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The Logic and Practice of Financial Management
Ninth Edition
Global Edition
Arthur J. Keown
Virginia Polytechnic Institute and State University
R. B. Pamplin Professor of Finance
John D. Martin
Baylor University
Professor of Finance
Carr P. Collins Chair in Finance
J. William Petty
Baylor University
Professor of Finance
W. W. Caruth Chair in Entrepreneurship
Boston Columbus Indianapolis New York San Francisco

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To my parents, from whom I learned the most.
Arthur J. Keown
To the Martin women—wife Sally and daughter-in-law Mel, the Martin men
—sons Dave and Jess, and the Martin boys—grandsons Luke and Burke.
John D. Martin
To Jack Griggs, who has been a most loyal and dedicated friend for over 55
years, always placing my interests above his own, and made life’s journey a lot
of fun along the way.
J. William Petty

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About the Authors
Arthur J. Keown is the Department Head and R. B. Pamplin Professor of
Finance at Virginia Polytechnic Institute and State University. He received his
bachelor’s degree from Ohio Wesleyan University, his M.B.A. from the University of
Michigan, and his doctorate from Indiana University. An award-winning teacher, he
is a member of the Academy of Teaching Excellence; has received five Certificates of
Teaching Excellence at Virginia Tech, the W. E. Wine Award for Teaching Excellence,
and the Alumni Teaching Excellence Award; and in 1999 received the Outstanding
Faculty Award from the State of Virginia. Professor Keown is widely published
in academic journals. His work has appeared in the Journal of Finance, Journal of
Financial Economics, Journal of Financial and Quantitative Analysis, Journal of Financial
Research, Journal of Banking and Finance, Financial Management, Journal of Portfolio
Management, and many others. In addition to Foundations of Finance, two others of his
books are widely used in college finance classes all over the country—Basic Financial
Management and Personal Finance: Turning Money into Wealth. Professor Keown is a
Fellow of the Decision Sciences Institute, was a member of the Board of Directors of
the Financial Management Association, and is the head of the finance department
at Virginia Tech. In addition, he served as the co-editor of the Journal of Financial
Research for 6½ years and as the co-editor of the Financial Management Association’s
Survey and Synthesis series for 6 years. He lives with his wife in Blacksburg, Virginia,
where he collects original art from Mad Magazine.
John D. Martin holds the Carr P. Collins Chair in Finance in the Hankamer
School of Business at Baylor University, where he was selected as the outstanding
professor in the EMBA program multiple times. Professor Martin joined the Baylor
faculty in 1998 after spending 17 years on the faculty of the University of Texas at
Austin. Over his career he has published over 50 articles in the leading finance jour-
nals, including papers in the Journal of Finance, Journal of Financial Economics, Journal
of Financial and Quantitative Analysis, Journal of Monetary Economics, and Management
Science. His recent research has spanned issues related to the economics of uncon-
ventional energy sources, the hidden cost of venture capital, and the valuation of
firms filing Chapter 11. He is also co-author of several books, including Financial
Management: Principles and Practice (13th ed., Prentice Hall), Foundations of Finance
(9th ed., Prentice Hall), Theory of Finance (Dryden Press), Financial Analysis (3rd ed.,
McGraw-Hill), Valuation: The Art and Science of Corporate Investment Decisions (3rd ed.,
Prentice Hall), and Value Based Management with Social Responsibility (2nd ed., Oxford
University Press).

6 Part 4 • Managing Your Investments
J. William Petty, PhD, Baylor University, is Professor of Finance and

W. W. Caruth Chair of Entrepreneurship. Dr. Petty teaches entrepreneurial finance
at both the undergraduate and graduate levels. He is a University Master Teacher.
In 2008, the Acton Foundation for Entrepreneurship Excellence selected him as the
National Entrepreneurship Teacher of the Year. His research interests include the
financing of entrepreneurial firms and shareholder value-based management. He
has served as the co-editor for the Journal of Financial Research and the editor of the
Journal of Entrepreneurial Finance. He has published articles in various academic and
professional journals, including Journal of Financial and Quantitative Analysis, Financial
Management, Journal of Portfolio Management, Journal of Applied Corporate Finance, and
Accounting Review. Dr. Petty is co-author of a leading textbook in small business and
entrepreneurship, Small Business Management: Launching and Growing Entrepreneurial
Ventures. He also co-authored Value-Based Management: Corporate America’s Response
to the Shareholder Revolution (2010). He serves on the Board of Directors of a publicly
traded oil and gas firm. Finally, he serves on the Board of the Baylor Angel Network,
a network of private investors who provide capital to start-ups and early-stage
companies.

Brief Contents
Preface 16
Part 1 The Scope and Environment

of Financial Management 26
1 An Introduction to the Foundations of Financial Management 26
2 The Financial Markets and Interest Rates 46
3 Understanding Financial Statements and Cash Flows 78
4 Evaluating a Firm’s Financial Performance 130
Part 2 The Valuation of Financial Assets 176

5 The Time Value of Money 176
6 The Meaning and Measurement of Risk and Return 220
7 The Valuation and Characteristics of Bonds 260
8 The Valuation and Characteristics of Stock 292
9 The Cost of Capital 318
Part 3 Investment in Long-Term Assets 350

10 Capital-Budgeting Techniques and Practice 350
11 Cash Flows and Other Topics in Capital Budgeting 392
Part 4 Capital Structure and Dividend Policy 430

12 Determining the Financing Mix 430
13 Dividend Policy and Internal Financing 468
Part 5 orking-Capital Management and International

W
Business Finance 490
14 Short-Term Financial Planning 490
15 Working-Capital Management 510
16 International Business Finance 538
Web 17 Cash, Receivables, and Inventory Management
Available online at www.myfinancelab.com
Web Appendix A Using a Calculator
Glossary 560
Indexes 569

Contents
Preface 16
Part 1 The Scope and Environment

of Financial Management 26
1 An Introduction to the Foundations of Financial

Management 26
The Goal of the Firm 27
Five Principles That Form the Foundations of Finance 28
Principle 1: Cash Flow Is What Matters 28
Principle 2: Money Has a Time Value 29
Principle 3: Risk Requires a Reward 29
Principle 4: Market Prices Are Generally Right 30
Principle 5: Conflicts of Interest Cause Agency Problems 32
The Global Financial Crisis 33
Avoiding Financial Crisis—Back to the Principles 34
The Essential Elements of Ethics and Trust 35
The Role of Finance in Business 36
Why Study Finance? 36
The Role of the Financial Manager 37
The Legal Forms of Business Organization 38
Sole Proprietorships 38
Partnerships 38
Corporations 39
Organizational Form and Taxes: The Double Taxation on Dividends 39
S-Corporations and Limited Liability Companies (LLCs) 40
Which Organizational Form Should Be Chosen? 40
Finance and the Multinational Firm: The New Role 41
Chapter Summaries 42 • Review Questions 44 • Mini Case 45
2 The Financial Markets and Interest Rates 46

Financing of Business: The Movement of Funds Through
the Economy 48
Public Offerings Versus Private Placements 49
Primary Markets Versus Secondary Markets 50
The Money Market Versus the Capital Market 51
Spot Markets Versus Futures Markets 51
Stock Exchanges: Organized Security Exchanges Versus Over-the-Counter
Markets, a Blurring Difference 51
Selling Securities to the Public 53
Functions 53
Distribution Methods 54
Private Debt Placements 55
Flotation Costs 57
Regulation Aimed at Making the Goal of the Firm Work: The Sarbanes-Oxley
Act 57
Rates of Return in the Financial Markets 58
Rates of Return over Long Periods 58
Interest Rate Levels in Recent Periods 59

Contents 9
Interest Rate Determinants in a Nutshell 62

Estimating Specific Interest Rates Using Risk Premiums 62
Real Risk-Free Interest Rate and the Risk-Free Interest Rate 63
Real and Nominal Rates of Interest 63
Inflation and Real Rates of Return: The Financial Analyst’s Approach 65
The Term Structure of Interest Rates 67
Shifts in the Term Structures of Interest Rates 67
What Explains the Shape of the Term Structure? 69
Chapter Summaries 71 • Review Questions 74 • Study Problems 74 • Mini Case 77
3 Understanding Financial Statements and Cash

Flows 78
The Income Statement 80
Coca-Cola’s Income Statement 82
Restating Coca-Cola’s Income Statement 83
The Balance Sheet 85
Types of Assets 85
Types of Financing 87
Coca-Cola’s Balance Sheet 89
Working Capital 90
Measuring Cash Flows 93
Profits Versus Cash Flows 93
The Beginning Point: Knowing When a Change in the Balance Sheet Is a Source
or Use of Cash 95
Statement of Cash Flows 95
Concluding Suggestions for Computing Cash Flows 102
What Have We Learned about Coca-Cola? 103
GAAP and IFRS 103
Income Taxes and Finance 104
Computing Taxable Income 104
Computing the Taxes Owed 105
The Limitations of Financial Statements and Accounting
Malpractice 107
Chapter Summaries 109 • Review Questions 112 • Study Problems 113 • Mini Case 121
Appendix 3A: Free Cash Flows 124

Computing Free Cash Flows 124
Computing Financing Cash Flows 127
Study Problems 128
4 Evaluating a Firm’s Financial Performance 130

The Purpose of Financial Analysis 130
Measuring Key Financial Relationships 134
Question 1: How Liquid Is the Firm—Can It Pay Its Bills? 135
Question 2: Are the Firm’s Managers Generating Adequate Operating Profits
on the Company’s Assets? 140
Managing Operations 142
Managing Assets 143
Question 3: How Is the Firm Financing Its Assets? 147
Question 4: Are the Firm’s Managers Providing a Good Return on the Capital
Provided by the Company’s Shareholders? 150
Question 5: Are the Firm’s Managers Creating Shareholder Value? 155

10 Contents
The Limitations of Financial Ratio Analysis 162
Chapter Summaries 163 • Review Questions 166 • Study Problems 166

• Mini Case 174
Part 2 The Valuation of Financial Assets 176
5 The Time Value of Money 176

Compound Interest, Future Value, and Present Value 178
Using Timelines to Visualize Cash Flows 178
Techniques for Moving Money Through Time 181
Two Additional Types of Time Value of Money Problems 186
Applying Compounding to Things Other Than Money 187
Present Value 188
Annuities 192
Compound Annuities 192
The Present Value of an Annuity 194
Annuities Due 196
Amortized Loans 197
Making Interest Rates Comparable 199
Calculating the Interest Rate and Converting It to an EAR 201
Finding Present and Future Values With Nonannual Periods 202
Amortized Loans With Monthly Compounding 205
The Present Value of an Uneven Stream and Perpetuities 206
Perpetuities 207

• Mini Case 219
6 The Meaning and Measurement of Risk

and Return 220
Expected Return Defined and Measured 222
Risk Defined and Measured 225
Rates of Return: The Investor’s Experience 232
Risk and Diversification 233
Diversifying Away the Risk 234
Measuring Market Risk 235
Measuring a Portfolio’s Beta 242
Risk and Diversification Demonstrated 243
The Investor’s Required Rate of Return 246
The Required Rate of Return Concept 246
Measuring the Required Rate of Return 246

• Mini Case 258
7 The Valuation and Characteristics

of Bonds 260
Types of Bonds 261
Debentures 261
Subordinated Debentures 262
Mortgage Bonds 262
Eurobonds 262
Convertible Bonds 262

Contents 11
Terminology and Characteristics of Bonds 263

Claims on Assets and Income 263
Par Value 263
Coupon Interest Rate 264
Maturity 264
Call Provision 264
Indenture 264
Bond Ratings 265
Defining Value 266
What Determines Value? 268
Valuation: The Basic Process 269
Valuing Bonds 270
Bond Yields 276
Yield to Maturity 276
Current Yield 278
Bond Valuation: Three Important Relationships 279

• Mini Case 291
8 The Valuation and Characteristics

of Stock 292
Preferred Stock 293
The Characteristics of Preferred Stock 294
Valuing Preferred Stock 295
Common Stock 299
The Characteristics of Common Stock 299
Valuing Common Stock 301
The Expected Rate of Return of Stockholders 306
The Expected Rate of Return of Preferred Stockholders 307
The Expected Rate of Return of Common Stockholders 308

• Mini Case 317
9 The Cost of Capital 318

The Cost of Capital: Key Definitions and Concepts 319
Opportunity Costs, Required Rates of Return, and the Cost of
Capital 319
The Firm’s Financial Policy and the Cost of Capital 320
Determining the Costs of the Individual Sources
of Capital 321
The Cost of Debt 321
The Cost of Preferred Stock 323
The Cost of Common Equity 325
The Dividend Growth Model 326
Issues in Implementing the Dividend Growth Model 327
The Capital Asset Pricing Model 328
Issues in Implementing the CAPM 329
The Weighted Average Cost of Capital 331
Capital Structure Weights 332
Calculating the Weighted Average Cost of Capital 332

12 Contents
Calculating Divisional Costs of Capital 335

Estimating Divisional Costs of Capital 335
Using Pure Play Firms to Estimate Divisional WACCs 335
Using a Firm’s Cost of Capital to Evaluate New Capital Investments 337

• Mini Cases 348
Part 3 Investment in Long-Term Assets 350
10 Capital-Budgeting Techniques and Practice 350

Finding Profitable Projects 351
Capital-Budgeting Decision Criteria 352
The Payback Period 352
The Net Present Value 356
Using Spreadsheets to Calculate the Net Present Value 359
The Profitability Index (Benefit–Cost Ratio) 359
The Internal Rate of Return 362
Computing the IRR for Uneven Cash Flows with a Financial Calculator 364
Viewing the NPV–IRR Relationship: The Net Present Value Profile 365
Complications with the IRR: Multiple Rates of Return 367
The Modified Internal Rate of Return (MIRR) 368
Using Spreadsheets to Calculate the MIRR 371
A Last Word on the MIRR 371
Capital Rationing 372
The Rationale for Capital Rationing 373
Capital Rationing and Project Selection 373
Ranking Mutually Exclusive Projects 374
The Size-Disparity Problem 374
The Time-Disparity Problem 375
The Unequal-Lives Problem 376

• Mini Case 390
11 Cash Flows and Other Topics in Capital

Budgeting 392
Guidelines for Capital Budgeting 393
Use Free Cash Flows Rather Than Accounting Profits 393
Think Incrementally 393
Beware of Cash Flows Diverted from Existing Products 394
Look for Incidental or Synergistic Effects 394
Work in Working-Capital Requirements 394
Consider Incremental Expenses 395
Remember That Sunk Costs Are Not Incremental Cash Flows 395
Account for Opportunity Costs 395
Decide If Overhead Costs Are Truly Incremental Cash Flows 395
Ignore Interest Payments and Financing Flows 396
Calculating a Project’s Free Cash Flows 396
What Goes into the Initial Outlay 396
What Goes into the Annual Free Cash Flows over the Project’s Life 397
What Goes into the Terminal Cash Flow 399
Calculating the Free Cash Flows 399
A Comprehensive Example: Calculating Free Cash Flows 403
Options in Capital Budgeting 406
The Option to Delay a Project 407
The Option to Expand a Project 407
The Option to Abandon a Project 408
Options in Capital Budgeting: The Bottom Line 408

Contents 13
Risk and the Investment Decision 409

What Measure of Risk Is Relevant in Capital Budgeting? 410
Measuring Risk for Capital-Budgeting Purposes with a Dose of Reality—Is
Systematic Risk All There Is? 411
Incorporating Risk into Capital Budgeting 411
Risk-Adjusted Discount Rates 411
Measuring a Project’s Systematic Risk 414
Using Accounting Data to Estimate a Project’s Beta 415
The Pure Play Method for Estimating Beta 415
Examining a Project’s Risk Through Simulation 415
Conducting a Sensitivity Analysis Through Simulation 417

• Mini Case 426
Appendix 11A: The Modified Accelerated Cost

Recovery System 428
What Does All This Mean? 429
Study Problems 429
Part 4 Capital Structure and Dividend Policy 430
12 Determining the Financing Mix 430

Understanding the Difference Between Business and Financial
Risk 432
Business Risk 433
Operating Risk 433
Break-Even Analysis 433
Essential Elements of the Break-Even Model 434
Finding the Break-Even Point 436
The Break-Even Point in Sales Dollars 437
Sources of Operating Leverage 438
Financial Leverage 440
Combining Operating and Financial Leverage 442
Capital Structure Theory 444
A Quick Look at Capital Structure Theory 446
The Importance of Capital Structure 446
Independence Position 446
The Moderate Position 448
Firm Value and Agency Costs 450
Agency Costs, Free Cash Flow, and Capital Structure 452
Managerial Implications 452
The Basic Tools of Capital Structure Management 453
EBIT-EPS Analysis 453
Comparative Leverage Ratios 456
Industry Norms 457
Net Debt and Balance-Sheet Leverage Ratios 457
A Glance at Actual Capital Structure Management 457

• Mini Cases 466
13 Dividend Policy and Internal Financing 468

Key Terms 469
Does Dividend Policy Matter to Stockholders? 470
Three Basic Views 470
Making Sense of Dividend Policy Theory 473
What Are We to Conclude? 475

14 Contents
The Dividend Decision in Practice 476

Legal Restrictions 476
Liquidity Constraints 476
Earnings Predictability 477
Maintaining Ownership Control 477
Alternative Dividend Policies 477
Dividend Payment Procedures 477
Stock Dividends and Stock Splits 478
Stock Repurchases 479
A Share Repurchase as a Dividend Decision 480
The Investor’s Choice 481
A Financing or an Investment Decision? 482
Practical Considerations—The Stock Repurchase Procedure 482

• Mini Case 489
Part 5 orking-Capital Management and International

W
Business Finance 490
14 Short-Term Financial Planning 490

Financial Forecasting 491
The Sales Forecast 491
Forecasting Financial Variables 491
The Percent of Sales Method of Financial Forecasting 492
Analyzing the Effects of Profitability and Dividend Policy
on DFN 493
Analyzing the Effects of Sales Growth on a Firm’s DFN 494
Limitations of the Percent of Sales Forecasting Method 497
Constructing and Using a Cash Budget 498
Budget Functions 498
The Cash Budget 499

• Mini Case 508
15 Working-Capital Management 510

Managing Current Assets and Liabilities 511
The Risk–Return Trade-Off 512
The Advantages of Current versus Long-term Liabilities: Return 512
The Disadvantages of Current versus Long-term Liabilities: Risk 512
Determining the Appropriate Level of Working
Capital 513
The Hedging Principle 513
Permanent and Temporary Assets 514
Temporary, Permanent, and Spontaneous Sources of Financing 514
The Hedging Principle: A Graphic Illustration 515
The Cash Conversion Cycle 516
Estimating the Cost of Short-Term Credit Using the Approximate
Cost-of-Credit Formula 518
Sources of Short-Term Credit 520
Unsecured Sources: Accrued Wages and Taxes 521
Unsecured Sources: Trade Credit 522
Unsecured Sources: Bank Credit 523
Unsecured Sources: Commercial Paper 525

Contents 15
Secured Sources: Accounts-Receivable Loans 527

Secured Sources: Inventory Loans 529
16 International Business Finance 538

The Globalization of Product and Financial Markets 539
Foreign Exchange Markets and Currency Exchange Rates 540
Foreign Exchange Rates 541
What a Change in the Exchange Rate Means for Business 541
Exchange Rates and Arbitrage 544
Asked and Bid Rates 544
Cross Rates 544
Types of Foreign Exchange Transactions 546
Exchange Rate Risk 548
Interest Rate Parity 550
Purchasing-Power Parity and the Law of One Price 551
The International Fisher Effect 552
Capital Budgeting for Direct Foreign Investment 552
Foreign Investment Risks 553

• Mini Case 558
Web 17 Cash, Receivables, and Inventory Management

Web Appendix A Using a Calculator

Glossary 560
Indexes 569

Preface
The study of finance focuses on making decisions that enhance the value of the firm.
This is done by providing customers with the best products and services in a cost-
effective way. In a sense we, the authors of Foundations of Finance, share the same
purpose. We have tried to create a product that provides value to our customers—
both students and instructors who use the text. It was this priority that led us to write
Foundations of Finance: The Logic and Practice of Financial Management, which was the
first “shortened book” of financial management when it was first published. This
text launched a trend that has since been followed by all the major competing texts
in this market. The text broke new ground not only by reducing the breadth of mate-
rials covered but also by employing a more intuitive approach to presenting new
material. From that first edition, the text has met with success beyond our expecta-
tions for eight editions. For that success, we are eternally grateful to the multitude of
finance instructors who have chosen to use the text in their classrooms.
New to the Ninth Edition

Technology is ever present in our lives today, and we are beginning to see its effec-
tive use in education. One form of learning technology that we believe has great
merit today is the lecture video. For all the numbered in-text examples in the Ninth
Edition, we have recorded brief (10- to 15-minute) lecture videos that students can
replay as many times as they need to help them understand more fully each of the
in-text examples. We are confident that many students will enjoy having the authors
“tutoring” them when it comes to the primary examples in the text. The videos can
be found in the eText within MyFinanceLab.
In addition to the innovations of this edition, we have made some chapter-by-
chapter updates in response to the continued development of financial thought,
reviewer comments, and the recent economic crisis. Some of these changes include:
Chapter 1
An Introduction to the Foundations of Financial Management
◆ Revised and updated chapter introduction
◆ Revised and updated discussion of the five principles
Chapter 2
The Financial Markets and Interest Rates
◆ Revised coverage of the term structure of interest rates to address the very low
rates that characterize today’s markets
◆ Simplified, more intuitive discussion on interest rate determinants
◆ Added coverage of the term structure of interest rates into the end-of-chapter
problems
Chapter 3
Understanding Financial Statements and Cash Flows
◆ Uses The Coca-Cola Company, a firm all students are familiar with, to help them
understand financial statements
◆ Expanded coverage of balance sheets, focusing on what can be learned from them
16

Preface 17
◆ More intuitive presentation of cash flows

◆ New explanation of fixed and variable costs as part of presenting an income
statement
◆ Four lecture videos accompany the in-chapter examples.
Chapter 4
Evaluating a Firm’s Financial Performance
◆ Continues the use of The Coca-Cola Company’s financial data to illustrate how
we evaluate a firm’s financial performance, compared to industry norms or a
peer group. In this case, we compare Coca-Cola’s financial performance to that of
PepsiCo, a major competitor.
◆ Provides a new Finance at Work box, based on an example from the soft-drink
industry
◆ Revised presentation of evaluating a company’s liquidity to align more closely
with how business managers talk about liquidity
Chapter 5
The Time Value of Money
◆ Revised to appeal to all students regardless of their level of mathematical skill
◆ New section added on “Making Interest Rates Comparable,” with new end-of-
chapter questions dealing with calculation of the effective annual rate
◆ Additional problems emphasizing complex streams of cash flows
◆ Thirteen lecture videos accompany the in-chapter examples.
Chapter 6
The Meaning and Measurement of Risk and Return
◆ Updated information on the rates of return that investors have earned over the
long term with different types of security investments
◆ Numerous new examples involving companies the students are familiar with are
presented throughout the chapter to illustrate the concepts and applications in
the chapter.
◆ Two lecture videos accompany the in-chapter examples.
Chapter 7
The Valuation and Characteristics of Bonds
◆ A number of new examples involving real-life firms
Chapter 8
The Valuation and Characteristics of Stock
◆ More current explanation of options for getting stock quotes from the Wall Street
Journal
Chapter 9
The Cost of Capital
◆ Five lecture videos correspond to the five major in-chapter examples
◆ End-of-chapter problems revised or replaced by new problem exercises

18 Preface
Chapter 10
Capital-Budgeting Techniques and Practice
◆ Extensively revised chapter introduction, which looks at Disney’s decision to
build the Shanghai Disney Resort
◆ Addition of a new section along with additional discussion of the modified inter-
nal rate of return that not only summarizes the tool, but also provides important
caveats concerning its use
◆ Eight lecture videos accompany the in-chapter e
xamples.
Chapter 11
Cash Flows and Other Topics in Capital Budgeting
◆ Revised introduction examining the difficulties Toyota faced in estimating future
cash flows when it introduced the Prius
◆ New Finance at Work box dealing with Disney World
◆ Problem set revised to include additional coverage of real options
◆ Three lecture videos accompany the in-chapter e
xamples.
Chapter 12
Determining the Financing Mix
◆ Problem set revised to include two new and one revised exercise
Chapter 13
Dividend Policy and Internal Financing
◆ Updated discussion of the tax code for personal tax treatment of dividends and
capital gains
◆ A lecture video accompanies the in-chapter example.
Chapter 14
Short-Term Financial Planning
◆ Two new problems added
Chapter 15
Working-Capital Management
◆ Four new problem exercises added
◆ Five lecture videos accompany the in-chapter e
xamples.
Chapter 16
International Business Finance
◆ Revised extensively to reflect changes in exchange rates and global financial m
arkets
◆ A new section titled “What a Change in the Exchange Rate Means for Business”
deals with the implications of exchange rate changes
◆ Three lecture videos accompany the in-chapter e xamples.
Web Chapter 17
Cash, Receivables, and Inventory Management
◆ Simplified presentation of chapter materials

4 PART 1 • The Scope and Environment of Financial Management
Obviously, some serious practical problems arise when we use changes in the
value of the firm’s stock to evaluate financial decisions. Many things affect stock
prices; to attempt to identify a reaction to a particular financial decision would sim-
ply be impossible, but fortunately that is unnecessary. To employ this goal, we need
not consider every stock price change to be a market interpretation of the worth of
our decisions. Other factors, such as changes in the economy, also affectPreface
stock prices. 19
What we do focus on is the effect that our decision should have on the stock price if
everything else were held constant. The market price of the firm’s stock reflects the
value of the firm as seen by its owners and takes into account the complexities and
complications of the real-world risk. As we follow this goal throughout our discus-
sions, we must keep in mind one more question: Who exactly are the shareholders?
Pedagogy That Works

The answer: Shareholders are the legal owners of the firm.
Concept Check
In our opinion, the success of this textbook derives from our1. focus What is theon maintaining
goal of the firm?
2. How would you apply this goal in practice?
pedagogy that works. We endeavor to provide students with a conceptual understand-
ing of the financial decision-making
process that includes a survey of the
LO2 Understand the basic Five Principles That Form the Foundations
tools and techniques of finance. For principles of finance,
their importance, and the
of Finance
the student, it is all too easy to lose importance of ethics and trust.
To the first-time student of finance, the subject matter may seem like a collection of
sight of the logic that drives finance unrelated decision rules. This impression could not be further from the truth. In fact,
our decision rules, and the logic that underlies them, spring from five simple princi-
and to focus instead on memoriz- ples that do not require knowledge of finance to understand. These five principles
ing formulas and procedures. As guide the financial manager in the creation of value for the firm’s owners (the stock-
holders).
a result, students have a difficult As you will see, although it is not necessary to understand finance to understand
these principles, it is necessary to understand these principles in order to understand
time understanding the interrela- finance. These principles may at first appear simple or even trivial, but they provide
tionships among the topics covered. the driving force behind all that follows, weaving together the concepts and tech-
niques presented in this text, and thereby allowing us to focus on the logic underly-
Moreover, later in life, when the ing the practice of financial management. Now let’s introduce the five principles.
problems encountered do not match
Principle 1: Cash Flow Is What Matters
principle
the textbook presentation, students 1

You probably recall from your accounting classes that a company’s profits can differ
may find themselves unprepared dramatically from its cash flows, which we will review in Chapter 3. But for now
understand that cash flows, not profits, represent money that can be spent.
to abstract from what they have Consequently, it is cash flow, not profits, that determines the value of a business. For
learned. We have worked to be “good at the basics.” To achieve this
this reason whengoal,
we analyze wethehave
consequences of a managerial decision, we focus on
the resulting cash flows, not profits.
refined the book over the last eight editions to include the following features.
In the movie industry, there is a big difference between accounting profits and
cash flow. Many a movie is crowned a success and brings in plenty of cash flow for
the studio but doesn’t produce a profit. Even some of the most successful box office
Building on Foundational Finance Principles hits—Forrest Gump, Coming to America, Batman, My Big Fat Greek Wedding, and the TV
series Babylon 5—realized no accounting profits at all after accounting for various
movie studio costs. That’s because “Hollywood Accounting” allows for overhead
costs not associated with the movie to be added on to the true cost of the movie. In
Chapter 1 presents five foundational principles of finance which are the threads that fact, the movie Harry Potter and the Order of the Phoenix, which grossed almost $1 bil-
bind all the topics of the book. Then throughout the text, we provide reminders of lion worldwide, actually lost $167 million according to the accountants. Was Harry
Potter and the Order of the Phoenix a successful movie? It certainly was—in fact, it was
the foundational principles in “Remember Your Principles” boxes. the 27th highest grossing film of all time. Without question, it produced cash, but it
didn’t make any profits.
The five principles of finance allow us to provide an introduction to financial
decision making rooted in current financial theory and in the current state of world
economic conditions. What results is an introductory treatment of a discipline rather
than the treatment of a series of isolated financial problems that managers encounter.
M01_KEOW3285_09_SE_C01.indd 4 28/11/15 2:53 PM
Use of an Integrated Learning System

The text is organized around the learning objectives that appear at the beginning of
each chapter to provide the instructor and student with an easy-to-use integrated
learning system. Numbered icons identifying each objective appear next to the
related material throughout the text and in the summary, allowing easy location of
material related to each objective.
A Focus on Valuation
Although many professors and instructors make valuation the central theme of their
course, students often lose sight of this focus when reading their text. We reinforce
this focus in the content and organization of our text in some very concrete ways:
◆ We build our discussion around the five finance principles that provide the foun-
dation for the valuation of any investment.
◆ We introduce new topics in the context of “what is the value proposition?” and
“how is the value of the enterprise affected?”
Real-World Opening Vignettes

Each chapter begins with a story about a current, real-world company faced with a
financial decision related to the chapter material that follows. These vignettes have

20 Preface
been carefully prepared to stimulate student interest in the topic to come and can be
used as a lecture tool to provoke class discussion.
• The Financial Markets and Interest Rates 41
A Step-by-Step Approach to Problem Solving
CHAPTER 2
someone for 1 year at a nominal rate of interestand Analysis

of 11.3 percent. This means you will
get back $111.30 in 1 year. But if during the year, the prices of goods and services rise
by 5 percent, it will take $105 at year-end to purchase the same goods and services
As anyone who has taught the core undergraduate finance course knows, students
that $100 purchased at the beginning of the year. What was your increase in purchas-
ing power over the year? The quick and dirty answer is found by subtracting the
demonstrate a wide range of math comprehension and skill. Students who do not
inflation rate from the nominal rate, 11.3% 2 5% 5 6.3%, but this is not exactly cor-
have the math skills needed to master the subject sometimes end up memorizing for-
rect. We can also express the relationship among the nominal interest rate, the rate of
inflation (that is, the inflation premium), and the real rate of interest as follows:
1 1 nominal interest rate 5 (1 1 real rate of mulas rather
interest)(1 1 than focusing
rate of inflation) (2-3) on the analysis of business decisions using math as a tool.
Solving for the nominal rate of interest, We address this problem in terms of both text content and pedagogy.
Nominal interest rate
◆ rate
5 real rate of interest 1 rate of inflation 1 (real First, we present math only as a tool to help us analyze problems, and only when
of interest) (rate of inflation)
necessary. We do not present math for its own sake.
Consequently, the nominal rate of interest is equal to the sum of the real rate of
interest, the inflation rate, and the product of the real rate and the inflation rate. This
relationship among nominal rates, real rates, and◆ Second, finance is an analytical subject and requires that students be able to
therate of inflation has come to be
called the Fisher effect. What does the product of the real rate of interest and the infla-
solve problems. To help with this process, numbered chapter examples appear
tion rate represent? It represents the fact that the money you earn on your investment
throughout the book. All of these examples follow a very detailed and struc-
is worth less because of inflation. All this demonstrates that the observed nominal
rate of interest includes both the real rate and an inflation premium.
tured three-step approach to problem solving that helps students develop their
Substituting into equation (2-3) using a nominal rate of 11.3 percent and an infla-
tion rate of 5 percent, we can calculate the real rate of interest as follows:
problem-solving skills:
Nominal or quoted 5 real rate of interest 1 inflation 1 product of the real rate of
rate of interest
0.113 5 real rate of interest 1
Step
rate
0.05
1: Formulate a Solution Strategy. For example, what is the appropriate for-
interest and the inflation rate
1 0.05 3 real rate of interest
0.063 5 1.05 3 real rate of interest mula to apply? How can a calculator or spreadsheet be used to “crunch the
0.063/1.05 5 real rate of interest numbers”?
Solving for the real rate of interest: Step 2: Crunch the Numbers. Here we provide a completely worked out step-by-
Real rate of interest = 0.06 = 6%
step solution. We present first a description of the solution in prose and then a
Thus, at the new higher prices, your purchasing power will have increased by only 6
percent, although you have $11.30 more than you had at corresponding mathematical
the start of the year. To see why, implementation.
let’s assume that at the outset of the year, one unit ofStep 3: Analyze
the market basket of goods Your
and Results. We end each solution with an analysis of what the
services cost $1, so you could purchase 100 units with your $100. At the end of the year,
you have $11.30 more, but each unit now costs $1.05 solution
(remember themeans. This
5 percent rate of stresses the point that problem solving is about analysis and
inflation). How many units can you buy at the end of the year? The answer is
$111.30 4 $1.05 5 106, which represents a 6 percent increase in real purchasing power.Moreover, in this step we emphasize that decisions are often
decision making. 2
based on incomplete information, which requires the exercise of managerial

Inflation and Real Rates of Return: The Financial
Analyst’s Approach judgment, a fact of life that is often learned on the job.
Although the algebraic methodology presented in the previous section is strictly cor-
rect, few practicing analysts or executives use it. Rather, they employ some version of
CAN YOU DO IT? “Can You Do It?” and

Solving for the Real Rate of Interest “Did You Get It?”
Your banker just called and offered you the chance to invest your savings for 1 year at a quoted rate of 10 percent. You also saw on
42 thePART
news 1 • The
that the inflation
Scope andrate is 6 percent. What
Environment is the real Management
of Financial rate of interest you would be earning if you made the investment? (The
solution can be found on page 42.) The text provides examples for the
students to work at the conclusion
PART 1 • The Scope and Environment
DID YOU GET IT?Management
of Financial
of each major section of a chapter,
2
In Chapter 5, we will study more about the time value of money.
Solving for the Real Rate of Interest which we call “Can You Do It?,” fol-
right thing.” NominalInoraquoted
sense,5 we can
rate of interest
real think
rate of of laws
interest
as a set1 ofinterest
1 inflation
rate
rules
product that
of reflect
the real rate of the values of
and the inflation rate
lowed by “Did You Get It?” later in
a society as a 0.10 whole. 5 real rate of interest 1 0.06 1 0.06 3 real rate of interest the chapter. This tool provides an
You might0.04 ask yourself,5 1.06 “As
3 real long as I’m not breaking society’s laws, why should I
M02_KEOW3285_09_SE_C02.indd 41
rate of interest
care about ethics?” The answer to this question lies in consequences. Everyone makes 28/11/15 essential ingredient in the building-
2:54 PM
Solving for the real rate of interest:

errors of judgment in business, which is to be expected in an uncertain world. But ethi- block approach to the material that
Real rate of interest 5 0.0377 5 3.77%
cal errors are different. Even if they don’t result in anyone going to jail, they tend to end we use.
careers and thereby terminate future opportunities. Why? Because unethical behavior
destroys trust, and businesses cannot
the following function
relationship without
(which comesa from
certain degree
equation of an
(2-2)), trust.
approximation
method, to estimate the real rate of interest over a selected past time frame.
Concept Check
Nominal interest rate 2 inflation rate > real interest rate Concept Check
The concept is straightforward, but its implementation requires that several judg-
ments be made. For example, suppose we want to use their
this relationship
money? to determine
1. According to Principle 3, how do investors decide where to invest
the real risk-free interest rate. Which interest rate series and maturity period should At the end of major chapter sections
2. What is an efficient market?
be used? Suppose we settle for using some U.S. Treasury security as a surrogate for a we include a brief list of questions
3. What is the agency problem, and whyinterest
nominal risk-free does itrate.
occur?
Then, should we use the yield on 3-month U.S.
Treasury
4. Why are ethics and trust bills or, perhaps,
important the yield on 30-year Treasury bonds? There is no absolute
in business? that are designed to highlight key
answer to the question.
So, we can have a real risk-free short-term interest rate, as well as a real risk-free ideas presented in the section.
long-term interest rate, and several variations in between. In essence, it just depends
on what the analyst wants to accomplish. Of course we could also calculate the real
The Role of Finance in Business

rate of interest on some rating class of 30-year corporate bonds (such as Aaa-rated
bonds) and have a risky real rate of interest as opposed to a real risk-free interest rate.
3 Describe the role of Furthermore, the choice of a proper inflation index is equally challenging. Again,
finance in business. Finance is the study ofwehow havepeople
several choices. We could use the
and businesses consumerinvestments
evaluate price index, the and
producer price
raise
index for finished goods, or some price index out of the national income accounts,
capital to fund them. Our suchinterpretation of an
as the gross domestic investment
product chain priceisindex.
quite broad.
Again, thereWhen Apple
is no precise scien-
designed its Apple Watch, it was
tific answer clearly
as to making
which specific priceaindex
long-term investment.
to use. Logic and consistencyThedofirm
narrow
had to devote considerable the boundaries
expenses of theto
ultimate choice. producing, and marketing the
designing,
Let’s tackle a very basic (simple) example. Suppose that an analyst wants to esti-
device with the hope that mate it thewould
approximateeventually become
real interest indispensable
rate on (1) 3-month Treasury tobills,
everyone.
(2) 30-year
Similarly, Apple is making Treasury anbonds,
investment decision
and (3) 30-year whenever
Aaa-rated corporate bondsit hires a fresh
over the new
1990–2014 time
frame. Furthermore, the annual rate of change
graduate, knowing that it will be paying a salary for at least 6 months before the in the consumer price index (mea-
sured from December to December) is considered a logical measure of past inflation
employee will have much to contribute.
experience. Most of our work is already done for us in Table 2-2. Some of the data
Thus, the study of finance
from Table addresses threehere.
2-2 are displayed basic types of issues:
STEP 3: Analyze Your Results
Pre
30 Disney’s higher return on equity is due to the firm having a higher operating return
on assets (13.54 percent for Coca-Cola versus 7.50 percent for the industry) and using
20 more debt financing (46.6 percent debt ratio for Disney, compared to 34.21 percent
for the industry).
10
0
2 4 6 8 10 12 14Concept
16 Check
18 20 Preface 21
Number of years 1. How is a company’s return on equity related to the firm’s operating return on assets?
2. How is a company’s return on equity related to the firm’s debt ratio?
3. What is the upside of debt financing? What is the downside?
Financial Decision Tools

EXAMPLE 5.4
A feature that has proven popular with students FI NANCI AL D E CI S I ON TOOLS
Calculating the
has been Discounted
our recapping ofValue to Be Received
key equations shortly in 10
Name Years
of Tool
MyFinanceLab
Formula
Video
What It Tells You
What isafter their discussion.
the present Students
value of $500 to beget to see an
received equa- from today if our discountnet income
10 years Measures the shareholders’ accounting return on
Return on equity
rate is 6tion within the context of related equations.
percent? total common equity their investment.
STEP 1: Formulate a Solution Strategy

Financial
The present value to beCalculators
received can be calculated using equation (5-2) as follows:
CALCULATOR SOLUTION
and Excel Spreadsheets
1 M04_KEOW3285_09_SE_C04.indd 130
Data Input Function Key 02/12/15 2:00 PM
Present value = FVn c d (5-2)

+ r)n
(1 calculators
The use of financial and Excel spreadsheets has been integrated 10 N
throughout the text, especially with respect to presentation of the time 6 I/Y
STEP 2:value
Crunch the Numbers
of money and valuation. Where appropriate, actual calculator and - 500 FV
Substituting FV = $500,
spreadsheet n = appear
solutions r =
10, and in the6 text.
percent into equation (5-2), we find: 0 PMT
1 Function Key Answer

Present value = $500 c d
(1 + 0.06)10 466
CPT
Part 4 • Capital Structure and Dividend Policy
= $500(0.5584) PV 279.20
Chapter Summaries That Bring Together Con-
= $279.20 12-9. (EBIT-EPS analysis) A group of retired college professors has decided to form
cepts, Terminology, and Applications a small manufacturing corporation. The company will produce a full line of tradi-
tional office furniture. The investors have proposed two financing plans. Plan A is an
all-common-equity alternative. Under this agreement, 1 million common shares will
STEP 3: Analyze Your Results be sold to net the firm $20 per share. Plan B involves the use of financial leverage.
The chapter summaries have been written in a way that connects A debt issue them to the
with a 20-year in-period will be privately placed. The debt issue
maturity
Thus, the present value of the $500 to be received in 10 years is $279.20.
chapter sections and learning objectives. For each learning objective,
will carry anthe student
interest rate of 10 sees
percent, and the principal borrowed will amount to
$6 million. The marginal corporate tax rate is 50 percent.
in one place the concepts, new terminology, and key equationsa.that were
Find the presented
EBIT indifference level associated with the two financing proposals.
in the objective. b. Prepare a pro forma income statement that proves EPS will be the same re-
gardless of the plan chosen at the EBIT level found in part (a).
c. Prepare an EBIT-EPS analysis chart for this situation.
EXAMPLE 5.5 d. If a detailed financial analysis projects that long-term EBIT will always be close
Revised Study Problems to $2.4 million annually, which plan will provide for the higher EPS?
Calculating the Present Value of a Savings Bond 12-10. (Assessing leverage use) Financial data for three corporations are displayed here.
MyFinanceLab Video
With each edition, we have provided new and revised end-of-chapter study prob-FIRM B
You’re on
lemsvacation in a their
to refresh ratherusefulness
remote part of Floridafinance.
in teaching and seeAlso,
an advertisement
MEASURE
theDebtstudy
ratio
stat-
problems
FIRM A
20% con-25%
FIRM C
40%
INDUSTRY NORM
20%
ing thattinue
if youtotake a sales tour
be organized of some to
according condominiums “youso
learning objective will beboth
that given
Times the
interest $100 just
instructor
earned 8 times and 10 times 7 times 9 times
for taking the tour.”

student However,
can readily alignthe $100
text that
and you get
problem is in the form of aPrice/earnings
materials. savings ratio bond 9 times 11 times 6 times 10 times
that will not pay you the $100 for 10 years. What is the present value a.ofWhich $100 firmto be to be excessively leveraged?
appears
received 10 years from today if your discount rate is 6 percent? b. Which firm appears to be employing financial leverage to the most appropri-
Comprehensive Mini Cases ate degree?
c. What explanation can you provide for the higher price/earnings ratio enjoyed
by firm B as compared with firm A?
A comprehensive Mini Case appears at the end of almost
every chapter, covering all the major topics included in Mini Cases
that chapter. Each Mini Case can be used as a lecture or These Mini Cases are available in MyFinanceLab.
review tool by the professor. For the students, the Mini 1. Imagine that you were a new CFO of Beily Inc., a children’s bicycle manufacturer.
Case 165
M05_KEOW3285_09_SE_C05.indd provides an opportunity to apply all the concepts The president, Mr. Zhao, started the business 2 years ago. The firm manufactures two 2:11 PM
02/12/15
types of products, bicycles for girls and bicycles for boys. However, the two products
presented within the chapter in a realistic setting, thereby have the same prices and costs structures, the only differences are the colors and
designs. Recently, the president has started to focus more on the financial aspects
strengthening their understanding of the material. of managing the business. Mr. Zhao has set up a meeting for next week with you, to
discuss matters such as the business and financial risks faced by the company.
Accordingly, you are asked to prepare an analysis to assist his future manage-
ment decisions. As a first step in the work, you are provided the following informa-
tion regarding the company according to the past financial data:
Output level 25,000 units

Operating assets RMB 2,000,000
Operating asset turnover 5 times
Return on operating assets 45%
Degree of operating leverage 5 times
Interest expense RMB 300,000
Tax rate 25%
As the next step, you are required to determine the break-even point in units of
output for the company and report the result to Mr. Zhao. You are going to prepare
an analytical income statement for the company. This statement will also be useful
M12_KEOW5135_09_GE_C12.indd 466 06/05/16 5:49 PM

22 Preface
A Complete Support Package for the

Student and Instructor
MyFinanceLab
This fully integrated online homework system gives students the hands-on prac-
tice and tutorial help they need to learn finance efficiently. Ample opportunities for
online practice and assessment in MyFinanceLab are seamlessly integrated into each
chapter. For more details, see the inside front cover.
Instructor’s Resource Center

This password-protected site, accessible at http://www.pearsonglobaleditions.com/
Keown, hosts all of the instructor resources that follow. Instructors should click on
the “IRC Help Center” link for easy-to-follow instructions on getting access or may
contact their sales representative for further information.
Test Bank
This online Test Bank, prepared by Rodrigo Hernandez of Radford University, pro-
vides more than 1,600 multiple-choice, true/false, and short-answer questions with
complete and detailed answers. The online Test Bank is designed for use with the
TestGen-EQ test-generating software. This computerized package allows instruc-
tors to custom design, save, and generate classroom tests. The test program permits
instructors to edit, add, or delete questions from the Test Bank; analyze test results;
and organize a database of tests and student results. This software allows for greater
flexibility and ease of use. It provides many options for organizing and displaying
tests, along with a search and sort feature.
Instructor’s Manual with Solutions

Written by the authors and updated by Mary Schranz, the Instructor’s Manual
follows the textbook’s organization and represents a continued effort to serve the
teacher’s goal of being effective in the classroom. Each chapter contains a chapter
orientation, answers to end-of-chapter review questions, and solutions to end-of-
chapter study problems.
The Instructor’s Manual is available electronically, and instructors can download
it from the Instructor’s Resource Center by visiting http://www.pearsonglobaleditions
.com/Keown.
The PowerPoint Lecture Presentation

This lecture presentation tool, prepared by Sonya Britt of Kansas State University,
provides the instructor with individual lecture outlines to accompany the text. The
slides include many of the figures and tables from the text. These lecture notes can
be used as is, or instructors can easily modify them to reflect specific presentation
needs.
Excel Spreadsheets
Created by the authors, these spreadsheets correspond to end-of-chapter problems
from the text. This student resource is available on MyFinanceLab.

Preface 23
Acknowledgments
We gratefully acknowledge the assistance, support, and encouragement of those indi-
viduals who have contributed to Foundations of Finance. Specifically, we wish to rec-
ognize the very helpful insights provided by many of our colleagues. For this edition,
we are especially grateful to Mary Schranz, formerly of the University of Wisconsin,
Madison, who performed an incredibly detailed accuracy review. We are also
indebted to many other professionals for their careful reviews and helpful comments:
Haseeb Ahmed, Johnson C. Smith Dr. Charles Gahala, Benedictine
University University
Joan Anderssen, Arapahoe Harry Gallatin, Indiana State
Community College University
Chris Armstrong, Draughons Junior Deborah Giarusso, University of
College Northern Iowa
Curtis Bacon, Southern Oregon Gregory Goussak, University of
University Nevada, Las Vegas
Deb Bauer, University of Oregon Lori Grady, Bucks County
Pat Bernson, County College of Community College
Morris Ed Graham, University of North
Ed Boyer, Temple University Carolina, Wilmington
Joe Brocato, Tarleton State Barry Greenberg, Webster
University University
Joseph Brum, Fayetteville Technical Gary Greer, University of Houston
Community College Downtown
Lawrence Byerly, Thomas More Indra Guertler, Simmons College
College Bruce Hadburg, University of Tampa
Juan R. Castro, LeTourneau Thomas Hiebert, University of
University North Carolina, Charlotte
Janice Caudill, Auburn University Marlin Jensen, Auburn University
Ting-Heng Chu, East Tennessee John Kachurick, Misericordia
State University University
David Daglio, Newbury College Okan Kavuncu, University of
Julie Dahlquist, University of Texas California at Santa Cruz
at San Antonio Gary Kayakachoian, The University
David Darst, Central Ohio Technical of Rhode Island
College David F. Kern, Arkansas State
Maria de Boyrie, New Mexico State University
University Brian Kluger, University of
Kate Demarest, Carroll Community Cincinnati
College Lynn Phillips Kugele, University of
Khaled Elkhal, University of Mississippi
Southern Indiana Mary LaPann, Adirondack
Cheri Etling, University of Tampa Community College
Robert W. Everett, Lock Haven Carlos Liard-Muriente, Central
University Connecticut State University
Cheryl Fetterman, Cape Fear Christopher Liberty, College of Saint
Community College Rose, Empire State College
David R. Fewings, Western Lynda Livingston, University of
Washington University Puget Sound

24 Preface
Y. Lal Mahajan, Monmouth Ahmad Salam, Widener University

University Mary Schranz, University of
Edmund Mantell, Pace University Wisconsin, Madison (retired)
Peter Marks, Rhode Island College Jeffrey Schultz, Christian Brothers
Mario Mastrandrea, Cleveland University
State University Thomas W. Secrest, Coastal
Anna McAleer, Arcadia University Carolina University
Robert Meyer, Parkland College Ken Shakoori, California State
University, Bakersfield
Ronald Moy, St. John’s University
Michael Slates, Bowling Green
Elisa Muresan, Long Island
State University
University
Suresh Srivastava, University of
Michael Nugent, Stony Brook
Alaska, Anchorage
University
Maurry Tamarkin, Clark University
Tony Plath, University of North
Carolina at Charlotte Fang Wang, West Virginia
University
Anthony Pondillo, Siena College
Paul Warrick, Westwood College
Walter Purvis, Coastal Carolina
Community College Jill Wetmore, Saginaw Valley State
University
Emil Radosevich, Central New
Mexico Community College Kevin Yost, Auburn University
Deana Ray, Forsyth Technical Jingxue Yuan, Texas Tech
Community College University
Clarence Rose, Radford University Mengxin Zhao, Bentley College
We also thank our friends at Pearson. They are a great group of folks. We offer
our personal expression of appreciation to Vice President of Business Publishing
Donna Battista, who provided the leadership and direction to this project. She is the
best, and she settles for nothing less than perfection—thanks, Donna. We would also
like to thank Kate Fernandes, our finance editor. Kate is full of energy and drive
with amazing insights and intuition about what makes a great book. Additionally,
Kathryn Dinovo, our program manager, helped us develop new technology—videos
and animations—for this edition. We would also like to thank Meredith Gertz, our
project manager, who guided us through the writing and production processes.
Meredith kept us on schedule while maintaining extremely high quality. Our thanks
also go to Heidi Allgair of Cenveo Publisher Services, who served as the project man-
ager and did a superb job. Even more, she was fun to work with, always keeping us
on task. Miguel Leonarte, who worked on MyFinanceLab, also deserves a word of
thanks for making MyFinanceLab flow so seamlessly with the book. He has contin-
ued to refine and improve MyFinanceLab, and as a result of his efforts, it has become
a learning tool without equal. We also thank Melissa Honig, our media producer,
who did a great job of making sure we are on the cutting edge in terms of Web appli-
cations and offerings.
As a final word, we express our sincere thanks to those who are using Foundations
of Finance in the classroom. We thank you for making us a part of your teaching–
learning team. Please feel free to contact any member of the author team should you
have questions or needs.
—A.J.K. / J.D.M. / J.W.P.

Preface 25
Global Edition Acknowledgments

We gratefully acknowledge the contributions of those individuals who worked with
us on the Foundations of Finance, Global Edition. We are also indebted to many
other professionals for their careful reviews and helpful comments:
Contributors Reviewers
Nino Davitaya, University of Georgia Pauline Ho Hoi Yin, The Hong Kong
Hisham Farag, University of Polytechnic University
Birmingham Ravindran Raman, Wawasan Open
Katharina Fellnhofer, Lappeenranta University
University of Technology Manolis Noikokyris, Kingston University
Catherine Lions, Umea School of Rezart Erindi, Chartered Financial
Business and Economics Analysts
Biljana Pesalj, Rotterdam University of Andrejs Cirjevskis, Riga International
Applied Sciences School of Economics and Business
Jon Snorri Snorrason, Bifröst University Administration

An Introduction to
1
CHAPTER
the Foundations of
Financial Management
Learning Objectives
LO1 Identify the goal of the firm. The Goal of the Firm
LO2 Understand the basic principles of finance, Five Principles That Form the
their importance, and the importance of ethics Foundations of Finance
and trust.
LO3 Describe the role of finance in business. The Role of Finance in Business
LO4 Distinguish among the different legal forms The Legal Forms of Business
of business organization. Organization
LO5 Explain what has led to the era of the multi Finance and the Multinational
national corporation. Firm: The New Role
A
pple Computer (AAPL) ignited the personal computer revolution in the
1970s with the Apple II and reinvented the personal computer in the 1980s
with the Macintosh. But by 1997, it looked like it might be nearing the end
for Apple. Mac users were on the decline, and the company didn’t seem to be headed
in any real direction. It was at that point that Steve Jobs reappeared, taking back his
old job as CEO of Apple, the company he cofounded in 1976. To say the least, things
began to change. In fact, 18 years later, in 2015, the price of Apple’s common stock
climbed by 225-fold!
How did Apple accomplish this? The company did it by going back to what it does
best, which is to produce products that make the optimal trade-off among ease of
use, complexity, and features. Apple took its special skills and applied them to more
than just computers, introducing new products such as the iPod, iTunes, the sleek
iMac, the MacBook Air, the iPod Touch, and the iPhone along with its unlimited
“apps.” Although all these products have done well, the success of the iPod has been
truly amazing. Between the introduction of the iPod in October 2001 and the begin-
ning of 2005, Apple sold more than 6 million of the devices. Then, in 2004, it came
out with the iPod Mini, about the length and width of a business card, which has also
26
M01_KEOW5135_09_GE_C01.indd 26 02/05/16 2:29 PM

been a huge success, particularly among
women. How successful has this new
product been? By 2004, Apple was selling
more iPods than its signature Macintosh
desktop and notebook computers.
How do you follow up on the success
of the iPod? You keep improving your
products, and you keep developing and
introducing new products that consum-
ers want—the iPhone. With this in mind,
in October 2014, Apple unveiled its
iPhone 6 and 6 Plus, selling over 10 mil-
lion phones in the first week. In effect,
Apple seems to have a never-ending sup-
ply of new, exciting products that we all
want. Then in April 2015, Apple introduced the Apple Watch, and it is now consider-
ing introducing an Apple Car by 2020.
How did Apple make the decision to introduce the original iPod and now the
iPad? The answer is by identifying a customer need, combined with sound financial
management. Financial management deals with the maintenance and creation of
economic value or wealth by focusing on decision making with an eye toward creat-
ing wealth. This text deals with financial decisions such as when to introduce a new
product, when to invest in new assets, when to replace existing assets, when to bor-
row from banks, when to sell stocks or bonds, when to extend credit to a customer,
and how much cash and inventory to maintain. All of these aspects of financial man-
agement were factors in Apple’s decision to introduce and continuously improve the
iPod, iPhone, and iPad, and the end result is having a major financial impact on Apple.
In this chapter, we lay the foundation for the entire book by explaining the key
goal that guides financial decision making: maximizing shareholder wealth. From
there we introduce the thread that ties everything together: the five basic principles
of finance. Finally, we discuss the legal forms of business. We close the chapter with a
brief look at what has led to the rise in multinational corporations.
The Goal of the Firm LO1 Identify the goal of the

firm.
The fundamental goal of a business is to create value for the company’s owners (i.e.,
its shareholders). This goal is frequently stated as “maximization of shareholder
wealth.” Thus, the goal of the financial manager is to create wealth for the sharehold-
ers by making decisions that will maximize the price of the existing common stock.
Not only does this goal directly benefit the shareholders of the company, but it also
provides benefits to society as scarce resources are directed to their most productive
use by businesses competing to create wealth.
We have chosen maximization of shareholder wealth—that is, maximizing the
market value of the existing shareholders’ common stock—because all financial deci-
sions ultimately affect the firm’s stock price. Investors react to poor investment or
dividend decisions by causing the total value of the firm’s stock to fall, and they react
to good decisions by pushing up the price of the stock. In effect, under this goal,
good decisions are those that create wealth for the shareholder.
27
M01_KEOW5135_09_GE_C01.indd 27 02/05/16 2:29 PM

Another random document with
no related content on Scribd:
CHAPTER XIII.
SICKNESS AND DEATH OF ABU BEKR.
Jumâd II., A.H. XIII. August, A.D. 634.
In the first year of his Caliphate, Abu

Bekr was hindered by the engrossing work Abu Bekr presides over the
of repressing apostasy and rebellion, from pilgrimage at Mecca. Dzul
Hijj, a.h. XIII. March, a.d.
being present at the yearly pilgrimage in 634.
Mecca. But next year he presided at the
pilgrimage himself. As the party entered the vale of Mecca, the
young men hastened to tell his father, who, blind from great age, was
seated at his door. On his son’s approach, he arose and stood up to
greet him, Abu Bekr made his camel to kneel down at the threshold,
and alighting, embraced his father, who was shedding tears of
delight, and kissed him between the eyes. Attâb, the governor,
Soheil, and the other great men of Mecca, approached and shook
the Caliph by the hand. Then they did obeisance to his father, who
said: ‘These be our nobles; honour them, my son, and make much of
them.’ ‘Make much of them,’ answered Abu Bekr, ‘that I do; but
(mindful of his Master’s teaching), as for honour, there is none save
that which cometh from the Lord alone.’ After bathing, he went forth
in pilgrim garb, to kiss the Black Stone, and encompass the Holy
House. The people crowded round him; and as they made mention
of the Prophet, Abu Bekr wept. It was but two years since Mahomet
had been amongst them, celebrating the same rites, and how much
of danger and deliverance had come to pass in this short space! And
so they mourned his loss. At midday, he again went through the
ceremonies of the Káaba; then, sitting down beneath the shadow of
the Hall of Council,[179] he commanded the citizens that, if any had
complaint to make or justice to demand, he should speak. All were
silent; so he praised the people and their governor. Then he arose
and celebrated the midday prayer. After that he sat down again for a
little, and bade them all Farewell. Then he turned to go, and
departed for Medîna.[180]
During the summer, Abu Bekr was
busied with reinforcements for the Syrian Abu Bekr’s sickness. Jumâd
II., a.h. XIII. August, a.d.
campaign. Born three years after the era of 634.
the Elephant,[181] he was now over
threescore years of age; but, simple and temperate in his habits, still
hale and vigorous. In the autumn, happening to bathe incautiously
on a cold day, he was seized with a fever, which laid him low and
obliged him to make over the presidency at public prayer to Omar.
[182] When the illness had lasted for a fortnight, his friends, coming
daily to ask after him, at last became anxious, and said: ‘Shall we
send for the physician?’ ‘He[183] hath been to me already,’ answered
Abu Bekr. ‘And what said he?’ ‘He saith to me I am about to do that
with thee which I purpose to do.’ So they understood his meaning
and were silent. Aware thus that his end was not far, he made
preparation for a successor. His choice was fixed on Omar; but
willing to fortify his own conviction by the sense of others, he first
consulted Abd al Rahmân, who praised Omar as the fittest man, but
withal inclined to be severe.—‘Which,’ responded the dying Caliph,
‘is because he saw me soft and tender-hearted; when himself the
Master, he will forego much of what thou sayest. I have watched him
narrowly. If I were angry with one, he would intercede in his behalf; if
over lenient, then he would be severe.’ Othmân, too, confirmed his
choice. ‘What is hidden of Omar,’ he said, ‘is better than that which
doth appear. There is not his equal amongst us all.’[184] Talha, on the
other hand, expostulated: ‘If we have suffered so much from Omar
whilst thou wast yet with us to temper his severity, what will it be
when thou art gone to thy Lord, there to answer for having left His
people to the care of so hard a master?’ ‘Set me up,’ cried the
Caliph, much excited; ‘dost thou seek to frighten me? I swear that
when I meet my Lord, I will say to Him, “I have appointed as ruler
over Thy people him that is the best amongst them.”’
Thereupon Abu Bekr called for Othmân
and dictated an ordinance appointing Abu Bekr appoints Omar his
successor.
Omar his successor. He fainted while it
was being written down. On recovering, he bade Othmân to read it
over. When he had heard it all, he was satisfied, and praised the
Lord; ‘for,’ said he, ‘I saw thee apprehensive lest, if in the swoon I
had passed away, then the people had been left in doubt.’ Upon this,
he desired that the ordinance should be read in the hearing of the
citizens, who had assembled in the court of the Great Mosque. Omar
himself was present, and hushed the noise, that they might hear.
Then, desiring to obtain the assent of the people, the dying Caliph
bade his wife Asma raise him up to the window (for the Caliph’s
house looked out upon the court); so she bore him, in her beautifully
tattooed arms, to the window, from whence, with a great effort, he
called out: ‘Are ye satisfied with him whom I have appointed over
you? It is none of mine own kin, but Omar, son of Khattâb. Verily I
have done my best to choose the fittest. Wherefore, ye will obey him
loyally.’ The people answered with one voice, ‘Yea, we will obey.’[185]
To the end the mind of Abu Bekr
remained clear and vigorous. On the last His death, 21st Jumâd II.,
a.h. XIII. August 22, a.d.
day of his life, he gave audience, as we 634.
have seen, to Mothanna, and, grasping the
critical state of affairs, commanded Omar to raise, with all despatch,
a levy for Irâc. During his illness he recited these verses on the
vanity of life:
There is none that owneth herds or camels but must leave them to
his heir; And whosoever taketh spoil, one day he shall be spoiled of
the same. Every traveller, wheresoe’er he wander and however far,
returneth; Excepting only the pathway of death, from which there is no
return.
At another time one repeated verses from a heathen poet
supposed to be appropriate to the occasion. Abu Bekr was
displeased, and said: ‘Not so; say rather (and he quoted from a
passage of the Corân relating to death and judgment)—Then the
agony of death shall come in truth. This, O man, is what thou
soughtest to avoid.’[186]
His last act was to summon Omar to his bedside, and, as his
dying charge, to counsel him, which he did at great length, to temper
hardness and severity with mildness and moderation. Shortly after,
he sank, and feeling the agony approach, breathed his last with
these words: ‘Lord, make me to die a true believer. Take me to join
the blessed ones on high!’[187]
Abu Bekr died on August 22, a.d. 634,
having reigned two years and three and burial.
months.[188] His body was laid out, in
pursuance of his own wish, by the loving hands of Asma, and of Abd
al Rahmân, his son; and he was wound in the same clothes in which
he died; ‘for,’ said he, ‘new clothes befit the living, but old the
mouldering body.’[189] The same Companions that bore the
Prophet’s bier bore also that of Abu Bekr; and they laid him in the
same grave, the Caliph’s head resting by his Master’s shoulder.
Omar performed the funeral service, praying, as was customary,
over the bier. The funeral procession had not far to go; it had only to
cross the area in front of the Great Mosque; for Abu Bekr died in the
house appointed for him by Mahomet opposite his own, and looking
out, like it, upon the open court of the Sanctuary.[190]
During the greater part of his Caliphate,
he had occupied that house. For the first Abu Bekr’s character. Simple
six months, indeed, after Mahomet’s death, life at Al Sunh.
he continued to live chiefly, as he had done before, at Al Sunh, a
suburb of Upper Medîna. Here he inhabited a simple dwelling made
of palm stems, with the family of Habîba, the wife whom he married
when he came to Medîna, and who was with child when he died, and
bore him a daughter shortly after. Every morning he rode or walked
to the Great Mosque, where Mahomet had lived and ruled, for the
discharge of the business of the State, and to perform the daily
prayers, Omar presiding in his absence. For the more important
service of Friday, when a speech or sermon was delivered, he
stayed at home to dye his hair and beard, and dress more carefully;
and so did not appear till the time of midday prayer. In this primitive
home, as elsewhere, he preserved the severe simplicity of early life,
and even fed and milked the goats of the household. At the first also
he continued to maintain himself by merchandise; but finding it
interfere with the proper burdens of the State, he consented to
forego all other occupation, and to receive a yearly allowance of six
thousand dirhems for his household charges.[191]
Finding Al Sunh at an inconvenient
distance from the Great Mosque, where, Removes his dwelling to the
as in the time of Mahomet, the affairs of Great Mosque.
the kingdom continued to be transacted, he transferred his
residence, and with it the Treasury, thither. The Exchequer of Islam
was in those days but a simple one. It needed neither guard nor
office of account. The tithes were given to the poor, or spent on
equipage and arms. The spoil of war, and gold and silver from the
mines,[192] or elsewhere, were all distributed as soon as received, or
on the following morning.[193] All shared alike, the recent convert
and the veteran, male and female, bond and free. As a claimant on
the Moslem treasury, every believing Arab was his brother’s equal.
When urged to recognise precedence in the faith as a ground of
preference, he would reply, ‘That is for the Lord. He will fulfil the
reward of such as have excelled, in the world to come. These gifts
are but an accident of the present life.’ After his death, Omar had the
treasury opened; and they found therein but a solitary golden piece,
which had slipped out of the bags; so they lifted up their voices and
wept, and blessed his memory. His conscience troubled him for
having taken even what he did by way of stipend from the people’s
money; on his death-bed, therefore, he gave command that certain
lands, his private property, should be sold, and a sum equal to all
that he had received refunded.
In disposition Abu Bekr was singularly
mild and gentle. Omar used to say that Mild and gentle disposition.
there was no man for whom the people
would more readily have laid down their life. They gave him the
sobriquet of ‘the Sighing,’ because of his tender-heartedness.
Excepting the solitary case in which he committed a traitor-brigand to
the flames, no single act of cruelty stands against him; and for that
he expressed his sorrow. It was one of the three things, he used to
say, which he would wish undone. The others were, that he had
pardoned Asháth, who deserved death; and that when he transferred
Khâlid to Syria, he had not at the same time sent Omar to Irâc.
‘Then,’ said he, ‘I should have stretched out mine arms, both the
right and the left, in the ways of the Lord.’[194]
Unlike his Master, he contented himself
with but few wives. He had married two at His wives and family.
Mecca before his conversion. On his
arrival at Medîna he married the daughter of a Citizen, and, later on,
Asma, the widow of Jáfar. By all of these he left issue. There is no
mention of any other wives, nor of any slave-girls in his harem.[195]
Of his children, he loved Ayesha the best, and, in proof of special
affection, had given her a property for her own. On his death-bed,
this troubled his conscientious spirit, and he said to her, ‘I wish thee,
my daughter, to return it, that it may be divided with the rest of the
inheritance amongst you all, not forgetting the one yet unborn.’[196]
His father survived him six month, reaching the great age of ninety-
seven.’[197]
At his court, Abu Bekr maintained the
same simple and frugal life as Mahomet. Simplicity and diligence in
Guards and servitors there were none, nor the affairs of state.
anything approaching the pomp and circumstance of state. He was
diligent in business. He leaned upon Omar as his counsellor, whose
judgment (excepting in a few cases in which it was warped by
prejudice) had so great weight with him, that he might be said to
have shared in the government. Abu Bekr never spared himself, and
many incidents are related of the manner in which he descended to
the minutest things. Thus, he would sally forth by night to seek for
any destitute or oppressed person; and Omar found him one night
inquiring into the affairs of a poor blind widow, whose case Omar
himself had gone forth to look after. The department of justice was
made over to Omar, but for a whole year, we are told, hardly two
suitors came before him. The Seal of state bore the legend, God the
best of Potentates.[198] The despatches were chiefly indited by Aly;
and Abu Bekr made use also of Zeid (the amanuensis of the Prophet
and compiler of the Corân) and of Othmân, or of any other penman
who happened to be at hand.[199] In the choice of his agents for high
office or command, he was absolutely free from nepotism or
partiality, and was wise and discerning in his estimate of character.
But he had not Omar’s strength or decision; nor was his sense of
justice so keen and stern. This is illustrated
in the matter of the two Khâlids. From the Not so strong, or sternly just,
one—Khâlid ibn Saîd, though warned by as Omar.
Omar and Aly, he hesitated to withhold a command; and the disaster
in Syria was the consequence. On the other hand, by refusing to
degrade Khâlid, ‘the Sword of God,’ for injustice and cruelty and the
scandal of taking to wife his victim’s widow, he became indirectly
responsible for his acts. Yet to this unscrupulous agent it is due,
more than to any other, that Islam survived and triumphed. But Abu
Bekr was not wanting in firmness when the occasion demanded; for
example, the despatch of Osâma’s army, and the defence of Medîna
against the apostate tribes, when he stood almost alone and all
around was dark, showed a boldness and steadfastness of purpose,
which, more than anything else, contributed to turn the tide of
rebellion and apostasy.
The secret of Abu Bekr’s strength was
faith in Mahomet. He would say: ‘Call me Faith in Mahomet the secret
not the Caliph of the Lord: I am but the of his strength.
Caliph of the Prophet of the Lord.’ The question with him ever was,
What did Mahomet command? or, What now should he have done?
From this he never swerved one hair’s-breadth. And so it was that he
crushed apostasy, and laid secure the foundations of Islam, His reign
was short, but, after Mahomet himself, there is no one to whom the
Faith is more beholden.
For this reason, and because his belief
in the Prophet is itself a strong evidence of Abu Bekr’s belief in
the sincerity of Mahomet himself, I have Mahomet; presumptive
evidence of Mahomet’s own
dwelt at some length upon his life and sincerity.
character. Had Mahomet been from the
first a conscious impostor, he never could have won the faith and
friendship of a man who was not only sagacious and wise, but
simple and sincere. Abu Bekr had no thought of personal
aggrandisement. Endowed with sovereign and irresponsible power,
he used it simply for the interests of Islam and the people’s good. He
was too shrewd to be himself deceived, and too honest himself to act
the part of a deceiver.
CHAPTER XIV.
ACCESSION OF OMAR—REINFORCEMENTS FOR IRAC—
CAMPAIGN THERE UNDER ABU OBEID AND MOTHANNA.
Jumâd II., A.H. XIII.—Moharram, A.H. XIV.

August, A.D. 634–March, A.D. 635.
On the morrow after Abu Bekr’s death,

Omar ascended the pulpit, and addressed Accession of Omar.
the people assembled in the Great
Mosque. ‘The Arabs,’ he said, ‘are like a rebellious camel obliged to
follow its driver, and it pertaineth to the driver to see which way he
leadeth the same. By the Lord of the Káaba! even thus will I guide
you in the way that ye should go.’
The first act of the new Caliph was to
issue the despatch, with which the reader His first two acts.
is already acquainted, deposing Khâlid.
The second was, in fulfilment of Abu Bekr’s dying behest, to raise a
fresh levy for Mothanna. Leaving the former, we turn for the present
to the latter.
A new standard was planted in the
court of the Great Mosque, and urgent Fresh levies sent to Irâc
under Abu Obeid.
proclamation made that soldiers for the
campaign in Irâc were to rally round it. Then followed the oath of
fealty to Omar, which was taken by all who were in and around the
city, and not completed for three days. Meanwhile, so great a fear of
Persian pomp and prowess had fallen on the people, that none
responded to the military call. Seeing this, Mothanna harangued
them in a stirring speech. He told them of his victories, the endless
plunder, the captives, male and female, and the fruitful lands which
they had already spoiled the enemy of; ‘and the Lord,’ he added,
‘waiteth but to give the rest into your hands.’ Warmed by his
discourse, and stung by the indignant invectives of Omar, men
began at last to offer. The first who came forward was Abu Obeid, a
citizen of Tâyif; and then numbers crowded to the standard. When
they had reached a thousand, those around began to say to Omar:
‘Now choose thee one of the chiefest among them to be Ameer—a
veteran Companion of the Prophet,—Refugee, or Citizen.’[200] ‘That I
will not,’ said Omar. ‘Wherein doth the glory of the Companions
consist but in this, that they were the first to rally round the Prophet?
But now ye are backward, and come not to the help of the Lord.
Such as be ready for the burden, whether it be light or whether it be
heavy, these have the better claim. Verily I will give the command to
none but to him that first came forth.’ Then turning to Abu Obeid: ‘I
appoint thee,’ he said, ‘over this force, because thou wast the first to
offer; and in eagerness for battle is the Arab’s glory.’ Nevertheless,
he earnestly enjoined upon him ever to take counsel with the
Companions of the Prophet, and to associate them with him in the
conduct of affairs. So the force started for Irâc. At the same time
Omar removed the ban against the employment of the once apostate
tribes; and bade Abu Obeid to summon to his standard all, without
distinction, who since the apostasy had made a good profession.
Mothanna, with a lightened heart, hastened back in advance of Abu
Obeid, and returned to Hîra after the absence of a month.
During this period, while Mothanna was
away, further changes were transpiring at Rustem rouses the Persians
against the invaders.
the unhappy court of Persia. Prince and
princess succeeded one another in the midst of bloodshed and
rebellion, till at last a royal lady named Burân summoned Rustem, a
general of renown, from Khorasan, and by his aid established herself
as Regent upon the throne.[201] Rustem was an astrologer, and
knew from the conjunction of the planets the impending fate of
Persia. When asked why then he had linked himself with a doomed
cause, he answered that it was the love of pomp and riches. Amidst
such silly tales, of which there is no lack, we may discern the
lineaments of a prince brave in the field, but proud and overweening.
Such was the man whose authority Burân now proclaimed supreme.
His energy was soon felt. The nobles rallied round him; the great
landholders were incited to rise against the invaders, and
Mesopotamia, with the Sawâd and delta, speedily cast off the
Moslem yoke. Two columns were despatched from Medâin, one
under Jabân to cross the Euphrates and advance on Hîra; the other
under Narsa to occupy Kaskar between the Euphrates and Tigris.
The people flocked to their standard, and the position of the
Moslems again became precarious.
Mothanna, thus threatened, called in his forces, but they were too
few to oppose the enemy; so he abandoned Hîra, and falling back on
Khaffân, by the border of the desert, on the road to Medîna, there
awaited Abu Obeid. But he had to wait
some time. Swelled by reinforcements Abu Obeid gains a victory
from the tribes by the way, and, burdened over the Persians. Shaban,
a.h. XIII. October, a.d. 634.
by their families, it was a month before the
army made its appearance there. After a few days’ repose at
Khaffân, Abu Obeid took command of the combined force, and,
attacking Jabân, put him to flight. Then crossing the Euphrates, he
surprised Narsa, who was strongly posted at a royal date-grove near
to Kaskar, and, routing his army, took possession of his camp, with
much spoil. Great store of dates fell into their hands, of a rare kind,
reserved for royal use. These were distributed among the army, and
became the common food of all. With the royal Fifth, a portion of
them was sent to Medîna: ‘Behold,’ wrote Abu Obeid to his Master,
‘the food wherewith the Lord hath fed us, eaten heretofore only by
the kings of Persia. We desired that thou shouldest see the same
with thine own eyes, taste it with thine own lips, and praise the Lord
for his grace and goodness in giving us royal food to eat.’ Jalenûs,
another general, coming up too late to the help of Narsa, was also
discomfited; and the unfortunate delta, prey to alternate conquest
and defeat, began again to acknowledge Moslem sway. The
neighbouring chiefs brought in their tribute, and, in proof of loyalty,
made a feast of good things for Abu Obeid. But he declined to
partake of it, unless shared equally with his soldiers. A further supply
of the same delicacies was therefore furnished, and the whole army
sat down with him to the repast. His determination to taste none of
the Persian viands but in company with the rank and file of his men
redounded greatly to his popularity.[202]
Enraged at the defeat of his generals,
Rustem assembled a still larger force Bahmân sent with great army
against Abu Obeid. a.h. XIII.
under the warrior Bahmân.[203] To mark Autumn a.d. 634.
the gravity of the crisis, the great banner of
the empire, made of panthers’ skins, was unfurled,[204] and an array
of war elephants accompanied the army. Jalenûs, too, was sent back
to fight, under the threat that if again he fled before the enemy, he
would be put to death. Before this imposing host, the Arabian army
fell back, and, recrossing the Euphrates, took up ground on the right
bank. Bahmân, following, encamped at Coss Nâtick, on the opposite
shore. The field of battle was not far from Babylon, and, being on the
highway between the Capital and Hîra, a bridge of boats spanned
the river near the spot.[205] Bahmân, in his pride, gave Abu Obeid
the option of crossing the river unopposed, thus leaving him the
choice of either bank for the impending action. Abu Obeid desired to
take the offer and pass over to the other side. His advisers strongly
opposed the movement, and sought to dissuade him from quitting
their more advantageous ground. But he made it a point of honour;
and exclaiming, ‘Shall we fear death more than they?’ gave the order
at once to cross. They found the ground upon the farther side
confined; and, though they were under 10,000 men, there was little
room to manœuvre, and nothing but the bridge to fall back upon. The
unwieldy elephants, with their jingling bells
and trappings, spread confusion among Battle of the Bridge. Shabân,
the Arab cavalry. The riders, however, a.h. [206]
XIII. October, a.d. 634.
dismounting, went bravely at them on foot,

and tried, with some success, to cut the bands of the howdas, and
drive them from the field. Abu Obeid singled out the fiercest, a white
elephant, with great tusks, and rushed at it, sword in hand. While
vainly endeavouring to reach some vulnerable part, the huge beast
caught him with its trunk, and trampled him to death. Consternation
seized the ranks at the horrid spectacle. One after another the
captains whom Abu Obeid had named to meet disaster, were slain,
[207] and the troops began to waver. Just at this moment, a soldier of
the Beni Thackîf,[208] appalled at the fate of Abu Obeid and other
leaders of his clan, ran to the bridge, and crying out, Die, as your
chiefs have died, or conquer, cut the first boat adrift. Exit thus
closed, the panic spread. The Moslems were hemmed in, and driven
back upon the river. Many leaped in, but few reached the other shore
of the deep swift stream.[209] At this eventful moment Mothanna
rushed to the front. Backed by a few heroic spirits, among them a
Christian chief of the Beni Tay,[210] he seized the banner, and,
planting himself between the enemy and the bewildered Arabs,
called out that he would hold the ground till all had passed securely.
Then he chided the Thackîfite for what he had done, and
commanded the bridge to be restored. ‘Destroy not your own selves,’
he cried; ‘retire in order, and I will defend you.’ While thus bravely
holding the Persians at bay, the thrust of a lance imbedded several
rings of his armour in a deep and dangerous wound. Heedless of the
pain, he stood heroically to his ground endeavouring to calm his
panic-stricken men. But in vain. The
confusion increased, and before order The Moslems routed.
could be restored, a vast number had
perished in the river. At last the native boatmen were made to refit
the bridge, and a remnant escaped across it; but four thousand were
either swept off by the flood, left dead upon the field, or borne
wounded over the bridge. Of the new levies, two thousand, stung
with remorse, fled from the terrible field, away to their homes in
Arabia; and Mothanna, again assuming the command, was left with
only three thousand men. After the battle, Bahmân was on the point
of crossing the river to follow up his victory. Had he done so, it would
have fared badly with Mothanna and the wounded disheartened
remnants, who still held their ground on the opposite bank. But
fortunately for them, just at that moment, news reached Bahmân of a
revolt at Medâin; and so, relinquishing his design, he hastened, in
support of his master, back to the distracted capital.[211] With the
relics of his army, Mothanna fell back upon
Allîs, farther down the river; and there, for Mothanna retires on Allîs.
the time, fixing his head-quarters, bravely
defended his first conquests. The cause of Islam looked dark; but a
hero like Mothanna would not despair. Mindful of his early tactics, he
sought to recruit his diminished ranks from the surrounding coasts;
so, rallying around him the tribes of kindred race, before long he
regained a firmer footing.
Jabân, unaware of the General’s hasty
recall to Medâin, and supposing the Arabs Jabân taken prisoner and
to be in full flight before the conquering beheaded.
host, followed in pursuit. He had before been taken prisoner and
obtained his ransom by deceit.[212] Crossing now the river, he was
cut off by the Arabs, and, with his column, was taken prisoner by
Mothanna. The people also of Allîs brought many of the stragglers
into the Moslem camp. These were all beheaded. At a later period,
Allîs had special grace shown it for this service.
Omar received with calmness the
tidings of the disaster. Abu Obeid’s levies How the tidings of defeat
kept on their flight till they reached their were received at Medîna.
homes; and when those from Medîna returned there, they covered
their faces with shame. The Caliph spoke comfortably to them.
‘Verily,’ he said, ‘I am a defence to every believer that faceth the
enemy and misfortune overtaketh him. The Lord have mercy on Abu
Obeid, and be gracious unto him. Had he survived, and taken refuge
from the foe on some sandy mound, I surely would have been his
advocate and defender.’ Muâdz, reciter of the Corân, was among
those who fled. Shortly after, when, in the course of recitation, he
came to this verse: ‘Whosoever in the field shall give his back to the
enemy (excepting again to join in the battle), or shall turn aside unto
another party, verily he draweth the wrath of God upon him; his
refuge shall be hell-fire—an evil end!’[213] And he lifted up his voice
and wept. Omar addressed him kindly: ‘Weep not, O Muâdz,’ he
said, ‘thou hast not “turned aside unto another party”; thou hast
turned aside to none but unto me.’ Such was the spirit of these
Moslem heroes, even in defeat. The reverse had no other effect than
to nerve the Caliph to redoubled effort; and the cry for a levy en
masse soon resounded over the whole peninsula. The
reinforcements, in response to this new call, would, however, have
been too late to help Mothanna if (fortunately for Islam) earlier
succour had not reached him.
For the previous call, made at the time
of Abu Bekr’s death, was still drawing. Numerous levies join
Levies, from all directions, were daily Mothanna in Irâc.
coming in, eager (now that the ban against apostates was removed)
at once to evince the sincerity of their repentance, and to share in
the rewards of victory. Each band, as it came in, besought Omar that
they might be sent to Syria.[214] But the late victory on the Yermûk
had made him easy in that direction; and every available man must
now be despatched in haste to Irâc. The Beni Bajîla, a brave and
numerous levy, raised under the banner of Jarîr, urged that their
ancestral relations were all with Syria; but Omar was firm, and, at
last, reconciled them to set out at once for Irâc by the promise—
singular in the history of the time—that they should have one fourth
of the royal Fifth of all booty taken there.[215] The fugitives also, from
the army of Abu Obeid, hastened back, seeking to retrieve their
honour. But far the most remarkable of the levies that now gathered
under Mothanna’s standard—a proof, at once of his liberality,
statesmanship, and widespread influence—was from the Beni Namr,
a Christian tribe of the northern desert, which, without detriment to
their faith, threw in their lot with Mothanna, and brought a large
contingent to his help.[216] Thus, rapidly and largely reinforced, he
was soon stronger than ever, and ready for an offensive movement.
These troops were massed at first well in the rear of the enemy’s
country, on the edge of the Arabian desert, near Khaffân. The
women and children (for the practice had now become general of
carrying their families with them) were placed in security at a
distance behind; some were even left with friendly citizens in Hîra,
although, since the last retreat, the city had been reoccupied by a
Persian satrap. Mothanna had also a trusty follower in hiding there,
to give him notice of what was passing.
From this spy, Mothanna now learned
that, matters having been settled at the Mothanna advances to meet
capital, a great army was in motion against aa.h.
Persian army. Ramadhân,
XIII. November, a.d.
him. [217] Sending an urgent message to 634.
Jarîr, now close at hand, to hurry on, he
marched forward to Boweib, on the western branch of the Euphrates,
and there, close by the future site of Kûfa, and on ground
commanded by a bridge, he awaited the enemy. Omar had
cautioned him not again to risk his men by crossing the river before
victory was secure; so he suffered Mehrân, the Persian commander,
without question to defile his troops over the bridge.[218] The armies
were then marshalled. The Persians advanced in three columns, an
elephant surrounded by a company of footmen, at the head of each,
and all with great tumult and barbaric din. It was the fast of
Ramadhân; but a dispensation was given to the troops, and they had
been strengthened by a repast. Mothanna, on his favourite charger
(called, by the humour of his men, the Rebel, from its docility in
action), rode along the lines, and exhorted his soldiers to quit
themselves like men: ‘Your valour this day will be a proverb in the
mouths of all. Be still as death,’ he cried; ‘and if ye speak aught one
to the other, speak it in a whisper. None shall give way amongst us
this day. I desire no glory for myself, but the glory of you all.’ And
they answered him in like words; for he was beloved by his men.[219]
The word for the advance was to be the
Takbîr, ‘Great is the Lord!’ It was to be The Battle of Boweib.
thrice repeated; then, on the fourth cry, the
rush. But Mothanna had barely shouted the first, when the Persian
myrmidons bore down in great force; and the Beni Ijl, the nearest
column, broke before them. Mothanna stroked his beard in trouble.
Calling an officer of his staff, he bade him hasten with this message
to the wavering corps: ‘The Ameer sendeth greeting, and saith, Ye
will not this day shame the Moslems!’ They gave answer, ‘Yea, we
shall not!’ And, as the broken ranks closed up again in sharp serried
line, Mothanna smiled approvingly. The battle raged long and
equally. At last, Mothanna, seeing that a desperate onset must be
made, rode up to the chief of the Beni Namr, and said to him:
‘Though Christian, ye are one in blood with us; come now, and as I
charge, charge ye with me.’ The Persian centre quivered before the
fierce onslaught, and as the dust cleared off, it was seen to be giving
way. The Moslem wings, hitherto outflanked, now took heart, and
charged also. Then the Persian army fell back, and made for the
bridge. But Mothanna was before them. In despair, they turned on
their pursuers, and the multitude was so great that again there was a
moment of danger. But the fiery zeal of the Arabs, though a handful
in comparison, beat back the forlorn charge. ‘The enemy,’ says an
eye-witness, ‘driven before Arfaja, were brought up by the river, and
finding no escape, re-formed, and charged upon us. One cried to the
leader to move his banner back; “My work,” he answered, “is to
move the banner on.” So forward we drove, and cut them up, not
one reaching even to the river bank.’ Mothanna reproached himself
afterwards with having closed the bridge, and caused (on his own
side) a useless loss of life. ‘I made a grievous error,’ he would say:
‘follow not my example herein; it behoveth us not to close the way
against those who may be driven to turn upon us by despair.’[220]
The carnage was almost unparalleled even in the annals of Islam,
and it went on amongst the fugitives all night. A hundred warriors
boasted that they had slain each ten men to his lance; and hence the
battle of Boweib is sometimes called the field of Tens. There was no
engagement of which the marks were wider or more lasting. For
ages the bones of the slain bleached upon the plain; and the men of
Kûfa had here, at their very door, a lasting proof at once of the
prowess and the mercilessness of their forefathers in the faith.
The victory is remarkable, not only for
the unexampled loss of life, but also as Persian general slain by a
secured in great part by the valour of the Christian youth.
Beni Namr, a Christian tribe. And yet further, the most gallant feat of
the day was achieved by the member of another Christian clan. A
party of Beni Taghlib merchants, with a string of horses for sale,
arriving just as the ranks were being dressed, threw themselves into
the battle, choosing the Arab side. A youth from amongst them,
darting into the very centre of the Persians, slew Mehrân, and
leaping on his richly caparisoned horse, rode back upon it, amidst
the plaudits of the whole Moslem line, crying, as he passed in
triumph: ‘I am of the Beni Taghlib. I am he that hath slain
Mehrân’[221]
The loss on the Moslem side was
considerable. Mothanna had to mourn the Loss on the Moslem side.
death of his brave brother Masûd. As this
hero was borne from the field mortally wounded, he cried: ‘Exalt your
banners high, ye Beni Bekr.[222] The Lord will exalt you, my men;
and let not my fall disturb you!’ Amr, the Christian chieftain, met a
similar fate. And Mothanna affectionately tended the last moments of
both together—the Christian and the Moslem—an unwonted sight on
these crusading fields. He performed the funeral service over his
brother and the other fallen Moslems, and said in his panegyric of
their heroism: ‘It assuageth my grief that they stood stedfast; that
they yielded not a step; and now they lie here the martyrs of Boweib.’
The spoil was great. Immense stores of
grain, as well as herds of cattle, were The spoil.
captured; and, therefrom, supplies were
sent to the families in their desert retreat. As Amr ibn Mádekerib rode
up with these, the women, mistaking the convoy for a plundering
raid, rushed out, with their wild shrill Arab scream, and began
attacking them with stones and staves.
Amr soon made himself known to them, Moslem women defend their
and praised their courageous attitude. ‘It camp.
well becometh the wives of such an army,’ he said, ‘thus to defend
themselves.’ Then he told them of the victory; ‘and lo,’ he added, as
he produced the stores of grain, ‘the first-fruits thereof!’[223]
The country was now ravaged without
let or hindrance up to Sabât, within sight of Mesopotamia and delta
regained.
the walls of Medâin. The enemy’s
garrisons were all driven back; and lower Mesopotamia and the delta
anew reoccupied. Parties also scoured the country higher up. Anbâr
and Khanâfis were again taken possession of, and many rich
markets ransacked. They penetrated to Baghdad (then a mere
village on the Tigris above the modern city), and even as far north as
Tekrît. Great booty was gathered in these plundering expeditions. It
was divided in the usual way, excepting that the Beni Bajîla, who well
merited the distinction, received, according to promise, a fourth of
the imperial Fifth, beyond their proper share—the remaining portion
being sent to Medîna.[224]

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Part 1 The Scope and Environment

Part 2 The Valuation of Financial Assets 176

Part 3 Investment in Long-Term Assets 350

Part 4 Capital Structure and Dividend Policy 430

Part 5  orking-Capital Management and International

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Part 1 The Scope and Environment

1 An Introduction to the Foundations of Financial

Chapter Summaries 42 • Review Questions 44 • Mini Case 45

2 The Financial Markets and Interest Rates 46

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Interest Rate Determinants in a Nutshell 62

Chapter Summaries 71 • Review Questions 74 • Study Problems 74 • Mini Case 77

3 Understanding Financial Statements and Cash

Appendix 3A: Free Cash Flows 124

Study Problems 128

4 Evaluating a Firm’s Financial Performance 130

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The Limitations of Financial Ratio Analysis 162

Chapter Summaries 163 • Review Questions 166 • Study Problems 166

Part 2 The Valuation of Financial Assets 176

5 The Time Value of Money 176

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6 The Meaning and Measurement of Risk

Chapter Summaries 249 • Review Questions 253 • Study Problems 253

7 The Valuation and Characteristics

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Terminology and Characteristics of Bonds 263

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8 The Valuation and Characteristics

Chapter Summaries 311 • Review Questions 314 • Study Problems 314

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Calculating Divisional Costs of Capital 335

Chapter Summaries 341 • Review Questions 343 • Study Problems 344

Part 3 Investment in Long-Term Assets 350

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Part 1 The Scope and Environment

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Part 1 The Scope and Environment

Part 5 orking-Capital Management and International

Web 17 Cash, Receivables, and Inventory Management

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