appendix 6A: The Financial Crisis: The Failure of Financial Institution
Specialness (located at www.mhhe.com/Cornett4e)
7 Valuing Bonds 226
8 Valuing Stocks 264
PART FIVE: RISK AND RETURN 296

9 Characterizing Risk and Return 296
10 Estimating Risk and Return 330
PART SIX: CAPITAL BUDGETING 362

11 Calculating the Cost of Capital 362
12 Estimating Cash Flows on Capital Budgeting Projects 392
Appendix 12A: MACRS Depreciation Tables 421
13 Weighing Net Present Value and Other Capital Budgeting
Criteria 426
PART SEVEN: WORKING CAPITAL MANAGEMENT AND

FINANCIAL PLANNING 462
14 Working Capital Management and Policies 462
Appendix 14A: The Cash Budget 492
15 Financial Planning and Forecasting 498
xxiv
PART EIGHT: CAPITAL STRUCTURE ISSUES 530
16 Assessing Long-Term Debt, Equity, and Capital Structure 530
17 Sharing Firm Wealth: Dividends, Share Repurchases, and Other
Payouts 564
18 Issuing Capital and the Investment Banking Process 588
PART NINE: OTHER TOPICS IN FINANCE 614

19 International Corporate Finance 614
20 Mergers and Acquisitions and Financial Distress 642

brief table of contents xxv
table of contents
PART ONE : Introduction 2
1 Introduction to Financial Management 2
1.1 Finance in Business and in Life 4

What Is Finance? 4
Subareas of Finance 6
Application and Theory for Financial Decisions 8
Finance versus Accounting 10
1.2 The Financial Function 10
The Financial Manager 10
Finance in Other Business Functions 10
Finance in Your Personal Life 11
1.3 Business Organization 12
Sole Proprietorships 12
Partnerships 12
Corporations 13
Hybrid Organizations 13
1.4 Firm Goals 14
1.5 Agency Theory 16
Agency Problem 16
Corporate Governance 17
The Role of Ethics 19
1.6 Financial Markets, Intermediaries, and the Firm 20
1.7 Big Picture Environment 21
Oil Prices Plummet 21
China Slows Down 21
Viewpoints Revisited 22
Summary of Learning Goals 23
Key Terms 24
Self-Test Problem with Solution 25
Questions 25
Research It! 26
Integrated Mini-Case 26
Answers to Time Out 27
xxvi
PART TWO : Financial Statements 30
2 Reviewing Financial Statements 30
2.1 Balance Sheet 32

Assets 32
Liabilities and Stockholders’ Equity 32
Managing the Balance Sheet 34
2.2 Income Statement 36
Debt versus Equity Financing 38
Corporate Income Taxes 39
2.3 Statement of Cash Flows 42
GAAP Accounting Principles 43
Noncash Income Statement Entries 43
Sources and Uses of Cash 44
2.4 Free Cash Flow 46
2.5 Statement of Retained Earnings 48
2.6 Cautions in Interpreting Financial Statements 49
Chapter Equations 53
Key Terms 53
Self-Test Problems with Solution 54
Questions 59
Problems 60
Research It! 68
3 Analyzing Financial Statements 72
3.1 Liquidity Ratios 74

3.2 Asset Management Ratios 75
Inventory Management 75
Accounts Receivable Management 76
Accounts Payable Management 76
Fixed Asset and Working Capital Management 77
Total Asset Management 78
3.3 Debt Management Ratios 79
Debt versus Equity Financing 79
Coverage Ratios 80

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3.4 Profitability Ratios 82
3.5 Market Value Ratios 84
3.6 DuPont Analysis 85
3.7 Other Ratios 89
Spreading the Financial Statements 89
Internal and Sustainable Growth Rates 89
3.8 Time Series and Cross-Sectional Analyses 91
3.9 Cautions in Using Ratios to Evaluate Firm Performance 92
Key Terms 97
Questions 99
Problems 100
Research It! 106
PART THREE : Valuing of Future Cash Flows 110
4 Time Value of Money 1: Analyzing Single Cash Flows 110
4.1 Organizing Cash Flows 112

4.2 Future Value 112
Single-Period Future Value 113
Compounding and Future Value 113
4.3 Present Value 119
Discounting 119
4.4 Using Present Value and Future Value 122
Moving Cash Flows 122
4.5 Computing Interest Rates 125
Return Asymmetries 125
4.6 Solving for Time 126
Key Terms 129
Questions 132
Problems 132
Research It! 136
xxviii table of contents
5 Time Value of Money 2: Analyzing Annuity Cash Flows 140
5.1 Future Value of Multiple Cash Flows 142

Finding the Future Value of Several Cash Flows 142
Future Value of Level Cash Flows 143
Future Value of Multiple Annuities 145
5.2 Present Value of Multiple Cash Flows 147
Finding the Present Value of Several Cash Flows 147
Present Value of Level Cash Flows 148
Present Value of Multiple Annuities 150
Perpetuity—A Special Annuity 152
5.3 Ordinary Annuities versus Annuities Due 152
5.4 Compounding Frequency 154
Effect of Compounding Frequency 154
5.5 Annuity Loans 158
What Is the Interest Rate? 158
Finding Payments on an Amortized Loan 158
Key Terms 167
Questions 170
Problems 171
Research It! 176
PART FOUR : Valuing of Bonds and Stocks 178
6 Understanding Financial Markets and Institutions 178
6.1 Financial Markets 180

Primary Markets versus Secondary Markets 180
Money Markets versus Capital Markets 182
Other Markets 185
6.2 Financial Institutions 187
Unique Economic Functions Performed by Financial Institutions 189
6.3 Interest Rates and the Loanable Funds Theory 191
Supply of Loanable Funds 193
Demand for Loanable Funds 194
Equilibrium Interest Rate 195
Factors That Cause the Supply and Demand Curves for Loanable Funds to Shift 196

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Movement of Interest Rates over Time 200
6.4 Factors That Influence Interest Rates for Individual Securities 200
Inflation 200
Real Risk-Free Rate 201
Default or Credit Risk 202
Liquidity Risk 203
Special Provisions or Covenants 204
Term to Maturity 204
6.5 Theories Explaining the Shape of the Term Structure of Interest Rates 206
Unbiased Expectations Theory 207
Liquidity Premium Theory 209
Market Segmentation Theory 211
6.6 Forecasting Interest Rates 212
Key Terms 215
Questions 217
Problems 218
Research It! 222
7 Valuing Bonds 226
7.1 Bond Market Overview 228

Bond Characteristics 228
Bond Issuers 229
Other Bonds and Bond-Based Securities 231
Reading Bond Quotes 233
7.2 Bond Valuation 236
Present Value of Bond Cash Flows 236
Bond Prices and Interest Rate Risk 238
7.3 Bond Yields 240
Current Yield 240
Yield to Maturity 240
Yield to Call 242
Municipal Bonds and Yield 244
Summarizing Yields 245
7.4 Credit Risk 246
Bond Ratings 246
Credit Risk and Yield 248
7.5 Bond Markets 249
Following the Bond Market 250
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Key Terms 253
Questions 257
Problems 257
Research It! 261
8 Valuing Stocks 264
8.1 Common Stock 266

8.2 Stock Markets 266
Tracking the Stock Market 269
Trading Stocks 271
8.3 Basic Stock Valuation 272
Cash Flows 272
Dividend Discount Models 275
Preferred Stock 276
Expected Return 277
8.4 Additional Valuation Methods 278
Variable-Growth Techniques 278
The P/E Model 281
Estimating Future Stock Prices 283
Key Terms 287
Questions 290
Problems 290
Research It! 294
PART FIVE : Risk and Return 296
9 Characterizing Risk and Return 296
9.1 Historical Returns 298

Computing Returns 298
Performance of Asset Classes 300

table of contents xxxi
9.2 Historical Risks 301
Computing Volatility 302
Risk of Asset Classes 304
Risk versus Return 305
9.3 Forming Portfolios 306
Diversifying to Reduce Risk 306
Modern Portfolio Theory 309
Key Terms 316
Questions 320
Problems 320
Research It! 326
10 Estimating Risk and Return 330
10.1 Expected Returns 332

Expected Return and Risk 332
Risk Premiums 334
10.2 Market Risk 335
The Market Portfolio 335
Beta, a Measure of Market Risk 337
The Security Market Line 337
Finding Beta 340
Concerns about Beta 341
10.3 Capital Market Efficiency 343
Efficient Market Hypothesis 343
Behavioral Finance 345
10.4 Implications for Financial Managers 346
Using the Constant-Growth Model for Required Return 346
Key Terms 351
Questions 353
Problems 354
Research It! 359
xxxii table of contents
PART SIX : Capital Budgeting 362
11 Calculating the Cost of Capital 362
11.1 The WACC Formula 364

Calculating the Component Cost of Equity 364
Calculating the Component Cost of Preferred Stock 366
Calculating the Component Cost of Debt 366
Choosing Tax Rates 367
Calculating the Weights 368
11.2 Firm WACC versus Project WACC 369
Project Cost Numbers to Take from the Firm 370
Project Cost Numbers to Find Elsewhere:
The Pure-Play‑Approach 371
11.3 Divisional WACC 373
Pros and Cons of a Divisional WACC 373
Subjective versus Objective Approaches 376
11.4 Flotation Costs 379
Adjusting the WACC 379
Key Terms 383
Questions 386
Problems 386
Research It! 389
12 Estimating Cash Flows on Capital Budgeting Projects 392
12.1 Sample Project Description 394

12.2 Guiding Principles for Cash Flow Estimation 394
Opportunity Costs 394
Sunk Costs 395
Substitutionary and Complementary Effects 395
Stock Dividends and Bond Interest 396
12.3 Total Project Cash Flow 396
Calculating Depreciation 397
Calculating Operating Cash Flow 397
Calculating Changes in Gross Fixed Assets 398
Calculating Changes in Net Working Capital 399
Bringing It All Together 401

table of contents xxxiii
12.4 Accelerated Depreciation and the Half-Year Convention 402
MACRS Depreciation Calculation 402
Section 179 Deductions 403
Impact of Accelerated Depreciation 404
12.5 “Special” Cases Aren’t Really That Special 405
12.6 Choosing between Alternative Assets with Differing Lives: EAC 407
12.7 Flotation Costs Revisited 409
Key Terms 413
Questions 416
Problems 416
Research It! 418
Appendix 12A: MACRS Depreciation Tables 421
13 eighing Net Present Value and Other Capital Budgeting

W
Criteria 426
13.1 The Set of Capital Budgeting Techniques 428

13.2 The Choice of Decision Statistic Format 429
13.3 Processing Capital Budgeting Decisions 430
13.4 Payback and Discounted Payback 430
Payback Statistic 431
Payback Benchmark 431
Discounted Payback Statistic 432
Discounted Payback Benchmark 432
Payback and Discounted Payback
Strengths and Weaknesses 434
13.5 Net Present Value 435
NPV Statistic 435
NPV Benchmark 435
NPV Strengths and Weaknesses 438
13.6 Internal Rate of Return and Modified Internal Rate of Return 438
Internal Rate of Return Statistic 438
Internal Rate of Return Benchmark 439
Problems with Internal Rate of Return 440
IRR and NPV Profiles with Non-Normal Cash Flows 441
Differing Reinvestment Rate Assumptions of NPV and IRR 441
Modified Internal Rate of Return Statistic 442
IRRs, MIRRs, and NPV Profiles with Mutually Exclusive Projects 443
MIRR Strengths and Weaknesses 448
xxxiv table of contents
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DANCE ON STILTS AT THE GIRLS’ UNYAGO, NIUCHI
Newala, too, suffers from the distance of its water-supply—at least

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

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

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

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

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

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

FINISHING THE BOTTOM
LAST SMOOTHING BEFORE

BURNING
FIRING THE BRUSH-PILE

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

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

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

SOFT
MANUFACTURE OF BARK-CLOTH AT NEWALA

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

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Finance: Applications and Theory

(Mcgraw hill / Irwin Series in Finance,

CHANGES IN THE FOURTH EDITION

Chapter 1: Introduction to Financial Management

Chapter 2: Reviewing Financial Statements

• Added a discussion of difference between EBIT and operating income

• Added more discussion of debt ratios

Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows

• Updated the data in Figure 4.5 on gold prices

Chapter 5: Time Value of Money 2: Analyzing Annuity Cash Flows

• Revised the chapter introduction to discuss Boeing

Chapter 6: Understanding Financial Markets and Institutions

Chapter 7: Valuing Bonds

• Updated the Personal Application with new data

Chapter 8: Valuing Stocks

x a note from the authors

Chapter 10: Estimating Risk and Return

• Updated values and data in Tables 10.1–10.4

Chapter 11: Calculating the Cost of Capital

Chapter 12: Estimating Cash Flows on Capital Budgeting Projects

• Clarified the definition of salvage value

Chapter 14: Working Capital Management and Policies

Chapter 15: Financial Planning and Forecasting

• Clarified the discussion of deseasonalizing sales

• Refined the discussion of active versus passive capital structure changes

• Expanded the discussion of information effect on dividend policy

Chapter 18: Issuing Capital and the Investment Banking Process

Chapter 19: International Corporate Finance

• Revised the chapter introduction to include new data about Starbucks

Chapter 20: Mergers and Acquisitions and Financial Distress

• Added Herfindahl-Hirschman Index (HHI)

xii a note from the authors

tors with hundreds of questions organized

cor91411_ch05_140-177.indd 141 01/20/17 03:32 PM

finance at work markets

and hot topics noted in the news. The Want to Know

to use for searching the Internet Care, Inc. for updates.

features are great to use for class discussion or as

dents’ understanding of the key terms and core concepts

Research It! projects, perfect for individual assign-

PART TWO integrated mini-case Working with Financial Statements

Analyzing Financial GARNERS’ PLATOON MENTAL HEALTH CARE, INC.

Viewpoints, a unique feature presented at

the beginning of each chapter, pose both a

Business Application business and a personal problem using key

clearer. Viewpoints Revisited at the end of

the chapter show how these problems are

solved. Viewpoints Extended leverage a

So how can these financial

at each personal application raised. These

cor91411_ch03_072-109.indd 106 01/13/17 12:29 PM

Numbered examples in each chapter feature vari- LG4-3

problems in both business and individual contexts.

tion process. How much of what he pays is interest-on-interest?

SOLUTION: Dominic will have to pay:

FV 3 = $1,500 × (1.07) 3 = $1,500 × 1.225 = $1,837.56

Cash flow PV = 1,500 FV = –1,837.56

COMPOUNDING AT DIFFERENT INTEREST RATES OVER TIME LG4-4

Cash flow PV = –100 FV = ?

Future value in N periods = Today’s value × Each period’s compounding

explaining why the student is correct or incorrect, and con-

Saving in the Company Pension Plan For interactive versions

• The solution to the example in the book is demonstrated

13 eighing Net Present Value and Other Capital Budgeting