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 GLOBAL
EDITION

Fundamentals of
Corporate Finance
FIFTH EDITION

Jonathan Berk   Peter DeMarzo   Jarrad Harford

 Fundamentals of

Corporate Finance
FIFTH EDITION
GLOBAL EDITION

Jonathan Peter Jarrad

Berk DeMarzo Harford
STANFORD UNIVERSITY STANFORD UNIVERSITY UNIVERSITY OF WASHINGTON

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Authorized adaptation from the United States edition, entitled Fundamentals of

Corporate Finance, 5th Edition, ISBN 978-0-13-581159-7 by Jonathan B. Berk,
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 To Natasha and Hannah for all the joy you
bring to my life. —J. B.

To Kaui, Pono, Koa, and Kai for all the love

and laughter. —P. D.

To Katrina, Evan, and Cole for your love and

support. —J. H.

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 Brief Contents

PART 1 Introduction 29
CHAPTER 1 Corporate Finance and the Financial Manager 31
CHAPTER 2 Introduction to Financial Statement Analysis 55

PART 2 Interest Rates and Valuing Cash Flows 99

CHAPTER 3 Time Value of Money: An Introduction 101
CHAPTER 4 Time Value of Money: Valuing Cash Flow Streams 121
CHAPTER 5 Interest Rates 159
CHAPTER 6 Bonds 187
CHAPTER 7 Stock Valuation 225

PART 3 Valuation and the Firm 253

CHAPTER 8 Investment Decision Rules 255
CHAPTER 9 Fundamentals of Capital Budgeting 293
CHAPTER 10 Stock Valuation: A Second Look 331

PART 4 Risk and Return 363

CHAPTER 11 Risk and Return in Capital Markets 365
CHAPTER 12 Systematic Risk and the Equity Risk Premium 397
CHAPTER 13 The Cost of Capital 433

PART 5 Long-Term Financing 461

CHAPTER 14 Raising Equity Capital 463
CHAPTER 15 Debt Financing 495

PART 6 Capital Structure and Payout Policy 523

CHAPTER 16 Capital Structure 525
CHAPTER 17 Payout Policy 565

PART 7 Financial Planning and Forecasting 599

CHAPTER 18 Financial Modeling and Pro Forma Analysis 601
CHAPTER 19 Working Capital Management 631
CHAPTER 20 Short-Term Financial Planning 657

PART 8 Special Topics 687

CHAPTER 21 Option Applications and Corporate Finance 689
CHAPTER 22 Mergers and Acquisitions 715
CHAPTER 23 International Corporate Finance 745 5

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 Detailed Contents
PART 1 Introduction 29
CHAPTER 1 Corporate Finance and the
Financial Manager 31
1.1 Why Study Finance? 32
1.2 The Four Types of Firms 32
Sole Proprietorships 33
Partnerships 34
Limited Liability Companies 34
Corporations 34
Tax Implications for Corporate Entities 36
• Corporate Taxation Around the World 36
1.3 The Financial Manager 38
Making Investment Decisions 38
• GLOBAL FINANCIAL CRISIS The
Dodd-Frank Act 38
Making Financing Decisions 39
Managing Short-Term Cash Needs 39
The Goal of the Financial Manager 39
• Shareholder Value Versus Stakeholder
Value 40
1.4 The Financial Manager’s Place in the
Corporation 40
The Corporate Management Team 40
Ethics and Incentives in Corporations 41
• GLOBAL FINANCIAL CRISIS The
Dodd-Frank Act on Corporate Compensation
and Governance 42
• Citizens United v. Federal Election
Commission 42
1.5 The Stock Market 43
The Largest Stock Markets 43
Primary Versus Secondary Markets 44
Traditional Trading Venues 44
• INTERVIEW WITH Frank Hatheway 45
New Competition and Market Changes 46
Dark Pools 47
Listing Standards 47
Other Financial Markets 47
• NYSE, BATS, DJIA, S&P 500: Awash in
Acronyms 48
1.6 Financial Institutions 48
The Financial Cycle 48
Types of Financial Institutions 49
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Role of Financial Institutions 49
Summary 51 ● Problems 52
CHAPTER 2 Introduction to Financial
Statement Analysis 55
2.1 Firms’ Disclosure of Financial Information 56
Preparation of Financial Statements 56
• International Financial Reporting
Standards 56
• INTERVIEW WITH Ruth Porat 57
Types of Financial Statements 58
2.2 The Balance Sheet 58
Assets 59
Liabilities 60
Stockholders’ Equity 60
Market Value Versus Book Value 61
Market-to-Book Ratio 62
Enterprise Value 62
2.3 The Income Statement 64
Earnings Calculations 64
EBITDA 65
2.4 The Statement of Cash Flows 66
Operating Activity 66
Investment Activity 69
Financing Activity 69
2.5 Other Financial Statement Information 69
Statement of Stockholders’ Equity 70
Management Discussion and Analysis 70
Notes to the Financial Statements 70
2.6 Financial Statement Analysis 70
Profitability Ratios 71
Liquidity Ratios 72
Asset Efficiency 72
Working Capital Ratios 72
Interest Coverage Ratios 74
Leverage Ratios 74
Valuation Ratios 76
• COMMON MISTAKE Mismatched
Ratios 76
Operating Returns 77
The DuPont Identity 78
2.7 Financial Reporting in Practice 82
Enron 82
The Sarbanes-Oxley Act 82
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 8 Detailed Contents

Dodd-Frank Act 83 • Historical Examples of Perpetuities 128

• GLOBAL FINANCIAL CRISIS Bernard • COMMON MISTAKE Discounting One Too
Madoff’s Ponzi Scheme 84 Many Times 129
The Financial Statements: A Useful Starting
4.3 Annuities 129
Point 84
Present Value of an Annuity 129
Summary 85 ● Critical Thinking 87 ●
Future Value of an Annuity 132
Problems 88 ● Data Case 96
4.4 Growing Cash Flows 133
Growing Perpetuity 134
Growing Annuity 136
PART 2 Interest Rates and
4.5 Solving for Variables Other Than Present Value
Valuing Cash Flows 99 or Future Value 137
Solving for the Cash Flows 137
CHAPTER 3 Time Value of Money: An
Rate of Return 140
Introduction 101 Solving for the Number of Periods 143
3.1 Cost-Benefit Analysis 102 4.6 Non-Annual Cash Flows 144
Role of the Financial Manager 102 The Big Picture 145
Quantifying Costs and Benefits 102 Summary 146 ● Critical Thinking 147 ●
3.2 Market Prices and the Valuation Principle 104 Problems 147 ● Data Case 153
The Valuation Principle 104 CHAPTER 4 APPENDIX Using a Financial
Why There Can Be Only One Competitive Price for Calculator 155
a Good 105
• Your Personal Financial Decisions 106 CHAPTER 5 Interest Rates 159
3.3 The Time Value of Money and Interest
5.1 Interest Rate Quotes and Adjustments 160
Rates 106
The Effective Annual Rate 160
The Time Value of Money 106
Adjusting the Discount Rate to Different Time
The Interest Rate: Converting Cash Across
Periods 161
Time 107
Annual Percentage Rates 162
Timelines 110
• COMMON MISTAKE Using the EAR in the
3.4 Valuing Cash Flows at Different Points in Annuity Formula 163
Time 111
5.2 Application: Discount Rates and Loans 165
Rule 1: Comparing and Combining Values 111
Computing Loan Payments 165
• COMMON MISTAKE Summing Cash Flows • GLOBAL FINANCIAL CRISIS Teaser Rates
Across Time 111
and Subprime Loans 167
Rule 2: Compounding 112
Computing the Outstanding Loan Balance 167
• Rule of 72 113
Rule 3: Discounting 114 5.3 The Determinants of Interest Rates 168
Inflation and Real Versus Nominal Rates 169
• Using a Financial Calculator 116
Summary 116 ● Critical Thinking 117 ● Investment and Interest Rate Policy 170
Problems 117 • How Is Inflation Actually Calculated? 171
The Yield Curve and Discount Rates 172
CHAPTER 4 Time Value of Money: Valuing • INTERVIEW WITH Dr. Janet Yellen 174
Cash Flow Streams 121 • COMMON MISTAKE Using the Annuity
Formula When Discount Rates Vary 175
4.1 Valuing a Stream of Cash Flows 122 The Yield Curve and the Economy 175
Applying the Rules of Valuing Cash Flows to a 5.4 The Opportunity Cost of Capital 178
Cash Flow Stream 122 • Interest Rates, Discount Rates, and the Cost
• Using a Financial Calculator: Solving for of Capital 179
Present and Future Values of Cash Flow • COMMON MISTAKE States Dig a $3 Trillion
Streams 125 Hole by Discounting at the Wrong Rate 180
4.2 Perpetuities 126 Summary 180 ● Critical Thinking 182 ●
Perpetuities 126 Problems 182

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CHAPTER 6 Bonds 187
6.1 Bond Terminology 188
6.2 Zero-Coupon Bonds 189
Zero-Coupon Bond Cash Flows 190
Yield to Maturity of a Zero-Coupon Bond 190
• GLOBAL FINANCIAL CRISIS Negative Bond
Yields 191
Risk-Free Interest Rates 192
6.3 Coupon Bonds 193
Coupon Bond Cash Flows 193
• The U.S. Treasury Market 194
Yield to Maturity of a Coupon Bond 195
• Finding Bond Prices on the Web 197
Coupon Bond Price Quotes 198
6.4 Why Bond Prices Change 198
Interest Rate Changes and Bond Prices 198
Time and Bond Prices 201
Interest Rate Risk and Bond Prices 202
• Clean and Dirty Prices for Coupon Bonds 205
Bond Prices in Practice 205
6.5 Corporate Bonds 206
Credit Risk 207
• Are Treasuries Really Default-Free
Securities? 207
• INTERVIEW WITH Lisa Black 208
Corporate Bond Yields 208
Bond Ratings 209
Corporate Yield Curves 209
• The Credit Crisis and Bond Yields 211
Summary 213 ● Critical Thinking 214 ●
Problems 214 ● Data Case 218
CHAPTER 6 APPENDIX A Solving for the
Yield to Maturity of a Bond Using a Financial
Calculator 220
CHAPTER 6 APPENDIX B The Yield Curve and
the Law of One Price 221
CHAPTER 7 Stock Valuation 225
7.1 Stock Basics 226
Stock Market Reporting: Stock Quotes 226
Common Stock 227
Preferred Stock 228
7.2 The Mechanics of Stock Trades 229
7.3 The Dividend-Discount Model 230
A One-Year Investor 230
Dividend Yields, Capital Gains, and Total
Returns 231
A Multiyear Investor 232
Dividend-Discount Model Equation 233
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7.4 Estimating Dividends in the Dividend-Discount
Model 234
Constant Dividend Growth 234
Dividends Versus Investment and Growth 235
Changing Growth Rates 237
• COMMON MISTAKE Forgetting to “Grow”
This Year’s Dividend 238
Value Drivers and the Dividend-Discount Model 240
7.5 Limitations of the Dividend-Discount Model 240
Uncertain Dividend Forecasts 240
Non-Dividend-Paying Stocks 241
7.6 Share Repurchases and the Total Payout
Model 242
7.7 Putting It All Together 243
Summary 244 ● Critical Thinking 246 ●
Problems 246
PART 2 INTEGRATIVE CASE 250
PART 3 Valuation and the
Firm 253
CHAPTER 8 Investment Decision Rules 255
8.1 The NPV Decision Rule 256
Net Present Value 256
The NPV Decision Rule 257
8.2 Using the NPV Rule 258
Organizing the Cash Flows and Computing the
NPV 258
The NPV Profile 259
Measuring Sensitivity with IRR 260
Alternative Rules Versus the NPV Rule 260
8.3 Alternative Decision Rules 260
• USING EXCEL Computing NPV and
IRR 261
The Payback Rule 262
The Internal Rate of Return Rule 263
• COMMON MISTAKE IRR Versus the IRR
Rule 267
Modified Internal Rate of Return 267
• Why Do Rules Other Than the NPV Rule
Persist? 268
8.4 Choosing Among Projects 270
Differences in Scale 271
• INTERVIEW WITH Dick Grannis 274
Timing of the Cash Flows 275
8.5 Evaluating Projects with Different
Lives 276
Important Considerations When Using the
­Equivalent Annual Annuity 278
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 10 Detailed Contents

8.6 Choosing Among Projects When Resources Are

CHAPTER 10 Stock Valuation: A Second
Limited 279
Look 331
Evaluating Projects with Different Resource
Requirements 279 10.1 The Discounted Free Cash Flow Model 332
8.7 Putting It All Together 282 Valuing the Enterprise 332
Summary 283 ● Critical Thinking 284 ● Implementing the Model 333
Problems 285 ● Data Case 291 Connection to Capital Budgeting 334
CHAPTER 8 APPENDIX Creating the NPV 10.2 Valuation Based on Comparable Firms 336
Profile Using Excel's Data Table Function 292 Valuation Multiples 336
Limitations of Multiples 341
CHAPTER 9 Fundamentals of Capital Comparison with Discounted Cash Flow
Budgeting 293 Methods 342
10.3 Stock Valuation Techniques: A Final Word 342
9.1 The Capital Budgeting Process 294 • INTERVIEW WITH Douglas Kehring 343
9.2 Forecasting Incremental Earnings 295 10.4 Information, Competition, and Stock
Operating Expenses Versus Capital Prices 344
Expenditures 295 Information in Stock Prices 344
Incremental Revenue and Cost Estimates 296 Competition and Efficient Markets 346
Taxes 297 • Forms of Market Efficiency 346
Incremental Earnings Forecast 297 Lessons for Investors and Corporate
9.3 Determining Incremental Free Cash Flow 299 Managers 348
Converting from Earnings to Free Cash • Nobel Prize The 2013 Prize: An
Flow 300 Enigma? 349
Calculating Free Cash Flow Directly 303 The Efficient Markets Hypothesis Versus No
Calculating the NPV 304 Arbitrage 349
• USING EXCEL Capital ­Budgeting Using a 10.5 Individual Biases and Trading 350
­Spreadsheet Program 305 Excessive Trading and Overconfidence 350
9.4 Other Effects on Incremental Free Cash Hanging On to Losers and the Disposition
Flows 306 Effect 350
Opportunity Costs 306 Investor Attention, Mood, and Experience 352
• COMMON MISTAKE The Opportunity Cost Summary 353 ● Critical Thinking 354 ●
of an Idle Asset 306 Problems 354 ● Data Case 359
Project Externalities 306 PART 3 INTEGRATIVE CASE 361
Sunk Costs 307
• COMMON MISTAKE The Sunk Cost
Fallacy 307 PART 4 Risk and Return 363
Adjusting Free Cash Flow 308
CHAPTER 11 Risk and Return in Capital
Replacement Decisions 310
Markets 365
9.5 Analyzing the Project 311
Sensitivity Analysis 311 11.1 A First Look at Risk and Return 366
Break-Even Analysis 312 11.2 Historical Risks and Returns of Stocks 368
• INTERVIEW WITH David Holland 314 Computing Historical Returns 369
Scenario Analysis 315 Average Annual Returns 371
• USING EXCEL Project Analysis Using • Arithmetic Average Returns Versus
Excel 316 ­Compound Annual Returns 373
9.6 Real Options in Capital Budgeting 317 The Variance and Volatility of Returns 374
Option to Delay 318 • COMMON MISTAKE Mistakes When
Option to Expand 318 Computing Standard Deviation 376
Option to Abandon 318 • USING EXCEL Computing the Standard
Summary 319 ● Critical Thinking 320 ● ­Deviation of Historical Returns 376
Problems 320 ● Data Case 328 The Normal Distribution 377
CHAPTER 9 APPENDIX MACRS 11.3 The Historical Tradeoff Between Risk and
Depreciation 329 Return 379

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 Detailed Contents 11

The Returns of Large Portfolios 379 The Big Picture 422

The Returns of Individual Stocks 379 Summary 422 ● Critical Thinking 424 ●
11.4 Common Versus Independent Risk 381 Problems 424
Theft Versus Earthquake Insurance: An CHAPTER 12 APPENDIX Alternative Models of
Example 381 Systematic Risk 429
Types of Risk 381
11.5 Diversification in Stock Portfolios 383 CHAPTER 13 The Cost of Capital 433
Unsystematic Versus Systematic Risk 383
• GLOBAL FINANCIAL CRISIS Diversification 13.1 A First Look at the Weighted Average Cost of
Benefits During Market Crashes 384 Capital 434
Diversifiable Risk and the Risk Premium 386 The Firm’s Capital Structure 434
The Importance of Systematic Risk 386 Opportunity Cost and the Overall Cost of
• COMMON MISTAKE A Fallacy of Long-Run Capital 434
Diversification 387 Weighted Averages and the Overall Cost of
Summary 388 ● Critical Thinking 389 ● Capital 435
Problems 390 ● Data Case 393 Weighted Average Cost of Capital
Calculations 436
CHAPTER 12 Systematic Risk and the Equity 13.2 The Firm’s Costs of Debt and Equity Capital 437
Risk Premium 397 Cost of Debt Capital 437
• COMMON MISTAKE Using the Coupon Rate
12.1 The Expected Return of a Portfolio 398 as the Cost of Debt 438
Portfolio Weights 398 Cost of Preferred Stock Capital 439
Portfolio Returns 398 Cost of Common Stock Capital 440
Expected Portfolio Return 400
13.3 A Second Look at the Weighted Average Cost of
12.2 The Volatility of a Portfolio 401 Capital 442
Diversifying Risks 401 WACC Equation 442
Measuring Stocks’ Co-Movement: Weighted Average Cost of Capital in
Correlation 403 Practice 443
• USING EXCEL Calculating the Correlation Methods in Practice 444
Between Two Sets of Returns 405
13.4 Using the WACC to Value a Project 445
Computing a Portfolio’s Variance and Standard
Key Assumptions 446
Deviation 405
WACC Method Application: Extending the Life of
The Volatility of a Large Portfolio 407
an AT&T Facility 447
• Nobel Prize Harry Markowitz 408 Summary of the WACC Method 448
12.3 Measuring Systematic Risk 409
13.5 Project-Based Costs of Capital 448
Role of the Market Portfolio 409
Stock Market Indexes as the Market
• COMMON MISTAKE Using a Single Cost of
Capital in Multi-Divisional Firms 448
Portfolio 410
Cost of Capital for a New Acquisition 449
Market Risk and Beta 410
Divisional Costs of Capital 449
• Index Funds 411 • INTERVIEW WITH Shelagh Glaser 450
• COMMON MISTAKE Mixing Standard
Deviation and Beta 413 13.6 When Raising External Capital Is Costly 451
Estimating Beta from Historical Returns 414 Summary 452 ● Critical Thinking 454 ●
Problems 454 ● Data Case 457
• USING EXCEL Calculating a Stock’s Beta 416
12.4 Putting It All Together: The Capital Asset Pricing PART 4 INTEGRATIVE CASE 459
Model 416
The CAPM Equation Relating Risk to Expected PART 5 Long-Term
Return 416
Financing 461
• Why Not Estimate Expected Returns
Directly? 417 CHAPTER 14 Raising Equity Capital 463
• Nobel Prize William Sharpe 418
The Security Market Line 419 14.1 Equity Financing for Private Companies 464
The CAPM and Portfolios 421 Sources of Funding 464
Summary of the Capital Asset Pricing Model 422 • INTERVIEW WITH Kevin Laws 465

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 12 Detailed Contents
• Crowdfunding: The Wave of the Future?
Securities and Valuation 467
Exiting an Investment in a Private Company 469
14.2 Taking Your Firm Public: The Initial Public
Offering 470
Advantages and Disadvantages of Going Public 470
Primary and Secondary IPO Offerings 470
Other IPO Types 476
• Google’s IPO 477
• An Alternative to the Traditional IPO: Spotify's
Direct Listing 479
14.3 IPO Puzzles 479
Underpriced IPOs 480
“Hot” and “Cold” IPO Markets 481
• GLOBAL FINANCIAL CRISIS 2008–2009:
A Very Cold IPO Market 482
High Cost of Issuing an IPO 482
Poor Post-IPO Long-Run Stock Performance 483
14.4 Raising Additional Capital: The Seasoned Equity
Offering 484
SEO Process 484
SEO Price Reaction 486
SEO Costs 487
Summary 488 ● Critical Thinking 489 ●
Problems 489 ● Data Case 492
CHAPTER 15 Debt Financing 495
15.1 Corporate Debt 496
Private Debt 496
• Debt Financing at Hertz: Bank Loans 496
• Debt Financing at Hertz: Private
Placements 497
Public Debt 497
• Debt Financing at Hertz: Public Debt 499
15.2 Other Types of Debt 501
Sovereign Debt 501
Municipal Bonds 502
• Detroit’s Art Museum at Risk 503
Asset-Backed Securities 503
• GLOBAL FINANCIAL CRISIS CDOs,
Subprime Mortgages, and the Financial
Crisis 504
15.3 Bond Covenants 506
Types of Covenants 506
Advantages of Covenants 506
Application: Hertz’s Covenants 507
15.4 Repayment Provisions 507
Call Provisions 507
• New York City Calls Its Municipal
Bonds 509
Sinking Funds 510
Convertible Provisions 510
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467 Summary 513 ● Critical Thinking 515 ●
Problems 515 ● Data Case 517
CHAPTER 15 APPENDIX Using a Financial
­Calculator to Calculate Yield to Call 518
PART 5 INTEGRATIVE CASE 519
PART 6 Capital Structure and
Payout Policy 523
CHAPTER 16 Capital Structure 525
16.1 Capital Structure Choices 526
Capital Structure Choices Across Industries 526
Capital Structure Choices Within Industries 526
16.2 Capital Structure in Perfect Capital Markets 528
Application: Financing a New Business 529
Leverage and Firm Value 530
The Effect of Leverage on Risk and Return 531
Homemade Leverage 533
Leverage and the Cost of Capital 533
• COMMON MISTAKE Capital Structure
Fallacies 534
• GLOBAL FINANCIAL CRISIS Bank Capital
Regulation and the ROE Fallacy 536
MM and the Real World 537
• Nobel Prize Franco Modigliani and Merton
Miller 537
16.3 Debt and Taxes 538
The Interest Tax Deduction and Firm Value 538
Value of the Interest Tax Shield 539
The Interest Tax Shield with Permanent Debt 541
Leverage and the WACC with Taxes 542
Debt and Taxes: The Bottom Line 542
16.4 The Costs of Bankruptcy and Financial
Distress 543
Direct Costs of Bankruptcy 544
• Bankruptcy Can Be Expensive 544
Indirect Costs of Financial Distress 544
16.5 Optimal Capital Structure: The Tradeoff
Theory 545
Differences Across Firms 545
Optimal Leverage 546
16.6 Additional Consequences of Leverage: Agency
Costs and Information 547
Agency Costs 547
• Airlines Use Financial Distress to Their
Advantage 548
• GLOBAL FINANCIAL CRISIS Moral Hazard
and Government Bailouts 549
• Financial Distress and Rolling the Dice,
Literally 550
Debt and Information 550
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16.7 Capital Structure: Putting It All Together 552
Summary 553 ● Critical Thinking 555 ●
Problems 555
CHAPTER 16 APPENDIX The Bankruptcy
Code 563
CHAPTER 17 Payout Policy 565
17.1 Cash Distributions to Shareholders 566
Dividends 567
Share Repurchases 568
17.2 Dividends Versus Share Repurchases in a
­Perfect Capital Market 569
Alternative Policy 1: Pay a Dividend with Excess
Cash 570
Alternative Policy 2: Share Repurchase
(No Dividend) 570
• COMMON MISTAKE Repurchases and the
Supply of Shares 572
Alternative Policy 3: High Dividend (Equity
Issue) 572
Modigliani-Miller and Dividend Policy
Irrelevance 573
• COMMON MISTAKE The Bird in the Hand
Fallacy 574
Dividend Policy with Perfect Capital
Markets 574
17.3 The Tax Disadvantage of Dividends 575
Taxes on Dividends and Capital
Gains 575
Optimal Dividend Policy with Taxes 575
Tax Differences Across Investors 578
17.4 Payout Versus Retention of Cash 580
Retaining Cash with Perfect Capital
Markets 580
Retaining Cash with Imperfect Capital
Markets 581
17.5 Signaling with Payout Policy 584
Dividend Smoothing 584
Dividend Signaling 585
• Royal & SunAlliance’s Dividend Cut 586
Signaling and Share Repurchases 586
• INTERVIEW WITH John Connors 587
17.6 Stock Dividends, Splits, and Spin-Offs 588
Stock Dividends and Splits 588
• Berkshire Hathaway’s A and
B Shares 589
Spin-Offs 589
17.7 Advice for the Financial Manager 590
Summary 591 ● Critical Thinking 593 ●
Problems 593 ● Data Case 596
PART 6 INTEGRATIVE CASE 598
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PART 7 Financial Planning and
Forecasting 599
CHAPTER 18 Financial Modeling and Pro
Forma Analysis 601
18.1 Goals of Long-Term Financial Planning 602
Identify Important Linkages 602
Analyze the Impact of Potential Business
Plans 602
Plan for Future Funding Needs 602
18.2 Forecasting Financial Statements: The Percent
of Sales Method 603
Percent of Sales Method 603
Pro Forma Income Statement 604
Pro Forma Balance Sheet 605
• COMMON MISTAKE Confusing
Stockholders’ Equity with Retained
Earnings 606
Making the Balance Sheet Balance: Net New
Financing 606
Choosing a Forecast Target 608
18.3 Forecasting a Planned Expansion 608
KMS Designs’ Expansion: Financing
Needs 609
KMS Designs’ Expansion: Pro Forma Income
Statement 610
• COMMON MISTAKE Treating Forecasts
as Fact 612
Forecasting the Balance Sheet 612
18.4 Growth and Firm Value 613
Sustainable Growth Rate and External
Financing 614
18.5 Valuing the Expansion 617
Forecasting Free Cash Flows 617
• COMMON MISTAKE Confusing Total
and Incremental Net Working
Capital 619
KMS Designs’ Expansion: Effect on Firm
Value 619
Optimal Timing and the Option to Delay 622
Summary 623 ● Critical Thinking 624 ●
Problems 624
CHAPTER 18 APPENDIX The Balance Sheet
and Statement of Cash Flows 628
CHAPTER 19 Working Capital
Management 631
19.1 Overview of Working Capital 632
The Cash Cycle 632
Working Capital Needs by Industry 634
Firm Value and Working Capital 635
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 14 Detailed Contents

19.2 Trade Credit 636 • A Seventeenth-Century Financing

Trade Credit Terms 637 Solution 671
Trade Credit and Market Frictions 637 Inventory as Collateral 672
• COMMON MISTAKE Using APR Instead of EAR • Loan Guarantees: The Ex-Im Bank
to C
­ ompute the Cost of Trade Credit 638 Controversy 672
Managing Float 639
20.6 Putting It All Together: Creating a Short-Term
19.3 Receivables Management 640 Financial Plan 674
Determining the Credit Policy 640 Summary 675 ● Critical Thinking 676 ●
• The 5 C’s of Credit 640 Problems 677
Monitoring Accounts Receivable 642
PART 7 INTEGRATIVE CASE 681
19.4 Payables Management 644
Determining Accounts Payable Days
Outstanding 644 PART 8 Special Topics 687
Stretching Accounts Payable 645
19.5 Inventory Management 646
CHAPTER 21 Option Applications and
Benefits of Holding Inventory 646 Corporate Finance 689
Costs of Holding Inventory 647
21.1 Option Basics 690
• Inventory Management Adds to the ­Bottom Option Contracts 690
Line at Gap 647
Stock Option Quotations 691
19.6 Cash Management 648 Options on Other Financial Securities 693
Motivation for Holding Cash 648 • Options Are for More Than Just Stocks 693
Alternative Investments 648
21.2 Option Payoffs at Expiration 693
• Hoarding Cash 650 The Long Position in an Option Contract 694
Summary 650 ● Critical Thinking 652 ●
The Short Position in an Option Contract 695
Problems 652 ● Data Case   655
Profits for Holding an Option to Expiration 697
Returns for Holding an Option to Expiration 699
CHAPTER 20 Short-Term Financial
Planning 657 21.3 Factors Affecting Option Prices 700
Strike Price and Stock Price 700
20.1 Forecasting Short-Term Financing Needs 658 Option Prices and the Exercise Date 700
Application: Springfield Snowboards, Inc. 658 Option Prices and the Risk-Free Rate 701
Negative Cash Flow Shocks 658 Option Prices and Volatility 701
Positive Cash Flow Shocks 659 21.4 The Black-Scholes Option Pricing
Seasonalities 659 Formula 702
The Cash Budget 661
21.5 Put-Call Parity 703
20.2 The Matching Principle 663 Portfolio Insurance 704
Permanent Working Capital 663
21.6 Options and Corporate Finance 707
Temporary Working Capital 663
Summary 709 ● Critical Thinking 710 ●
Permanent Versus Temporary Working
Problems 710 ● Data Case 712
Capital 663
Financing Policy Choices 664 CHAPTER 22 Mergers and Acquisitions 715
20.3 Short-Term Financing with Bank Loans 666
Single, End-of-Period Payment Loan 666 22.1 Background and Historical Trends 716
Line of Credit 666 Merger Waves 717
Bridge Loan 667 Types of Mergers 718
Common Loan Stipulations and Fees 667 22.2 Market Reaction to a Takeover 718
20.4 Short-Term Financing with Commercial 22.3 Reasons to Acquire 719
Paper 669 Economies of Scale and Scope 719
• Short-Term Financing and the Financial ­Crisis Vertical Integration 720
of the Fall of 2008 669 Expertise 720
20.5 Short-Term Financing with Secured Monopoly Gains 720
Financing 671 Efficiency Gains 721
Accounts Receivable as Collateral 671 Tax Savings from Operating Losses 721

A01_BERK7156_05_GE_FM.indd 14 20/01/22 5:37 PM

 Detailed Contents 15

Diversification 722 Hedging with Forward Contracts 752

Earnings Growth 723 Cash-and-Carry and the Pricing of Currency
Managerial Motives to Merge 724 Forwards 754
22.4 The Takeover Process 725 Hedging Exchange Rate Risk with
Valuation 725 Options 756
The Offer 726 23.3 Internationally Integrated Capital Markets 758
Merger “Arbitrage” 728 • COMMON MISTAKE Forgetting to Flip the
Tax and Accounting Issues 729 Exchange Rate 760
Board and Shareholder Approval 730 23.4 Valuation of Foreign Currency Cash Flows 760
22.5 Takeover Defenses 731 Application: Ityesi, Inc. 760
Poison Pills 731 The Law of One Price as a Robustness
Staggered Boards 732 Check 762
White Knights 733 23.5 Valuation and International Taxation 764
Golden Parachutes 733 The TCJA: A New Approach to International
Recapitalization 733 Taxation 764
Other Defensive Strategies 733
23.6 Internationally Segmented Capital
Regulatory Approval 734
Markets 765
• Weyerhaeuser’s Hostile Bid for Willamette Differential Access to Markets 765
Industries 734
Macro-Level Distortions 766
22.6 Who Gets the Value Added from a Implications of Internationally Segmented Capital
Takeover? 735 Markets 767
The Free Rider Problem 735
23.7 Capital Budgeting with Exchange Rate
Toeholds 736
Risk 768
The Leveraged Buyout 736
Application: Ityesi, Inc. 769
• The Leveraged Buyout of RJR-Nabisco by Conclusion 770
KKR 738
Summary 770 ● Critical ­Thinking 772 ●
The Freezeout Merger 739
Problems 773 ● Data Case 776
Competition 739
Summary 740 ● Critical Thinking 741 ●
Problems 742 Index 779

CHAPTER 23 International Corporate

Finance 745

23.1 Foreign Exchange 746

The Foreign Exchange Market 746
Exchange Rates 748
23.2 Exchange Rate Risk 748
Exchange Rate Fluctuations 749
• Brexit 750

A01_BERK7156_05_GE_FM.indd 15 20/01/22 5:37 PM

 About the Authors

Jonathan Berk is the A.P. Giannini Professor of

Finance at the Graduate School of Business, Stanford
University and is a Research Associate at the National
Bureau of Economic Research. Before coming to
Stanford, he was the Sylvan Coleman Professor of
Finance at Haas School of Business at the University
of California, Berkeley. Prior to earning his Ph.D., he
worked as an Associate at Goldman Sachs (where his
education in finance really began).
Professor Berk’s research interests in finance
include corporate valuation, capital structure, mutual
funds, asset pricing, experimental economics, and
labor economics. His work has won a number of
research awards including the Stephen A. Ross
Prize in Financial Economics, TIAA-CREF Paul A.
Jonathan Berk, Peter DeMarzo, and Jarrad Harford Samuelson Award, the Smith Breeden Prize, Best
Paper of the Year in The Review of Financial Studies,
and the FAME Research Prize. His paper, “A Critique of Size-Related Anomalies,” was
selected as one of the two best papers ever published in The Review of Financial Studies.
In recognition of his influence on the practice of finance he has received the Bernstein-
Fabozzi/Jacobs Levy Award, the Graham and Dodd Award of Excellence, and the Roger F.
Murray Prize. He served two terms as an Associate Editor of the Journal of Finance, and a
term as a director of the American Finance Association, the Western Finance Association,
and academic director of the Financial Management Association. He is a Fellow of the
Financial Management Association and a member of the advisory board of the Journal of
Portfolio Management.
Born in Johannesburg, South Africa, Professor Berk has two daughters, and is an avid
skier and biker.

Peter DeMarzo is the Staehelin Family Professor of Finance at the Graduate School
of Business, Stanford University and Faculty Director of the Stanford LEAD program. He
is past President and Fellow of the American Finance Association and a Research Associ-
ate at the National Bureau of Economic Research. He teaches MBA and Ph.D. courses in
Corporate Finance and Financial Modeling. In addition to his experience at the Stanford
Graduate School of Business, Professor DeMarzo has taught at the Haas School of Busi-
ness and the Kellogg Graduate School of Management, and he was a National Fellow at
the Hoover Institution.
Professor DeMarzo received the Sloan Teaching Excellence Award at Stanford and
the Earl F. Cheit Outstanding Teaching Award at U.C. Berkeley. Professor DeMarzo has
served as an Associate Editor for The Review of Financial Studies, Financial Manage-
ment, and the B.E. Journals in Economic Analysis and Policy, as well as President of the
Western Finance Association. Professor DeMarzo’s research is in the area of corporate
finance, asset securitization, and contracting, as well as market structure and regulation.
His recent work has examined issues of the optimal design of contracts and securities,
16

A01_BERK7156_05_GE_FM.indd 16 20/01/22 5:37 PM

 About the Authors 17

leverage dynamics and the role of bank capital regulation, and the influence of informa-
tion asymmetries on stock prices and corporate investment. He has also received nu-
merous awards including the Western Finance Association Corporate Finance Best-Paper
Award, the Charles River Associates Best-Paper Award, and the Barclays Global Investors/
Michael Brennan Best-Paper of the Year Award from The Review of Financial Studies.
Professor DeMarzo was born in Whitestone, New York, and is married with three boys.
He and his family enjoy hiking, biking, and skiing.

Jarrad Harford is the Paul Pigott-PACCAR Professor of Finance at the University

of Washington’s Foster School of Business. Prior to Washington, Professor Harford taught
at the University of Oregon. He received his Ph.D. in Finance with a minor in Organiza-
tions and Markets from the University of Rochester. Professor Harford has taught the
core undergraduate finance course, Business Finance, for over twenty years, as well as
an elective in Mergers and Acquisitions, and “Finance for Non-financial Executives” in
the ­executive education program. He has won numerous awards for his teaching, includ-
ing the UW Finance Professor of the Year (2010, 2012, 2016), Panhellenic/Interfraternity
Council Business Professor of the Year Award (2011, 2013), ISMBA Excellence in Teach-
ing Award (2006), and the Wells Fargo Faculty Award for Undergraduate Teaching (2005).
Professor Harford is currently a Managing Editor of the Journal of Financial and Quanti-
tative Analysis, and serves as an Associate Editor for the Journal of Financial Economics,
and the Journal of Corporate Finance. His main research interests are understanding
the dynamics of merger and acquisition activity as well as the interaction of corporate
cash management policy with governance, payout and global tax considerations. Professor
Harford was born in Pennsylvania, is married, and has two sons. He and his family enjoy
traveling, hiking, and skiing.

A01_BERK7156_05_GE_FM.indd 17 20/01/22 5:37 PM

 Bridging Theory
and Practice
EXAMPLE 7.1
Stock Prices and PROBLEM Study Aids with a Practical Focus
Suppose you expect Longs Drug Stores to pay an annual dividend of $0.56 per share in the coming year
Returns
and to trade for $45.50 per share at the end of the year. If investments with equivalent risk to Longs’ stock To be successful, students need to master the core
have an expected return of 6.80%, what is the most you would pay today for Longs’ stock? What dividend
yield and capital gain rate would you expect at this price? concepts and learn to identify and solve problems
SOLUTION that today’s practitioners face.
PLAN
We can use Eq. 7.1 to solve for the beginning price we would pay now 1P0 2 given our expectations about • The Valuation Principle is presented as the
dividends 1Div1 = $0.56 2 and future price 1P1 = $45.50 2 and the return we need to expect to earn to be
willing to invest 1rE = 0.068 2. We can then use Eq. 7.2 to calculate the dividend yield and capital gain rate. foundation of all financial decision making: The
EXECUTE central idea is that a firm should take projects or
Using Eq. 7.1, we have

Div1 + P1 $0.56 + $45.50

make investments that increase the value of the
P0 =
1 + rE
=
1.0680
= $43.13
firm. The tools of finance determine the impact
Referring to Eq. 7.2, we see that at this price, Longs’ dividend yield is Div1/P0 = 0.56/43.13 = 1.30%. of a project or investment on the firm’s value by
The expected capital gain is $45.50 - $43.13 = $2.37 per share, for a capital gain rate of
2.37/43.13 = 5.50%. comparing the costs and benefits in equivalent
EVALUATE
At a price of $43.13, Longs’ expected total return is 1.30% + 5.50% = 6.80%, which is equal to its
terms. The Valuation Principle is first introduced
equity cost of capital (the return being paid by investments with equivalent risk to Longs’). This amount is in Chapter 3, revisited in the part openers, and
the most we would be willing to pay for Longs’ stock. If we paid more, our expected return would be less
than 6.8% and we would rather invest elsewhere. integrated throughout the text.
PERSONAL FINANCE • Guided Problem Solutions (GPS) are Examples
PROBLEM
EXAMPLE 4.5 Ellen is 35 years old and she has decided it is time to plan seriously for her retirement. At the end of each that accompany every important concept using
Retirement Savings year until she is 65, she will save $10,000 in a retirement account. If the account earns 10% per year, how
Plan Annuity much will Ellen have in her account at age 65? a consistent problem-solving methodology that
SOLUTION breaks the solution process into three steps:
PLAN Plan, Execute, and Evaluate. This approach aids
As always, we begin with a timeline. In this case, it is helpful to keep track of both the dates and Ellen’s age:
35 36 37 65
student comprehension, enhances their ability
0 1 2
...
30 to model the solution process when tackling
+10,000 +10,000 +10,000 problems on their own, and demonstrates the
Ellen’s savings plan looks like an annuity of $10,000 per year for 30 years. (Hint : It is easy to become importance of interpreting the mathematical
confused when you just look at age, rather than at both dates and age. A common error is to think there
are only 65 - 36 = 29 payments. Writing down both dates and age avoids this problem.) solution.
To determine the amount Ellen will have in her account at age 65, we’ll need to compute the future
value of this annuity. • Personal Finance GPS Examples showcase the
EXECUTE
1
use of financial analysis in everyday life by set-
FV = $10,000 * 11.1030 - 1 2
0.10 ting problems in scenarios, such as purchasing a
= $10,000 * 164.49
new car or house and saving for retirement.
= $1.645 million at age 65
Using a financial calculator or Excel:

N I/Y PV PMT FV
Given:
Solve for:
30 10 0 210,000
1,644,940
• Common Mistake boxes alert students to
Excel Formula: 5FV(RATE,NPER, PMT, PV)5FV(0.10,30,210000,0) frequently made mistakes stemming from misun-
derstanding of core concepts and calculations—
EVALUATE
By investing $10,000 per year for 30 years (a total of $300,000) and earning interest on those investments, in the classroom and in the field.
the compounding will allow Ellen to retire with $1.645 million.

COMMON MISTAKE
Summing Cash Flows Across Time
Once you understand the time value of money, our first rule may seem straightforward. However,
it is very common, especially for those who have not studied finance, to violate this rule, simply
treating all cash flows as comparable regardless of when they are received. One example is in
sports contracts. In 2019, Mike Trout signed a contract extension with the Los Angeles Angels
that was repeatedly referred to as a “$430 million” contract. The $430 million comes from simply
adding up all the payments Trout would receive over the 12 years of the contract—treating dollars
received in 12 years the same as dollars received today. The same thing occurred when Lionel
Messi signed a contract extension with FC Barcelona in 2017, giving him a “$320 million” contract
through 2021, and in 2011 when Albert Pujols agreed to a “240 million” ten-year contract with the

18

A01_BERK7156_05_GE_FM.indd 18 20/01/22 5:37 PM

 Applications That
Reflect Real Practice
GLOBAL 2008–2009: A Very Cold IPO Market
FINANCIAL The drop in IPO issues during the 2008 fi-
nancial crisis was both global and dramatic.
CRISIS
The bar graph shows the total worldwide dol-
lar volume of IPO proceeds in billions of dollars (blue bars) and
number of deals (red line) by quarter, from the last quarter of
2006 to the first quarter of 2009. Comparing the fourth quarter
of 2007 (a record quarter for IPO issues) to the fourth quarter of
2008, dollar volume dropped a stunning 97% from $102 billion
to just $3 billion. Things got even worse in the first quarter of
2009 with just $1.4 billion raised. The market for IPOs essentially
dried up altogether.
During the 2008 financial crisis, IPO markets were not the only
equity issue markets that saw a collapse in volume. Markets for
seasoned equity offerings and leveraged buyouts also collapsed.
The extreme market uncertainty at the time created a “flight to
quality.” Investors, wary of taking risk, sought to move their capital
into risk-free investments like U.S. Treasury securities. The result
was a crash in existing equity prices and a greatly reduced supply
of new capital to risky asset classes.

585 567 591

IPO Proceeds ($ billion)

440
Global Financial Crisis boxes reflect the reality

$105

$102
381

$90
of the recent financial crisis and sovereign debt 251 269

$59
crisis, noting lessons learned. Boxes interspersed 164

$41

$38
$36
through the book illustrate and analyze key $13
78
$3.0
51
$1.4
details. 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1
Quarter

Source: Shifting Landscape—Are You Ready? Global IPO Trends report 2009, Ernst & Young.

INTERVIEW DR. JANET YELLEN

Practitioner Interviews from notable
professionals featured in many chapters
highlight leaders in the field and address
the effects of the financial crisis.
WITH
Dr. Janet L. Yellen served as the Chair of the overshooting the Fed’s 2%
Board of Governors of the Federal Reserve System from 2014 to target level; raising rates
2018, and as Vice Chair from 2010 to 2014. Previously she was too quickly, on the other
President and Chief Executive Officer of the Federal Reserve Bank hand, could stall economic
of San Francisco; Chair of the White House Council of Economic growth. As of March 2018,
Advisers under President Bill Clinton; and business professor at the Fed had raised rates
the University of California, Berkeley, Haas School of Business. She six times, bringing the
is currently Distinguished Fellow in Residence—Economic Stud- fed funds rate to almost
ies, at The Brookings Institution’s Hutchins Center on Fiscal and 1.75%. It also began a
Monetary Policy. gradual process of shrink-
ing its massive balance
QUESTION: What are the main policy instruments used by central sheet by diminishing its
banks to control the economy, and how did they change as a reinvestments of principal.
result of the financial crisis?
QUESTION: Inthe last 10 years we have witnessed a period of
ANSWER: Before the financial crisis, short-term interest rates were the
main tool of monetary policy. The Federal Reserve (The Fed) controlled
very low interest rates. Is this a new norm, or do you think
rates will eventually rise to their historic averages?
these rates by adjusting the quantity of bank reserves (cash in the
banking system) it made available. By purchasing or selling Treasury ANSWER: The evidence suggests, and I concur, that low interest
securities the Federal Reserve raised or lowered the available quantity rates may be the “new norm” in developed countries. Short-term
of reserves and thereby controlled short-term interest rates. interest rates appeared to be falling in the United States and other
In the aftermath of the crisis, short-term interest rates remain a developed countries even before the financial crisis. Estimates now
prime tool of monetary policy, but they are now set in a different place the “neutral rate”—the rate consistent with stable growth
way and the quantity of reserves is an order-of-magnitude larger— and low inflation—at a bit under 1% in real terms. Two key factors
peaking at around $2.5 trillion compared to about $25 billion precrisis. that influence the level of neutral rates are productivity growth and
At the height of the financial crisis (December 2008), the Fed set demographics. Productivity growth in most developed countries
the interest rate on reserves at 25 basis points, bringing the general has been slow relative to the postwar period; at the same time,
level of safe short-term rates down to near zero (its so-called “effec- populations are aging and labor force growth has slowed. These
tive lower bound”), where it remained for seven years. It also began factors tend to boost a society’s saving rate and reduce investment
buying long-term Treasury bonds and agency mortgage-backed spending, pushing the level of neutral rates down.
securities—“unconventional” policies that lowered longer-term inter-
QUESTION: How will the recent tax cuts affect future Fed policy?
est rates once short rates had reached the effective lower bound. In
addition, the Federal Reserve began providing more detailed forward ANSWER:
Monetary policy is designed to achieve the Fed’s Congres -
guidance about the likely path of short-term rates. These “unconven-
sionally mandated goals of maximum or “full” employment and 2%
tional” policies were intended to lower longer-term interest rates once
inflation. This means that all factors that affect these dimensions of
short rates had reached the effective lower bound. economic performance will influence Fed policy. Tax cuts serve to
boost domestic demand—both consumer and investment spend-
QUESTION: What challenges does the Fed face in the aftermath
ing. Higher investment spending, over time, boosts the economy’s
of the financial crisis?
capital stock and its potential output to some extent. Moreover,
ANSWER: The Fed faces the challenge of raising interest rates lower marginal tax rates may boost labor supply. Over the next few
and shrinking the quantity of reserves at an appropriate pace as years, the demand impact of the spending increases and tax cuts
the economy recovers and no longer needs the level of stimu- seems likely to dominate any supply effects. With the economy
lus required post-crisis. The danger of raising rates too slowly near full employment, the Fed may need to raise interest rates a
is the risk of the economy overheating and inflation significantly bit faster as a consequence.

General Interest boxes highlight timely material
from current financial events that shed light on
business problems and real company practices.
The Credit Crisis and Bond Yields
The financial crisis that engulfed the world’s economies in 2008
originated as a credit crisis that first emerged in August 2007. At
that time, problems in the mortgage market had led to the bank-
ruptcy of several large mortgage lenders. The default of these firms,
and the downgrading of many of the bonds backed by mortgages
these firms had made, caused many investors to reassess the risk
of other bonds in their portfolios. As perceptions of risk increased,
and investors attempted to move into safer U.S. Treasury securi-
ties, the prices of corporate bonds fell and so their credit spreads
6.7. Panel (a) shows
the yield spreads for long-term corporate bonds, where we can
see that spreads of even the highest-rated Aaa bonds increased
dramatically, from a typical level of 0.5% to over 2% by the fall
of 2008. Panel (b) shows a similar pattern for the rate banks had
to pay on short-term loans compared to the yields of short-term
Treasury bills. This increase in borrowing costs made it more costly
for firms to raise the capital needed for new investment, slowing
economic growth. The decline in these spreads in early 2009 was
viewed by many as an important first step in mitigating the ongoing
impact of the financial crisis on the rest of the economy.

19

A01_BERK7156_05_GE_FM.indd 19 20/01/22 5:37 PM

 Teaching Every
Student to Think Finance
notation C cash flow N date of the last cash flow in Simplified Presentation
Cn
FV
cash flow at date n
future value
P initial principal or deposit, or of Mathematics
equivalent present value
FVn future value on date n
Because one of the hardest parts of learning finance
PV present value
g growth rate r interest rate or rate of return
for non-majors is mastering the jargon, math, and
non-standardized notation, Fundamentals of Corpo-
rate Finance systematically uses:

• Notation Boxes. Each chapter begins with a

Using a Financial Calculator: Solving for Present and Future Values of Cash Flow Streams Notation box that defines the variables and the
3,
acronyms used in the chapter and serves as a
both financial calculators and spreadsheets have these formulas preprogrammed to quicken the process. In this box, we focus on financial “legend” for students’ reference.
calculators, but spreadsheets such as Excel have very similar shortcut functions.
Financial calculators have a set of functions that perform the calculations that finance professionals do most often. These functions
are all based on the following timeline, which among other things can handle most types of loans: • Numbered and Labeled Equations. The first
0 1 2
...
NPER time a full equation is given in notation form it is
PV PMT PMT PMT 1 FV numbered. Key equations are titled and revisited
There are a total of five variables: number of periods (N or NPER ), present value (PV ), cash flow or “payment” (PMT ), future value (FV ), in the summary and in end papers.
and the interest rate, denoted I / Y. Each function takes four of these variables as inputs and returns the value of the fifth one that ensures
that the sum of the present value of the cash flows is zero.
By setting the recurring payments equal to 0, you could compute present and future values of single cash flows such as we have done
• Timelines. Introduced in Chapter 3, timelines are
above using Eqs. 4.2 and 4.1. In the examples shown in Sections 4.2 through 4.4, we will calculate cash flows using the PMT button. The
best way to learn to use a financial calculator is by practicing. We present one example below. We will also show the calculator buttons
emphasized as the important first step in solving
every problem that involves cash flows over time.
contains step-by-step instructions for using the two most popular financial calculators.
Example
Suppose you plan to invest $20,000 in an account paying 8% interest. You will invest an additional $1000 at the end of each year for
• Financial Calculator instructions, including a
box in Chapter 4 on solving for future and present
NPER 5 15
0 1 2
... values, and appendices to Chapters 4, 6, and 15
PV 5 2+20,000 PMT 5 2+1000 2+1000 FV 5 ? with keystrokes for HP-10bII+ and TI BAII Plus
To compute the solution, we enter the four variables we know, N = 15, I/Y = 8, PV = -20,000, PMT = -$1000, and solve for the one calculators, highlight this problem-solving tool.
we want to determine: FV. Specifically, for the HP-10bII+ or TI BAII Plus calculators:
1. Enter 15 and press the N button.
2. Enter 8 and press the I/Y button ( I/YR for the HP calculator). • Spreadsheet Tables. Select tables are available
as Excel® files, enabling students to change inputs
3. Enter -20,000 and press the PV button.
4. Enter -$1000 and press the PMT button.
5. Press the FV button (for the Texas Instruments calculator, press CPT and then FV ).
and manipulate the underlying calculations.
N I/Y PV PMT FV
Given: 15 8 220,000 21000 • Using Excel boxes describe Excel techniques
Solve for: 90,595.50 and include screenshots to serve as a guide for
Excel Formula: 5FV(0.08,15,21000,220000)
students using this technology.
The calculator then shows a future value of $90,595.50.
Note that we entered PV and PMT as negative numbers (the amounts we are putting into the bank), and FV is shown as a positive
number (the amount we can take out of the bank). It is important to use signs correctly to indicate the direction in which the money is flow-
ing when using the calculator functions. You will see more examples of getting the sign of the cash flows correct throughout the chapter.
Excel has the same functions, but it calls “N,” “NPER” and “I / Y,” “RATE.” Also, it is important to note that you enter an interest

TABLE 18.18 USING EXCEL Capital budgeting forecasts and analysis are most easily performed in a spreadsheet program. Here, we
1 Year 2019 2020 2021 2022 2023 2024
highlight a few best practices when developing your own capital budgets.
Pro Forma Statement 2 Statement of Cash Flows ($000s)
Capital Budgeting
of Cash Flows for KMS, 3 Net Income 8,769 10,162 12,854 15,852 19,184 Create a Project Dashboard
4 Depreciation 7,444 7,499 7,549 7,594 7,635 Using a Spreadsheet
2019–2024 All capital budgeting analyses begin with a set of assumptions regarding future revenues and costs associ-
5 Changes in Working Capital Program
ated with the investment. Centralize these assumptions within your spreadsheet in a project dashboard so
6 Accounts Receivable 22,561 22,827 23,144 23,491 23,872 they are easy to locate, review, and potentially modify. Here, we show an example for the HomeNet project.
7 Inventory 22,696 22,976 23,309 23,675 24,076
8 Accounts Payable 2,157 2,381 2,647 2,940 3,261
9 Cash from Operating Activities 13,112 14,239 16,598 19,221 22,132
10 Capital Expenditures 225,000 28,000 28,000 28,000 28,000
11 Other Investment — — — — —
12 Cash from Investing Activities 225,000 28,000 28,000 28,000 28,000
13 Net Borrowing 20,000 — — — —
14 Dividends 25,955 23,858 25,951 28,280 210,871
15 Cash from Financing Activities 14,045 23,858 25,951 28,280 210,871
16
17 Change in Cash (9 1 12 1 15) 2,157 2,381 2,647 2,940 3,261

20

A01_BERK7156_05_GE_FM.indd 20 20/01/22 5:37 PM

 Practice Finance
to Learn Finance
Working problems is the proven way to cement and
KEY POINTS AND EQUATIONS KEY TERMS
demonstrate an understanding of finance.
4.1 Valuing a Stream of Cash Flows stream of cash flows, p. 122
• The present value of a cash flow stream is: • Concept Check questions at the end of each
C1 C2 CN
PV = C0 + + + g + (4.3) section enable students to test their understand-
11 + r 2 11 + r 2 2 11 + r 2 N
ing and target areas in which they need further
4.2 Perpetuities consol, p. 126 review.
• A perpetuity is a stream of equal cash flows C perpetuity, p. 126
The present value of a perpetuity is: • End-of-chapter problems written personally
PV 1C in Pe rp e tuity 2 =
C
(4.4)
by Jonathan Berk, Peter DeMarzo, and Jarrad
r
Harford offer instructors the opportunity to assign
4.3 Annuities annuity, p. 129 first-rate materials to students for homework and
• An annuity is a stream of equal cash flows C paid every period for N
periods. The present value of an annuity is: practice with the confidence that the problems
1 1 are consistent with the chapter content. Both
C * ¢1 - ≤ (4.5)
r 11 + r 2 N the problems and solutions, which were also
• The future value of an annuity at the end of the annuity is: prepared by the authors, have been class-tested
C *
1
¢ 11 + r 2 N - 1 ≤ (4.6)
and accuracy checked to ensure quality.
r

End-of-Chapter Materials
Reinforce Learning
Testing understanding of central concepts is crucial to learning finance.
• The Chapter Summary presents the key points and conclusions from each chapter, provides a
list of key terms with page numbers, and indicates online practice opportunities.
• Data Cases present in-depth scenarios in a business setting with questions designed to guide
students’ analysis. Many questions involve the use of Internet resources.
• Integrative Cases occur at the end of most parts and present a capstone extended problem for
each part with a scenario and data for students to analyze based on that subset of chapters.

DATA CASE This is your second interview with a prestigious brokerage firm for a job as an equity analyst.
You survived the morning interviews with the department manager and the vice president
of equity. Everything has gone so well that they want to test your ability as an analyst. You
are seated in a room with a computer and a list with the names of two companies—Ford (F)
and Microsoft (MSFT). You have 90 minutes to complete the following tasks:
1. Download the annual income statements, balance sheets, and cash flow statements
for the last four fiscal years from Morningstar (www.morningstar.com). Enter each
company’s stock symbol and then go to “financials.” Copy and paste the financial
statements into Excel.

2. Find historical stock prices for each firm from Yahoo! Finance (finance.yahoo.com).
Enter the stock symbol, click “Historical Prices” in the left column, and enter the proper
date range to cover the last day of the month corresponding to the date of each financial
statement. Use the closing stock prices (not the adjusted close). To calculate the firm’s
market capitalization at each date, multiply the number of shares outstanding by the
firm’s historic stock price. You can find the number of shares by using “Basic” under
“Weighted average shares outstanding” at the bottom of the Income Statement.

21

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 Preface

Finance professors are united by their commitment to shaping future

generations of financial professionals as well as instilling financial awareness and skills in
non-majors. Our goal with Fundamentals of Corporate Finance is to provide an accessible
presentation for both finance and non-finance majors. We know from experience that count-
less undergraduate students have felt that corporate finance is challenging. It is tempting to
make finance seem accessible by de-emphasizing the core principles and instead concentrat-
ing on the results. In our over 75 years of combined teaching experience, we have found that
emphasizing the core concepts in finance—which are clear and intuitive at heart—is what
makes the subject matter accessible. What makes the subject challenging is that it is often
difficult for a novice to distinguish between these core ideas and other intuitively appealing
approaches that, if used in financial decision making, will lead to incorrect decisions.
The 2007–2009 financial crisis was fueled in part by many practitioners’ poor deci-
sion making when they did not understand—or chose to ignore—the core concepts that
underlie finance and the pedagogy in this book. With this point in mind, we present finance
as one unified whole based on two simple, powerful ideas: (1) valuation drives decision
making—the firm should take projects for which the value of the benefits exceeds the
value of the costs, and (2) in a competitive market, market prices (rather than individual
preferences) determine values. We combine these two ideas with what we call the Valuation
Principle, and from it we establish all of the key ideas in corporate finance.

New to This Edition

We have updated all text discussions and figures, tables, data cases, and facts to accu-
rately reflect developments in the field in the last few years. Specific highlights include
the following:
• Extensive updates made to Chapter 9 (Fundamentals of Capital Budgeting), Chapter 16
(Capital Structure), and Chapter 23 (International Corporate Finance).
• Added discussion of Finance and Technology (Fintech) in Chapter 1 (Corporate
Finance and the Financial Manager).
• Added a new interview with Janet L. Yellen in Chapter 5 (Interest Rates).
• Incorporated new and/or revised features throughout, including Common Mistakes,
Global Financial Crisis, Nobel Prize, and General Interest boxes, as well as Examples.
• Extensively revised and updated Data Cases and end-of-chapter problems, once again
personally writing and solving each one.
• Updated tables and figures to reflect current data.
• Updates made throughout the text to reflect the Tax Cuts and Jobs Act of 2017.

22

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 Preface 23

Emphasis on Valuation
While the global financial crisis was not a formative experience for many of today’s stu-
dents, financial topics ranging from speculative start-up valuations to sovereign debt crises
continue to dominate the news. As a result, today’s undergraduate students arrive in the
classroom with an interest in finance. We strive to use that natural interest and motivation
to overcome their fear of the subject and communicate time-tested core principles. Again,
we take what has worked in the classroom and apply it to the text: By providing examples
involving familiar companies such as Starbucks and Apple, making consistent use of real-
world data, and demonstrating personal finance applications of core concepts, we strive to
keep both non-finance and finance majors engaged.
By learning to apply the Valuation Principle, students develop the skills to make the
types of comparisons—among loan options, investments, projects, and so on—that turn
them into knowledgeable, confident financial consumers and managers. When students
see how to apply finance to their personal lives and future careers, they grasp that finance
is more than abstract, mathematically based concepts.

Table of Contents Overview

Fundamentals of Corporate Finance offers coverage of the major topical areas for
­introductory-level undergraduate courses. Our focus is on financial decision making
related to the corporation’s choice of which investments to make or how to raise the
capital required to fund an investment. We designed the book with the need for flex-
ibility and with consideration of time pressures throughout the semester in mind.

Part 1 Introduction
Ch. 1: Corporate Finance and the Financial Manager Introduces the corporation and its governance; updated to include
comparison of traditional trading venues, new electronic exchanges,
and how the market for trading stocks is changing
Ch. 2: Introduction to Financial Statement Analysis Introduces key financial statements; Coverage of financial ratios has
been centralized to prepare students to analyze financial statements
holistically
Part 2 Interest Rates and Valuing Cash Flows
Ch. 3: Time Value of Money: An Introduction Introduces the Valuation Principle and time value of money
techniques for single-period investments
Ch. 4: Time Value of Money: Valuing Cash Flow Introduces the mechanics of discounting; Includes examples with
Streams non-annual interest rates that provide time value of money
applications in a personal loan context
Ch. 5: Interest Rates Presents how interest rates are quoted and compounding for all
frequencies; Discusses key determinants of interest rates and
their relation to the cost of capital; New discussion of negative
interest rates
Ch. 6: Bonds Analyzes bond prices and yields; Discusses credit risk and the effect
of the financial crisis on credit spreads
Ch. 7: Stock Valuation Introduces stocks and presents the dividend discount model as an
application of the time value of money

A01_BERK7156_05_GE_FM.indd 23 20/01/22 5:37 PM

 24 Preface

Part 3 Valuation and the Firm

Ch. 8: Investment Decision Rules
Ch. 9: Fundamentals of Capital Budgeting
Ch. 10: Stock Valuation: A Second Look
Part 4 Risk and Return
Ch. 11: Risk and Return in Capital Markets
Ch. 12: Systematic Risk and the Equity Risk Premium Develops portfolio risk, the CAPM, beta and the Security Market Line
Ch. 13: The Cost of Capital
Part 5 Long-Term Financing
Ch. 14: Raising Equity Capital
Ch. 15: Debt Financing
Part 6 Capital Structure and Payout Policy
Ch. 16: Capital Structure
Ch. 17: Payout Policy
Part 7 Financial Planning and Forecasting
Ch. 18: Financial Modeling and Pro Forma Analysis
Ch. 19: Working Capital Management
Ch. 20: Short-Term Financial Planning
Part 8 Special Topics
Ch. 21: Option Applications and Corporate Finance
Ch. 22: Mergers and Acquisitions
Ch. 23: International Corporate Finance
Introduces the NPV rule as the “golden rule” against which we
evaluate other investment decision rules
Provides a clear focus on the distinction between earnings and free
cash flow, and shows how to build a financial model to assess the
NPV of an investment decision; Using Excel boxes demonstrate
best-practices and sensitivity analysis
Builds on capital budgeting material by valuing the ownership claim
to the firm’s free cash flows and discusses market efficiency and
behavioral finance
Establishes the intuition for understanding risk and return; Explains
the distinction between diversifiable and systematic risk; New
Global Financial Crisis box “Diversification Benefits During Market
Crashes”
Calculates and uses the firm’s overall costs of capital with the WACC
method; New Common Mistake box “Using a Single Cost of Capital
in Multi-Divisional Firms
Chapter-long example of Facebook from founding to SEO; Overview
of the stages of equity financing, from venture capital to IPO to
seasoned equity offerings; Discussion of crowdfunding and direct
listings
Overview of debt financing, including covenants, convertible bonds
and call provisions; Other types of debt; Boxes on “Detroit’s Art
Museum at Risk” and “CDOs, Subprime Mortgages, and the
Financial Crisis”
Analyzes the tax benefits of leverage, including the debt tax shield;
Discusses distress costs and the Tradeoff Theory
Considers alternative payout policies including dividends and share
repurchases; Analyzes the role of market imperfections in determin-
ing the firm’s payout policy
Demonstrates careful pro forma modeling of an expansion plan
Introduces the Cash Conversion Cycle and methods for managing
working capital
Develops methods for forecasting and managing short-term cash
needs
Introduces the concept of financial options, how they are used and
exercised
Considers motives and methods for mergers and acquisitions,
including leveraged buyouts
Analyzes the valuation of projects with foreign currency cash flows
with integrated or segregated capital markets

A01_BERK7156_05_GE_FM.indd 24 20/01/22 5:37 PM

 Preface 25

Acknowledgments
With five editions behind us, we are heartened by the book’s success and its impact on the
profession by shaping future practitioners. As any textbook writer will tell you, achieving
this level of success requires a substantial amount of help. First and foremost we thank
Donna Battista, whose leadership, talent, and market savvy are imprinted on all aspects of
the project and were central to its more than 10 years of success; Adrienne D’Ambrosio, for
her efforts and commitment to the success of the book, and for taking on Donna’s leader-
ship role for this edition; Denise Clinton, a friend and a leader in fact not just in name,
whose experience and knowledge were indispensable in the earliest stages; Rebecca Ferris-
Caruso, for her unparalleled expertise in managing the complex writing, reviewing, and
editing processes and patience in keeping us on track—it is impossible to imagine writing
the first edition without her; Kate Fernandes, for her energy and fresh perspective as our
former editor; Emily Biberger, for her enthusiasm and excellent guidance on this edition;
Miguel Leonarte, for his central role on MyLab Finance; and Gina Linko for getting the
book from draft pages into print. We were blessed to be approached by the best publisher
in the business and we are both truly thankful for the indispensable help provided by these
and other professionals, including Catherine Cinque, Meredith Gertz, Melissa Honig, Rox-
anne McCarley, and Carol Melville.
Updating a textbook like ours requires a lot of painstaking work, and there are many
who have provided insights and input along the way. We would especially like to call out Jared
Stanfield for his important contributions and suggestions throughout. We’re also appreciative
of Marlene Bellamy’s work conducting the lively interviews that provide a critically important
perspective, and to the interviewees who graciously provided their time and insights.
Given the scope of this project, identifying the many people who made it happen is a
tall order. This textbook was the product of the expertise and hard work of many talented
colleagues. We are especially gratified with the work of those who revised the supplements
that accompany the book: William Chittenden for the PowerPoint presentations; Mary R.
Brown, for the Instructor’s Manual; Brian Nethercutt, for the Test Bank; James Linck, for
serving as advisor for the videos; and our MyLab Finance content development team, in-
cluding Melissa Honig, Miguel Leonarte, Noel Lotz, and Sarah Peterson. We’re also deeply
appreciative of Susan White’s contributions to the part-ending cases.
Creating a truly error-free text is a challenge we could not have lived up to without our
team of expert error checkers. Jared Stanfield subjected the text and problem solutions
to his exacting standards. We are also indebted to Jared for his adept research support
throughout the writing process and Michael Wittry’s assistance in providing updates.
We are indebted to our colleagues for the time and expertise invested as manuscript
reviewers, class testers, and focus group participants. We list all of these contributors on
the following pages, but want to single out one group, our First Edition editorial board, for
special notice: Tom Berry, DePaul University; Elizabeth Booth, Michigan State University;
Julie Dahlquist, the University of Texas–San Antonio; Michaël Dewally, Marquette
University; Robert M. Donchez, the University of Colorado–Boulder; Belinda Mucklow,
the University of Wisconsin–Madison; Coleen Pantalone, Northeastern University; and
Susan White, the University of Maryland. We strived to incorporate every contributor’s
input and are truly grateful for each comment and suggestion. The book has benefited
enormously from this input.

A01_BERK7156_05_GE_FM.indd 25 20/01/22 5:37 PM

 26 Preface
Reviewers
Pankaj Agrrawal, University of Maine
Daniel Ahern, California State University–Chico
Paul Asabere, Temple University
Victor Bahhouth, University of North
Carolina-Pembroke
Ajeyo Banerjee, University of Colorado–Denver
Michael Bennett, Curry College
Tom Berry, DePaul University
Karan Bhanot, University of Texas–San Antonio
Rafiqul Bhuyan, California State University–San
Bernardino
Eugene Bland, Texas A&M University–Corpus Christi
Matej Blasko, University of Georgia
Elizabeth Booth, Michigan State University
Mary Brown, University of Illinois–Chicago
Bill Brunsen, Eastern New Mexico University
David G. Cazier, Brigham Young University–Provo
Leo Chan, Delaware State University
Cindy Chen, California State University–Long Beach
Haiyu Chen, Youngstown State University
James F. Cotter, Wake Forest University
Vicentiu Covrig, California State University–Northridge
Julie Dahlquist, University of Texas–San Antonio
Pieter de Jong, University of Texas–Arlington
Andrea L. DeMaskey, Villanova University
Xiaohui Deng, California State University–Fresno
Michaël Dewally, Marquette University
Prakash Dheeriya, California State
University–Dominguez Hills
Robert M. Donchez, University of Colorado Boulder
Gang Dong, Rutgers University
Dean Drenk, Montana State University
Robert Dubil, University of Utah
Hsing Fang, California State University–Los Angeles
David O. Fricke, University of North
Carolina–Pembroke
Scott Fung, California State University–East Bay
Sharon Garrison, University of Arizona
Rakesh Gupta, Central Queensland University
Joseph D. Haley, St. Cloud State University
Thomas Hall, Christopher Newport University
Karen Hallows, University of Maryland
Karen L. Hamilton, Georgia Southern University
Robert Hanson, Eastern Michigan University
Mahfuzul Haque, Indiana State University
Edward C. Howell, Northwood University
Ping Hsiao, San Francisco State University
Xiaoqing Hu, University of Illinois at Chicago
Pankaj Jain, University of Memphis
Robert James, Boston College
A01_BERK7156_05_GE_FM.indd 26
Susan Ji, Baruch College, City University of New York
Zi Jia, University of Arkansas at Little Rock
Domingo Joaquin, Illinois State University
Fred R. Kaen, University of New Hampshire
Terrill Keasler, Appalachian State University
Howard Keen, Temple University
Brett A. King, University of North Alabama
Daniel Klein, Bowling Green State University
Gregory Kuhlemeyer, Carroll University
Rose Neng Lai, University of Macau
Keith Lam, University of Macau
Reinhold P. Lamb, University of North Florida
Douglas Lamdin, University of Maryland–Baltimore
County
Mark J. Laplante, University of Georgia
Sie Ting Lau, Nanyang Technological University
Richard LeCompte, Wichita State University
Adam Y.C. Lei, Midwestern State University
Qian Li, Midwestern State University
Lubomir Litov, University of Oklahoma
Chang Liu, Washington State University
Wei Liu, Texas A&M University
Hugh Marble III, University of Vermont
James Milanese, University of North Carolina at
Greensboro
Sunil K. Mohanty, University of St. Thomas
Ted Moorman, Northern Illinois University
Mike Morgan, University of Southern Mississippi
James Morris, University of Colorado–Denver
Belinda Mucklow, University of Wisconsin–Madison
Rick Nelson, University of Minnesota
Tom C. Nelson, University of Colorado–Boulder
Anthony C. Ng, Hong Kong Polytechnic University
Curtis Nicholls, Bucknell University
Coleen Pantalone, Northeastern University
Daniel Park, Azusa Pacific University
Janet Payne, Texas State University
Jay Peroni, College of Charleston
Lynn Pi, Hong Kong University of Science and Technology
J. Michael Pinegar, Brigham Young University
Natalia Piqueira, University of Houston
Michael Portnoy, University of Tampa
Annette Poulsen, University of Georgia
Eric Powers, University of South Carolina
Rose M. Prasad, Central Michigan University
Shoba Premkumar, Iowa State University
Mark K. Pyles, College of Charleston
Jue Ren, Texas Christian University
A.A.B. Resing, Hogeschool Van Amsterdam
Greg Richey, California State University, San
Bernardino
20/01/22 5:37 PM

Scott Roark, Boise State University
David L. Robbins, University of New Mexico
Rob Ryan, DePaul University
Andrew Samwick, Dartmouth College
Mukunthan Santhanakrishnan, Southern Methodist
University
Salil K. Sarkar, University of Texas–Arlington
Oliver Schnusenberg, University of North Florida
Michael Schor, Ohio University
Kenneth Scislaw, University of Alabama–Huntsville
Roger Severns, Minnesota State University–Mankato
Tatyana Sokolyk, University of Wyoming
Andrew C. Spieler, Hofstra University
Steven Stelk, University of Southern Mississippi
Timothy G. Sullivan, Bentley College
Janikan Supanvanij, St. Cloud State University
Hugo Tang, Purdue University
Oranee Tawatnuntachai, Pennsylvania State
University–Harrisburg
Robert Terpstra, University of Macau
Thomas Thomson, University of Texas–San Antonio
Olaf J. Thorp, Babson College
Ed Tiryakian, Duke University
Mary Kathleen Towle, University of New Mexico
Emery Trahan, Northeastern University
Joe Ueng, University of St. Thomas
Mo Vaziri, California State University–San Bernardino
Gautam Vora, University of New Mexico
Premal P. Vora, Pennsylvania State
University– Harrisburg
Hefei Wang, University of Illinois–Chicago
Gwendolyn Webb, Baruch College
Paul M. Weinstock, Ohio State University
Susan White, University of Maryland
Annie Wong, Western Connecticut State University
Wentao Wu, Clarkson University
Xiaoyan Xu, San Jose State University
Qianqian Yu, Lehigh University
Zhong-gou Zhou, California State
University–Northridge
Kermit C. Zieg, Jr., Florida Institute of Technology
Focus Group Participants
Anne-Marie Anderson, Lehigh University
Sung Bae, Bowling Green State University
H. Kent Baker, American University
Steven Beach, Radford University
Rafiqul Bhuyan, California State University–San
Bernardino
Deanne Butchey, Florida International University
Leo Chan, Delaware State University
A01_BERK7156_05_GE_FM.indd 27
Preface 27
George Chang, Grand Valley State University
Haiwei Chen, California State University–San
­Bernardino
Haiyu Chen, Youngstown State University
Massimiliano De Santis, Dartmouth College
Jocelyn Evans, College of Charleston
Kathleen Fuller, University of Mississippi
Xavier Garza Gomez, University of
Houston–Victoria
William Gentry, Williams College
Axel Grossmann, Radford University
Pankaj Jain, University of Memphis
Zhenhu Jin, Valparaiso University
Steve Johnson, University of Northern Iowa
Steven Jones, Samford University
Yong-Cheol Kim, University of Wisconsin–Milwaukee
Robert Kiss, Eastern Michigan University
Ann Marie Klingenhagen, DePaul University
Thomas J. Krissek, Northeastern Illinois University
Olivier Maisondieu Laforge, University of
Nebraska–Omaha
Douglas Lamdin, University of Maryland–Baltimore
County
D. Scott Lee, Texas A&M University
Stanley A. Martin, University of Colorado–Boulder
Jamshid Mehran, Indiana University, South Bend
Sunil Mohanty, University of St. Thomas
Karyn L. Neuhauser, State University of New York–
Plattsburgh
Thomas O’Brien, University of Connecticut
Hyuna Park, Minnesota State University–Mankato
G. Michael Phillips, California State University–
Northridge
Wendy Pirie, Valparaiso University
Antonio Rodriguez, Texas A&M International
University
Camelia S. Rotaru, St. Edward’s University
Salil Sarkar, University of Texas at Arlington
Mark Sunderman, University of Wyoming
Chu-Sheng Tai, Texas Southern University
Oranee Tawatnuntachai, Pennsylvania State
University–Harrisburg
Benedict Udemgba, Alcorn State University
Rahul Verma, University of Houston–Downtown
Angelo P. Vignola, Loyola University–Chicago
Premal Vora, Pennsylvania State
University–Harrisburg
Eric Wehrly, Seattle University
Yan A. Xie, University of Michigan–Dearborn
Fang Zhao, Siena College
Sophie Zong, California State University–Stanislaus
20/01/22 5:37 PM
 28 Preface

Class Testers TeWhan Hahn, Auburn University–Montgomery

Tom Berry, DePaul University
Eugene Bland, Texas A&M University–Corpus Christi
Charles Blaylock, Murray State University
Mary Brown, University of Illinois–Chicago
Bill Brunsen, Eastern New Mexico University
Sarah Bryant Bower, Shippensburg University of
Pennsylvania
Alva Wright Butcher, University of Puget Sound
David G. Cazier, Brigham Young University–Provo
Asim G. Celik, University of Nevada–Reno
Michaël Dewally, Marquette University
Richard Gaddis, Oklahoma Wesleyan University
Matthew Hood, University of Southern Mississippi
Zhenhu Jin, Valparaiso University
Travis Jones, Florida Gulf Coast University
Francis E. Laatsch, Bowling Green State University
Diane Lander, Saint Michael’s College
Vance Lesseig, Texas State University
Frances Maloy, University of Washington
Jamshid Mehran, Indiana University–South Bend
Belinda Mucklow, University of Wisconsin–Madison
Kuo-Chung Tseng, California State University–Fresno
Kermit C. Zieg, Jr., Florida Institute of Technology

Global Edition Acknowledgments

Pearson would like to thank Gary Rangel, University of Science, Malaysia and Rezart Erindi, Lead Analyst,
Strategic Asset Allocation and Credit Risk Unit, Bank of Albania, for contributing to the Global Edition.

Global Edition Reviewers

Sylvain Bourjade, TBS Education France
Ufuk Gucbilmez, Glasgow University
Patricia Boyallian, Lancaster University
Catherine Lions, Umeå University

A01_BERK7156_05_GE_FM.indd 28 20/01/22 5:37 PM

Another random document with
no related content on Scribd:
parmi les guides les plus actifs de la civilisation contemporaine, en
bien comme en mal.
— … Pas plus qu’un représentant qualifié du travail, de cette
formidable puissance qui s’appelle « les syndicats ouvriers ». Le
camarade Jouhaux n’a jamais songé à se présenter, et nul n’y pense
pour lui. L’Académie échantillonne les anciennes forces dirigeantes
de la communauté, non pas celles qui ne sont apparues que depuis
Richelieu. En cela elle manque d’imagination. Mais cela viendra un
jour. Par degrés. Très lentement. Comme toutes les vieilles
institutions, l’Académie ne peut évoluer qu’en ayant l’air de ne pas
évoluer. A cet égard elle est presque logée à la même enseigne que
l’Église catholique.
— Et, poursuivit Pamphile, est-ce qu’elle sert à quelque chose,
l’Académie ? J’avoue que je ne discerne pas bien à quoi. Vous
n’allez point, n’est-ce pas, me parler du Dictionnaire. Il serait
dérisoire d’assembler depuis quatre siècles quarante personnes, en
aucune façon du reste, pour la plus grande part, préparées par leur
profession à ce travail, et de les habiller en vert pomme, uniquement
pour rédiger un Dictionnaire !
— Rien de plus certain. Mais, Pamphile, à quoi sert aux Anglais
de mettre, dans l’abbaye de Westminster, les statues de leurs
grands hommes, dont la plupart ne se recommandent point des
mérites de leurs sculpteurs ?
— L’Angleterre les veut ainsi honorer ; ce faisant, elle s’honore
elle-même. Cela lui donne, aux yeux des étrangers et de ses
propres citoyens, quelque grandeur.
— L’Académie Française, pareillement, est une sorte de musée,
mais de personnages encore en vie. Et voyez un peu, entre
parenthèses, l’évolution qui s’est faite dans l’esprit national : en
associant lorsqu’elle fut créée, de grands seigneurs et de simples
écrivains, son fondateur entendait relever ceux-ci devant l’opinion ;
du moins c’est ainsi qu’on le considéra bientôt. A cette heure, c’est
plutôt la présence des écrivains qui relève, devant l’opinion, la
qualité de ceux de ses membres qui ne sont point des
professionnels de la pensée écrite. De là vient même cette erreur
générale, dont vous venez de vous faire l’écho, que pour faire partie
de l’Académie, l’on devrait être auteur. Cela prouve l’éminente
situation des écrivains dans la société contemporaine — en France,
car il n’en est pas tout à fait de même ailleurs. On peut dire que les
lettres de noblesse de la profession littéraire, chez nous, datent de
1635, année, comme chacun sait, de la fondation de l’Académie.
C’est pourquoi les écrivains tiennent tant à en être ; et la sélection
distinguée de la compagnie lui vaut, à l’étranger, une estime qui
n’est pas sans exercer une salutaire influence. L’Académie, on l’a vu
pendant la guerre, et depuis, est un excellent agent de propagande
nationale.
— Voilà pour l’étranger. Mais à l’intérieur ?
— A l’intérieur, au point de vue strictement littéraire, il est bien
possible qu’elle ne serve pas à grand’chose, malgré les
récompenses dont elle est dispensatrice. Indirectement, il n’en est
pas de même.
— Indirectement ?
— Elle agit comme frein régulateur. Il n’est pas d’écrivain de
quelque mérite, c’est-à-dire de quelque ambition, qui ne se figure
avoir l’épée d’académicien dans son plumier. Cela n’est pas sans
exercer une action, après tout bienfaisante, sur sa manière de
concevoir l’œuvre d’art, et son respect de la langue. Par essence, la
profession est anarchique, elle se place au-dessus des conventions
morales et sociales. Il arrive qu’on s’en aperçoive un peu trop, bien
qu’il ne me semble pas mauvais, en somme, qu’il en soit ainsi. Mais
son désordre et, si j’ose dire, son irrespect souvent heureux,
seraient bien plus grands encore si les écrivains ne songeaient
parfois à se réserver, le temps venu, les faveurs de celle qu’entre
eux ils appellent « la vieille dame ».
— Cela me paraît vrai… et je n’y avais point pensé.
— Mon cher Pamphile, ce qu’il y a toujours de plus difficile à
distinguer, c’est ce qu’on a quotidiennement sous les yeux,
justement parce qu’on a l’habitude de le voir, et qu’alors on n’y fait
plus attention. Telles sont les actions et les réactions des différents
éléments de la société contemporaine les uns sur les autres.
— Vous parliez tout à l’heure des prix, si nombreux, que
l’Académie distribue chaque année. Vous n’avez pas l’air d’y porter
grand intérêt.
— C’était pour aller vite, et parce que j’avais autre chose à dire.
En réalité, ils aident à vivre quelques modestes et sérieux
travailleurs que leurs ouvrages n’enrichissent pas, dans le domaine
de l’histoire, même littéraire, et de la morale. Pour ceux de pure
littérature, il n’en va pas tout à fait ainsi, par cette raison sans doute
qu’il y en a trop, et que l’attention s’y égare. Peut-être aussi parce
que, agissant, comme je l’ai dit, à la manière d’un frein, l’Académie
suit de loin le goût du public et les tendances des auteurs, au lieu de
les provoquer.
— Mais il y a aussi les prix de vertu, les prix d’encouragement
aux familles nombreuses, que sais-je encore !
— Oui. Cela est, en principe, excellent. Toutefois je n’envisage
pas sans une certaine inquiétude ce développement des attributions
de l’Académie. Son budget est considérable, elle dispose d’une
large fortune, qui va sans cesse en grandissant. Elle en fait, certes,
le meilleur usage. Pourtant je redoute que, comme celle des
congrégations, cette fortune ne finisse par susciter des convoitises
administratives, encouragées par quelques éléments extrêmes de
l’opinion publique.
— Et alors ?
— Alors, il y aura une crise de l’Académie, extérieure à elle, et
peut-être intérieure.
— Vous le regretteriez ?
— Je l’avoue. L’Académie demeure, quoi qu’on puisse dire, une
jolie plume au chapeau de la communauté française. Elle fait
quelque bien, et nul mal. Elle est connue, du moins de nom, du
dernier des paysans et des ouvriers. Elle est la preuve antique, et
toujours vivante à leur regard, qu’il est chez nous d’autres
puissances que celles de l’argent et de la politique. Cela n’est pas
rien.

— Mais enfin, demanda Pamphile, est-il exact qu’il existe, à

l’Académie, une droite et une gauche ?
— Il n’y a guère là qu’une apparence. La vérité est que, dans une
compagnie qui se recrute par cooptation, il faut bien voter pour ou
contre quelqu’un, et par conséquent former des groupes qui
s’accordent chacun, un peu d’avance, sur le choix d’un candidat.
Sinon le scrutin offrirait des résultats encore plus imprévus que ceux
dont, parfois, s’étonne le public. Ce n’est que dans ce sens que l’on
peut dire, parlant grossièrement, qu’il existe une droite et une
gauche à l’Académie.
— Alors l’Académie ne fait pas de politique ?
— Certes non ! A quoi cela lui servirait-il ? Elle ne peut exercer,
en cette matière, aucune action. Il faut se souvenir seulement que,
depuis trois quarts de siècle, elle agit, ou prétend agir, à la manière
d’un frein, comme je vous l’ai dit — ce qui tient un peu, sans doute, à
l’âge moyen de ses membres, assez élevé, et à leurs origines
sociales. C’est ainsi qu’elle tend ordinairement à l’opposition. Sous
le second Empire, elle était libérale. Sous le régime actuel, elle est
plutôt conservatrice.
« Je souhaiterais vous faire observer que, du temps du second
Empire, son attitude prenait une certaine importance politique, du fait
que les discours de ses membres étaient une des rares
manifestations d’opinion qui parvinssent aux Français. Les
délibérations mêmes du corps législatif n’étaient pas publiques. Mais
aujourd’hui que tout le monde peut dire n’importe quoi à l’occasion
de n’importe quoi et au sujet de n’importe qui, un discours
académique demeure, dans tous les sens du terme, « académique »,
et voilà tout. A peine s’émeut-on légèrement quand un immortel
qualifie le coup d’État du 2 décembre « d’opération de police un peu
rude ».
 « Pour en revenir aux élections à l’Académie, et à cette fameuse
division en droite et en gauche, il est à noter que, dans les moments
mêmes où les augures déclarent gravement que la majorité
appartient à la droite, cela n’empêche jamais un candidat passant
pour être « de gauche » d’être élu ; et réciproquement. C’est que les
relations personnelles entre un candidat et ses électeurs, et aussi la
prise en considération sérieuse de ses titres, jouent au bout du
compte un plus grand rôle que cette prétendue division politique.
Seulement…
— Seulement quoi ?
— Pamphile, avez-vous remarqué qu’il est souvent beaucoup
plus aisé, surtout avec le scrutin uninominal, de prévoir le résultat
d’une élection au suffrage universel que d’une élection au suffrage
restreint — d’un député que d’un sénateur ? C’est que, plus le corps
électoral est réduit, et plus les possibilités de combinaisons, plus les
tractations, secrètes ou avouées, sont nombreuses. C’est ce qui se
passe, malgré le secours de l’Esprit Saint, pour l’élection d’un pape.
C’est ce qui arrive aussi quelquefois aux élections académiques
pour certains fauteuils.
— Et cela est décevant pour la galerie !
— Rassurez-vous. Si le candidat battu est académisable, il aura
bientôt sa revanche.
— Mais qu’est-ce qu’un candidat véritablement académisable ?
— Ah ! vous m’en demandez trop !… On est académisable pour
des titres non littéraires, un rang distingué dans l’armée, la
diplomatie, l’Église, la politique. On n’est pas académisable, même
si l’on est un écrivain, un historien, un philosophe de valeur, sans
une certaine « tenue » mondaine, ou tout au moins bourgeoise…
Verlaine n’était pas académisable, et M. Jean Aicard l’était… Encore
une fois l’Académie est un cercle : on ne doit pas donner à craindre
par ses mœurs, ses fréquentations, son caractère, que l’on
compromettra, aux yeux du vulgaire, la réputation du cercle.
— Vous venez de me dire que les fonctions d’homme politique
rendent académisable. Le public s’en étonne.
 — Il en fut toujours ainsi. C’est une vieille tradition. Il peut arriver
seulement que, à de certains instants, il y ait trop d’hommes
politiques à l’Académie. Mais c’est que celle-ci, comme tous les
autres corps électoraux, est sujette à des engouements…
« Par ailleurs, il est des candidats non académisables qui sont
malgré tout candidats. Il en est dont on s’amuse. Il en est aussi de
charmants. Je veux, demain, que vous fassiez la connaissance de
mon ami Covielle : il est candidat, par principe, à tous les fauteuils
vacants.

— Il n’est jamais entré dans ma pensée, nous dit Covielle, même

au cas où je devrais vivre plus longtemps qu’Arganthonius, roi de
Gadar, lequel, au dire de Pline l’Ancien, vit briller l’aurore de sa cent
quatre-vingtième année, que je serais véritablement un jour de
l’Académie. Je me présente infatigablement : ce qui n’est pas du tout
la même chose.
« Je me présente parce que j’ai fait une découverte. C’est que les
membres de l’Académie Française sont les seuls humains, en
France, chez lesquels on puisse pénétrer, sur simple lettre
d’audience, sans avoir jamais eu l’honneur de leur avoir été
présenté ! Quand on n’a pas de relations, ou bien uniquement,
comme moi, des relations ennuyeuses, c’est un avantage
inappréciable. Une tradition bienveillante, ancienne et généreuse,
veut qu’ils ne puissent refuser d’accueillir aucun candidat. J’imagine
pourtant que ces immortels sont aussi occupés que les ordinaires
mortels ; tout le monde, de notre temps, a quelque chose à faire, les
minutes sont comptées. Cependant je crois qu’il est sans exemple
qu’un académicien ait jamais refusé le quart d’heure d’usage à
n’importe quel candidat, même au candidat que je suis : cela est
admirable et touchant.
« Il ne saurait y avoir façon plus agréable d’employer son temps.
Il doit y avoir un art de recevoir les impétrants à l’Académie qui
s’apprend peu à peu, et dont les principes se sont transmis, tendant
à la perfection, pendant quatre cents ans. Aucun de ceux que j’ai
vus ne m’a promis sa voix. Ils sont incapables d’une telle erreur de
goût, dérisoire et grossière. Ils m’ont fait savoir, au contraire, qu’ils
ne me l’accorderaient point. Mais avec quel souci des nuances,
quelle courtoisie ! Depuis que je suis né, je n’avais entendu dire si
grand bien de moi ; même il ne m’est jamais arrivé d’en penser
autant.
« Je ne serai jamais de l’Académie. Je n’ai jamais nourri cette
illusion. Mais j’en viens parfois à songer que c’est dommage : parce
que, si j’en étais, une grâce particulière descendrait peut-être sur ma
tête, qui me prêterait le talent d’inspirer un si subtil et délicat plaisir
en vous disant « non ». Les femmes elles-mêmes ne le possèdent
pas à ce point. Ajoutez à cela qu’après vous avoir parlé de vous, de
façon si flatteuse, on vous parle quelquefois des autres — des
autres candidats. On ne vous en dit jamais de mal : cela serait
contraire aux principes. Mais on ne vous en dit pas de bien ; on y
met une gentille malice. Et puis, cinq minutes encore, on vous parle
d’autre chose, et l’on vous en parle d’une manière divine. J’ai trouvé
là ce que j’ai souhaité toute ma vie, et ce qui, toute ma vie, m’avait
manqué, une conversation.
« Je crois me souvenir que vous écrivez dans les journaux. Je
vous supplie de ne point rapporter ces confidences : trop de gens
après cela voudraient être candidats, et je répugne à imposer ce
surcroît de charges à ceux dont je garde un si reconnaissant
souvenir. Ce serait, vous l’estimerez sûrement comme moi, mal
payer l’agrément si rare dont j’ai joui. Je préfère d’ailleurs, par pur
égoïsme, garder pour moi ce secret délicieux, et en user.
« Car je veux être candidat à l’Académie jusqu’à ma mort. J’y
suis fermement décidé ; cette vocation s’est révélée à mon esprit et
à mon cœur. Réfléchissez qu’il y a toujours de trente à trente-cinq
visites à faire, chaque fois — quatre cent vingt-cinq minutes de cette
causerie d’où l’on sort rasséréné, avec l’impression qu’on est
quelqu’un. Pour retomber dans la plate réalité, pour recommencer à
se juger à sa mince valeur, il faut se retrouver avec des gens qui ne
sont pas académiciens, tels que vous. Tandis que là, même les
regards, ô miracle, même les regards ne vous découragent point.
 « Je vais vous avouer une chose : même si je pouvais être de
l’Académie, je ne le voudrais pas, afin d’avoir l’occasion de me
représenter. Et je compte recommencer toutes les fois que
l’occasion s’en offrira. Ce sera désormais ma carrière. »
 CHAPITRE XXI

OÙ L’ON VA…

Pamphile vient de publier son premier roman. Il est à cette heure

le poulain, ou l’un des poulains, d’un éditeur actif ; il sait, à vingt-
quatre ans, soigner ses intérêts d’écrivain avec une intelligence et
un bonheur qui m’émerveillent, en me choquant un peu ; il collabore
à quelques-unes de ces revues où les jeunes gens d’aujourd’hui
s’appliquent à couvrir des apparences d’une intellectualité grave un
lyrisme sous-jacent, peut-être plus amoral et individualiste encore
que celui des générations précédentes — toutefois aristocratique et
anti-démocratique. Enfin il s’efforce d’être de son temps. C’est bien
naturel, je ne songe pas un instant à le lui reprocher.
J’ai lu son ouvrage avec curiosité, et aussi avec intérêt. Un
intérêt véritable, je vous assure. D’abord ce n’est pas ça du tout que
j’aurais écrit, je n’y aurais jamais pensé. C’est bien quelque chose.
S’il faisait ce que j’ai fait, à quoi servirait-il qu’il eût pris la plume ?
Son roman n’est nullement à mettre de côté, encore qu’il ne soit pas
entièrement satisfaisant. Il est imparfaitement composé, il montre, à
côté de trouvailles, d’expressions neuves et ingénieuses, des
faiblesses singulières, une méconnaissance parfois inquiétante du
génie de la langue. Il unit, dans un mauvais mariage, ainsi que l’a
déjà marqué M. Robert Lejeune au sujet de quelques-uns de ses
contemporains émules, « au style à images vives et incohérentes,
très mauvais pour les yeux fatigués, le style en sauts de carpe, où
des tronçons de phrases se tordent, se retournent, échantillons de
toutes les inversions, ellipses, anacoluthes, possibles en français ».
Ce qui me paraît plus inquiétant encore, c’est qu’il emploie les
mots à contresens, ou tout au moins de façon fort plate, parce qu’il
ignore leur origine et leur histoire, qu’il ne connaît point l’art de leur
rendre leur fraîcheur et leur jeunesse en les allant retremper à ces
sources. Nous sommes en vérité à une époque où, en toute
occurrence, la monnaie de papier, dont la valeur change à chaque
instant, a remplacé l’étalon d’or.
Tout cela me gêne. Tout cela me donne le sentiment d’une chose
qui n’est pas faite pour durer, d’une œuvre qui n’a pas le souci d’être
un chef-d’œuvre, mais seulement un objet de consommation
immédiate — le sentiment, enfin, de « la mode » remplaçant « l’art ».
C’est fait pour cette année-ci, non pour l’éternité. Ça n’est pas en
bronze ni en marbre, mais en soie légère.
Et pourtant c’est plein de qualités ! D’abord cela constitue, sur
notre époque, un précieux document. C’est vu avec des yeux de
sauvage qui parle comme il voit. Cela révèle des tas de choses que
je n’aurais su ni discerner ni décrire avec mes vieux outils, ces outils
d’un si bon métal, et dont la trempe a résisté aux siècles. C’est
assez creux dans l’invention générale, et d’une construction lâche,
mais si riche dans l’observation du détail, de « l’accident ». Et c’est
l’accident qui fait la réalité. Et puis, c’est amusant ! Il n’y a pas à dire,
c’est amusant ! Peut-être seulement comme la dernière création d’un
grand couturier, non pas d’un grand sculpteur ni d’un grand peintre.
Mais c’est toujours ça. Et j’y sens davantage la manifestation directe
d’un tempérament, malgré l’insuffisance de la technique, peut-être
même à cause de cette insuffisance comme chez beaucoup de
peintres de nos jours.
Enfin, chose curieuse, les ouvrages mêmes de ceux qui
s’affirment, avec le plus d’assurance, anti-romantiques, semblent
bien souvent beaucoup plus anti-classiques qu’anti-romantiques. Je
veux dire qu’on n’y rencontre guère le souci de la mesure et de la
composition. Marcel Proust lui-même est un écrivain rare et
remarquable. Mais si, comme on le voulait aux époques classiques
— et du reste comme le voulaient encore les grands romantiques, —
l’art consiste dans le choix, où est l’art, dans cette prose qui veut tout
dire, et ne choisit rien ? Pourtant elle en a. Mais ce n’est pas celui-ci.
Autre caractère à signaler. Cette littérature de jeunes,
singulièrement intelligente, manque singulièrement de jeunesse et
d’ingénuité. Souvent d’humanité. Ce sont des qualités qu’on
rencontre toutefois dans le Nono de Gaston Roupnel, dans la Nêne
de Pérochon. Mais c’est justement peut-être parce que ces œuvres
en manifestent qu’elles paraissent discutables, qu’elles n’ont pas,
dans notre France contemporaine, la place qu’on leur accorderait
ailleurs, en Angleterre par exemple. Le courant ne se dirige pas de
ce côté.
C’est par cette recherche, excessive parfois, et comme
« cocaïnique » de l’intelligence, et par ce défaut d’ingénuité, que les
tendances de notre littérature contemporaine diffèrent en effet de
celles de la littérature contemporaine anglo-saxonne ; et c’est,
j’imagine, pour cette cause qu’elle a tant de peine, malgré tous ses
efforts, à paraître une littérature « d’action ». Elle a parfois une
propension malheureuse à confondre le roman d’action et le roman
d’aventures.
Il serait assez facile de démontrer que c’est juste le contraire.
Mais, d’un point de vue tout extérieur, qui n’est point cependant
sans signification, ces deux littératures, l’anglaise et la française,
offrent de nos jours une apparence commune : l’abondance de la
production.
Cela vient d’abord de ce que, dans les deux pays, la
« demande » est très supérieure à ce qu’elle était il y a un demi-
siècle. Beaucoup plus de personnes ont appris à lire, et lisent en
effet. En même temps les classes qui ont, assez récemment, appris
à lire, bénéficient de plus gros salaires et de plus de loisirs. Dans les
deux pays ce progrès de l’instruction générale, et ces loisirs, sont le
fruit du développement des institutions démocratiques. Il ne semble
pas, en France du moins, que tous les écrivains en témoignent à
celles-ci une égale gratitude.
Mais il n’y a pas que cet accroissement du nombre des lecteurs.
Il y a aussi augmentation du nombre des auteurs.
Dans les pays anglo-saxons ceux-ci, depuis longtemps, ne se
recrutaient pas uniquement dans la peu nombreuse aristocratie qui a
passé par les établissements secondaires de Harrow, d’Eton, de
Rugby ou de Windsor, par les grandes universités de Cambridge et
d’Oxford ; ou aux États-Unis, dans les écoles analogues. Ils venaient
d’un peu partout : témoin Kipling, Wells, Conrad, Jack London, Mark
Twain et tant d’autres.
Notre belle langue écrite, depuis quatre siècles, est une plante de
culture intensive, qui n’a pu croître que sur le terrain des études
classiques, et, par suite, jusqu’à l’époque actuelle, à la faveur d’un
enseignement secondaire fondé sur la connaissance plus ou moins
approfondie — plutôt moins que plus — des langues anciennes. Cet
enseignement n’était donné qu’aux enfants de la bourgeoisie. C’est
lui qui formait presque tous nos écrivains. On compterait sur les
doigts d’une seule main ceux qui, au XIXe siècle, et même au XXe
siècle, ne sont point sortis d’un lycée, d’un collège — ou d’un
séminaire. Tout cela, je l’ai déjà signalé au début de ce petit livre.
Cependant supputez la population de ces établissements
d’enseignement secondaire en 1850 et de nos jours : en trois quarts
de siècle, elle a triplé. Cela tient à deux causes : il y a plus de
familles en état de faire donner cet enseignement à leurs enfants ; et
il y a, en raison des sollicitudes du régime, plus de bourses
accordées à des enfants pauvres. La concurrence des
établissements religieux élargit encore le chiffre de cette population.
Il est clair, que, si l’on apprend à écrire à un plus grand nombre
de jeunes gens, il y en aura aussi un plus grand nombre qui écriront.
Il existe donc en somme, de nos jours, plus d’hommes de lettres,
pour la même raison qu’il y a plus d’avocats, de médecins et
d’ingénieurs.
 Il faut ajouter à cela que l’enseignement primaire, par ses écoles
normales, a créé une culture primaire supérieure, qui a produit elle-
même quelques écrivains, et de mérite : tel ce Pergaud, dont la
guerre nous a privés.
C’est donc une floraison extrêmement drue à laquelle nous
assistons. Elle donne des fleurs de toutes sortes, qui n’ont pas
toutes le même parfum, ni le même éclat, ni la même rareté. On en
discerne toutefois appartenant à des espèces neuves, encore non
classées, et dont un botaniste dirait, à tout le moins, qu’on en
pourrait tirer quelque chose en la cultivant, car l’impression générale
est celle-ci :
Beaucoup d’œuvres, plus qu’auparavant, montrent une
personnalité forte, des mérites d’ordres divers, annonçant, en
quelque mesure, un renouveau. Fort peu — peut-être moins
qu’auparavant — qui soient entièrement satisfaisantes, offrent un
caractère définitif… On dirait de la littérature d’une démocratie qui
s’aristocratise.
 TABLE DES MATIÈRES

CHAPITRE I.
CONSULTATION 5
CHAPITRE II.
LES DÉBUTS DE PAMPHILE 11
CHAPITRE III.
L’AMATEUR 17
CHAPITRE IV.
LA PROFESSION « SECONDE » 22
CHAPITRE V.
PREMIERS ESSAIS, PREMIERS ÉCHECS 28
CHAPITRE VI.
EXPÉRIENCES PERSONNELLES 34
CHAPITRE VII.
LE CONTE 39
CHAPITRE VIII.
DU JOURNALISME 44
CHAPITRE IX.
TYPES DE JOURNALISTES 50
CHAPITRE X.
POLÉMIQUES LITTÉRAIRES CONTEMPORAINES 55
CHAPITRE XI.
UNE OPINION POLITIQUE POUR L’ÉCRIVAIN 59
CHAPITRE XII.
 ESPOIRS ET REGRETS 64
CHAPITRE XIII.
VACHES GRASSES ET VACHES MAIGRES 69
CHAPITRE XIV.
PUBLICITÉ LITTÉRAIRE 75
CHAPITRE XV.
LA CRITIQUE 80
CHAPITRE XVI.
PRIX LITTÉRAIRES 86
CHAPITRE XVII.
L’ÉCRIVAIN ET L’ARGENT 91
CHAPITRE XVIII.
LE MARIAGE DE L’ÉCRIVAIN. L’ÉCRIVAINE 97
CHAPITRE XIX.
SALONS LITTÉRAIRES 101
CHAPITRE XX.
L’ÉCRIVAIN ET L’ACADÉMIE 107
CHAPITRE XXI.
OÙ L’ON VA… 118
IMPRIMERIE CRÉTÉ
CORBEIL (S.-ET-O.)
5527-25
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