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vi brief contents
Financing decisions 347

Part
15. Financial markets 348
4 16.
17.
18.
The cost of capital
Weighted average cost of capital
Capital structure in a simple world
372
412
426
19. Capital structure in a complex world 446
20. Investment and financing interactions 487
21. The dividend decision 517
International issues 533

Part
22. Foreign exchange 534
5 23. Foreign exchange hedging

24. Foreign direct investment
551
579
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CONTENTS
About the authors xvi

Preface xvii
Publisher’s acknowledgements xix
Walk-through tour xx
Part
Introduction 1
1 1. Financial decision–making
The nature of financial decisions
The decision process
2
4
2
Financial decision-making 5
Summary 10
Notes 11
Quiz questions 11
2. Decision objectives 12
Value maximization and the company 12
Ownership and control 14
Regulation of the relationship between directors and shareholders 14
Incentive scheme criteria 20
Conclusion 22
Summary 23
Notes 24
Further reading 24
Quiz questions 25
Problems 26
vii
viii contents
Part
Investment decisions 27
2 3. Traditional methods of
investment appraisal
Introduction
The payback method
28
28
30
Return on capital employed 37
Conclusions 39
Summary 39
Notes 40
Further reading 41
Quiz questions 42
Problems 43
4. Investment–consumption decision model 45

Introduction to the model 45
The time value of money 47
The basic graphical analysis 48
Introduction of capital markets 50
The separation theorem 52
The conclusions of the basic model 56
Payback and ROCE 57
Summary 57
Notes 58
Further reading 59
Quiz questions 59
Problems 60
5. The discounted cash flow approach 61

Net present value 61
Alternative interpretations of NPV 67
Internal rate of return 72
Discounted payback 77
Truncated NPV 78
Summary 78
Appendix: compounding and discounting 79
Notes 82
Further reading 82
Quiz questions 83
Problems 84
contents ix
6. Net present value and

internal rate of return 87
NPV and project interdependence 87
IRR rule and interdependent projects 92
Extending the time horizon 102
Multiple IRRs 103
Extended yield method 106
Other problems with the IRR rule 107
The modified IRR: MIRR 109
NPV versus IRR: conclusion 111
The replacement cycle problem 112
Summary 116
Notes 117
Further reading 117
Quiz questions 118
Problems 118
7. Project cash flows 121

Investment appraisal and inflation 121
Inflation and the IRR technique 128
Investment appraisal and taxation 129
The relevant cash flows 134
Summary 138
Appendix: a typical corporate tax system 139
Notes 139
Further reading 140
Quiz questions 141
Problems 141
8. Capital rationing 145

Introduction 145
Hard and soft capital rationing 147
Single-period capital rationing 148
Multi-period capital rationing 156
Summary 165
Notes 166
Further reading 166
Quiz questions 167
Problems 168
x contents
Part
Risk analysis 171
3 9. Simple risk techniques

Risk and return
Expected net present value
The abandonment decision
172
172
173
180
Sensitivity analysis 183
The risk-adjusted discount rate 187
Summary 189
Notes 190
Further reading 190
Quiz questions 190
Problems 191
10. Risk and return 195

Introduction to uncertainty 195
The expected utility model 197
The approach to portfolio theory 203
Summary 212
Notes 213
Further reading 214
Quiz questions 214
Problems 214
11. Portfolio theory 216

Two-asset portfolios 216
Multi-asset portfolios 224
Introduction of a risk-free investment 229
The capital market line 235
Summary 240
Notes 241
Further reading 242
Quiz questions 242
Problems 243
12. The capital asset pricing model 246

The security market line 246
The capm expression 250
The beta value 253
The validity of the CAPM 264
contents xi
Arbitrage pricing theory 269

Betas and project investment appraisal 271
Summary 274
Notes 276
Further reading 277
Quiz questions 277
Problems 278
13. Option valuation 281

Introduction 281
The basic characteristics of options 282
Option terminology 283
The valuation of options 284
The Black and Scholes model 289
The building blocks of investment 293
Put–call parity theorem 298
Using share options 302
The option ‘Greeks’ 307
The binomial model 311
Real options 314
Summary 315
Notes 316
Further reading 317
Quiz questions 317
Problems 318
14. Interest rate risk 319

Introduction 319
The money markets 320
Forward forward loans 321
Forward rate agreements 322
Interest rate guarantees 326
Option contract markets 328
Interest rate futures 328
Caps, collars and floors 337
Interest rate swaps 339
Summary 342
Notes 342
Further reading 343
Quiz questions 343
Problems 344
xii contents
Part
Financing decisions 347
4 15. Financial markets

Introduction
Market efficiency
Market efficiency and share dealing
348
348
349
351
The empirical evidence of EMH 353
The term structure of interest rates 358
Pure expectations hypothesis 362
Summary 368
Notes 369
Further reading 370
Quiz questions 371
Problems 371
16. The cost of capital 372

The financing decision 372
The cost of equity capital 373
Expected return, dividends and market price 376
Applying the dividend valuation model 378
CAPM and the cost of equity capital 386
CAPM versus the DVM 388
The cost of debt capital 390
Convertible debt 403
Summary 406
Notes 407
Further reading 408
Quiz questions 409
Problems 410
17. Weighted average cost of capital 412

The project discount rate 412
The calculation of WACC 415
The WACC and project risk 418
Summary 422
Notes 422
Further reading 423
Quiz questions 423
Problems 424
contents xiii
18. Capital structure in a simple world 426

An optimal capital structure 426
Business and financial risk 430
The arbitrage proof 434
Conclusions 439
Summary 442
Notes 442
Further reading 443
Quiz questions 443
Problems 443
19. Capital structure in a complex world 446

Taxation and capital structure 446
Using the M and M equations 451
M and M in the real world 457
Further views on capital structure 461
Conclusion 466
Capital structure in practice 467
Real world considerations 470
Earnings per share and gearing 472
Degree of operating gearing 475
Summary 480
Notes 481
Further reading 481
Quiz questions 482
Problems 483
20. Investment and financing interactions 487

Company valuation and investment appraisal 487
1. The dividend and interest valuation model 488
2. Adjusted present value model 489
3. The M and M valuation model 489
4. The traditional valuation model 490
Approaches to investment appraisal 490
Asset betas and gearing 496
Risk-adjusted WACC 504
Lease or purchase decision 507
Summary 512
Notes 512
xiv contents
Further reading 513

Quiz questions 514
Problems 514
21. The dividend decision 517

Dividend policy in perfect capital markets 517
Traditional view of the dividend decision 521
Dividend policy in an imperfect market 525
The empirical evidence 527
Conclusion 528
Summary 528
Notes 529
Further reading 529
Quiz questions 530
Problems 530
Part
International issues 533
5 22. Foreign exchange

Introduction
Exchange rates
Foreign exchange markets
534
534
535
536
Exchange rate systems 541
Determinants of FX rates 543
Summary 549
Note 549
Further reading 549
Quiz questions 550
Problems 550
23. Foreign exchange hedging 551

Foreign exchange risk definitions 551
Transaction risk hedging 552
Foreign exchange futures contracts 559
Forward versus futures 565
Foreign exchange options contracts 565
Setting up an option hedge 568
Early exercise 573
Contingent exposure to foreign exchange risk 573
Traded options versus OTC options 574
contents xv
Summary 575
Notes 575
Further reading 576
Quiz questions 576
Problems 577
24. Foreign direct investment 579

Introduction 579
Project cash flows 583
Project discount rate 587
Translation risk 592
Economic risk 595
Country/political risk 598
Summary 600
Notes 600
Further reading 600
Quiz questions 601
Problems 601
Tables 603
Answers to quiz questions 607
References for real world views 633
Index 639
ABOUT THE AUTHORS
Steve Lumby has been involved with teaching corporate finance over many years, in both
universities and business schools. He is a former Managing Director of the LCA Business
School. After five years in industry with the H.J. Heinz Company, he spent several years
lecturing and researching in corporate finance at the London School of Economics. He
has also held teaching posts at both King’s College (University of London) and at Brunel
University, and was a specialist advisor on finance to the Parliamentary Select Committee
on Energy. His current appointment is as a Strategic Financial Management Module Leader
for the University of London’s Masters Professional Accountancy qualification.
Chris Jones has lectured in accounting and finance for over 30 years since leaving Arthur
Young. He has now retired from his position as Principal Lecturer in Accounting and
Finance at Sheffield Hallam University.
xvi
PREFACE
There is a popular feeling that ‘theory’ is opposed to practice and the merits lie with ‘prac-
tice’. This is a false conclusion, based on a false supposition. If practice has long been
successful and does not conform to theory, the theory is bad and in need of revision.... The
distinction should not be between theory and practice; it should be between good theory
and bad theory, between good practice and bad practice.... Practice is brick; theory is mor-
tar. Both are essential and both must be good if we are to erect a worthy structure.
d. paarlberg, great myths of economics (1968)
new american library
The description in plain language will be a criterion of the degree of understanding that
has been reached.
w. heisenberg, physics and philosophy (2007) harper
perennial modern classics (reprint edition).
T his book takes these two quotations as its starting point. Its subject matter covers some
of the more important financial decisions that face companies; principally, investment,
financing and dividend decisions, together with the management of risk. These are areas of
vital importance to companies because they represent the main ways by which firms can
enhance the value for their owners. This importance is reflected in the fact that corporate
finance is a standard element of virtually all undergraduate and postgraduate courses that
are concerned with business and management, as well as being a prominent element in
professional accountancy examinations.
It is with all these groups of people in mind that this book has been written. However, it is
hoped that practising financial managers will also find its contents of interest, in that it may help
to provoke thoughtful reflection on how financial decisions should be and are actually made.
The book’s origins lie in the courses taught at various universities and business schools
around the world at both undergraduate and postgraduate level and in the courses taught to
students studying for professional accountancy qualifications. In many ways this is not my
book but my students’ book. Their searching questions have often prompted me to think
through the subject matter in greater depth and to seek out alternative ways of providing
clear and full explanations of the subject matter. This is not an easy book, but patience and
application will be richly rewarded with understanding.
This new edition closely retains the format of the previous edition, but contains many
amendments, clarifications and corrections in order to improve the overall ‘learning expe-
rience’ of the reader. Its objective is to provide a clear, thoughtful and systematic analysis
of the key elements of corporate finance theory through a non-academic writing style and
plenty of illustrative numerical examples.
It is all too easy for authors to lose sight of just how difficult some topics can be to the
new reader. Familiarity, if not exactly breeding contempt, can sometimes lead to an over-
concise exposition of the subject being discussed. Hopefully this pitfall has been avoided,
xvii
xviii PREFACE
so that the changes made further enhance the book’s clarity of presentation of what is quite
a challenging subject matter.
The purpose of the Learning Objectives is to provide the reader with a ‘road map’ of
what is to come in each chapter; while the summaries are designed to give an overview
of the key areas that have been discussed in each chapter and to provide a snapshot of the
main points. The suggested further reading has been compiled with particular emphasis on
providing articles that are, in the main, accessible to those readers who do not possess a
higher degree in mathematics! The quiz questions are to test both recall and understanding
and to give the reader essential feedback – the quiz answers are tucked away at the back of
the book, in order to reduce the temptation to cheat! Finally, the end-of-chapter exam-style
problems have been selected to try and cover the major elements of each chapter’s subject
matter. The answers to many of these problems are available to students on the accompa-
nying online platform. However, some are only available to course lecturers.
‘Real World Views’ feature boxes are interspersed throughout the text to help put theo-
ries and concepts into context, to present differing views from economies around the world
and to invoke group debate. In this new edition, these have been carefully and thoughtfully
updated by Angus Smith, with my thanks.
As I have said right from the start of the original edition, it should be made clear that this
is not a ‘how-to-do-it’ book of corporate financial management. Such a book is not really
possible in the complex, practical and ever-changing area of corporate finance. Instead,
it is an attempt at a fairly detailed, reasoned discussion of the normative theory of corpo-
rate finance. Where examples have used real-world data, they are there for the purposes
of exposition, rather than to encourage unthinking application of the theory to practical
decision-making. It is not the aim to put forward theoretical solutions to practical prob-
lems, but to promote thought and reflection on how decisions are made and, perhaps, how
they can be improved.
As far as possible, the presentation has been argued in descriptive and graphical terms rath-
er than using a strict mathematical analysis. The reasons for this are two-fold. First, a math-
ematical treatment often excludes a great many potential enquirers and reduces the subject
matter to a degree of terseness that makes unrealistic demands upon the concentration of the
reader. Second, a mathematical treatment, although often rather elegant, can sometimes fail
to make clear the full significance of important conclusions. However, it has been impossible
to exclude mathematics completely – indeed it would have been counterproductive to do so
in some areas – but its complexity has been kept to an absolute minimum. The derivation of
formulae and relationships ‘just for the sake’ of it has been resisted and only occurs where
the mathematical derivation leads to a greater understanding for the reader.
All that remains is to thank all the people at the publishers, Cengage, and in particular to
Editorial Assistant Hayley Wallbridge, for all their help, understanding and general prod-
ding to get the new edition finished and onto the bookshelves. Most of all, my thanks go
to students everywhere who make writing and teaching so enjoyable! Anyway, time now
to walk the dogs…
Steve Lumby
2018
PUBLISHER’S
ACKNOWLEDGEMENTS
The publisher would like to thank the following reviewers for their invaluable feedback in
developing this new edition:
●● Wim Westerman, University of Groningen (Netherlands)
●● Graeme Elgin, Manchester Metropolitan University Business School (UK)
●● Prof Janine Krüger, Nelson Mandela University (South Africa)
In addition, we wish to thank Dr Carl-Gustaf Malmstrom (Professor of Finance at SBS
Swiss Business School) for his advice and assistance in sourcing ideas and composing the
Real World View features.
xix
WALK–THROUGH TOUR
ChaPTER ChaPTER 3 tRADItIonAL MetHoDs oF InVestMent APPRAIsAL 37
1 FINaNCIal
RETuRN ON CaPITal EmPlOyEd
The second traditional approach to investment appraisal is the Return on Capital
dECISION–makINg Employed (ROCE) which, like payback, has a number of alternative names (in particu-
lar, the Accounting Rate of Return, or ARR) and a wide variety of different methods of
computation.
There are two common ways of expressing ROCE in practice. One is the ratio of the
average annual profit generated over the life of the project, to its average investment cost
(i.e. the average capital employed). The other approach is to take the average annual profit
as a ratio of the initial cost. Example 3 illustrates these two sets of calculations.
lEaRNINg OBjECTIvES
The purpose of this chapter is to:

■ Identify the elements that make up the decision process.
ExamPlE 3
■ Introduce the objective of financial management decision-making as the The Techniek BV wants to evaluate an investment proposal using the ROCE technique. The project
maximization of shareholder value. requires an initial capital expenditure of €10 000, together with €3 000 of working capital. The project will
have a four-year life, at the end of which time the working capital will be fully recovered and the capital
■ Translate this theoretical objective onto the basis of maximizing the value of that
expenditure will have a scrap value of €2 000.
company’s shares, through maximizing the cash flow to shareholders over time.
The project’s expected annual profits (or loss, as in the case of Year 4) are as follows:
■ Argue that the more traditional financial objective of accounting profit
maximization is inappropriate within the context of financial decision-making.
Year (€)
Forecast annual profit (or loss): 1 2 000
2 4 000
3 1 500
4 (500)
ThE NaTuRE OF FINaNCIal dECISIONS Total profit 5 €7 000
An overview The average annual profit would therefore be: ;7 000 4 4 5 ;1 750 and the initial capital employed
would equal €13 000 (capital expenditure plus working capital). The average capital employed would be
This book covers a particular area of managerial economics: the theory of financial
calculated as:
decision-making by business corporations. It is concerned with how management within
companies should make financial decisions, and so it can be said to adopt a normative Capital expenditure 2 Scrap value
approach because it sets out to establish a standard or norm. But such a theory cannot hope 1 Scrap value 1 Working capital
2
to succeed in its task if it is developed in isolation from what actually does happen in prac-
tice, and so we shall also examine how financial decisions are made in practice, in order to €10 000 2 €2 000
guide and enrich the development of our normative approach. that is: 1 €2 000 1 €3 000 5 €9 000
2
To help explain this rather odd-looking calculation see Figure 3.1.
The value base Hence the investment’s return on initial capital employed equals:
Financial decisions are no different in their fundamental aspects from other decisions of a €1 750
5 0.1351approx2 or 13.5%
non-financial nature. In essence, all decisions are based on the concept of the comparison €13 000
and return on average capital employed equals:
€1 750
5 0.1941approx2 or 19.4%
€9000
2
▲
Learning Objectives – Listed at the start of Examples and Scenarios – Examples and
each chapter, these provide the reader with a scenarios are dispersed throughout the text to
‘road map’ of what is to come in each chapter. illustrate practical application.
50 PaRT II InVestMent DecIsIons ChaPTER 6 net PResent VALUe AnD InteRnAL RAte oF RetURn 111
In many ways this modified IRR calculation achieves the best of all worlds. Its theoretical
FIguRE 4.2 Indifference curves underpinning is that of NPV, but its method of evaluation is through the use of a user-friendly
rate of return. Therefore, it can be seen as a cosmetic restatement of an NPV analysis.
Owner’s IV
consumption III
Increasing
at t1 I II welfare or
B
utility NPv vERSuS IRR: CONCluSION
Our analysis puts forward a very strong case for the use of the NPV decision rule for
Owner’s
investment appraisal. At best, the IRR method (and particularly the modified IRR) might be
indifference used as a support and as a communication device on the basis of management’s familiarity
Z
D curves with rates of return, rather than NPVs, for the decision advice given by the NPV rule.6 As a
result of this conclusion, from now on we shall be implicitly assuming that the NPV tech-
nique will be the approach that should be used by companies in making capital investment
decisions. It is the only technique from the four investigated that can be relied upon to give
advice that will lead towards the maximizing of shareholder wealth.
O
C A Owner’s
consumption
at t0
Limitations of the NPV and Its Practical Uses in

REAL WORLD VIEW: Day-to-Day Life
The point of tangency between the two curves represents a point where the slopes of
each equate. As the slope of the indifference curve reflects an individual’s marginal TVM As acknowledged throughout the examples in this ‘information asymmetries among individuals’).
and the slope of the physical investment line represents the rate of return on the marginal book, all models have their limitations and the NPV There are cases, they contest, when both these
project, then the point where the slopes of these two curves equate must be the point at is not exempt from detractors. A key issue is the assumptions are false.
which the owner’s TVM equals the return on the marginal investment made by the com- inherent difficulty of predicting future cash flows However, limitations aside, others profess the
pany. Thus, the investment decision rule should be that the company continues to make with precision. As one commentator, Seth Klarman, NPV’s broad usefulness to all people in everyday
physical investments until the return from the marginal investment (i.e. the last one made) notes, ‘When future cash flows are reasonably pre- life, from consumers to homeowners and pet lov-
equals the owner’s marginal TVM. Any further investment will not produce the necessary dictable and an appropriate discount rate can be ers. One blogger, for example, used the model to
return required and so will have the effect, in terms of our indifference curve analysis, of chosen, NPV analysis is one of the most accurate establish the ‘best’ deal when looking at the various
placing the owner on a lower indifference curve. and precise methods of valuation. Unfortunately, options for personal finance, noting that ‘NPV can
cash flows are usually uncertain, often highly so.’ be used for myriad situations you’ll face in life.’ He
Indeed, as one academic paper from 1998 argues used NPV to help in decisions ranging from choos-
INTROduCTION OF CaPITal maRkETS further, the problem of assumptions underlying ing to buy his yellow Labrador puppy from a pure-
the rule not being met in practice results in some bred breeder (taking into consideration the greater
‘numerical examples wherein applying the NPV initial outlay versus future veterinary bills which
From this simple analysis, using a series of restrictive assumptions about the real world,
leads to erroneous decisions.’ may be higher with an adopted dog), to opting to
we have seen how investment decisions would be made and why money is said to possess
It is the ‘violation’ of these assumptions – or, in buy a new lawnmower rather than paying for a lawn
a ‘time value’. If we now make our analysis slightly more realistic by relaxing our third
other words, poor ‘framing’ of the specific scenario management service. Another classic example is
assumption so as to make available the opportunity of being able to lend and borrow money
or problem in light of other ambiguities – that effec- the use of energy-saving light bulbs, which cost
on a capital market at a rate of interest, we can then develop a second reason for money
tively distorts or even invalidates the NPV’s actual more than standard light bulbs to purchase yet save
having a time value.
usefulness. The two such assumptions questioned on the bills over time. The blogger recognized that
With the introduction of capital markets, the firm is faced with three possible courses
are, first, that the approval decision is ‘now-or- each model merely presented a simplified account
of action at t0: consumption, physical investment or capital market investment. Making the
never’ (i.e. that only the one current chance to act of life’s everyday problems (that may not account
very important assumption that there is a perfect capital market,7 and therefore there is only
one market rate of interest at which the company can both lend and borrow, we can use the
will be presented) and second, that decision-making for all possibilities or uncertainties), yet nonetheless
one-period graphical analysis to illustrate how the company makes investment decisions so is driven only by a single-person or, alternatively, a had real value in providing real analysis to aid his
multi-person firm (without taking into consideration decision-making.
Numbered Figures and Tables – Clearly set Real World Views – Boxes throughout help to
out on the page, to aid the reader with quick provide context of application in practice and
conceptualization. relevant developments in the real world.
xx
WALK–THROUGH TOUR xxi
116 PaRT II InVestMent DecIsIon s ChaPTER 7 PRoJect cAsH FLoWs 139
● The approach to use is to evaluate the after-tax project cash flows with the after-tax
SummaRy discount rate. The after-tax project cash flows take account of the capital expenditure
tax relief and the tax charge on the project’s profit. The third tax impact – tax relief
This chapter has looked at the application of the two DCF investment appraisal methods in on interest payments – is taken into account through the after-tax discount rate.
the context of decisions between mutually exclusive projects. As a result, a number of dif- ● As far as the relevant project cash flows are concerned, an investment appraisal should
ficulties were encountered with the standard IRR decision rule. The main points made are: only include the incremental investment cash flows. This is the key concept. Any cash
flows that have already occurred prior to the investment decision, or any subsequent
● The NPV decision rule for mutually exclusive decisions is: accept whichever project
cash flows that will occur whether or not the project is undertaken, are irrelevant.
has the largest positive NPV, as the NPV is a measure of ‘economic profit’ that is the
source of shareholder value. Thus, the investment with the largest +NPV will provide ● In addition, use has to be made of the opportunity cost concept to ensure that the full
the largest increase in shareholder value. costs and benefits of undertaking the project are captured in the investment appraisal.
● The decision rule holds even when the alternative investments are of unequal mag-
nitude, duration or risk; assuming a perfect capital market and that the discount rate
used properly reflects the return available elsewhere on the capital market from a aPPENdIx: a TyPICal CORPORaTE Tax SySTEm
similar-risk investment.
● The standard IRR decision rule for mutually exclusive investments is: the ‘best’ pro- This appendix briefly outlines the basics of a typical corporate tax system as it affects
ject has the highest IRR; accept the best project if its IRR > hurdle rate. investment appraisal. In no way does it purport to represent a complete analysis. However,
● This standard IRR decision rule gives unreliable investment decision advice in situ- some familiarity with the tax regime is necessary in order to be able to appreciate how it is
ations of mutually exclusive projects: the problem arises from the arithmetic of the likely to impact on project appraisal.
IRR and the fact that it assumes project-generated cash flows will be reinvested to 1. Company ‘profits’ are subject to a rate of tax – which can vary depending upon the
earn a rate of return equal to the IRR of the project generating those cash flows. situation – and the tax liability is generally paid shortly after year-end.
● The reinvestment assumption is, strictly speaking, an assumption about the opportu- 2. Profit can be defined as revenues less allowable costs. Within these costs, deprecia-
nity cost of project-generated cash flows. Given a perfect capital market, the assumption is not an allowable cost, nor are dividend payments or working capital expenses.
tion made by the IRR is incorrect – their opportunity cost equates with the capital However, interest payments are an allowable cost. Most normal business expenses such
market rate of return for the risk level involved. The NPV method makes this, correct, as labour, materials and overhead costs are allowable against tax.
assumption. 3. As a substitute for depreciation, companies will be allowed to spread out capital
● The problem of the IRR can be resolved, in an artificial way, by adjusting the simple expenditure costs over the expected life of the investment, less the expected scrap value,
decision rule to a more complex one that states: as a tax allowable expense. (Notice in the calculation of the tax allowable capital cost
(a) if IRR of the differential cash flow is > hurdle rate, accept the project with the expense in Example 5 that the tax relief at 28% was taken into account separately. It
smallest IRR could have been incorporated into the ‘taxable profit’ calculations.)
(b) if IRR of the differential cash flow is < hurdle rate, accept the project with the 4. Companies normally receive tax relief on loan interest costs. They do not receive tax
largest IRR. relief on either loan repayments or on dividend payments.
● A further problem for the IRR arises out of the possible existence of multiple IRRs,
when the decision rule then breaks down completely.
● The problem of multiple IRRs can be resolved, again in a purely artificial way, NOTES
through the use of the extended yield technique. However, this was shown not to deal
with the problem, merely to avoid it.
1. Alternatively, the cash flows could be shown as:
● The theoretical objections to the IRR can be overcome by the use of the ‘modified’
IRR technique (MIRR), which is, in reality, more akin to a cosmetic restatement of Year 0 1 2 3
NPV.
Loan from bank 11 000
● The strong conclusion to the chapter is that, for many reasons, the IRR investment Interest 2100 2100 2 100
appraisal technique is – just like payback and ROCE – unsatisfactory. Therefore,
Loan repayment 21 000
only NPV remains as an investment appraisal technique that will give consistently
reliable advice, leading to shareholder wealth maximization. Capital expenditure 21 000
● Finally, two related areas were examined: the optimal replacement cycle and the Net revenue 1450 1450 1 450
repair-or-replace decision. These were seen to be special cases of the ‘mutually Net cash flow 0 1350 1350 2 650
exclusive projects’ decision, involving the use of the annuity discounting factors.
but the net effect is the same.
Summary – The end of each chapter has a Appendix – Some chapters have an appendix,
summary designed to give an overview of the containing additional useful information.
key areas that have been discussed, and to
provide a snapshot of the main points.
40 PaRT II InVestMent DecIsIons

ChaPTER 3 tRADItIonAL MetHoDs oF InVestMent APPRAIsAL 41
● As far as payback is concerned, the technique is usually applied to a project’s aftertax assumed to occur instantaneously on the last day of the year in which they arise. Thus, a cash flow in
cash flows, but working capital should be excluded entirely from the evaluation. the second year of a project’s life will be assumed to occur on the last day of the second year. The main
● There are four key advantages to payback: exception to this rule is that a project’s outlay (or cost) which arises in the first year of its life is assumed
to occur on the first day of the year. These rather unrealistic assumptions are made for arithmetical con-
1. Quick and simple to calculate. venience, but, in most circumstances, they do not affect the realism of our results in any substantial
2. Seen as automatically selecting the less ‘risky’ project from amongst alternatives. way. (See the Appendix to Chapter 5 on ‘Compounding and discounting’.) Diagrammatically this is
illustrated in Figure 3.2.
3. Seen as helpful in capital rationing situations.
4. Management is required only to forecast project cash flows up to the payback
point and not over the whole of the project’s life. FIguRE 3.2
● Payback’s main disadvantage is its failure to consider project cash flows after the Year 0 1 2 3
point of payback. However, it was argued that, to some extent, this omission might
be understandable where management felt that their forecasting ability was suspect
1st year 2nd year 3rd year
beyond the criterion time period.
● The other disadvantage is payback’s failure to account for the time value of money,
but this can be taken into account through the use of discounted payback. 4 ‘Year 0’ (or t0) refers to the start of the first year (i.e. ‘now’). ‘Year 1’ refers to the end of the first year
● The ROCE also has advantages: and – simultaneously – the start of the second year. ‘Year 3’ refers to the end of the third year, and so
on. References in the text to, for example, ‘the second year’ will refer to events that happen during the
1. It uses the familiar percentage concept. second year, while references to ‘Year 2’ (or t2) will refer to a financial flow that is assumed to arise at
2. It evaluates projects on the basis of the familiar concept of profitability. the end of the second year (or, the start of the third year).
5 Project independence can be defined as a situation where the expected financial flows that arise from a
3. Management’s success or failure in taking financial decisions in aggregate is judged project will occur irrespective of any other project being or not being undertaken.
on the basis of the company’s ROCE (among other things). Therefore, it appears 6 SAR is the Saudi Arabian Riyal.
logical that individual investment decisions should be taken on the same basis. 7 This may be especially true of very small companies that may be lacking the resources and knowledge
to undertake a more complex appraisal.
● However, to be set against these advantages are two major disadvantages: a failure 8 Even this is really open to doubt. Original writers on the topic, such as Joel Dean (1954), believed that
to consider the investment’s cash flow and a failure to take the time value of money payback could be used as a coarse screening device to pick out projects whose desirability (in terms
into account. of profitability) is so obvious as to remove the need for more refined appraisal. For similar reasons it
is held that the method could also be used to reject ‘obviously’ highly unprofitable projects. There is
● In sum, these two techniques may be suitable, at best, as initial screening devices, or little evidence to support this belief, neither has there been an operational definition of ‘obvious’ in this
to evaluate small, short-lived projects. However, they should not be used otherwise; context.
with the possible exception of discounted payback. 9 Even allowing for the discounted payback variant referred to earlier, payback still suffers the major
criticism of not considering a project’s financial flows outside the payback period.
NOTES
FuRThER REadINg
1 Not least among these diverse considerations is the decision-maker’s own psychology; one survey
(R.W. Scapens, T.J. Sale and P.A. Tikkas, Financial Control of Divisional Capital Investment, London 1. Most of the literature concerning payback and ROCE is fairly old, and the more up-to-date contribu-
Institute of Cost and Management Accountants 1982) concludes that concern with an investment’s tions such as G. Arnold and P. Hatzopoulos, ‘The Theory-practice Gap in Capital Budgeting: Evidence
financial viability is of almost secondary importance to whether or not it ‘fits in’ with the company’s from the United Kingdom’, Journal of Business Finance and Accounting, June/July 2000 have tended
strategic plans. to contrast them with the discounted cash flow (DCF) techniques which are to be discussed in Chapter
2 The term ‘mutually exclusive’ when applied to investment projects is best explained by means of an 5. Nevertheless, an interesting starting point is the discussion in D. Bodenhorn, ‘On the Problem of
example. Suppose a company requires a new distribution centre and there are two possible sites under Capital Budgeting’, Journal of Finance, December 1959.
consideration, then the decision could be analyzed in terms of two mutually exclusive investments:
building the distribution centre at Site A or building it at Site B. The projects are said to be mutually 2. Even older, but also of interest is: J. Dean, ‘Measuring the Productivity of Capital’, Harvard Business
exclusive because only one new distribution centre is required, so if it is built at Site A, the acceptance Review, Jan–Feb 1954; as is E.A. Ravenscroft, ‘Return on Investment: Fit the Method to your Needs’,
of this project excludes the other project from being chosen, and vice versa. More generally, a pair of Harvard Business Review, Mar–Apr 1960.
projects are mutually exclusive if the acceptance of one means that the other would not, or could not, 3. Specifically, on payback, see: M.J. Gordon, ‘The Payoff Period and the Rate of Profit’, Journal of
be accepted. This definition can be extended to any number of alternative investment projects of which Business, October 1955; A. Rappaport, ‘The Discounted Payback Period’, Management Science, Jul–
only one can be chosen. Aug 1965; H. Levy, ‘A Note on the Payback Method’, Journal of Financial and Quantitative Analysis,
3 It is important to note that throughout this book we shall use the following convention when dealing December 1968; and M.H. Weingartner, ‘Some New Views on the Payback Period and Capital
with all types of financial flows (e.g. profit, dividend, cash or tax flows): all flows will normally be Budgeting Decision’, Management Science, August 1969.
Notes – Useful end-of-chapter notes provide Further Reading – Provide helpful directions
helpful additional information and clarification. to further sources of information, compiled with
particular emphasis on providing articles that
are, in the main, accessible to those readers who
do not possess a higher degree in mathematics.
xxii WALK–THROUGH TOUR
ChaPTER 8 cAPItAL RAtIonInG 167
ChaPTER 7 PRoJect cAsH FLoWs 141

quIZ quESTIONS
quIZ quESTIONS
1 What are the two types or classes of capital rationing?
2 Why does capital rationing cause problems for the NPV decision rule?
1 If the market interest rate is 13% and the general rate of inflation is 4%, what is the real
3 Given these projects:
interest rate?
2 What approaches can be taken to an NPV investment appraisal in inflationary conditions?
t0 t1 ……. NPV
3 What is a ‘real’ cash flow?
A 2100 2 50 ……. 160 4 Rent is paid each year. This year’s rent 2;10 000 – has just been paid. How much rent
will need to be paid in two years’ time if:
B 2200 2200 ……. 190
(a) the rent remains constant in real terms?
C 2 40 2150 ……. 120 (b) the rent remains constant in money terms?
D 2100 1 20 ……. 210 In both of the above cases, what is the PV of the Year 2 rent? Assume that the market
discount rate is 15.5% and the general rate of inflation is 5% per year.
If only 200 is available at t0, which projects should be selected? 5 A company owns a machine that is currently lying unused in the factory. The machine
4 Given the projects in question 3, if only 240 external capital was available at t1 was bought five years ago at a cost of £60 000 and has now been depreciated down to a
(no capital rationing at t0), which projects should be selected? ‘book value’ of £10 000. It could be sold now for £3 000. Alternatively, it could be
5 Given these projects: rented out for one year at £2 500. The company’s chief engineer believes the machine
will be totally obsolete in 12 months’ time and would then have a scrap value of £800.
t0 ……. NPV The company is considering using the machine to undertake a 1-year project. If it did,
the machine’s scrap value at the end of the year, net of dismantling costs, would be zero.
A 2100 ……. 140 Ignoring the time value of money, what is the cost of using the machine on the project?
B 2100 ……. 130 6 What is the approach used to handling tax in investment appraisal?
7 Why should ‘allocated’ fixed costs be excluded from project cash flows in an NPV
C 2200 ……. 150 analysis?
D 2100 ……. 110 8 A company pays an annual rent of €20 000 for its factory of 10 000 m2. All space is
fully utilized and no more space is available for rent. Each square metre of space gener-
E 2 50 ……. 1 4
ates a contribution of €15. A project is being considered that would require 150 m2 of
Only 300 is available at t0 and Projects B and C are mutually exclusive. Which projects factory space. What would be the cost, to the project, of that space?
should the firm accept? (See the ‘Answers to Quiz Questions’ section at the back of the book.)
6 Given the projects:
t0 t1 t2 ……. NPV
A 2100 2200 150 ……. 140
B 2150 1 70 170 ……. 120 PROBlEmS
C 2200 2120 230 ……. 150
The answers to two of the following problems (those indicated by an asterisk) are available to students online. The
External capital is limited to 190 at t0, 110 at t1 and zero at t2. Formulate the problem into answer to the remaining problem is available only to lecturers (see the ‘Teaching & Learning Support Resources’
an LP. page for details).
7 A capital rationing LP produces the following dual values for cash:
1* SatNav Systems p1c is considering buying a machine to produce printed circuit boards. The machine costs £1.2
million and will last for five years. The scrap value of the machine is expected to be £200 000. In addition to
t0 1.86 the capital investment, an investment of £150 000 in working capital will also be required. SatNav’s accounting
t1 0.73 department has prepared the following estimated annual trading account for the project:
t2 0.64 (£)
t3 1.21 Sales 1 400 000
Materials (300 000)
A bank loan is available at t1, repayable at t2. What is the maximum rate of interest
you would be willing to pay, given the firm uses a 10% discount rate for project Labour (500 000)
appraisal? Depreciation (200 000)
Allocated fixed overheads (250 000)
Annual profit £ 150 000
▲
Quiz Questions – Included at the end of every Problems – Exam-style questions which cover
chapter, these test both recall and understanding the major elements of each chapter’s subject
and give the reader essential feedback. matter – some answers are included on the
students’ online platform, whilst others go on
the lecturers’ side only.
ChaPTER 23 FoReIGn eXcHAnGe HeDGInG 577
aNSwERS TO quIZ quESTIONS Required:

(a) Set up the futures hedge.
(b) Calculate the hedge efficiency if, in August:
Chapter 1 Spot EUR/USD 0.7210 – 0.7228

9 A Greek company imports goods from the USA and is invoiced for US$297 500
1. The process by which the company seeks out alternative courses of action, alternative investments, etc. payable in October.
2. The assumed objective of financial decision-making is maximization of shareholder wealth. While recog-
nizing that this is a simplification of the real world, it is reasonable to accept that this should be the main EUR/USD spot rate 0.7280 – 0.7300
objective, other things being equal. October forward 0.7320 – 0.7345
3. It is a reporting concept, not a decision-making concept. Its purpose is to report on the success or failure of (a) Show how a forward market hedge would be carried out.
decisions taken. It has only a secondary role in the decision-making process itself. Accounting profit is also (b) Show how a futures market hedge would be carried out. (One USD/EUR futures
based on historic cost whereas financial management is concerned with value; the two things are very differ- contract represents US$20 000 and December sterling futures are priced at €73.15
per US$100.)
ent. Finally, profit as reported is subject to the judgement of the accountant and cannot be viewed as entirely
(c) What would be the result if the futures market hedge in EUR/USD spot turned out
reliable.
to be 0.7335 2 0.7360 in October, and December USD/EUR futures were priced
4. On the basis of the expected flow of dividends the shares will generate in the future. at €73.55?
(See the Answers to Quiz Questions’ section at the back of the book.)
Chapter 2
1. The problem is one of control. How does the principal control the agent to ensure that the agent acts in the
principal’s best interests? PROBlEmS
2. Fiduciary responsibilities; independent external audit; stock exchange rules and regulations; legal restric-
tions: and corporate governance regulations and practice. The answers to the following problems are available to students online.
3. Reward managerial ability, not luck; rewards should have a significant impact on managerial remuneration; 1 Fiddécreme is a medium-sized French electronics company with export and import trade with the USA. The
reward systems should work two ways; concept of risk should be taken into account; the shareholders’ time following transactions are due within the next six months. Transactions are in the currency specified.
horizon should be taken into account. The scheme should be simple, inexpensive and difficult to manipulate. (i) Purchases of semiconductor components, cash payment due in three months: €116 000.
(ii) Sale of application-specific integrated circuits (ASIC), cash receipt due in three months: US$197 000.
Chapter 3 (iii) Purchase of digital signal processors for resale, cash payment due in six months: US $447 000.
(iv) Sale of ASICs, cash receipt due in six months: US$154 000.
1. Stage one: The best of the alternative projects has the shortest payback. Stage two: Accept the best project
as long as its payback period satisfies the decision criterion. Exchange rates (Euronext market)
2. Working capital should be excluded from the analysis. Project W net cash flow: EUR/USD
0 2 11 000 Spot 0.7230 – 0.7248

1 1 4 000 Payback 5 2.75 years three months forward 0.0082 – 0.0088 discount
2 1 4 000 six months forward 0.0115 – 0.0122 discount
3 1 4 000
4 1 3 000 Money market interest rates
5 1 3 000 Euros: 3.5% per year.
3. (a) Quick and simple to calculate. US dollars: 2.5% per year
(b) Thought to automatically select less risky projects in mutually exclusive decision situations. USD/EUR option (Euronext market) (Prices are US$ per €100, contract size €10 000)
(c) Saves management the trouble of having to estimate project cash flows beyond the maximum
Exercise price March calls March puts June calls June puts
payback time period.
US$138 2.25 4.44 3.16 4.90
(d) Convenient method to use in capital rationing.
▲
607
607
Answers to Quiz Questions – Helpfully Answers to Problems – The majority of

provided at the back of the book to enable answers to the exam question-style problems
students to easily test themselves. are available to students online, though some
lecturer-only answers are on the lecturers’
password protected website.
C engage’s peer reviewed content for higher and
further education courses is accompanied by a range
of digital teaching and learning support resources. The
resources are carefully tailored to the specific needs of
the instructor, student and the course. Examples of the
kind of resources provided include:
• A password protected area for instructors with,

for example, a testbank, PowerPoint slides and
an instructor’s manual.
• An open-access area for students including, for

example, useful weblinks and glossary terms.
Lecturers: to discover the dedicated lecturer digital

support resources accompanying this textbook please
register here for access: login.cengage.com.
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brizna, vna miserable ocasion
para le despegar de sí. Dize que
por tener grande edad le perdio el
respeto que le deuia como a
señor. O que le trata mal sus
hijos; o que quiere mandar más
que él; y si eres moço leuantate
que te le quieres echar con la hija,
o con la muger; o que te hallaron
hablando con vna donzella de
casa en vn rincon. De manera
que nunca les falta con que
infame y miserablemente los
echar, y avn sin el salario que
siruio, y donde penso el
desuenturado del sieruo que auia
proueydo a la pobreza y
neçesidad en que pudiera venir
se ofreçio de su voluntad a la
causa y ocasion de muy mayor,
pues echado de aquellas agenas
casas viene forçado al hospital.
Alli viejos los tales y enfermos y
miserables los dan de comer y
beber y sepoltura por limosna y
amor de Dios. Resta agora,
Miçilo, que quieras considerar
como cuerdo y auisado animo
todo lo que te he representado
aqui, porque todo lo esperimenté
y passó por mí. No çeues ni
engañes tu entendimiento con la
vanidad de las cosas desta vida,
que talmente suelen engañar, y
mira bien que Dios y naturaleza a
todos crian y produçen con
habilidad y estado de poder gozar
de lo bueno que ella crió, si por
nuestro apetito, oçio y miseria no
lo venimos a perder, y de aqui
adelante contentate con el estado
que tienes, que no es çierto digno
de menospreçiar.
Miçilo.—¡O gallo
bienauenturado! que
bienauenturado me has hecho oy,
pues me has auisado de tan gran
bien; yo te prometo nunca serte
ingrato a benefiçio de tanto valor.
Solo te ruego no me quieras
desamparar que no podre viuir sin
ti; y porque es venido el dia
huelga, que quiero abrir la tienda
por vender algun par de çapatos
de que nos podamos mantener
oy.
Fin del deçimo nono canto del

gallo.
NOTAS:
[1102] G., canto del gallo.
[1103] G., poseen.
[1104] G., morir.
[1105] G., acordarsseme.
[1106] G., el daño que despues de tragado el çeuo en el anzuelo
está, y teniendo la meluca en la boca para la tragar no te la hago
echar fuera antes que prendiendo la punta en tu paladar bomites
la sangre y vida con dolor.
[1107] G., el veneno.
[1108] G., no ha de aprouechar mi.
[1109] G., fuerça.
[1110] G., ¿como podre yo aprobar vuestra opinion?
[1111] G., se suple.
[1112] G., pleytos.
[1113] G., los.
[1114] G., poder soliçitar.
[1115] G., los sienten.
[1116] G., y casa.
[1117] G., trabajo, y por el consiguiente más miseria y
enfermedad que lleuan.
[1118] G., deuen desear aquella vida, por solo el deleyte y
contentamiento que da vibir en aquellas anchas y espaçiosas
casas, habitaçion de dioses y de sola persona Real y inçitados de
aquellas grandes esperanças que prometen aquellos poderosos
señores con su real y generosa conuersaçion.
[1119] G., por gozar solamente de aquellos marauillosos tesoros,
aparadores de oro.
[1120] G., al cunplimiento de vuestra neçesidad.
[1121] G., hallara.
[1122] G., propias.
[1123] G., pobres.
[1124] G., día.
[1125] G., grande.
[1126] G., en tal vida.
[1127] G., a la.
[1128] G., acaben.
[1129] G., porque se acuerde de tu.
[1130] G., dignidad.
[1131] G., que vas a.
[1132] G., patrimonio.
[1133] G., seruiçio.
[1134] G., a tu amo.
[1135] G., que te aconteçe que preguntandote el señor que
hombre fue el rey Tholomeo, respondas tu que fue hermano y
marido de Clopatra; o otra cosa que va muy lexos de la intinçion
de tu señor.
[1136] G., dizen que es temor.
[1137] G., de tu habilidad, persona y linaje.
[1138] G., y esta pesquisa que de ti.
[1139] G., a tu.
[1140] G., que digan que se sirue.
[1141] G., sabios y cuerdos.
[1142] G., oculto y sonoliento.
[1143] G., tu saber, cordura y discreçion.
[1144] G., trihunfador.
[1145] G., mereçes, no de roble o arrayan como los otros en la
Olimpia.
[1146] G., cosas.
[1147] G., alguna.
[1148] G., de.
[1149] G., ante.
[1150] G., vna gran.
[1151] G., quanto a grandes salarios.
[1152] G., con.
[1153] G., inuidiosos.
[1154] G., pues.
[1155] G., puede.
[1156] G., osas.
[1157] G., les tienen.
[1158] G., çinquenta.
[1159] G., la.
[1160] G., que te manda tu señora.
[1161] G., que yo tanto amo.
[1162] G., confiar.
ARGUMENTO
DEL VIGESSIMO Y
VLTIMO CANTO
En este vigessimo canto el auctor

representa a Demophon, el
qual viniendo vn dia a casa de
Miçilo su vezino a le visitar le
halló triste y afligido por la
muerte de su gallo, y
procurando dexarle consolado
se vuelue a su casa.
Demophon. Miçilo.
Demophon.—¡O Miçilo! vezino y
amigo mio, ¿qué es la causa que
ansi te tiene atormentado por
cuydado y miserable
aconteçimiento? veote triste,
flaco, amarillo con representaçion
de philosopho, el rostro lançado
en la tierra, pasearte por este
lugar obscuro dexado tu contino
offiçio de çapateria en que tan a
la contina te solias ocupar con
eterno trabajo, ¿consumes agora
el tiempo en sospiros? Nuestra
igual edad, vezindad y amistad te
obliga a fiar de mí tus tan
miserables cuydados; porque ya
que no esperes de mí que
cunpliese tus faltas ayudarte he
con consejo; y si todo esto no
estimares, bastarte ha saber que
mitiga mucho el dolor comunicar
la pena, prinçipalmente
contandose a quien en alguna
manera por propria la sienta.
¿Qué es de tu belleza y alegria,
desemboltura y comunicaçion con
que a todos tus amigos y vezinos
te solias dar de noche y de dia en
çenas y combites y fuera dellos?
ya son pasados muchos dias que
te veo recogido en soledad en tu
casa que ni me quieres ver ni
hablar, ni visitar como solias.
Miçilo.—¡O mi Demophon! mi
muy caro hermano y amigo. Solo
esto quiero que como tal amigo
de mí sepas, que no sin gran
razon en mí ay tan gran muestra
de mal. Prinçipalmente quando
tienes de mí bien entendido que
no qualquiera cosa haze en mí
tan notable mudança, pues has
visto en mí auer disimulado en
varios tienpos notables toques de
fortuna y infortunios tan graues
que a muy esforçados varones
huuieran puesto en ruyna, y yo
con igual rostro los he sabido
passar. Avnque comunmente se
suele dezir que al pobre no ay
infortunio, que aunque esto sea
ansi verdad no dexamos de sentir
en nuestro estado humilde lo que
al anima le da a entender su
natural. Ansi que tengo por çierto,
Demophon, que no ay igual dolor
de perdida ni miseria que con
gran distançia se compare con el
mio.
Demophon.—Mientras más me le
has encareçido más me has
augmentado la piedad y miseria
que tengo de tu mal; de donde
naçe en mí mayor deseo de lo
saber. Por tanto no reserues en tu
pecho tesoro tan perjudiçial, que
no hay peor espeçie de auariçia
que de dolor. Por çierto en poco
cargo eres a naturaleza pues
pribandote del oro y riquezas, de
pasiones y miserias fue contigo
tan liberal que en abundançia te
las comunicó. Dime porqué ansi
te dueles, que no podré consentir
lo passes con silençio y
disimulaçion.
Miçilo.—Quiero que ante todas
las cosas sepas, ¡o Demophon!
que no es la que me fatiga falta
de dineros para que con tus
tesoros me ayas de remediar, ni
de salud para que con medicos
me la ayas de restituir. Ni tanpoco
me aflixo por mengua que me
hagan las tus vasijas, ni aparatos
y arreos de tapetes y alhajas con
que en abundançia te sueles
seruir. Pero faltame de mi casa vn
amigo, vn conpañero de mis
miserias y trabajos y tan igual que
era otro yo; con el qual poseya yo
todos los tesoros y riquezas que
en el mundo ay; faltame, en
conclusion, vna cosa, Demophon,
que con ningun poder ni fuerças
tuyas la puedes suplir: por lo qual
me escuso de te la dezir, y a ti de
la saber.
Demophon.—No en vano suelen
dezir, que al pobre es proprio el
filisofar, como agora tú; yo no
creo que has aprendido esa
retorica en las scuelas de
Athenas, con que agora de nueuo
me encareçes tu dolor: ni sé qué
maestro has tenido della de poco
acá.
Miçilo.—Ese maestro se me
murio, cuya muerte es causa de
mi dolor.
Demophon.—¿Quien fue?[1163].
Miçilo.—Sabras, amigo, que yo
tenia vn gallo que por mi casa
andaua estos dias en conpañia
destas mis pocas gallinas que las
albergaua y recogia y defendia
como verdadero marido y varon.
Suçedio que este dia de
carnestolendas que passó, vnas
mugeres desta nuestra vezindad,
con temeraria libertad, habiendo
solamente cuenta, y
pareçiendoles que era el dia
priuillegiado me entraron mi casa
estando yo ausente, que
cautelosamente aguardaron que
fuesse ansi, y tomaron mi gallo y
lleuaronle al campo, y con gran
grita y alarido le corrieron
arroxandosele las vnas a las
otras: y como quien dize[1164],
daca el gallo, toma el gallo, les
quedauan las plumas en la mano.
En fin fue pelado y desnudo de su
adornado y hermoso vestido; y no
contentas con esto, rendiendosele
el desuenturado sin poderles
huyr, confiandose de su
inoçençia: pensando que no
pasara adelante su tirania y[1165]
crueldad, subjetandoseles con
humildad, pensando que por esta
via las pudiera conuençer y se les
pudiera escapar, sacaron de sus
estuches cuchillos, y sin tener
respecto alguno a su inoçençia le
cortaron su dorada y hermosa
çeruiz, y de comun acuerdo
hiçieron çena opulenta dél.
Demophon.—Pues ¿por faltarte
vn gallo te afliges tanto que estás
por desesperar? Calla que yo lo
quiero remediar con embiarte otro
gallo criado en mi casa, que creo
que hará tanta ventaja al tuyo
quanta haze mi despensa a la
tuya para le mantener.
Miçilo.—¡O Demophon! quanto
viues engañado en pensar que mi
gallo perdido con qualquiera otro
gallo se podria satisfazer.
Demophon.—¿Pues qué tenia
más?
Miçilo.—Oyeme, que te quiero
hazer saber que no sin causa me
has hallado philosopho rectorico
oy.
Demophon.—Dimelo.
Miçilo.—Sabras que aquel gallo
era Pythagoras el philosopho,
eloquentissimo varon, si le has
oydo dezir.
Demophon.—Pythagoras,
muchas vezes le oy dezir. Pero
dime ¿cómo quieres que entienda
que el gallo era Pythagoras: que
me pones en confusion?
Miçilo.—Porque si oyste dezir de
aquel sapientissimo philosopho,
tambien oyrias dezir de su
opinion.
Demophon.—¿Quál fue?
Miçilo.—Este afirmó que las
animas passauan de vn cuerpo a
otro. De manera que dixo que
muriendo vno de nosotros luego
desanparando nuestra alma este
nuestro cuerpo en que vibio se
passa a otro cuerpo de nueuo a
viuir: y no sienpre a cuerpo de
honbre. Pero aconteçe que el que
agora fue rey passar[1166] a
cuerpo de vn puerco, vaca ó leon,
como sus hados y suçeso[1167] lo
permiten, sin el alma lo poder
evitar; y ansi el alma de
Pythagoras despues aca que
naçio auia viuido en diuersos
cuerpos, y agora viuia en el
cuerpo de aquel gallo que tenia
yo aqui.
Demophon.—Esa manera de
dezir ya la oy que la afirmaua él.
Pero era un mentiroso,
prestigioso y embaydor, y tanbien
como el era efficaz en el persuadir
y aquella gente de su tienpo era
sinple y ruda, façilmente les hazia
creer qualquiera cosa que él
quisiesse soñar.
Miçilo.—Çierto es yo que ansi
como lo dezia era verdad.
Demophon.—¿Como ansi?
Miçilo.—Porque en aquel gallo
me habló y me mostró en muchos
dias ser él.
Demophon.—¿Que te habló?
Cosa me cuentas digna de
admiraçion. En tanta manera me
marauillo de[1168] lo que dices por
cosa nueua que sino huuiera
conoçido tu bondad y sinçera
condiçion pensara yo agora que
estauas fuera de seso y que
como loco deuaneas. O que
teniendome en poco pensauas
con semejantes sueños vurlar de
mí. Pero por Dios te conjuro ¡o
Miçilo! y por nuestra amistad, la
qual por ser antigua entre
nos[1169] tiene muestra de
deydad, me digas muy en
particular todo lo que en la verdad
es.
Miçilo.—¡O Demophon! que sin
lagrimas no te lo puedo dezir,
porque sé yo solo lo mucho que
perdi. Auianme tanto faboreçido
los hados que no creo que en el
mundo haya sido honbre tan feliz
como yo. Pero pareçeme que
este fabor fue para escarneçer de
mí, pues me comunicaron tan
gran bien con tanta breuedad,
que no parece sino que como
anguila se me deleznó.
Solamente me pareçe que
entendí mientra le tuue en le
apretar en el puño para le poseer,
y quando pense que le tenía con
alguna seguridad se me fue.
Tanbien sospecho que los hados
me quisieron tentar si cabia en mí
tanto bien, y por mi mala suerte
no fue dél mereçedor; y porque
veas si tengo razon de lo
encareçer, sabras que en él tenía
yo toda la consolaçion y
bienauenturança que en el mundo
se podia tener. Con él pasaua yo
mis trabajos de noche y de dia: no
auia cosa que yo quisiesse saber
o auer que no se me diesse a
medida de mi voluntad. El me
mostró la vida de todos quantos
en el mundo ay: lo bueno y malo
que tiene la vida del rey y del
çiudadano, del cauallero, del
mercader y del labrador. El me
mostró quanto en el çielo y el
infierno ay, porque me mostró a
Dios y todo lo que gozan los
bienauenturados allá. En
conclusion ¡o Demophon! yo perdi
vn tesoro que ningun poderoso
señor en el mundo más no pudo
poseer.
Demophon.—Por çierto tengo, ¡o
Miçilo! sentir con mucha razon el
gran mal que te han hecho esas
mugeres en pribarte de tanto
bien, quando queriendo satisfazer
a sus vanos apetitos, çelebrando
sus lasçiuas y adulteras fiestas no
perdonan cosa dedicada ni
reseruada por ningun varon, con
tanto que executen su voluntad.
No miraron que tú no eras honbre
con quien tal dia se suelen
festejar, y que por tu edad no
entras en cuenta de los que
çelebran semejantes fiestas. Que
los moços ricos subjetos al tirano
y lasçiuo[1170] amor, enpleados en
las contentar no les pueden negar
cosa que haga a su querer, y ansi
por[1171] los entretener les
demandan en tales dias cosas
curiosas, en el cumplimiento de
las quales conoçen ellas su
mayor y más fiel enamorado y
seruidor; y ansi agora dandoles a
entender que para su laçiuia no
los han menester en el tienpo que
entra[1172] de la quaresma,
mostrando gran voluntad de se
contener pelan aquellos gallos en
lugar de la juuentud; mostrando
menospreçiar su gallardia por ser
tienpo santo el que entra, y que
no se quieren dellos en este
tienpo seruir; y ansi, burlando
dellos, pelan aquellos gallos en su
lugar, dando a entender que los
tengan en poco, pues pelados de
toda su pluma y hazienda en el
tienpo pasado que les fue
disimulado el luxuriar, ya,
recogiendose a la santidad, los
dexan[1173]; ¡o animal tirano y
ingrato a todo bien!; que en todas
sus obras se preçian mostrar su
mala condiçion. ¿Y no vian que tú
no estauas en edad para vurlar de
ti?
Miçilo.—Y avn por conocer yo
bien esa verdad ni me casé, ni las
quise ver; y avn no me puedo
escapar de su tirania, que
escripto me dizen que está que
no ay honbre a quien no alcançe
siquiera la sombra de su veneno y
maldiçion. Solamente me lastima
pensar que ya que me auian de
herir no fue de llaga que se
pudiesse remediar. Quitaronme
mi consejero, mi consuelo y mi
bien. Avn pluguiesse a Dios que
en este tienpo tan santo se
recogiessen de veras y sin alguna
fiçion[1174] tratassen de veras la
virtud. Ayunar, no beber, ni comer
con tanta disoluçion, no se
afeytar, ni vestirse tan
profanamente, ni vurlar, ni mofar
como en otro qualquiera tienpo
comun[1175]. Pero vemos que sin
alguna rienda viben el dia de
quaresma como qualquiera otro.
Son sus fiestas las que aborreçe
Dios, porque no son sino para le
ofender.
Demophon.—Por çierto, Miçilo,
espantado estoy de ver la vurla
destas vanas mugeres; con
quantas inuençiones[1176] passan
su tienpo, y quantas astuçias
vsan para sacar dineros de sus
amantes. Prinçipalmente en estos
pueblos grandes de villas y
çiudades; porque estas cosas no
las saben los aldeanos[1177], ni ha
llegado del todo la maliçia
humana por allá. Por çierto cosas
ay de gran donayre que se
inuentan en estos pueblos
grandes[1178]; con las quales los
inuentores dellas entretienen sus
cosas, y hazen sus hechos[1179]
por su proprio fin de cada qual y
interes; por çierto que me tienen
de cada dia en más admiraçion.
Prinçipalmente en este pueblo
donde ay tanta concurrencia de
gentes, o por causa de corte Real
o por[1180] chançelleria; porque la
diuersidad de estrangeros haze
dar en cosas, y inuentar donayres
que confunden el ingenio auerlas
solamente de notar. Quantas
maneras de santidades fingidas,
romerias, bendiçiones y
peregrinaçiones. Tanto hospital,
colejios de santos y santas; casas
de niños y niñas é hospitales de
viejos. Tanta cofradia de
disçiplinantes de la cruz y de la
pasion, y proçesiones. Tanto
pedigueño de limosnas, que más
son los que piden que son los
pobres que lo[1181] quieren[1182]
reçebir.
Miçilo.—Por çierto, Demophon,
tú tienes mucha razon y vna de
las cosas de que yo estoy más
confuso es de ver que en este
nuestro lugar, siendo tan noble y
el más prinçipal de nuestra
Castilla, donde[1183] ay más
letrados y honbres más agudos
en la conuersaçion y cosas del
mundo y cortesanía, y en estas
flaquezas y engaños que se
ofreçen[1184], son todos en vn
común más façilmente arroxados
y derrocados que en todos
quantos en otros pueblos ay; y
avn engañados para lo aprobar,
auctorizar y seguir[1185]. Que se
atreua vn honbre a entrar aqui en
este pueblo donde está la flor de
cordura y agudeça y discreçion, y
que debajo de vn habito religioso
engañe a todo estado eclesiastico
y seglar, diziendo que hará boluer
los rios atras, y hará cuaxar el
mar, y que forçará los demonios
que en los infiernos estan, y que
hará[1186] parir quantas[1187]
mugeres son, quanto quiera que
de su naturaleza sean esteriles y
que no puedan conçebir[1188], y
que en esto vengan a caer todos
los más prinçipales y generosos
prinçipes y señores, y se le
vengan a rendir quantas dueñas y
donzellas viben en este
lugar[1189]. Que se sufra vibir en
este pueblo vn honbre que debajo
de nonbre de Juan de Dios, no se
le çierre puerta de ningun Señor
ni letrado, ni se le niegue cosa
alguna que quiera demandar, y
después le quemen públicamente
por sometico engañador. Pues,
¿no se ha disimulado tanbien un
clerigo que auia sido primero
frayle veynte años, al qual por
tener muestra de gran santidad le
fue encargado aquel colegio de
niñas? tal sea su salud qual dellas
cuenta dio. ¿En que está esto,
amigo?
Demophon.—A tu gallo quisiera
yo, Miçilo que lo huuieras
preguntado antes que a mí
porque él te supiera mejor
satisfazer. Pero para mi bien creo
que en alguna manera deuo de
açertar; que creo que de los
grandes pecados que ay en este
lugar[1190] viene esta comun
confusion, o çeguedad. Que como
no hay en este pueblo más
prinçipal ni más comun que
pecados y ofensas de Dios;
pleytos, hurtos, vsuras, mohatras,
juegos, blasfemias, symonias,
trapazas y engaños, y despues
desto una puteria general, la qual
ni tiene punto, suelo, ni fin. Que ni
se reserua dia, ni fiesta,
quaresma, ni avn Semana Santa
ni pasqua en que se çese[1191] de
exerçitar como offiçio conueniente
a la republica, permitido y
aprobado por neçesario en la ley,
en pena deste mal nos çiega Dios
nuestros entendimientos, orejas y
ojos, para que auisandonos no
entendamos, y oyendo no
oyamos, y con ojos[1192] seamos
como çiegos que palpamos la
pared. En tanta manera somos
traydos en çeguedad que
estamos rendidos al engaño muy
antes que se ofrezca el
engañador. Hanos hecho Dios
escarnio, mofa y risa a los muy
chicos[1193] niños de muy tierna
edad. ¿En qué lugar por pequeño
que sea se consentira, o
disimulará lo mucho, ni lo muy
poco que se disimula y sufre
aqui? ¿Dónde hay tanto juez sin
justiçia como aqui? ¿Dónde tanto
letrado sin letras como aqui?
¿Dónde tanto executor sin que se
castigue[1194] la maldad? ¿Dónde
tanto escribano, ni más comun el
borron? Que no ay honbre de
gouierno en este pueblo que trate
más que su proprio interes, y
como más se auentajará. Por esto
permite Dios que vengan vnos
zarlos, o falsos prophetas que con
embaymientos, aparençias y
falsas demostraçiones nos hagan
entender qualquiera cosa que nos
quieran fingir. Y lo que peor es,
que quiere Dios que despues
sintamos más la risa que el
interes en que nos engañó.
Miçilo.—Pues avn no pienses,
Demophon, que la vanidad y
perdiçion destas liuianas mugeres
se le ha de passar a Dios sin
castigo; que yo te oso afirmar por
cosa muy çierta y que no faltará.
Que por ver Dios su disoluçion,

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(eBook PDF) Corporate Finance:

Theory and Practice 10th Edition

Financing decisions 347

International issues 533

5 23. Foreign exchange hedging

About the authors xvi

4. Investment–consumption decision model 45

5. The discounted cash flow approach 61

6. Net present value and

7. Project cash flows 121

8. Capital rationing 145

3 9. Simple risk techniques

10. Risk and return 195

11. Portfolio theory 216

12. The capital asset pricing model 246

Arbitrage pricing theory 269

13. Option valuation 281

14. Interest rate risk 319

4 15. Financial markets

16. The cost of capital 372

17. Weighted average cost of capital 412

18. Capital structure in a simple world 426

19. Capital structure in a complex world 446

20. Investment and financing interactions 487

Further reading 513

21. The dividend decision 517

5 22. Foreign exchange

23. Foreign exchange hedging 551

24. Foreign direct investment 579

ChaPTER ChaPTER 3 tRADItIonAL MetHoDs oF InVestMent APPRAIsAL 37

The second traditional approach to investment appraisal is the Return on Capital

The purpose of this chapter is to:

Limitations of the NPV and Its Practical Uses in

116 PaRT II InVestMent DecIsIon s ChaPTER 7 PRoJect cAsH FLoWs 139

40 PaRT II InVestMent DecIsIons

ChaPTER 8 cAPItAL RAtIonInG 167

ChaPTER 7 PRoJect cAsH FLoWs 141

ChaPTER 23 FoReIGn eXcHAnGe HeDGInG 577

aNSwERS TO quIZ quESTIONS Required:

Chapter 1 Spot EUR/USD 0.7210 – 0.7228

0 2 11 000 Spot 0.7230 – 0.7248

Answers to Quiz Questions – Helpfully Answers to Problems – The majority of

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Lecturers: to discover the dedicated lecturer digital

Students: to discover the dedicated student digital

Fin del deçimo nono canto del

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6. Net present value and