Corporate finance 12th Edition

Randolph W Westerfield
Visit to download the full and correct content document:
https://textbookfull.com/product/corporate-finance-12th-edition-randolph-w-westerfield
/
More products digital (pdf, epub, mobi) instant
download maybe you interests ...

Corporate Finance 4th Edition Ivo Welch

https://textbookfull.com/product/corporate-finance-4th-edition-
ivo-welch/

Corporate Finance - European Edition David Hillier

https://textbookfull.com/product/corporate-finance-european-
edition-david-hillier/

Corporate Finance Fundamentals Stephen A. Ross

https://textbookfull.com/product/corporate-finance-fundamentals-
stephen-a-ross/

Fundamentals of Corporate Finance 10th Edition Brealey

https://textbookfull.com/product/fundamentals-of-corporate-
finance-10th-edition-brealey/
Cases in Corporate Finance 1st Edition Joshipura

https://textbookfull.com/product/cases-in-corporate-finance-1st-
edition-joshipura/

Cases in Corporate Finance 1st Edition Joshipura

https://textbookfull.com/product/cases-in-corporate-finance-1st-
edition-joshipura-2/

CFIN 6: Corporate Finance 6th Edition Scott Besley

https://textbookfull.com/product/cfin-6-corporate-finance-6th-
edition-scott-besley/

Corporate Finance theory and practice Fourth Edition

Dallocchio

https://textbookfull.com/product/corporate-finance-theory-and-
practice-fourth-edition-dallocchio/

Quantitative Corporate Finance John B. Guerard Jr.

https://textbookfull.com/product/quantitative-corporate-finance-
john-b-guerard-jr/
Corporate Finance
The McGraw-Hill Education Series in Finance, Insurance, and Real Estate
FINANCIAL MANAGEMENT Ross, Westerfield, and Jordan Saunders and Cornett
Essentials of Corporate Finance Financial Markets and Institutions
Block, Hirt, and Danielsen Ninth Edition Seventh Edition
Foundations of Financial Management
Seventeenth Edition Ross, Westerfield, and Jordan
Fundamentals of Corporate Finance INTERNATIONAL FINANCE
Brealey, Myers, and Allen Twelfth Edition
Principles of Corporate Finance Eun and Resnick
Twelfth Edition Shefrin International Financial Management
Behavioral Corporate Finance: Decisions That Eighth Edition
Brealey, Myers, and Allen Create Value
Principles of Corporate Finance, Concise Second Edition REAL ESTATE
Second Edition
Brueggeman and Fisher
Brealey, Myers, and Marcus INVESTMENTS Real Estate Finance and Investments
Fundamentals of Corporate Finance Sixteenth Edition
Ninth Edition Bodie, Kane, and Marcus
Essentials of Investments Ling and Archer
Brooks Eleventh Edition Real Estate Principles: A Value Approach
FinGame Online 5.0 Fifth Edition
Bodie, Kane, and Marcus
Bruner, Eades, and Schill Investments
Case Studies in Finance: Managing for Corporate Eleventh Edition FINANCIAL PLANNING
Value Creation AND INSURANCE
Eighth Edition Hirt and Block
Fundamentals of Investment Management Allen, Melone, Rosenbloom, and Mahoney
Cornett, Adair, and Nofsinger Tenth Edition Retirement Plans: 401(k)s, IRAs, and Other Deferred
Finance: Applications and Theory Compensation Approaches
Fourth Edition Jordan, Miller, and Dolvin
Fundamentals of Investments: Valuation Twelfth Edition
Cornett, Adair, and Nofsinger and Management Altfest
M: Finance Eighth Edition Personal Financial Planning
Fourth Edition Second Edition
Stewart, Piros, and Heisler
DeMello Running Money: Professional Portfolio Harrington and Niehaus
Cases in Finance Management Risk Management and Insurance
Third Edition First Edition Second Edition
Grinblatt (editor) Sundaram and Das Kapoor, Dlabay, Hughes, and Hart
Stephen A. Ross, Mentor: Influence through Generations Derivatives: Principles and Practice Focus on Personal Finance: An Active Approach to Help
Grinblatt and Titman Second Edition You Achieve Financial Literacy
Financial Markets and Corporate Strategy Sixth Edition
Second Edition FINANCIAL INSTITUTIONS
Kapoor, Dlabay, Hughes, and Hart
Higgins AND MARKETS Personal Finance
Analysis for Financial Management Rose and Hudgins Twelfth Edition
Twelfth Edition Bank Management and Financial Services Walker and Walker
Ross, Westerfield, Jaffe, and Jordan Ninth Edition Personal Finance: Building Your Future
Corporate Finance Rose and Marquis Second Edition
Twelfth Edition Financial Institutions and Markets
Ross, Westerfield, Jaffe, and Jordan Eleventh Edition
Corporate Finance: Core Principles and Saunders and Cornett
Applications Financial Institutions Management: A Risk Management
Fifth Edition Approach
Ninth Edition
Corporate Finance
TWELFTH EDITION

Stephen A. Ross

Randolph W. Westerfield
Marshall School of Business
University of Southern California

Jeffrey Jaffe
Wharton School of Business
University of Pennsylvania

Bradford D. Jordan
Gatton College of Business and Economics
University of Kentucky
 CORPORATE FINANCE

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright ©2019 by McGraw-Hill
Education. All rights reserved. Printed in the United States of America. No part of this publication may be
reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the
prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic
storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the
United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 LWI 21 20 19 18

ISBN 978-1-260-09187-8
MHID 1-260-09187-2

Cover Image: ©Bahadir Yeniceri/Shutterstock

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does
not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not
guarantee the accuracy of the information presented at these sites.

mheducation.com/highered

ros91872_fm_ISE_iv.indd 4 9/8/18 2:48 PM

 To Stephen A. Ross and family
Our great friend, colleague, and coauthor Steve Ross passed away on
March 3, 2017, while we were working on this edition of Corporate
Finance. Steve’s influence on our textbook is seminal, deep, and
enduring, and we will miss him greatly. On the foundation of Steve’s
lasting and invaluable contributions, we pledge to continue our efforts
to provide the best possible textbook for today—and tomorrow.

R.W.W. J.F.J B.D.J.

This page intentionally left blank
About the Authors

STEPHEN A. ROSS Sloan School of Management, Massachusetts Institute of Technology

Stephen A. Ross was the Franco Modigliani Professor of Finance and Economics at the
Sloan School of Management, Massachusetts Institute of Technology. One of the most
widely published authors in finance and economics, Professor Ross was widely recognized
for his work in developing the Arbitrage Pricing Theory and his substantial contributions
to the discipline through his research in signaling, agency theory, option pricing, and the
theory of the term structure of interest rates, among other topics. A past president of the
American Finance Association, he also served as an associate editor of several academic
and practitioner journals. He was a trustee of CalTech. He died suddenly in March of 2017.

RANDOLPH W. WESTERFIELD Marshall School of Business, University of Southern California

Randolph W. Westerfield is Dean Emeritus of the University of Southern California’s
Marshall School of Business and is the Charles B. Thornton Professor of Finance Emeritus.
Professor Westerfield came to USC from the Wharton School, University of Pennsylvania,
where he was the chairman of the finance department and member of the finance faculty
for 20 years. He is a member of the Board of Trustees of Oak Tree Capital Mutual Funds.
His areas of expertise include corporate financial policy, investment management, and
stock market price behavior.

JEFFREY F. JAFFE Wharton School of Business, University of Pennsylvania Jeffrey F. Jaffe

has been a frequent contributor to the finance and economics literatures in such jour-
nals as the Quarterly Economic Journal, The Journal of Finance, The Journal of Financial
and Quantitative Analysis, The Journal of Financial Economics, and The Financial Analysts
Journal. His best-known work concerns insider trading, where he showed both that corpo-
rate insiders earn abnormal profits from their trades and that regulation has little effect on
these profits. He also has made contributions concerning initial public offerings, regulation
of utilities, the behavior of market makers, the fluctuation of gold prices, the theoretical
effect of inflation on interest rates, the empirical effect of inflation on capital asset prices,
the relationship between small-capitalization stocks and the January effect, and the capital
structure decision.

BRADFORD D. JORDAN Gatton College of Business and Economics, University of Kentucky

Bradford D. Jordan is Professor of Finance and holder of the duPont Endowed Chair
in Banking and Financial Services. He has a long-standing interest in both applied and
theoretical issues in corporate finance and has extensive experience teaching all levels of
corporate finance and financial management policy. Professor Jordan has published numer-
ous articles on issues such as cost of capital, capital structure, and the behavior of security
prices. He is a past president of the Southern Finance Association and is coauthor of
Fundamentals of Investments: Valuation and Management, 8th edition, a leading investments
text, also published by McGraw-Hill Education.

vii
Preface

T he teaching and the practice of corporate finance are more challenging and exciting
than ever before. The last decade has seen fundamental changes in financial markets
and financial instruments. In the early years of the 21st century, we still see announce-
ments in the financial press about takeovers, junk bonds, financial restructuring, initial
public offerings, bankruptcies, and derivatives. In addition, there are the new recognitions
of “real” options, private equity and venture capital, subprime mortgages, bailouts, and
credit spreads. As we have learned in the recent global credit crisis and stock market col-
lapse, the world’s financial markets are more integrated than ever before. Both the theory
and practice of corporate finance have been moving ahead with uncommon speed, and our
teaching must keep pace.
These developments have placed new burdens on the teaching of corporate finance.
On one hand, the changing world of finance makes it more difficult to keep materials up to
date. On the other hand, the teacher must distinguish the permanent from the temporary
and avoid the temptation to follow fads. Our solution to this problem is to emphasize the
modern fundamentals of the theory of finance and make the theory come to life with con-
temporary examples. Increasingly, many of these examples are outside the United States.
All too often, the beginning student views corporate finance as a collection of unre-
lated topics that are unified largely because they are bound together between the covers of
one book. We want our book to embody and reflect the main principle of finance: Namely,
good financial decisions will add value to the firm and to shareholders and bad financial
decisions will destroy value. The key to understanding how value is added or destroyed is
cash flows. To add value, firms must generate more cash than they use. We hope this simple
principle is manifest in all parts of this book.

The Intended Audience of This Book

This book has been written for the introductory courses in corporate finance at the MBA
level and for the intermediate courses in many undergraduate programs. Some instructors
will find our text appropriate for the introductory course at the undergraduate level as well.
We assume that most students either will have taken, or will be concurrently enrolled in,
courses in accounting, statistics, and economics. This exposure will help students understand
some of the more difficult material. However, the book is self-contained, and a prior knowl-
edge of these areas is not essential. The only mathematics prerequisite is basic algebra.

New to 12th Edition

THE TAX CUTS AND JOBS ACT (TCJA) IS INCORPORATED THROUGHOUT
There are six primary areas of change and they will be reflected in the 12th edition:
1. Corporate tax. The new, flat-rate 21 percent corporate rate is discussed and compared
to the old progressive system. The new rate is used throughout the text in examples
and problems. Entities other than C corporations still face progressive taxation, so the
discussion of marginal versus average tax rates remains relevant and is retained.

viii
 2. Bonus depreciation. For a limited time, businesses can take a 100 percent deprecia-
tion charge the first year for most non-real estate, MACRS-qualified investments. This
“bonus depreciation” ends in a few years and MACRS returns, so the MACRS mate-
rial remains relevant and is retained. The impact of bonus depreciation is illustrated in
various problems.
3. Limitations on interest deductions. The amount of interest that may be deducted for
tax purposes is limited. Interest that cannot be deducted can be carried forward to
future tax years (but not carried back; see next).
4. Carrybacks. Net operating loss (NOL) carrybacks have been eliminated and NOL
carryforward deductions are limited in any one tax year.
5. Dividends-received tax break. The tax break on dividends received by a corporation has
been reduced, meaning that the portion subject to taxation has increased.
6. Repatriation. The distinction between U.S. and non-U.S. profits essentially has been
eliminated. All “overseas” assets, both liquid and illiquid, are subject to a one-time
“deemed” tax.
With the 12th edition, we’ve also included coverage of
●● Inversions.

●● Negative interest rates.

●● NYSE market operations.

●● Direct listings and cryptocurrency initial coin offerings (ICOs).

●● Regulation CF.

●● Brexit.

●● Repatriation.

●● Changes in lease accounting.

In addition, each chapter has been updated and, where relevant, “internationalized.” We try
to capture the excitement of corporate finance with current examples, chapter vignettes,
and openers. Spreadsheet applications are spread throughout.

ix
 Students—study more efficiently, retain more
and achieve better outcomes. Instructors—focus
on what you love—teaching.

SUCCESSFUL SEMESTERS INCLUDE CONNECT

For Instructors
You’re in the driver’s seat.
Want to build your own course? No problem. Prefer to use our
turnkey, prebuilt course? Easy. Want to make changes throughout the
65%
Less Time
semester? Sure. And you’ll save time with Connect’s auto-grading too.
Grading

They’ll thank you for it.

Adaptive study resources like SmartBook® help your
students be better prepared in less time. You can
transform your class time from dull definitions to dynamic
debates. Hear from your peers about the benefits of
Connect at www.mheducation.com/highered/connect

Make it simple, make it affordable.

Connect makes it easy with seamless integration using any of the
major Learning Management Systems—Blackboard®, Canvas,
and D2L, among others—to let you organize your course in one
convenient location. Give your students access to digital materials
at a discount with our inclusive access program. Ask your
McGraw-Hill representative for more information.

©Hill Street Studios/Tobin Rogers/Blend Images LLC

Solutions for your challenges.
A product isn’t a solution. Real solutions are affordable,
reliable, and come with training and ongoing support
when you need it and how you want it. Our Customer
Experience Group can also help you troubleshoot
tech problems—although Connect’s 99% uptime
means you might not need to call them. See for
yourself at status.mheducation.com
 For Students
Effective, efficient studying.
Connect helps you be more productive with your
study time and get better grades using tools like
SmartBook, which highlights key concepts and creates
a personalized study plan. Connect sets you up for
success, so you walk into class with confidence and
walk out with better grades.
©Shutterstock/wavebreakmedia

Study anytime, anywhere.

“ I really liked this app—it
made it easy to study when
Download the free ReadAnywhere app and access your
online eBook when it’s convenient, even if you’re offline.
you don't have your textbook And since the app automatically syncs with your eBook in
in front of you.
”
- Jordan Cunningham,
Connect, all of your notes are available every time you open
it. Find out more at www.mheducation.com/readanywhere

Eastern Washington University

No surprises.
The Connect Calendar and Reports
tools keep you on track with the 13 14
work you need to get done and
your assignment scores. Life gets Chapter 12 Quiz Chapter 11 Quiz
busy; Connect tools help you keep
Chapter 13 Evidence of Evolution Chapter 11 DNA Technology
learning through it all.
Chapter 7 Quiz
Chapter 7 DNA Structure and Gene...
and 7 more...

Learning for everyone.

McGraw-Hill works directly with Accessibility Services
Departments and faculty to meet the learning needs of all
students. Please contact your Accessibility Services office
and ask them to email accessibility@mheducation.com, or
visit www.mheducation.com/about/accessibility.html for
more information.
Pedagogy

In this edition of Corporate Finance, we have updated and improved our features to
present material in a way that makes it coherent and easy to understand. In addition,
Corporate Finance is rich in valuable learning tools and support to help students
succeed in learning the fundamentals of financial management.

Chapter Opening Vignettes

Each chapter begins with a contemporary vignette that highlights the concepts in
the chapter and their relevance to real-world examples.

10 PART III: RISK

Lessons from Market History

With the S&P 500 Index returning about 19 percent and
the NASDAQ Composite Index up about 28 percent in
2017, stock market performance overall was very good.
In particular, investors in biopharmaceutical company
Madrigal Pharmaceuticals, Inc., had to be happy about the
These examples show that there were tremendous
potential profits to be made during 2017, but there was
also the risk of losing money—and lots of it. So what
should you, as a stock market investor, expect when you
invest your own money? In this chapter, we study more

ExcelMaster Icons
516 percent gain in that stock and investors in genomic than eight decades of market history to find out.
therapy company Sangamo Therapeutics had to feel pretty
good following that company’s 438 percent gain. Of
Please visit us at rwjcorporatefinance.blogspot.com for
course, not all stocks increased in value during the year.
Stock in Sears Holdings fell 61 percent during the year and
the latest developments in the world of corporate finance.
Topics covered in the comprehensive
stock in Under Armour dropped 48 percent.
ExcelMaster supplement (in Connect) are
indicated by ALLOCATED
an icon in the margin.
172 ■■■ PART II Valuation and Capital Budgeting

COSTS
Frequently a particular expenditure benefits a number of projects. Accountants allocate
10.1 Returns this cost across the different projects when determining income. However, for capital
budgeting purposes, this allocated cost should be viewed as a cash outflow of a project
only if it is an incremental cost of the project.
DOLLAR RETURNS
EXAMPLE
Excel Suppose the Video Concept Company has several thousand shares of stock outstanding 6.5 Allocated Costs The Voetmann Consulting Corp. devotes one wing of its suite of offices to a
Master and you are a shareholder. Further suppose that you purchased some of the shares of library requiring a cash outflow of $100,000 a year in upkeep. A proposed capital budgeting
coverage online project is expected to generate revenue equal to 5 percent of the overall firm’s sales. An
stock in the company at the beginning of the year; it is now year-end and you want to executive at the firm, David Pedersen, argues that $5,000 (= .05 × $100,000) should be viewed
figure out how well you have done on your investment. The return you get on an invest- as the proposed project’s share of the library’s costs. Is this appropriate for capital budgeting?
The answer is no. One must ask what the difference is between the cash flows of the entire
ment in stocks, like that in bonds or any other investment, comes in two forms. firm with the project and the cash flows of the entire firm without the project. The firm will spend
$100,000 on library upkeep whether or not the proposed project is accepted. Because accep-
As the owner of stock in the Video Concept Company, you are a part owner of the
How did the market tance of the proposed project does not affect this cash flow, the cash flow should be ignored

do today? Find out at company. If the company is profitable, it generally could distribute some of its profits to
finance.yahoo.com. the shareholders. Therefore, as the owner of shares of stock, you could receive some cash,
called a dividend, during the year. This cash is the income component of your return. In
addition to the dividends, the other part of your return is the capital gain—or, if it is nega-
tive, the capital loss (negative capital gain)—on the investment.
For example, suppose we are considering the cash flows of the investment in
coverage online
Figure 10.1, showing that you purchased 100 shares of stock at the beginning of the year
at a price of $37 per share. Your total investment, then, was:
C0 = $37 × 100 = $3,700
299
when calculating the NPV of the project. Suppose the project has a positive NPV without the
allocated costs but is rejected because of the allocated costs. In this case, the firm is losing
potential value that it could have gained otherwise.
6.2 The Baldwin Company: An Example
Excel We next consider the example of a proposed investment in machinery and related items.
Master Our example involves the Baldwin Company and colored bowling balls.
The Baldwin Company, originally established 16 years ago to make footballs, is now
a leading producer of tennis balls, baseballs, footballs, and golf balls. Nine years ago, the
company introduced “High Flite,” its first line of high-performance golf balls. Baldwin
management has sought opportunities in whatever businesses seem to have some potential
for cash flow. Recently W. C. Meadows, vice president of the Baldwin Company, identi-
fied another segment of the sports ball market that looked promising and that he felt was
not adequately served by larger manufacturers. That market was for brightly colored bowl-
ing balls, and he believed many bowlers valued appearance and style above performance.
He also believed that it would be difficult for competitors to take advantage of the oppor-
tunity because of both Baldwin’s cost advantages and its highly developed marketing skills.
As a result, the Baldwin Company investigated the marketing potential of brightly
colored bowling balls. Baldwin sent a questionnaire to consumers in three markets: Phila-
delphia, Los Angeles, and New Haven. The results of the three questionnaires were much
better than expected and supported the conclusion that the brightly colored bowling balls
could achieve a 10 to 15 percent share of the market. Of course, some people at Baldwin
complained about the cost of the test marketing, which was $250,000. (As we shall see
later, this is a sunk cost and should not be included in project evaluation.)
In any case, the Baldwin Company is now considering investing in a machine to
produce bowling balls. The bowling balls would be manufactured in a warehouse owned
by the firm and located near Los Angeles. This warehouse, which is vacant, and the land
can be sold for $150,000 after taxes.
Working with his staff, Meadows is preparing an analysis of the proposed new prod-
uct. He summarizes his assumptions as follows: The cost of the bowling ball machine is
$100,000 and it is expected to last five years. At the end of five years, the machine will be

xii
 240 ■■■ PART II Valuation and Capital Budgeting

Figure 8.2
Interest Rate Risk
and Time to Maturity

2,000
$1,768.62

30-year bond

Bond value ($)

1,500

$1,047.62 1-year bond

1,000 278 ■■■ PART II Valuation and Capital Budgeting
$916.67

500 $502.11
Figures and Tables
In this case, total return works out to be:
R = $1/$20 + .10
= .05 + .10
This text makes extensive use of real data and
= .15, or 15%
This stock has an expected return of 15 percent.
5 10
Interest rate (%)
15 20
presents them
We can verify in various
this answer figures
by calculating the and
price in one year, Ptables. Ex-
, using 15 percent
1
as the required expected return. Because the dividend expected to be received in one year
Value of a Bond with a 10 Percent Coupon Rate for Different Interest Rates and Maturities
planations in the
is $1 and the expected growth narrative,
rate of dividends isexamples, andexpected
10 percent, the dividend end-to
Time to Maturity be received in two years, D , is $1.10. Based on the dividend growth model, the stock
of-chapter problems will refer to many of these
2
Interest Rate 1 Year 30 Years price in one year will be:
5% $1,047.62 $1,768.62
P = D /(R − g)
10
15
1,000.00
956.52
1,000.00
671.70
exhibits. 1 2
= $1.10/(.15 − .10)
20 916.67 502.11 = $1.10/.05
= $22
Notice that this $22 is $20 × 1.1, so the stock price has grown by 10 percent, as it should.
This means the capital gains yield is 10 percent, which equals the growth rate in dividends.
What is the investor’s total expected return? If you pay $20 for the stock today, you
tells us that a relatively small change in interest rates will lead to a substantial change will get a $1 dividend at the end of the year, and you will have a $22 − 20 = $2 gain.
in the bond’s value. In comparison, the 1-year bond’s price is relatively insensitive to Your dividend yield is $1/$20 = .05, or 5 percent. Your capital gains yield is $2/$20 =
interest rate changes. .10, or 10 percent, so your total expected return would be 5 percent + 10 percent = 15
Intuitively, shorter-term bonds have less interest rate sensitivity because the $1,000 percent, as we calculated above.
face amount is received so quickly. The present value of this amount isn’t greatly affected To get a feel for actual numbers in this context, consider that, according to the 2017
by a small change in interest rates if the amount is received in, say, one year. However, Value Line Investment Survey, Procter & Gamble’s dividends were expected to grow by
even a small change in the interest rate, once compounded for, say, 30 years, can have a 6.5 percent over the next 5 or so years, compared to a historical growth rate of 6.0 percent
significant effect on present value. As a result, the present value of the face amount will over the preceding 5 years and 8.5 percent over the preceding 10 years. In 2017, the
be much more volatile with a longer-term bond. projected dividend for the coming year was given as $2.85. The stock price at that time
The other thing to know about interest rate risk is that, like many things in finance was $94.40 per share. What is the expected return investors require on P&G? Here, the
and economics, it increases at a decreasing rate. A 10-year bond has much greater interest dividend yield is 3.0 (= $2.85/$94.40) percent and the capital gains yield is 6.5 percent,
rate risk than a 1-year bond has. However, a 30-year bond has only slightly greater interest giving a total required return of 9.5 percent on P&G stock.
rate risk than a 10-year bond.
The reason that bonds with lower coupons have greater interest rate risk is essen-EXAMPLE
tially the same. As we discussed earlier, the value of a bond depends on the present
Examples
value of both its coupons and its face amount. If two bonds with different coupon
rates have the same maturity, the value of the lower-coupon bond is proportionately
9.5 Calculating the Required Return Pagemaster Enterprises, the company examined in
Example 9.4, has 1,000,000 shares of stock outstanding. The stock is selling at $10. What is the
required return on the stock?
more dependent on the face amount to be received at maturity. As a result, its value The payout ratio is the ratio of dividends/earnings. Because Pagemaster’s retention ratio is
Separate called-out examples are integrated
will fluctuate more as interest rates change. Put another way, the bond with the higher 40 percent, the payout ratio, which is 1 – Retention ratio, is 60 percent. Recall both that Page-
master reported earnings of $2,000,000 and that the firm’s growth rate is 6.4 percent.
throughout the chapters. Each example Earnings a year from now will be $2,128,000 (= $2,000,000 × 1.064), implying that divi-
dends will be $1,276,800 (= .60 × $2,128,000). Dividends per share will be $1.28
illustrates an intuitive or mathematical ap- (= $1,276,800/1,000,000). Given that g = .064, we calculate R from Equation 9.9 as follows:
$1.28
.192 = ______ + .064
plication in a step-by-step format. There is $10.00

enough detail in the explanations so stu-

A HEALTHY SENSE OF SKEPTICISM
dents don’t have to look elsewhere for It is important to emphasize that our approach merely estimates g; our approach does
not determine g precisely. We mentioned earlier that our estimate of g is based on a
additional information. number of assumptions. We assumed that the return on reinvestment of future retained

In Their Own Words

ROBERT C. HIGGINS ON SUSTAINABLE
GROWTH
Most financial officers know intuitively that it takes
money to make money. Rapid sales growth requires
increased assets in the form of accounts receivable,
inventory, and fixed plant, which, in turn, require money
to pay for assets. They also know that if their company
does not have the money when needed, it can literally
be what to do with all the cash that keeps piling up in
the till.
Bankers also find the sustainable growth equation
useful for explaining to financially inexperienced small
business owners and overly optimistic entrepreneurs
that, for the long-run viability of their business, it is nec-
essary to keep growth and profitability in proper
balance.
Finally, comparison of actual to sustainable growth

“In Their Own Words” Boxes

“grow broke.” The sustainable growth equation states
these intuitive truths explicitly.
Sustainable growth is often used by bankers and other
external analysts to assess a company’s creditworthiness.
They are aided in this exercise by several sophisticated
computer software packages that provide detailed analy-
ses of the company’s past financial performance, includ-
ing its annual sustainable growth rate.
Bankers use this information in several ways. Quick
comparison of a company’s actual growth rate to its sus-
tainable rate tells the banker what issues will be at the
top of management’s financial agenda. If actual growth
consistently exceeds sustainable growth, management’s
problem will be where to get the cash to finance growth.
The banker thus can anticipate interest in loan products.
Conversely, if sustainable growth consistently exceeds
actual, the banker had best be prepared to talk about
investment products because management’s problem will
rates helps a banker understand why a loan applicant
needs money and for how long the need might continue.
In one instance, a loan applicant requested $100,000 to
pay off several insistent suppliers and promised to repay
in a few months when he collected some accounts receiv- Located throughout the chapters, this unique se-
able that were coming due. A sustainable growth analysis
revealed that the firm had been growing at four to six
times its sustainable growth rate and that this pattern
ries consists of articles written by distinguished
was likely to continue in the foreseeable future. This
alerted the banker that impatient suppliers were only a
scholars or practitioners about key topics in the
symptom of the much more fundamental disease of
overly rapid growth, and that a $100,000 loan would text. Boxes include essays by Edward I. Altman,
likely prove to be only the down payment on a much
larger, multiyear commitment. Robert S. Hansen, Robert C. Higgins, Michael C.
SOURCE: Robert C. Higgins is the Marguerite Reimers Professor of
Finance, Emeritus, at the Foster School of Business at the University of Jensen, Merton Miller, and Jay R. Ritter.
Washington. He pioneered the use of sustainable growth as a tool for
financial analysis.

xiii
3.6 Some Caveats Regarding Financial
Planning Models
Financial planning models do not always ask the right questions. A primary reason is that
 CHAPTER 4 Discounted Cash Flow Valuation ■■■ 97

Spreadsheet Applications SPREADSHEET APPLICATIONS

Using a Spreadsheet for Time Value of Money Calculations

Now integrated into select chapters, Spread- More and more, businesspeople from many different areas (not only finance and accounting) rely on spread-
sheets to do all the different types of calculations that come up in the real world. In this section, we will
sheet Applications boxes reintroduce students show you how to use a spreadsheet to handle the various time value of money problems we present in this
chapter. We will use Microsoft Excel™, but the commands are similar for other types of software. We assume
to Excel, demonstrating how to set up spread- you are already familiar with basic spreadsheet operations.
As we have seen, you can solve for any one

sheets in order to analyze common financial of the following four potential unknowns: future
value, present value, the discount rate, or the num-
To Find Enter This Formula

ber of periods. The box at right lists formulas that Future value = FV (rate,nper,pmt,pv)
problems—a vital part of every business stu- can be used in Excel to solve for each input in the
Present value
Discount rate
= PV (rate,nper,pmt,fv)
= RATE (nper,pmt,pv,fv)
time value of money equation. Number of periods = NPER (rate,pmt,pv,fv)
dent’s education. (For even more spreadsheet In these formulas, pv and fv are present value
and future value, nper is the number of periods,

example problems, check out ExcelMaster and rate is the discount, or interest, rate.
Two things are a little tricky here. First, unlike a financial calculator, the spreadsheet requires that the rate
be entered as a decimal. Second, as with most financial calculators, you have to put a negative sign on
in Connect). either the present value or the future value to solve for the rate or the number of periods. For the same
reason, if you solve for a present value, the answer will have a negative sign unless you input a negative
22 ■■■ PART I Overview
future value. The same is true when you compute a future value.
To illustrate how you might use these formulas, we will go back to an example in the chapter. If you invest
the least liquid kind of assets. Tangible fixed assets include property, plant, and equipment. $25,000 at 12 percent per year, how long until you have $50,000? You might set up a spreadsheet like this:
Annual and
quarterly financial These assets do not convert to cash from normal business activity, and they are not usu-
A B C D E F G H
statements for ally used to pay expenses such as payroll.
1
most public U.S. Some fixed assets are intangible. Intangible assets have no physical existence but can be 2 Using a spreadsheet for time value of money calculations
corporations can be very valuable. Examples of intangible assets are the value of a trademark or the value of a pat- 3
found in the EDGAR
ent. The more liquid a firm’s assets, the less likely the firm is to experience problems meeting 4 If we invest $25,000 at 12 percent, how long until we have $50,000? We need to solve
database at 5 for the unknown number of periods, so we use the formula NPER(rate,pmt,pv,fv).
www.sec.gov. short-term obligations. The probability that a firm will avoid financial distress can be linked to
6
the firm’s liquidity. Unfortunately, liquid assets frequently have lower rates of return than fixed 7 Present value (pv): $25,000
assets; for example, cash generates no investment income. To the extent a firm invests in liquid 8 Future value (fv): $50,000
assets, it sacrifices an opportunity to invest in potentially more profitable investment vehicles. 9 Rate (rate): .12
10
11 Periods: 6.1162554
DEBT VERSUS EQUITY 12
13 The formula entered in cell B11 is =NPER(B9,0,-B7,B8); notice that pmt is zero and that pv
Liabilities are obligations of the firm that require a payout of cash within a stipulated period.
14 has a negative sign on it. Also notice that rate is entered as a decimal, not a percentage.
Many liabilities involve contractual obligations to repay a stated amount plus interest over
a period. Liabilities are debts and are frequently associated with fixed cash burdens, called
debt service, that put the firm in default of a contract if they are not paid. Stockholders’ equity
is a claim against the firm’s assets that is residual and not fixed. In general terms, when the EXAMPLE
firm borrows, it gives the bondholders first claim on the firm’s cash flow.1 Bondholders can 4.9 Waiting for Godot You’ve been saving up to buy the Godot Company. The total cost will be
sue the firm if the firm defaults on its bond contracts. This may lead the firm to declare $10 million. You currently have about $2.3 million. If you can earn 5 percent on your money,
itself bankrupt. Stockholders’ equity is the difference between assets and liabilities: how long will you have to wait? At 16 percent, how long must you wait?
At 5 percent, you’ll have to wait a long time. From the present value equation:
Assets − Liabilities ≡ Stockholders’ equity
$2.3 million = $10 million/1.05t
This is the stockholders’ share in the firm stated in accounting terms. The accounting 1.05t = 4.35
CHAPTER 25 Derivatives and Hedging Risk ■■■ 771
value of stockholders’ equity increases when retained earnings are added. This occurs t ≅ 30 years
when the firm retains part of its earnings instead of paying them out as dividends. At 16 percent, things are a little better. Verify for yourself that it will take about 10 years.
Moon Chemical. Because there is a crude oil futures contract for every month, selecting the
correct futures contract is not difficult. Many other commodities have only five contracts per
VALUE VERSUS COST
The home page year, frequently necessitating buying contracts one month away from the month of production.
for the Financial The accounting value of a firm’s assets is frequently referred to as the carrying value or
Explanatory Website Links
Accounting As mentioned earlier,
the book Moon
value Chemical
of the assets.is2 interested in hedging
Under generally the risk
accepted of fluctuating
accounting oil
principles (GAAP),
Standards Board
prices because it cannot pass any cost increases on to the consumer. Suppose, alternatively, 3
audited financial statements of firms in the United States carry assets at cost. The terms
(FASB) is that Moon Chemical was not selling petrochemicals on a fixed contract to the U.S. government.
These web links are specifically selected to ac-
www.fasb.org. carrying value and book value are misleading and cause many readers of financial state-
Instead, imagine that the petrochemicals were to be sold to private industry at currently prevail-
ments to believe the firm’s assets are recorded at true market values. Market value is the
ing prices. The price of petrochemicals should move directly with oil prices because oil is a
company text material and provide students and
price at which willing buyers and sellers would trade the assets. It would be only a coin-
major component of petrochemicals. Because cost increases are likely to be passed on to the
cidence if accounting value and market value were the same. In fact, management’s job
consumer, Moon Chemical would probably not want to hedge in this case. Instead, the firm is
is to create value for the firm that exceeds its cost.
instructors with a quick reference to additional
likely to choose Strategy 1, buying the oil as it is needed. If oil prices increase between April 1
and, say, September
ferent.
Many peopleChemical,
1, Moon use the balance
of course, sheet,
will but
findthethatinformation each become
its inputs have may wish to extract is dif-
quite information on the Internet.
costly. However, in aAcompetitive
banker maymarket,look atitsa revenues
balance sheet for evidence
are likely to rise, of
as accounting
well. liquidity and working
Strategy 2 is called a long hedge because one purchases a futures contract to reduce risk. promptness
capital, while a supplier also may note the size of accounts payable and the general
In other words,of one
payments.
takes aMany long users
positionof financial statements,
in the futures market.including
In general,managers and investors,
a firm institutes a want to
long hedge whenknowitthe value of the
is committed to firm,
a fixednot its cost.
sales price.This
Oneinformation is not found
class of situations involves onactual
the balance sheet.
written contracts with customers, such as the one Moon Chemical had with the U.S. government.
Alternatively, a firm may find that it cannot easily pass on costs to consumers or does not want
to pass on these
1 costs. For example, a group of students opened a small meat market called
Bondholders are investors in the firm’s debt. They are creditors of the firm. In this discussion, the term bondholder means the
What’s Your Beef nearas the
same thing University of Pennsylvania in the late 1970s.6 This was a time of
creditor.
2
volatile consumer prices,
Confusion oftenespecially
arises becausefood
manyprices.
financial Knowing
accounting that
terms their fellow
have the students
same meaning. Forwere par-
example, the following terms
usually refer to the same thing: assets minus liabilities, net worth, stockholders’ equity, owners’ equity, book equity, and equity
ticularly budget-conscious,
capitalization.
the owners vowed to keep food prices constant regardless of price
movements in3Generally,
either direction.
the U.S. GAAPTheyrequire
accomplished this byatpurchasing
assets to be carried futures
the lower of cost contracts
or market value. Ininmost
various
instances, cost is lower
agricultural commodities.
than market value. However, in some cases when a fair market value can be readily determined, the assets have their value
adjusted to the fair market value.

25.5 Interest Rate Futures Contracts

In this section, we consider interest rate futures contracts. Our examples deal with futures
contracts on Treasury bonds because of their high popularity. We first price Treasury
bonds and Treasury bond forward contracts. Differences between futures and forward
contracts are explored. Hedging examples are provided next.

PRICING OF TREASURY BONDS

As mentioned earlier in the text, a Treasury bond pays semiannual interest over its life.
In addition, the face value of the bond is paid at maturity. Consider a 20-year, 8 percent Numbered Equations
coupon bond that was issued on March 1. The first payment is to occur in six months—that
is, on September 1. The value of the bond can be determined as follows:
Pricing of Treasury Bond
Key equations are numbered and listed on the back
$40
PTB = ______
1 + R1 +
$40
________
2 +
$40
________ $40
+ ˙ ˙ ˙ + __________
$1,040
+ __________ (25.1) endsheets for easy reference.
(1 + R2) (1 + R3)3 (1 + R39)39 (1 + R40)40
Because an 8 percent coupon bond pays interest of $80 a year, the semiannual coupon
is $40. Principal and the semiannual coupon are both paid at maturity. As we mentioned
in a previous chapter, the price of the Treasury bond, PTB, is determined by discounting
each payment on the bond at the appropriate spot rate. Because the payments are semian-
nual, each spot rate is expressed in semiannual terms. That is, imagine a horizontal term
structure where the effective annual yield is 8 percent for all maturities. Because each
6
Ordinarily, an unusual firm name in this textbook is a tip-off that it is fictional. This, however, is a true story.

xiv
The end-of-chapter material reflects and builds upon the concepts learned from the chapter and study features.
790 ■■■ PART VI Options, Futures, and Corporate Finance

Summary and Conclusions Summary and Conclusions

1. Firms hedge to reduce risk. This chapter showed a number of hedging strategies.
2. A forward contract is an agreement by two parties to sell an item for cash at a later date.
The price is set at the time the agreement is signed. However, cash changes hands on the
The summary provides a quick review of key concepts
date of delivery. Forward contracts are generally not traded on organized exchanges.
3. Futures contracts are also agreements for future delivery. They have certain advantages,
such as liquidity, that forward contracts do not. An unusual feature of futures contracts
in the chapter.
is the mark-to-the-market convention. If the price of a futures contract falls on a particu-
lar day, every buyer of the contract must pay money to the clearinghouse. Every seller of
the contract receives money from the clearinghouse. Everything is reversed if the price
rises. The mark-to-the-market convention prevents defaults on futures contracts.
4. We divided hedges into two types: short hedges and long hedges. An individual or firm
Questions and Problems
that sells a futures contract to reduce risk is instituting a short hedge. Short hedges are
generally appropriate for holders of inventory. An individual or firm that buys a futures
contract to reduce risk is instituting a long hedge. Long hedges are typically used by firms Because solving problems is so critical to a student’s
with contracts to sell finished goods at a fixed price.
5. An interest rate futures contract employs a bond as the deliverable instrument. Because
of their popularity, we worked with Treasury bond futures contracts. We showed that
learning, new questions and problems have been
Treasury bond futures contracts can be priced using the same type of net present value
analysis that is used to price Treasury bonds themselves.
6. Many firms face interest rate risk. They can reduce this risk by hedging with interest rate
added and existing questions and problems have
futures contracts. As with other commodities, a short hedge involves the sale of a futures
contract. Firms that are committed to buying mortgages or other bonds are likely to institute been revised. All problems also have been thoroughly
short hedges. A long hedge involves the purchase of a futures contract. Firms that have
agreed to sell mortgages or other bonds at a fixed price are likely to institute long hedges.
7. Duration measures the average maturity of all the cash flows of a bond. Bonds with high reviewed and checked for accuracy.
duration have high price variability. Firms frequently try to match the duration of their
assets with the duration of their liabilities.
8. Swaps are agreements to exchange cash flows over time. The first major type is an inter-
Problems have been grouped according to level
est rate swap in which one pattern of coupon payments, say, fixed payments, is exchanged
for another, say, coupons that float with LIBOR. The second major type is a currency
swap, in which an agreement is struck to swap payments denominated in one currency
of difficulty with the levels listed in the margin: Basic,
124 ■■■ PART II Valuation and Capital Budgeting
CHAPTER 4 Discounted Cash Flow Valuation ■■■ 131
for payments in another currency over time.
Intermediate, and Challenge.
Well-known financial
18. Value
73. Present Interest
of aRates
Growing Perpetuity Whatwriter
is theAndrew Tobias
equation for argues that hevalue
the present can earn
of a 177
Additionally, one $10 we bottle ofhave
with a payment tried
fine Bordeaux per weekto
of C one periodmake from today the
He problems
percent per year buying wine by the case. Specifically, he assumes that he will consume
growing perpetuity
by C eachper period?
if the payments
for the next 12 weeks.
grow
can either pay $10
Concept Questions week or buy a case of 12 bottles today. If he buys the case, he receives a 10 percent

1. Hedging Strategies If a firm is selling futures contracts on lumber as a hedging strategy,

in the74.critical “concept”
A useful
Rule of 72discount and, rule
sumes the firstisbottle
discrete compounding
of thumb
by doing
chapters,
today. of
the “Rule
for the
so, earns
Do72.”
the time
you To
177 percent.
agree
usewith
such
it takes
the his
Assume
analysis?
Rule
as
an investment
of 72, Do youyou
those
he buystothe double
see a72
divide
wine with
on
and con-
problem
by thewith
his numbers?
rate to determine the number of periods it takes for a value today to double. For exam-
what must be true about the firm’s exposure to lumber prices?
2. Hedging Strategies If a firm is buying call options on pork belly futures as a hedging
value, risk,ple,19. and
if the rate iscapital
6 percent,
Calculating Number the structure,
Rule of 72
of Periods Onesays especially
it will
of your take 72/6
customers is = 12 yearschalleng-
delinquent to his
on double.
accounts
strategy, what must be true about the firm’s exposure to pork belly prices? This is approximately
payable balance. equal to the
You’ve actualagreed
mutually answerto of 11.90 years.
a repayment The Rule
schedule of 72
of $400 peralso
month.
3. Forwards and Futures What is the difference between a forward contract and a futures
contract? Why do you think that futures contracts are much more common? Are there any
ing and can interesting.
be applied
This is a balance
to determine
You will what rate
charge 1.1 percent
is $16,450, howfor
useful approximation long
perismonth
neededinterest
will rates
many it takeand
to double
for periods.
money
on the
the account
overduein abalance.
specifiedIf period.
to be rate
At what paid isoff?
the current
the Rule of
72 exact?
circumstances under which you might prefer to use forwards instead of futures? Explain.
4. Hedging Commodities Bubbling Crude Corporation, a large Texas oil producer, would
We provide
75. Rule of 69.3
answers
A corollary
toyouselected
the Rule and of
the Rule
problems
20. Calculating EAR Friendly’s Quick Loans, Inc., offers you “three for four or I knock
on your door.” This to means ofget72$3is today repay $4The
69.3. when Rule
inyourisAp-
youofget69.3 pay-
like to hedge against adverse movements in the price of oil because this is the firm’s check except
exactly correct in one for
week (or else).
rounding What’s
when ratestheareEAR Friendly’scontinuously.
compounded earns on thisProve lendingthebusi-
primary source of revenue. What should the firm do? Provide at least two reasons why it
pendix BRuleatof 69.3 the
ness?forIfend
paying?
you wereof
continuously bravethe
enoughbook.
compounded tointerest.
ask, what APR would Friendly’s say you were

INTERMEDIATE 21. Future Value What is the future value in 11 years of $1,000 invested in an account
(Questions 21–50) with an APR of 8.9 percent:
a. Compounded annually?
Excel Master It! Problems Excel Master It! Problem b. Compounded semiannually?
c. Compounded monthly?
d. Compounded continuously?
Excel Excel is a great tool for solving problems, but with many time value of money problems, you
e. Why does the future value increase as the compounding period shortens?
Included in the end-of-chapter material are prob- Master
coverage online
may still need to draw a time line. Consider a classic retirement problem. A friend is celebrat-
ing her birthday and wants
22. Simple to start
Interest versussaving for herInterest
Compound anticipated
Firstretirement.
Simple BankShepays
has5.3
thepercent
following
simple
years to retirement andon
interest retirement spending
its investment goals:If First Complex Bank pays interest on its accounts
accounts.
lems directly incorporating Excel, and new tips and compounded annually, what rate should the bank set if it wants to match First Simple
Bank over an investment horizon of 10 years?
Years until retirement 30
techniques taught in the chapter’s ExcelMaster 23. Calculating
To do
AmountAnnuities
to withdraw
this,toyou
You are year
each
will invest
planning to save for$90,000
retirement over the next 30 years.
$850 per month in a stock account and $350 per month
Years withdraw in retirement 20
in a Investment
bond account. The return of the stock account is expected to be 10 percent per
supplement. rate 8%
year, and the bond account will earn 6 percent per year. When you retire, you will
combine your money into an account with an annual return of 7 percent. How much
can you withdraw each month from your account assuming
Because your friend is planning ahead, the first withdrawal will not take place a 25-year withdrawal
until one
period?She wants to make equal annual deposits into her account for her retire-
year after she retires.

Excel Problems ment fund.24. Calculating Rates of Return Suppose an investment offers to quadruple your money in
a. If she 12 months
starts (don’t
making believe
these it). What
deposits rate year
in one of return
and per quarter
makes her are
lastyou being on
deposit offered?
the
25. sheCalculating
day Rates
retires, what must You’re
of Return
amount tryingannually
she deposit to choosetobetween
be abletwo different
to make the investments,
desired
both of which have
withdrawals in retirement? up-front costs of $65,000. Investment G returns $125,000 in 6 years.
Indicated by the Excel icon in the margin, these b. SupposeInvestment H returns
your friend $205,000a in
has inherited 10 years.
large sum of Which of these
money. investments
Rather than makinghas the higher
equal
annualreturn?
payments, she has decided to make one lump-sum deposit today to cover her
problems can be found at the end of almost all retirement
26. Growing
c. Suppose
needs.
laseryour
What amount
Perpetuities
eye friend’s
Markdoes
employer
surgery. His
she have
Weinstein
will will
technology contribute
to deposit
has been working
to the
be available
today?
on an advanced technology in
account
in the each He
near term. year as part his
anticipates
of the first annual cash
company’s flow from plan.
profit-sharing the technology
In addition, to beyour
$175,000,
friend received
expects two years from
a distribu-
chapters. Located in Connect Finance for Corpo- today.a Subsequent
tion from family trustannual cashyears
several flowsfrom
will grow
now. atWhat
3.8 percent
amount in must
perpetuity. What is the
she deposit
present
annually nowvalue of the
to be abletechnology
to make ifthe the desired
discount withdrawals
rate is 9.7 percent?
in retirement? The
rate Finance, 12e, Excel templates have been cre- details are:
27. Perpetuities A prestigious investment bank designed a new security that pays a
quarterly dividend of $2.25 in perpetuity. The first dividend occurs one quarter from

ated for each of these problems, where students today. What is the price of the security if the APR is 3.8 percent compounded
Employer’s annual contribution
quarterly?
Years until trust fund distribution
$ 1,500
20

can use the data in the problem to work out the Amount of trust fund distribution $25,000

solution using Excel skills.

132 ■■■ PART II Valuation and Capital Budgeting

End-of-Chapter Cases Mini Case THE MBA DECISION

Ben Bates graduated from college six years ago with a finance undergraduate degree. Although
he is satisfied with his current job, his goal is to become an investment banker. He feels that an
Located at the end of almost every chapter, these MBA degree would allow him to achieve this goal. After examining schools, he has narrowed
his choice to either Wilton University or Mount Perry College. Although internships are encour-
aged by both schools, to get class credit for the internship, no salary can be paid. Other than
mini cases focus on common company situations internships, neither school will allow its students to work while enrolled in its MBA program.
Ben currently works at the money management firm of Dewey and Louis. His annual salary
that embody important corporate finance topics. at the firm is $65,000 per year, and his salary is expected to increase at 3 percent per year until
retirement. He is currently 28 years old and expects to work for 40 more years. His current job
includes a fully paid health insurance plan, and his current average tax rate is 26 percent. Ben
Each case presents a new scenario, data, and a di- has a savings account with enough money to cover the entire cost of his MBA program.
The Ritter College of Business at Wilton University is one of the top MBA programs in
the country. The MBA degree requires two years of full-time enrollment at the university. The
lemma. Several questions at the end of each case annual tuition is $70,000, payable at the beginning of each school year. Books and other sup-
plies are estimated to cost $3,000 per year. Ben expects that after graduation from Wilton, he
require students to analyze and focus on all of the will receive a job offer for about $110,000 per year, with a $20,000 signing bonus. The salary
at this job will increase at 4 percent per year. Because of the higher salary, his average income
tax rate will increase to 31 percent.
material they learned in that chapter. The Bradley School of Business at Mount Perry College began its MBA program 16 years
ago. The Bradley School is smaller and less well known than the Ritter College. Bradley offers
an accelerated, one-year program, with a tuition cost of $85,000 to be paid upon matriculation.
Books and other supplies for the program are expected to cost $4,500. Ben thinks that he will
receive an offer of $92,000 per year upon graduation, with an $18,000 signing bonus. The
salary at this job will increase at 3.5 percent per year. His average tax rate at this level of xv
income will be 29 percent.
Both schools offer a health insurance plan that will cost $3,000 per year, payable at the
beginning of the year. Ben also estimates that room and board expenses will cost $2,000 more
per year at both schools than his current expenses, payable at the beginning of each year. The
appropriate discount rate is 4.7 percent.
1. How does Ben’s age affect his decision to get an MBA?
Comprehensive Teaching
and Learning Package

McGraw‐Hill Customer Care Contact

Information
At McGraw-Hill, we understand that getting the most from new technology can be chal-
lenging. That’s why our services don’t stop after you purchase our products. You can e-mail
our product specialists 24 hours a day to get product-training online. Or you can search
our knowledge bank of Frequently Asked Questions on our support website. For Customer
Support, call 800-331-5094 or visit mpss.mhhe.com. One of our Technical Support Analysts
will be able to assist you in a timely fashion.

Assurance of Learning Ready

Assurance of Learning is an important element of many accreditation standards. Corporate
Finance, 12e, is designed specifically to support your assurance of learning initiatives. Every
test bank question is labeled with level of difficulty, topic area, Bloom’s Taxonomy level,
and AACSB skill area. Connect, McGraw-Hill’s online homework solution, and EZ Test,
McGraw-Hill’s easy-to-use test bank software, can search the test bank by these and other
categories, providing an engine for targeted Assurance of Learning analysis and assessment.

AACSB Statement
The McGraw-Hill Companies is a proud corporate member of AACSB International.
Understanding the importance and value of AACSB accreditation, Corporate Finance, 12e,
has sought to recognize the curricula guidelines detailed in the AACSB standards for busi-
ness accreditation by connecting selected questions in the test bank to the general knowl-
edge and skill guidelines found in the AACSB standards.
The statements contained in Corporate Finance, 12e, are provided only as a guide
for the users of this text. The AACSB leaves content coverage and assessment within the
purview of individual schools, the mission of the school, and the faculty. While Corporate
Finance, 12e, and the teaching package make no claim of any specific AACSB qualification
or evaluation, we have, within the test bank, labeled selected questions according to the six
general knowledge and skills areas.

Instructor Resources
The Instructor Library in Connect contains all the necessary supplements—Instructor’s
Manual, Test Bank, Computerized Test Bank, and PowerPoint—all in one place. Go to
connect.mheducation.com to find:
●● Instructor’s Manual
Prepared by Steven D. Dolvin, Butler University
This is a great place to find new lecture ideas. The IM has three main sections. The
first section contains a chapter outline and other lecture materials. The annotated

xvi
 outline for each chapter includes lecture tips, real-world tips, ethics notes, suggested
PowerPoint slides, and, when appropriate, a video synopsis.
●● Test Bank
Prepared by Kay Johnson
Here’s a great format for a better testing process. The Test Bank has over 100 questions per
chapter that closely link with the text material and provide a variety of question formats
(multiple-choice questions/problems and essay questions) and levels of difficulty (basic,
intermediate, and challenge) to meet every instructor’s testing needs. Problems are detailed
enough to make them intuitive for students, and solutions are provided for the instructor.
●● TestGen
TestGen is a complete, state-of-the-art test generator and editing application software
that allows instructors to quickly and easily select test items from McGraw Hill’s
TestGen testbank content and to organize, edit, and customize the questions and
answers to rapidly generate paper tests. Questions can include stylized text, symbols,
graphics, and equations that are inserted directly into questions using built-in mathe-
matical templates. TestGen’s random generator provides the option to display different
text or calculated number values each time questions are used. With both quick-and-
simple test creation and flexible and robust editing tools, TestGen is a test generator
system for today’s educators.
●● PowerPoint Presentation System
Prepared by Steven D. Dolvin, Butler University
Customize our content for your course. This presentation has been thoroughly revised
to include more lecture-oriented slides, as well as exhibits and examples both from the
book and from outside sources. Applicable slides have web links that take you directly
to specific Internet sites, or a spreadsheet link to show an example in Excel. You also
can go to the Notes Page function for more tips on presenting the slides. If you already
have PowerPoint installed on your PC, you can edit, print, or rearrange the complete
presentation to meet your specific needs.
●● Excel Simulations
Expanded for this edition! With 180 Excel simulation questions now included in
Connect, RWJJ is the unparalleled leader in offering students the opportunity to prac-
tice using the Excel functions they will use throughout their careers in finance.
●● Corporate Finance Videos
New for this edition, brief and engaging conceptual videos (and accompanying ques-
tions) help students to master the building blocks of the Corporate Finance course.

STUDENT SUPPORT
●● Narrated Presentations
Each chapter’s slides follow the chapter topics and provide steps and explanations
showing how to solve key problems. Because each student learns differently, a quick
click on each slide will “talk through” its contents with you!

xvii
 ●● Excel Templates
Corresponding to most end-of-chapter problems, each template allows the student to
work through the problem using Excel. Each end-of-chapter problem with a template is
indicated by an Excel icon in the margin beside it.
●● ExcelMaster
Developed by the authors for the RWJ franchise, this valuable and comprehensive
supplement provides a tutorial for students in using Excel in finance that is broken out
by chapter sections.

Options Available for Purchase

& Packaging
FINGAME ONLINE 5.0 ISBN-10: 0-07-721988-0 / ISBN-13: 978-0-07-721988-8
By LeRoy Brooks, John Carroll University.
$15.00 when packaged with this text. In this comprehensive simulation game, students con-
trol a hypothetical company over numerous periods of operation. As students make major
financial and operating decisions for their company, they will develop and enhance skills in
financial management and financial accounting statement analysis.

xviii
Acknowledgments

Andras Danis Abu Jalai Ronald M. Shapiro

Georgia Institute of Technology Suffolk University Rutgers University
Sugata Das Robert James Stephen V. Smith
Montana State University–Billings Boston College Drexel University
Lowell D’Souza Victoria Javine Mete Tepe
Northeastern University University of Alabama Virginia Tech
Eric Eller Roger Klee Gary P. Tripp
Loras College Cleveland State University Southern New Hampshire University
Melissa B. Frye Wendy Liu Emre Unlu
University of Central Florida University of Kentucky University of Nebraska
Melody J. Gunter Jeremy Marcq Kainan Wang
Florida State University Tufts University and Harvard University University of Toledo
Atul Gupta Narasimha Mohan Arthur J. Wilson
Bentley University Baldwin Wallace University George Washington University
Janet Hamilton Hongsong Neuhauser
Portland State University Elizabethtown College
John Hartman Francis Blaise Roncagli
University of California–Santa Barbara Cleveland State University

xix
Brief Contents

Part I
OVERVIEW
1 Introduction to Corporate Finance 1
2 Financial Statements and Cash Flow 20
3 Financial Statements Analysis and Financial Models 42

Part II
VALUATION AND CAPITAL BUDGETING
4 Discounted Cash Flow Valuation 85
5 Net Present Value and Other Investment Rules 133
6 Making Capital Investment Decisions 169
7 Risk Analysis, Real Options, and Capital Budgeting 205
8 Interest Rates and Bond Valuation 235
9 Stock Valuation 270

Part III
RISK
10 Lessons from Market History 299
11 Return, Risk, and the Capital Asset Pricing Model 328
12 An Alternative View of Risk and Return 371
13 Risk, Cost of Capital, and Valuation 393

Part IV
CAPITAL STRUCTURE AND DIVIDEND POLICY
14 Efficient Capital Markets and Behavioral Challenges 428
15 Long-Term Financing 468
16 Capital Structure 487
17 Capital Structure 519
18 Valuation and Capital Budgeting for the Levered Firm 551
19 Dividends and Other Payouts 573

xx
Part V
LONG-TERM FINANCING
20 Raising Capital 612
21 Leasing 649

Part VI
OPTIONS, FUTURES, AND CORPORATE FINANCE
22 Options and Corporate Finance 673
23 Options and Corporate Finance: Extensions and Applications 718
24 Warrants and Convertibles 742
25 Derivatives and Hedging Risk 763

Part VII
SHORT-TERM FINANCE
26 Short-Term Finance and Planning 795
27 Cash Management 825
28 Credit and Inventory Management 847

Part VIII
SPECIAL TOPICS
29 Mergers, Acquisitions, and Divestitures 876
30 Financial Distress 919
31 International Corporate Finance 935

Appendix A: Mathematical Tables 963

Appendix B: Solutions to Selected End-of-Chapter Problems 972
Appendix C: Using the HP 10B and TI BA II Plus
Financial Calculators 975
Glossary 979
Name Index 987
Subject Index 989

xxi
Contents

PART I Overview 2.3 Taxes

Corporate and personal Tax Rates
26
26
Chapter 1 Average versus Marginal Tax Rates 26
2.4 Net Working Capital 27
Introduction to Corporate Finance 1 2.5 Cash Flow of the Firm 28
1.1 What Is Corporate Finance? 1 2.6 The Accounting Statement of Cash Flows 31
The Balance Sheet Model of the Firm 1 Cash Flow from Operating Activities 31
The Financial Manager 3 Cash Flow from Investing Activities 32
1.2 The Corporate Firm 4 Cash Flow from Financing Activities 32
The Sole Proprietorship 4 2.7 Cash Flow Management 33
The Partnership 4 Summary and Conclusions 34
The Corporation 5 Concept Questions 34
A Corporation by Another Name . . . 7 Questions and Problems 35
1.3 The Importance of Cash Flows 8 Excel Master It! Problem 39
Identification of Cash Flows 8 Mini Case: Cash Flows at Warf
Timing of Cash Flows 9 Computers, Inc. 40
Risk of Cash Flows 10
1.4 The Goal of Financial Management 10
Possible Goals 10
Chapter 3
The Goal of the Financial Manager 11 Financial Statements Analysis
A More General Goal 12 and Financial Models 42
1.5 The Agency Problem and Control
3.1 Financial Statements Analysis 42
of the Corporation 12
Standardizing Statements 42
Agency Relationships 13
Common-Size Balance Sheets 43
Management Goals 13
Common-Size Income Statements 44
Do Managers Act in the Stockholders’
3.2 Ratio Analysis 46
Interests? 14
Short-Term Solvency or Liquidity Measures 47
Stakeholders 15
Long-Term Solvency Measures 48
1.6 Regulation 16
Asset Management or Turnover Measures 50
The Securities Act of 1933 and the
Profitability Measures 52
Securities Exchange Act of 1934 16
Market Value Measures 53
Sarbanes-Oxley 17
3.3 The DuPont Identity 56
Summary and Conclusions 18
A Closer Look at ROE 56
Concept Questions 18
Problems with Financial Statement Analysis 58
3.4 Financial Models 59
Chapter 2 A Simple Financial Planning Model 59
The Percentage of Sales Approach 61
Financial Statements and Cash Flow 20 3.5 External Financing and Growth 65
2.1 The Balance Sheet 20 The Relationship Between EFN
Liquidity 21 and Growth 66
Debt versus Equity 22 Financial Policy and Growth 68
Value versus Cost 22 A Note about Sustainable Growth
2.2 The Income Statement 23 Rate Calculations 72
Generally Accepted Accounting 3.6 Some Caveats Regarding Financial
Principles 24 Planning Models 73
Noncash Items 25 Summary and Conclusions 74
Time and Costs 25 Concept Questions 74

xxii
 Questions and Problems 76 Problems with the Payback Method 137
Excel Master It! Problem 81 Managerial Perspective 138
Mini Case: Ratios and Financial Planning Summary of Payback 139
at East Coast Yachts 82 5.3 The Discounted Payback Period Method 139
5.4 The Internal Rate of Return 139
5.5 Problems with the IRR Approach 143
PART II Valuation and Definition of Independent and Mutually
Exclusive Projects 143
Capital Budgeting Two General Problems Affecting Both
Independent and Mutually
Chapter 4 Exclusive Projects 143
Discounted Cash Flow Valuation 85 The Modified Internal Rate of
Return (MIRR) 146
4.1 Valuation: The One-Period Case 85
Problems Specific to Mutually
4.2 The Multiperiod Case 89
Exclusive Projects 148
Future Value and Compounding 89
Redeeming Qualities of IRR 153
The Power of Compounding: A Digression 92
A Test 153
Present Value and Discounting 93
5.6 The Profitability Index 153
Finding the Number of Periods 96
Calculation of Profitability Index 154
The Algebraic Formula 99
5.7 The Practice of Capital Budgeting 155
4.3 Compounding Periods 100
Summary and Conclusions 157
Distinction between Annual Percentage
Concept Questions 158
Rate and Effective Annual Rate 101
Questions and Problems 160
Compounding over Many Years 102
Excel Master It! Problem 167
Continuous Compounding 102
Mini Case: Bullock Gold Mining 168
4.4 Simplifications 104
Perpetuity 104
Growing Perpetuity 106 Chapter 6
Annuity 107
Growing Annuity 113
Making Capital Investment Decisions 169
4.5 Loan Amortization 114 6.1 Incremental Cash Flows: The Key
4.6 What Is a Firm Worth? 118 to Capital Budgeting 169
Summary and Conclusions 120 Cash Flows—Not Accounting Income 169
Concept Questions 121 Sunk Costs 170
Questions and Problems 121 Opportunity Costs 171
Excel Master It! Problem 131 Side Effects 171
Mini Case: The MBA Decision 132 Allocated Costs 172
Appendix 4A: Net Present Value: First 6.2 The Baldwin Company: An Example 172
Principles of Finance 132 An Analysis of the Project 175
Appendix 4B: Using Financial Calculators 132 Which Set of Books? 177
A Note about Net Working Capital 177
A Note about Depreciation 178
Chapter 5 Interest Expense 179
Net Present Value and Other 6.3 Alternative Definitions of Operating
Investment Rules 133 Cash Flow 179
The Top-Down Approach 180
5.1 Why Use Net Present Value? 133 The Bottom-Up Approach 180
5.2 The Payback Period Method 136 The Tax Shield Approach 181
Defining the Rule 136 Conclusion 182

xxiii
6.4 Some Special Cases of Discounted 8.2 Government and Corporate Bonds 245
Cash Flow Analysis 182 Government Bonds 245
Evaluating Cost-Cutting Proposals 182 Corporate Bonds 246
Setting the Bid Price 184 Bond Ratings 248
Investments of Unequal Lives: The 8.3 Bond Markets 249
Equivalent Annual Cost Method 186 How Bonds Are Bought and Sold 249
6.5 Inflation and Capital Budgeting 187 Bond Price Reporting 250
Interest Rates and Inflation 187 A Note on Bond Price Quotes 253
Cash Flow and Inflation 189 8.4 Inflation and Interest Rates 254
Discounting: Nominal or Real? 190 Real versus Nominal Rates 254
Summary and Conclusions 192 Inflation Risk and Inflation-Linked
Concept Questions 193 Bonds 255
Questions and Problems 194 The Fisher Effect 256
Excel Master It! Problems 203 8.5 Determinants of Bond Yields 258
Mini Case: Bethesda Mining Company 203 The Term Structure of Interest Rates 258
Bond Yields and the Yield Curve:
Putting It All Together 260
Chapter 7 Conclusion 262
Risk Analysis, Real Options, Summary and Conclusions 262
and Capital Budgeting 205 Concept Questions 262
Questions and Problems 263
7.1 Sensitivity Analysis, Scenario Analysis, Excel Master It! Problem 267
and Break-Even Analysis 205 Mini Case: Financing East Coast
Sensitivity Analysis and Scenario Analysis 206 Yachts’s Expansion Plans with
Break-Even Analysis 209 a Bond Issue 268
7.2 Monte Carlo Simulation 213
Step 1: Specify the Basic Model 213
Step 2: Specify a Distribution for
Chapter 9
Each Variable in the Model 214
Step 3: The Computer Draws One Stock Valuation 270
Outcome 216 9.1 The Present Value of Common Stocks 270
Step 4: Repeat the Procedure 217 Dividends versus Capital Gains 270
Step 5: Calculate NPV 217 Valuation of Different Types of Stocks 271
7.3 Real Options 218 9.2 Estimates of Parameters in
The Option to Expand 218 the Dividend Discount Model 275
The Option to Abandon 219 Where Does g Come From? 275
Timing Options 221 Where Does R Come From? 277
7.4 Decision Trees 222 A Healthy Sense of Skepticism 278
Summary and Conclusions 224 Dividends or Earnings: Which
Concept Questions 225 to Discount? 279
Questions and Problems 226 The No-Dividend Firm 279
Excel Master It! Problem 232 9.3 Comparables 280
Mini Case: Bunyan Lumber, LLC 233 Price-Earnings Ratio 280
Enterprise Value Ratios 282
Chapter 8 9.4 Valuing Stocks Using Free Cash Flows 284
9.5 The Stock Markets 285
Interest Rates and Bond Valuation 235 Dealers and Brokers 285
8.1 Bonds and Bond Valuation 235 Organization of the NYSE 286
Bond Features and Prices 235 Types of Orders 289
Bond Values and Yields 236 NASDAQ Operations 289
Interest Rate Risk 239 Stock Market Reporting 290
Finding the Yield to Maturity: More Trial Summary and Conclusions 291
and Error 241 Concept Questions 292
Zero Coupon Bonds 243 Questions and Problems 293

xxiv
 Excel Master It! Problem 296 11.6 Diversification 345
Mini Case: Stock Valuation The Anticipated and Unanticipated
at Ragan Engines 297 Components of News 345
Risk: Systematic and Unsystematic 346
The Essence of Diversification 347
PART III Risk The Effect of Diversification: Another
Lesson from Market History 348
Chapter 10 11.7 Riskless Borrowing and Lending 349
The Optimal Portfolio 351
Lessons from Market History 299
11.8 Market Equilibrium 353
10.1 Returns 299 Definition of the Market Equilibrium
Dollar Returns 299 Portfolio 353
Percentage Returns 301 Definition of Risk When Investors Hold
10.2 Holding Period Returns 303 the Market Portfolio 354
10.3 Return Statistics 309 The Formula for Beta 356
10.4 Average Stock Returns and A Test 357
Risk-Free Returns 310 11.9 Relationship between Risk and Expected
10.5 Risk Statistics 312 Return (CAPM) 357
Variance 312 Expected Return on the Market 357
Normal Distribution and Its Implications Expected Return on an Individual Security 358
for Standard Deviation 314 Summary and Conclusions 361
10.6 More on Average Returns 315 Concept Questions 361
Arithmetic versus Geometric Averages 315 Questions and Problems 362
Calculating Geometric Average Returns 315 Excel Master It! Problem 368
Arithmetic Average Return or Geometric Mini Case: A Job at East Coast
Average Return? 317 Yachts, Part 2 369
10.7 The U.S. Equity Risk Premium: Historical Appendix 11A: Is Beta Dead? 370
and International Perspectives 317
10.8 2008: A Year of Financial Crisis 320
Summary and Conclusions 321 Chapter 12
Concept Questions 322 An Alternative View of Risk
Questions and Problems 322 and Return 371
Excel Master It! Problem 325
Mini Case: A Job at East Coast Yachts 326 12.1 Systematic Risk and Betas 371
12.2 Portfolios and Factor Models 374
Portfolios and Diversification 377
Chapter 11 12.3 Betas, Arbitrage, and Expected Returns 379
Return, Risk, and the Capital The Linear Relationship 379
The Market Portfolio and the
Asset Pricing Model 328
Single Factor 380
11.1 Individual Securities 328 12.4 The Capital Asset Pricing Model
11.2 Expected Return, Variance, and the Arbitrage Pricing Theory 381
and Covariance 329 Differences in Pedagogy 381
Expected Return and Variance 329 Differences in Application 381
Covariance and Correlation 330 12.5 Empirical Approaches to Asset Pricing 383
11.3 The Return and Risk for Portfolios 334 Empirical Models 383
The Expected Return on a Portfolio 334 Style Portfolios 384
Variance and Standard Deviation Summary and Conclusions 385
of a Portfolio 335 Concept Questions 386
11.4 The Efficient Set for Two Assets 338 Questions and Problems 387
11.5 The Efficient Set for Many Securities 342 Excel Master It! Problem 391
Variance and Standard Deviation Mini Case: The Fama-French Multifactor
in a Portfolio of Many Assets 344 Model and Mutual Fund Returns 391

xxv
Chapter 13 Foundations of Market Efficiency 432
14.3 The Different Types of Efficiency 433
Risk, Cost of Capital, and Valuation 393 The Weak Form 433
13.1 The Cost of Capital 393 The Semistrong and Strong Forms 434
13.2 Estimating the Cost of Equity Capital Some Common Misconceptions about
with the CAPM 394 the Efficient Market Hypothesis 436
The Risk-Free Rate 397 14.4 The Evidence 437
Market Risk Premium 397 The Weak Form 437
13.3 Estimation of Beta 398 The Semistrong Form 438
Real-World Betas 399 The Strong Form 441
Stability of Beta 399 14.5 The Behavioral Challenge
Using an Industry Beta 401 to Market Efficiency 442
13.4 Determinants of Beta 402 Rationality 442
Cyclicality of Revenues 402 Independent Deviations from Rationality 444
Operating Leverage 402 Arbitrage 445
Financial Leverage and Beta 403 14.6 Empirical Challenges to Market
13.5 The Dividend Discount Model Approach 404 Efficiency 446
Comparison of DDM and CAPM 405 14.7 Reviewing the Differences 451
13.6 Cost of Capital for Divisions 14.8 Implications for Corporate Finance 453
and Projects 406 1. Accounting Choices, Financial Choices,
13.7 Cost of Fixed Income Securities 408 and Market Efficiency 453
Cost of Debt 408 2. The Timing Decision 454
Cost of Preferred Stock 409 3. Speculation and Efficient Markets 455
13.8 The Weighted Average Cost of Capital 410 4. Information in Market Prices 457
13.9 Valuation with WACC 411 Summary and Conclusions 459
Project Evaluation and the WACC 412 Concept Questions 460
Firm Valuation with the WACC 412 Questions and Problems 463
13.10 Estimating Eastman Chemical’s Mini Case: Your 401(k) Account at
Cost of Capital 415 East Coast Yachts 466
13.11 Flotation Costs and the Weighted
Average Cost of Capital 417
The Basic Approach 417 Chapter 15
Flotation Costs and NPV 418 Long-Term Financing 468
Internal Equity and Flotation Costs 419
15.1 Some Features of Common
Summary and Conclusions 420
and Preferred Stocks 468
Concept Questions 420
Common Stock Features 468
Questions and Problems 422
Preferred Stock Features 471
Mini Case: Cost of Capital for
15.2 Corporate Long-Term Debt 472
Swan Motors 426
Is It Debt or Equity? 473
Appendix 13A: Economic Value Added
Long-Term Debt: The Basics 473
and the Measurement of
The Indenture 475
Financial Performance 427
15.3 Some Different Types of Bonds 478
Floating-Rate Bonds 478
Other Types of Bonds 478
PART IV Capital Structure 15.4 Bank Loans 479
and Dividend Policy 15.5 International Bonds 480
15.6 Patterns of Financing 480
Chapter 14 15.7 Recent Trends in Capital Structure 482
Efficient Capital Markets Which Are Best: Book or Market
Values? 482
and Behavioral Challenges 428
Summary and Conclusions 483
14.1 Can Financing Decisions Create Value? 428 Concept Questions 484
14.2 A Description of Efficient Capital Markets 430 Questions and Problems 485

xxvi
Chapter 16 17.6 Shirking, Perquisites, and Bad Investments:
A Note on Agency Cost of Equity 533
Capital Structure 487 Effect of Agency Costs of Equity
16.1 The Capital Structure Question on Debt-Equity Financing 535
and the Pie Theory 487 Free Cash Flow 535
16.2 Maximizing Firm Value versus 17.7 The Pecking-Order Theory 536
Maximizing Stockholder Interests 488 Rules of the Pecking Order 537
16.3 Financial Leverage and Firm Value: Implications 538
An Example 490 17.8 Personal Taxes 539
Leverage and Returns to Shareholders 490 The Basics of Personal Taxes 539
The Choice between Debt and Equity 492 The Effect of Personal Taxes on
A Key Assumption 494 Capital Structure 539
16.4 Modigliani and Miller: Proposition II 17.9 How Firms Establish Capital
(No Taxes) 494 Structure 540
Risk to Equityholders Rises with Summary and Conclusions 545
Leverage 494 Concept Questions 546
Proposition II: Required Return to Questions and Problems 546
Equityholders Rises with Leverage 495 Mini Case: McKenzie Corporation’s
MM: An Interpretation 501 Capital Budgeting 549
16.5 Taxes 503 Appendix 17A: Some Useful Formulas
The Basic Insight 503 of Financial Structure 550
Present Value of the Tax Shield 505 Appendix 17B: T  he Miller Model and the
Value of the Levered Firm 506 Graduated Income Tax550
Expected Return and Leverage
under Corporate Taxes 508
The Weighted Average Cost of Capital, Chapter 18
WACC, and Corporate Taxes 509 Valuation and Capital Budgeting
Stock Price and Leverage under for the Levered Firm 551
Corporate Taxes 510
Summary and Conclusions 512 18.1 Adjusted Present Value Approach 551
Concept Questions 512 18.2 Flow to Equity Approach 553
Questions and Problems 513 Step 1: Calculating Levered Cash
Mini Case: Stephenson Real Estate Flow (LCF) 553
Recapitalization 518 Step 2: Calculating RS 554
Step 3: Valuation 554
18.3 Weighted Average Cost
Chapter 17 of Capital Method 554
18.4 A Comparison of the APV, FTE,
Capital Structure 519
and WACC Approaches 555
17.1 Costs of Financial Distress 519 A Suggested Guideline 556
Bankruptcy Risk or Bankruptcy Cost? 519 18.5 Valuation When the Discount Rate
17.2 Description of Financial Distress Costs 521 Must Be Estimated 558
Direct Costs of Financial Distress: Legal 18.6 APV Example 560
and Administrative Costs of Liquidation 18.7 Beta and Leverage 563
or Reorganization 521 The Project Is Not Scale Enhancing 565
Indirect Costs of Financial Distress 523 Summary and Conclusions 566
Agency Costs 524 Concept Questions 566
17.3 Can Costs of Debt Be Reduced? 527 Questions and Problems 567
Protective Covenants 527 Mini Case: The Leveraged Buyout
Consolidation of Debt 528 of Cheek Products, Inc. 571
17.4 Integration of Tax Effects and Financial Appendix 18A: The Adjusted Present Value
Distress Costs 529 Approach to Valuing
Pie Again 530 Leveraged Buyouts 572
17.5 Signaling 531

xxvii
Chapter 19 PART V Long‐Term
Dividends and Other Payouts 573 Financing
19.1 Different Types of Payouts 573
19.2 Standard Method of Cash Chapter 20
Dividend Payment 574 Raising Capital 612
19.3 The Benchmark Case: An Illustration
of the Irrelevance of Dividend Policy 576 20.1 Early-Stage Financing and
Current Policy: Dividends Set Equal Venture Capital 612
to Cash Flow 576 Venture Capital 613
Alternative Policy: Initial Dividend Stages of Financing 614
Is Greater Than Cash Flow 576 Some Venture Capital Realities 615
The Indifference Proposition 577 Venture Capital Investments and
Homemade Dividends 577 Economic Conditions 616
A Test 578 20.2 The Public Issue 616
Dividends and Investment Policy 579 Direct Listing 617
19.4 Repurchase of Stock 579 Crowdfunding 617
Dividend versus Repurchase: Conceptual Initial Coin Offerings (ICOs) 619
Example 581 20.3 Alternative Issue Methods 620
Dividends versus Repurchases: 20.4 The Cash Offer 621
Real-World Considerations 582 Investment Banks 623
19.5 Personal Taxes, Dividends, The Offering Price 625
and Stock Repurchases 583 Underpricing: A Possible Explanation 625
Firms without Sufficient Cash to Pay Evidence on Underpricing 627
a Dividend 583 The Partial Adjustment Phenomenon 628
Firms with Sufficient Cash to Pay 20.5 The Announcement of New Equity
a Dividend 584 and the Value of the Firm 629
Summary of Personal Taxes 586 20.6 The Cost of New Issues 630
19.6 Real-World Factors Favoring The Costs of Going Public: A Case
a High-Dividend Policy 587 Study 632
Desire for Current Income 587 20.7 Rights 634
Behavioral Finance 587 The Mechanics of a Rights Offering 634
Agency Costs 588 Subscription Price 634
Information Content of Dividends Number of Rights Needed to Purchase
and Dividend Signaling 589 a Share 635
19.7 The Clientele Effect: A Resolution Effect of Rights Offering on Price
of Real-World Factors? 591 of Stock 635
19.8 What We Know and Do Not Know Effects on Shareholders 636
about Dividend Policy 593 The Underwriting Arrangements 637
Corporate Dividends Are Substantial 593 20.8 The Rights Puzzle 638
Fewer Companies Pay Dividends 594 20.9 Dilution 639
Corporations Smooth Dividends 595 Dilution of Percentage Ownership 639
Some Survey Evidence about Dividends 597 Dilution of Stock Price 639
19.9 Putting It All Together 598 Dilution of Book Value 640
19.10 Stock Dividends and Stock Splits 600 Dilution of Earnings Per Share 641
Some Details about Stock Splits Conclusion 641
and Stock Dividends 600 20.10 Shelf Registration 641
Value of Stock Splits and Stock Dividends 602 20.11 Issuing Long-Term Debt 642
Reverse Splits 603 Summary and Conclusions 643
Summary and Conclusions 604 Concept Questions 643
Concept Questions 604 Questions and Problems 645
Questions and Problems 606 Mini Case: East Coast Yachts
Mini Case: Electronic Timing, Inc. 610 Goes Public 648

xxviii
Another random document with
no related content on Scribd:
 CHAPITRE VI
SUR LA PIERRE BRUNE

Ce fut seulement plus tard que je pus me rendre compte de la

durée de cette léthargie. Quand je m’en éveillai pour la première
fois, il me parut également possible qu’elle se fût poursuivie pendant
des mois ou pendant une heure. Les événements qui l’avaient
précédée étaient si vagues et si extraordinaires que je ne trouvai
d’abord en eux nul point où rattacher mes sensations et mes
pensées présentes.
La seule impression précise que j’eus fut que ce sommeil aurait
encore pu se prolonger longtemps, que c’était accidentellement et
non par suite de ma satiété qu’il avait pris fin. Je pensai à de
lointaines aubes de mon enfance où un domestique ayant besoin
d’entrer dans ma chambre allait et venait un instant en atténuant
soigneusement le bruit de ses pas ; quand le silence redevenait
absolu, je m’apercevais soudain que mes yeux étaient ouverts… Il
avait dû se passer quelque chose d’analogue. Je me rappelle m’être
levé en sursaut, avoir regardé avec effarement tout autour de moi :
Ceintras ronflait, calé dans un coin de la chambre de chauffe, le
buste droit, les jambes étendues, les mains jointes, la bouche
ouverte et le front creusé d’une ride : un sommeil pénible et qu’on
devinait peuplé de cauchemars. Par les hublots entraient des flots
de lumière violette : il faisait « jour ».
 Puis ce fut une terrible angoisse : où étions-nous ? Qu’était
devenu le ballon livré à lui-même pendant le temps peut-être long
qu’avait duré l’inconscience de ses pilotes ? J’ouvris la porte… Le
ballon reposait sur le sol, sur ce sol du Pôle où, la veille, nous
n’avions pas osé atterrir. Dominant mon appréhension je descendis,
fis le tour de la machine et un examen sommaire m’assura que nul
organe n’avait souffert, le moteur s’était arrêté uniquement faute
d’essence ; l’enveloppe semblait un peu flasque, mais cela n’était
rien et, sitôt que le moteur serait remis en marche, il suffirait d’ouvrir
le robinet d’air chaud pour reprendre notre vol.
Je me disposais à aller réveiller Ceintras et à l’avertir lorsqu’un
fait me frappa auquel je n’avais tout d’abord pas pris garde : le
ballon reposait sur ses amortisseurs d’une manière aussi stable que
s’il avait été attaché par de nombreuses et solides amarres ; je
remarquai alors que nous avions atterri sur une longue pierre
rectangulaire et brune et que les amortisseurs y adhéraient
irrésistiblement ; on aurait dit qu’ils y étaient soudés ; pourtant, étant
donnée la quantité d’hydrogène qui, visiblement, existait encore
dans l’enveloppe, la force ascensionnelle ne pouvait être de
beaucoup inférieure à la force d’inertie représentée par le poids brut
de l’appareil ; par conséquent un très léger effort aurait dû suffire
pour déplacer ou soulever le ballon ; mais ce fut en vain que je
voulus le faire, de la main d’abord, puis en utilisant comme levier le
canon de ma carabine que j’avais emportée par prudence.
Au bout de quelques minutes, il me parut évident que cette
adhérence du ballon à la pierre et l’obstacle mystérieux qui la veille
avait entravé notre marche étaient en relation immédiate. Et j’eus
dès lors le sentiment très net d’une intelligence cachée qui nous
avait longuement épiés, pris au piège et qui dès cet instant nous
dominait.
Nous n’étions pas seuls. Preuve tangible, irréfutable, le haut
disque de métal brillait d’un éclat terne à quelques mètres de moi.
J’entendis soudain, dans les épais fourrés de cactus et de fougères,
un bruit qui me fit monter le cœur à la gorge… J’épaulai mon arme
et m’avançai en tremblant : de nouveau les feuilles s’agitèrent à dix
mètres environ sur ma gauche. Le coup partit presque malgré
moi !… Plus rien… Puis je m’aperçus que ma peur avait créé des
fantômes et que dans les brusques frémissements des fourrés le
vent seul avait été pour quelque chose ; il venait de se lever et
arrivait de la banquise en bouffées glaciales qui, dans la tiédeur du
Pôle, me piquaient par instant au visage et aux mains comme
l’eussent fait de menus et lancinants coups de couteaux.
Ceintras, au bruit de la détonation, apparut sur la galerie. Je
courus à lui et le mis au courant de tout ce que j’avais constaté
depuis mon réveil. Il se contenta de hocher la tête et ne répondit
pas ; il semblait parfaitement ahuri. Alors je lui demandai en affectant
l’air le plus détaché et le plus tranquille du monde :
— As-tu bien dormi ?
Il me parut chercher péniblement des mots :
— Mal, très mal… C’est une chose étrange… je me souviens
d’avoir subi jadis une opération pour laquelle on fut obligé
d’employer le chloroforme…
— Eh bien ?
— Eh bien, j’ai eu cette nuit l’impression d’un sommeil analogue
à celui où l’on tombe sous l’influence du chloroforme, d’un sommeil
qui accable odieusement et durant lequel, si profond soit-il, on garde
toujours une lueur de conscience pour se rendre compte qu’on est
un esclave…
— On est comme entravé, ligoté par mille chaînes, on fait des
efforts désespérés pour les rompre et l’on sait pourtant qu’il n’y a
qu’à attendre le bon vouloir d’un maître…
— C’est cela ; et puis, pour comble, des cauchemars affreux se
sont abattus sur moi…
— Quels cauchemars ?
— Comment te dire ? il me semblait que je tombais lentement
dans quelque abîme sous-marin, au milieu de pieuvres
gigantesques, et je sentais par instant contre ma peau le frôlement
de leurs tentacules…
 Il se recueillit une minute, puis :
— J’ai peut-être tort, dit-il, de parler de cauchemar : cela
ressemblait moins à une chose rêvée qu’à une sensation réelle
perçue dans une demi-conscience.
Je ne pus me garder d’un frisson ; les paroles de Ceintras
avaient illuminé tout à coup en moi un souvenir obscur et, à présent,
j’étais à peu près sûr de m’être débattu quelques instants
auparavant dans un cauchemar qui ressemblait au sien…
Seulement les pieuvres y avaient été remplacées par des chauves-
souris ou des vampires. La coïncidence était tout au moins étrange
et si de part et d’autre les rêves n’avaient reposé sur rien de réel, il
fallait conclure à un cas de télépathie. Mais une conclusion plus
logique et plus effrayante s’imposait, à savoir que des êtres vivants,
hôtes de ces régions, des êtres d’une intelligence et d’une puissance
qui dès cet instant m’apparaissaient prodigieuses, nous avaient
attirés jusqu’à eux en utilisant par des procédés qui m’échappaient
une énorme force magnétique ; puis, désireux de nous observer, ils
s’étaient approchés de nous durant notre sommeil : un sommeil
qu’ils avaient peut-être provoqué artificiellement.
Allais-je faire part à Ceintras du point où venaient d’aboutir mes
inductions ?… J’eus pitié de lui. Il s’était laissé tomber sur un rocher
et ses yeux vacillants et vagues se fixaient en deçà ou au delà des
objets qu’ils regardaient ; son attitude trahissait un accablement
infini ; j’avais l’impression très nette d’assister à une effrayante
agonie morale, et je tentai de faire appel à son initiative dans l’espoir
de le remonter, de le remettre en possession de lui-même :
— Que comptes-tu faire ? lui demandai-je.
— Je ne sais pas, je vais voir…
Il fit quelques pas, s’avança vers le ballon et sauta sur la pierre
brune où les amortisseurs adhéraient. Je le vis alors s’agiter, se
balancer comme pour prendre son élan et retomber gauchement sur
ses mains sans que ses pieds eussent bougé d’un centimètre. Je
m’élançai à son secours.
 — N’approche pas, pour Dieu ! n’approche pas, s’écria-t-il en
hurlant comme une bête prise au piège.
Mais j’étais déjà sur la pierre où je continuais comme je l’avais
fait auparavant à pouvoir aller et venir sans encombre. Ceintras, lui,
était aussi incapable d’y faire un pas que si ses pieds y eussent été
du premier coup inexorablement rivés.
— Est-ce que tu souffres ? fis-je en essayant vainement de le
dégager.
— Non, évidemment non, mais ils vont venir, à présent, et
s’emparer de moi… Sauve-toi, au plus vite ; seulement, de grâce,
tue-moi avant de partir, ne me laisse pas tomber vivant entre leurs
mains… un coup de carabine… là… entre les deux yeux… fais
vite !…
— Tu parles comme un fou, répondis-je en haussant les épaules.
Et puis, tiens ! essaye de te déchausser, je crois que cela m’évitera
de te donner la mort.
Il obéit sans comprendre encore et son trouble seul l’empêcha de
tirer facilement ses pieds hors de ses souliers délacés.
— Emporte-moi, s’écria-t-il ensuite, ne me laisse pas toucher le
sol puisque leur damné sortilège ne semble pas avoir prise sur toi…
J’éclatai de rire :
— Tu peux être tranquille : le sortilège n’avait prise que sur tes
souliers, probablement parce que leurs semelles étaient ferrées…
On connaît à présent suffisamment Ceintras pour ne pas trouver
extraordinaire que l’heureuse issue de cette aventure l’ait fait passer
d’un excès de découragement à une joie exagérée et en tous cas
intempestive… Quant à sa confiance dans l’avenir, qu’il manifesta
aussitôt à grand renfort de gestes et d’éclats de voix, elle eût
réconforté le plus abattu des mortels, si ce mortel n’avait vécu
depuis près d’un an dans l’intimité du pauvre diable…
— Un aimant !… Ils voulaient nous attraper à l’aide d’un aimant !
Ils s’imaginaient que nous en ignorions les propriétés… Au fait, ils
doivent être encore plus effrayés que nous : pourquoi se
cacheraient-ils s’il en était autrement ? Est-ce que je me cache,
moi ? Est-ce que je me cache ? Ah ! Ah ! Ah ! Qu’ils se montrent donc
un peu ! Je les attends… Je me promets de leur faire passer pour
longtemps l’envie de nous jouer de vilains tours.
Je crus bon de réfréner légèrement cet enthousiasme :
— Mais, dis donc, le ballon ?… comment comptes-tu le tirer de
là ?
Ceintras n’était pas embarrassé pour si peu.
— Le ballon… Ah ! oui !… Eh bien, nous déboulonnerons les
amortisseurs, et pffft !… Le ballon délesté fera un petit bond d’un
millier de mètres dans l’atmosphère… Qu’ils viennent nous y
chercher… Ils pourront garder les amortisseurs en souvenir de nous,
ainsi que ma paire de souliers !… Nous en serons quittes pour ne
plus atterrir jusqu’à notre retour ou pour n’atterrir qu’avec une
extrême prudence… Tiens ! parlons d’autre chose : j’ai faim.
Cuisinier, à tes fourneaux !
Le repas fut abondant, bien arrosé et fort gai. Lorsqu’une cause
de tristesse ou de peur persiste un peu plus de vingt-quatre heures,
il est inévitable qu’une détente se produise dans l’esprit de ceux qui
subissent cette tristesse ou cette peur. Nous apportâmes à manger,
à boire et à deviser un entrain qui n’avait rien de factice, qui n’était
nullement dû au désir plus ou moins conscient de nous étourdir,
mais qui venait du fond le plus sincère de nous-mêmes… Nous nous
étions à moitié accoutumés à l’étrange paysage, nous ne pensions
plus à nous inquiéter des mystères qui nous entouraient et, dans la
clarté violette du Pôle, confortablement installés sur les fougères,
auprès du fleuve couleur d’argent bruni, nous débouchions du
champagne avec autant de plaisir que nous eussions pu le faire au
bord de la Seine ou de l’Oise, sous un ciel limpide et léger d’Ile-de-
France.
Réconfortés moralement et physiquement, nous résolûmes d’un
commun accord d’aller à la découverte.
 CHAPITRE VII
CEINTRAS ÉGARE SON OMBRE ET SA RAISON

Nous longeâmes le fleuve sur une distance d’un demi-mille

environ. Le silence était si grand que le bruit de nos pas et le
clapotement de l’eau semblaient suffire à remplir le ciel.
Quel était ce fleuve ? d’où venait-il ? où allait-il ?… Autant de
questions que nous nous posions vaguement et que nous étions, du
reste, parfaitement incapables de résoudre. Quand nous regardions
derrière nous, il paraissait, là-bas, très loin, après des lieues et des
lieues de plaine, sortir de la brume et probablement de la banquise ;
en face, à cent mètres en aval, il s’évanouissait derrière une arête
de rochers bleuâtres, abrupts et déchiquetés, le seul accident qui
rompît la monotonie de l’immensité plate…
Comme si ces rochers avaient abrité les plantes de quelque
chose qui, partout ailleurs, les eût empêchées de s’élever librement,
les végétations, à leur base, devenaient peu à peu arborescentes. A
notre approche, des oiselets, qui perchaient dans cette sorte de
bocage, prirent leur vol avec des pépiements aigus dans la direction
des rochers, puis firent un brusque détour et passèrent en tourbillon
au-dessus de nos têtes. Ils avaient de longs becs, des ailes azurées
et ne différaient guère de nos martins-pêcheurs.
Nous atteignîmes le sommet de la colline par une rampe de rocs
éboulés qui surplombaient les eaux mêmes du fleuve et, de là, nous
pûmes contempler le panorama polaire. De circulaires murailles de
brumes le limitaient sur tous les points et formaient les parois
diaphanes d’un immense vase dans lequel la clarté violette eût
bouillonné comme une liqueur. Elle se diluait au fluide
atmosphérique dans des proportions qui devaient, pour d’obscures
raisons, varier selon les lieux et les heures, car, lorsque le vent
soufflait avec quelque violence, on voyait véritablement bouger l’air.
La colline, abrupte du côté par lequel nous étions arrivés, rejoignait
la plaine, devant nous en pente douce, et longtemps, le fleuve
coulait entre de hautes falaises argileuses et bleues. A notre droite,
dans une échancrure de la muraille brumeuse, l’œil terne du soleil
avait l’air de s’ouvrir avec indifférence, sur ce pays qui n’était pas
son domaine. Çà et là, jalonnant l’immensité de la plaine et du
plateau, étaient dressés des disques pareils à celui que j’avais vu le
soir même de notre arrivée au Pôle.
Tournant le dos au fleuve, nous poursuivîmes notre excursion en
restant à mi-pente de la colline. De bizarres fleurs aux calices
charnus et contournés poussaient dans les anfractuosités du sol.
Puis, sous l’auvent d’un éboulis branlant, nous découvrîmes une
étroite caverne, ouverte comme une plaie dans la chair rocheuse du
coteau ; de petits cris brefs et perçants s’en échappèrent à notre
passage ; je m’arrêtai, indécis, interrogeant Ceintras du regard ; mais
celui-ci, que son entrain et son énergie n’avaient pas abandonné
encore, s’avança résolument et me dit :
— Il faut entrer.
Je le suivis, et je constatai avec stupéfaction que dans ce couloir
aux parois tortueuses il faisait aussi clair qu’au dehors : la lumière
violette, en s’y répandant, pénétrait dans les moindres recoins,
chassant l’ombre de partout. Les cris, dans le fond, redoublèrent au
bruit de nos pas ; puis ce furent d’éperdus battements d’ailes et des
bêtes passèrent au-dessus de nos têtes en les frôlant ; je dis « des
bêtes » parce que je fus, dans le premier moment, incapable de leur
donner un nom plus précis.
Brusquement, d’un coup de crosse, Ceintras en abattit une qui
restait encore accrochée à la voûte de la caverne. Elle pouvait avoir
vingt centimètres de longueur, sa tête ressemblait à celle d’un
serpent, mais la gueule était plus épaisse et plus large ; les ailes
étaient constituées par des membranes de couleur verdâtre, et me
parurent, pour le reste, analogues à celles de nos chauves-souris.
— C’est un chéiroptère d’espèce inconnue, m’écriai-je.
— Non, répondit simplement Ceintras en palpant l’animal.
— Pourtant, l’aspect général… et ces ailes…
— Ces ailes ne sont nullement des ailes de chauves-souris.
Regarde : elles ne sont pas soutenues par les quatre doigts, mais
seulement par le doigt extérieur, qui est démesurément allongé ; les
autres ne servent à la bête que pour se suspendre… Puis les
membres antérieurs sont plus grands, la tête est plus développée, la
mâchoire cornée et garnie d’une multitude de dents aiguës… et
puis… et puis, ça n’a pas de poil… ni poils ni plumes… Alors…
— Quoi ?
Sans répondre il fouilla dans ses poches, y prit un couteau, ouvrit
fébrilement le corps de l’animal, en sortit le cœur et le coupa.
— C’est bien cela : deux oreillettes et un seul ventricule : un
reptile !
— Un reptile qui vole ?
— Certainement, fit-il un peu pâle… Il y en a déjà eu…
— Quand cela ?
— Il y a des milliers et des milliers d’années. Celui-ci appartient à
une espèce qu’on croyait disparue, et, si mes souvenirs ne me
trompent pas, c’est tout bonnement un ptérodactyle que j’ai entre les
mains…
Ce nom scientifique me rappela des souvenirs de collège ; je
revis les animaux monstrueux des vieux âges dont les figures, sur
les manuels de paléontologie, avaient frappé si fort mon imagination.
Et je m’écriai :
— C’est enthousiasmant, c’est magnifique ! Il faut en attraper de
vivants et les emporter avec nous.
 Ceintras s’était assis sur une pierre. Tenant toujours la bestiole
éventrée et sanglante à la main, il regardait droit devant lui, dans le
vague. Le bruit de mes paroles le fit sursauter.
— Les emporter… Où donc les emporter ? demanda-t-il.
— Mais… dans le ballon. Qu’est-ce que cette idée a
d’extraordinaire ?
Il secoua la tête, fit un geste vague et, d’une voix étrange :
— On ne peut pas empêcher ce qui a été d’être encore,
murmura-t-il comme en s’adressant à lui-même… Ce qui a été se
cache, mais existe encore quelque part… Et quelquefois on le
rencontre, on le trouve… Mais alors c’est que soi-même on a été, et
on ne peut plus revenir vers ce qui est ; car ce qui est ne
communique pas avec ce qui a été… ou bien c’est si loin, si loin qu’il
faudrait des siècles, des siècles, plus que des siècles pour en
revenir…
— Qu’est-ce que tu racontes ? interrompis-je avec anxiété.
Il tressaillit ; puis ses yeux perdirent leur fixité nébuleuse ; il se
redressa, se ressaisit et me dit en affectant de rire :
— Ce que je racontais ? Des choses qui chantaient dans ma tête,
des bêtises !… mais ne nous éternisons pas là-dessous.
Je pensai qu’il avait voulu se rendre intéressant, ou se moquer
de moi, et je ne jugeai pas utile d’insister. Après avoir vainement
cherché d’autres ptérodactyles, — ils n’avaient pas cru devoir rester
dans la caverne à notre disposition, — nous regagnâmes la sortie.
Soudain Ceintras, qui marchait un peu devant moi, s’arrêta,
regarda de tous les côtés et s’écria dans un grand geste de folie et
de désespoir :
— Mon ombre ! Où est mon ombre ?
La question me parut si saugrenue que je restai un instant ahuri
et incapable de rien répondre. Puis, jetant les yeux sur le sol, je
m’aperçus que ni l’ombre de Ceintras ni la mienne ne se projetaient
nulle part ; les objets étaient aussi éclairés en haut qu’en bas, à
droite qu’à gauche… Et, jusque-là, nous ne nous étions pas rendu
compte que c’était cette absence absolue d’ombres qui, plus encore
que la coloration de la lumière diffuse dans l’atmosphère, donnait au
paysage son caractère de rêve, d’impossibilité, tout au moins
d’étrangeté hallucinante.
— Mon ombre ! Où est mon ombre ? hurlait toujours Ceintras en
se tournant dans tous les sens.
Je crus qu’il continuait à plaisanter et, pour mettre fin à cette
comédie énervante :
— En voilà assez ! lui dis-je. Une fois admis que cette lumière ne
vient d’aucune source précise et qu’elle est une propriété de l’air en
cet endroit de la terre, il est tout naturel qu’elle soit partout, comme
l’air, et qu’il n’y ait d’ombre nulle part.
Il baissa la tête comme un enfant pris en faute et, après s’être
recueilli un instant, répondit sur un ton d’humilité presque honteuse :
— Ne fais pas attention… j’étais comme accablé, dans celle
caverne ; j’ai mal à la tête, et c’est très pénible de penser… presque
aussi pénible que de se mouvoir.
— Le fait est, avouai-je, qu’il me semble avoir moi aussi des
membres de plomb.
Après que nous eûmes fait quelques pas, cette impression de
lourdeur s’atténua un peu. Nous rejoignîmes le cours du fleuve et
descendîmes sur la berge, au pied même de la colline. Alors
Ceintras s’agenouilla, et penché sur l’eau comme une bête but à
longues gorgées.
— C’est tout de même de l’eau, dit-il en se relevant ; seulement il
ne fait pas bon s’y mirer, nous avons d’effrayants visages.
Et comme je m’informais de sa santé :
— Ça va beaucoup mieux, répondit-il. Mais il y a loin d’ici au
ballon, je suis un peu fatigué encore… Arrêtons-nous une minute,
veux-tu ?
Nous nous assîmes côte à côte, les pieds pendant au-dessus de
l’eau. Et, durant quelque temps, chacun de nous s’absorba en lui-
même.
 — Vois-tu, dis-je ensuite à Ceintras qui, le menton dans les
mains, paraissait réfléchir, ce paysage me rappelle ceux que je
dessinais, quand j’étais gamin, pour me distraire : dans mes
peintures tout était plat et au même plan, parce que je ne savais pas
les ombrer.
— Oui, répondit-il, ce n’est que par l’ombre que nous pouvons
percevoir le relief… Je me souviens à présent que, tout à l’heure,
nous n’avons découvert la colline que quand nous nous sommes
trouvés à sa base… Nous ne distinguons dans ce paysage que les
différences de couleurs et cela nous trouble… et il nous est bien
difficile de nous rendre compte… Aussi, a-t-on idée de ça ? une
damnée lumière qui arrive de partout !…
Encore quelques minutes de silence. Ceintras reprit :
— Il y a une impression dont je ne puis me défendre : malgré
moi, en considérant ce qui nous entoure, je pense à quelque chose
d’artificiel, de truqué ; cette lumière me rappelle celle que les
machinistes de nos théâtres font ruisseler à flots sur certains décors
de féeries… Ici aussi il doit y avoir des machinistes, disposant
d’énormes forces magnétiques ou électriques, maîtres d’un fluide qui
peut rendre l’air lumineux et l’échauffer jusqu’à une température
clémente… Voilà ! seulement ils manquent totalement de sens
artistique… Eux non plus ne savent pas ombrer !… Et c’est
désagréable, même fatigant, très fatigant…
— Est-ce que tu souffres ? lui demandai-je, inquiet de son air de
lassitude.
— Non, fit-il ; seulement, je te l’ai déjà dit, cette lumière me gêne
pour penser ; il me semble qu’elle pénètre en moi, qu’elle désagrège
et éparpille toutes mes idées ; je suis obligé de faire effort pour les
tenir réunies. Et pourtant je voudrais pouvoir penser, j’ai besoin de
penser pour essayer de découvrir ce qu’ils sont.
Il s’animait, et bientôt sa volubilité devint telle qu’il me fut
impossible de placer un mot.
— Oui, qu’est-ce qu’ils sont ? Où peuvent-ils bien se cacher ?
Pas une maison, pas un édifice… Et pourtant ils existent
indubitablement : ces disques de métal, l’entravement mystérieux de
notre ballon… Dis donc, peut-être qu’ils sont invisibles ?…
Je haussai les épaules. Il se leva, fit quelques pas le long du
fleuve, et, soudain, poussa un cri :
— Viens voir : une porte !…
J’accourus. Ceintras me désigna du doigt une plaque de métal
enchâssée dans un enfoncement de la falaise rocheuse. Stupéfait,
je frappai machinalement trois coups contre la plaque ; l’écho du son
sembla retentir à l’infini dans les profondeurs de la terre.
— C’est creux, fis-je en baissant instinctivement la voix.
— Une porte !… C’est une porte ! s’écria Ceintras, et c’est sous la
terre qu’ils ont leur domicile. Voilà pourquoi nous ne les apercevions
nulle part !
— Si on rentrait ? proposai-je.
— Diable ! fit-il avec un léger mouvement de recul, cela me
semble un peu téméraire.
— Je n’en disconviens pas, répondis-je, Cependant, ces hommes
du Pôle sont intelligents, civilisés… Il n’y a que des créatures
raisonnables pour façonner les métaux, asservir les forces de la
nature… Et des créatures raisonnables, comme ils sont et comme
nous sommes, doivent toujours finir par s’entendre…
— Mais…
— Laisse-moi parler. Il n’y a pas d’hésitation possible. Notre
ballon est cloué au sol par leur volonté. Il faudra tôt ou tard, — et le
plus tôt sera le mieux — les aborder, même s’ils se dérobent… Lier
commerce avec eux, parvenir à nous en faire comprendre, obtenir
notre délivrance, c’est la meilleure ligne de conduite à suivre ; c’est
même, si tu veux savoir toute ma pensée, là-dessus que je fonde
mon unique espoir de sortir d’ici.
— Soit, je te suivrai, dit Ceintras après quelques secondes de
réflexion ; mais il faut d’abord ouvrir la porte.
— Cela ne sera pas difficile : je ne vois ni loquet, ni serrure ; les
voleurs ne doivent pas être à craindre, dans ce pays-ci !
 Or, malgré tous nos efforts, la porte ne s’ouvrit pas. Elle adhérait
irrésistiblement à son châssis métallique. Cette fois, instruits par de
précédentes expériences, nous comprîmes vite ce qu’il en était : le
peuple du Pôle usait de courants magnétiques en guise de serrures
et de clefs !
— Qu’est-ce que tu veux, dit Ceintras qui avait essayé d’ouvrir la
porte avec ardeur dès l’instant où il avait compris que c’était
impossible, qu’est-ce que tu veux ! nous sommes bien forcés de
remettre à plus tard l’exécution de tes projets…
Il ne paraissait pas en être autrement affecté. Il s’assit, se remit
debout, fit encore quelques pas en sifflotant, puis finalement
s’étendit de tout son long, à plat ventre, devant la porte. Moi,
cependant, assis à quelques pas de lui, j’échafaudais divers plans
ingénieux, audacieux, mais un peu vagues : il fallait nous emparer
d’un de ces hommes qui mettaient une insistance désagréable à
nous avoir pour hôtes et le garder comme otage pour obliger les
autres à se rendre à nos désirs. Comment parviendrions-nous à
mettre la main sur lui, c’était une question que je jugeais superflu
d’approfondir pour l’heure… Une nouvelle exclamation de Ceintras
vint me tirer de ces rêveries :
— Ces empreintes… regarde ces empreintes dans l’argile !
— Il y en a partout, dis-je en me baissant. Mais comment se fait-il
que nous ne nous en soyons pas aperçus plus tôt ?
— C’est sans doute à cause de cette lumière, de cette maudite
lumière, grommela Ceintras.
L’argile moite et souple avait nettement gardé la trace des pas
d’un animal. Çà et là on voyait aussi des sillons comme en eussent
pu laisser derrière elles des queues traînantes. Plus loin, dans une
éclaboussure boueuse, s’était moulé partiellement le corps d’une de
ces bêtes qui avait dû tomber là ou s’étendre de toute sa longueur.
— Qu’est-ce que cela peut bien être ? demandai-je à Ceintras.
— Un pas ici, un autre là, dit-il en observant attentivement le
sol… cela m’a tout l’air d’une trace de bipède, du plutôt d’un animal
qui utilise uniquement pour marcher ses membres postérieurs et sa
queue : quelque chose comme un kanguroo… Cependant cette
empreinte en forme de feuilles de lierre… Je crois me rappeler…
Attends… Mais oui ! C’est tout à fait semblable, en plus petit, aux
empreintes fossiles que nous possédons de l’iguanodon…
— L’iguanodon ?
— Oui, encore un monstre des vieux âges ! Nous avons fait, en
venant ici, un saut formidable dans le passé… Des lambeaux de la
période crétacée sont, en ce pays, restés vivants ; d’antiques
espèces s’y sont perpétuées depuis des milliers de siècles !
— Mais, dis-je, puisque la vie paraît, en cette partie isolée de la
terre, avoir suivi son cours d’une façon autre que partout ailleurs,
l’homme lui-même ne se serait-il pas conformé à la loi générale ?
Qui sait si nous ne sommes pas séparés de ces hommes du Pôle
par un abîme infiniment profond ?
— Oui, peut-être… peut-être qu’ils ont, en effet, évolué dans un
autre sens et qu’il y a quelques différences entre eux et nous. Ils
vivent sous la terre : ils doivent être petits, plus petits que toi et moi,
et difformes et laids… Je les imagine assez bien sous les traits des
gnomes des légendes, comme des nains industrieux et subtils qui
forgeraient merveilleusement les métaux et construiraient des
machines inouïes au fond de leurs souterrains. Qui peut prévoir les
prodiges que le sol recèle au-dessous de nous ?
— Mais alors, ces traces d’animaux devant une des portes de
leur demeure ?
— Un troupeau qui, le pâturage terminé, sera rentré dans les
cavernes avec eux.
— Un troupeau d’iguanodons, et d’iguanodons domestiques ?
Voilà qui vaudrait le voyage… si nous étions bien sûrs de jamais
revenir pour le raconter. Seulement, j’ai beau chercher, je ne vois
nulle empreinte de pied humain parmi les autres…
— Cette ouverture n’est sans doute que celle des bergeries et,
comme ces animaux sont domestiques, ils doivent rentrer seuls au
bercail, par accoutumance…
 — Ou sur un appel qu’on leur crie…
— Il se peut. Mais, après tout, je n’en sais rien et, ces inductions,
tu peux les faire aussi bien que moi-même. Quant aux habitants du
Pôle, ce sont peut-être tout simplement des gens qui ne diffèrent pas
plus de nous qu’un Peau-Rouge ou un Esquimau.
— Comment expliques-tu, alors, qu’ils ne se montrent pas ? S’ils
préparaient contre nous, sous terre, quelque terrible machination ?…
— C’est peu probable. Ils doivent plutôt être effrayés par ces
visiteurs qui tombent du ciel.
— Et le ciel est si peu clément au-dessus de leurs têtes qu’ils ne
doivent pas en attendre grand’chose de bon. Si l’homme a pris
l’habitude d’y loger ses meilleurs espérances c’est que de là lui
viennent la lumière, la chaleur… Mais ici !…
— Certainement. Et nous sommes sans doute, comme je te l’ai
déjà dit, beaucoup plus grands qu’eux… Qui sait ? Ils vont peut-être
nous adorer comme des Dieux puissants et redoutables…
Dans des phrases comme celle-ci, je retrouvai bien mon
Ceintras… Mais, lorsque l’heure nous parut arrivée de regagner le
ballon et que nous nous fûmes remis en marche,
d’incompréhensibles bizarreries se glissèrent peu à peu dans ses
moindres paroles, surtout aux moments où, après avoir parlé de
nouveau « de saut formidable dans le passé, de milliers et de milliers
de siècles », il recommençait à se lancer dans des théories
nébuleuses et interminables sur le passé et sur le présent, sur ce qui
avait été et ce qui était… A la fin, je ne comprenais véritablement
plus rien à ses discours. Je mis cela sur le compte de ma fatigue.
Nous atteignîmes enfin le ballon. Une épouvantable surprise
nous y attendait : les organes essentiels du moteur avaient été
déboulonnés avec une dextérité merveilleuse et emportés…
Ceintras me regarda, regarda la place vide, chancela et resta
une minute sans parler ; puis, très calme, il s’écria en haussant les
épaules :
— Cela n’a aucune importance !
 — Mais, malheureux, comment comptes-tu repartir, à présent ?
— Nous reviendrons à pied. Ou bien, si tu as peur de te fatiguer
en marchant, je fabriquerai un traîneau… Et j’y attellerai des
iguanodons… Hein ? Qu’est-ce que tu en penses ? Ce sera
splendide, ce retour !
Il se dandinait, les mains dans les poches et regardait devant lui
en souriant béatement. Je crus inutile de lui répondre : cette fois,
j’avais compris…
 CHAPITRE VIII
LA FACE AURÉOLÉE D’ÉTOILES

Étendu sur la couchette, au fond de la cabine, Ceintras

chantonna longtemps, sans prendre davantage garde à ma
présence que si je n’avais pas existé ; puis des silences de plus en
plus longs ponctuèrent sa monotone mélopée, sa voix devint plus
faible et plus lente, ses paupières papillotèrent et, bientôt, à la
régularité bruyante de sa respiration, je me rendis compte qu’il
dormait.
Alors l’horreur de ma situation m’apparut avec une impitoyable
netteté. Séparé de la patrie humaine par d’infranchissables
obstacles, exilé, à peu près sans espoir de retour, dans un pays de
cauchemar, condamné à la perpétuelle inquiétude d’un peuple
mystérieux, plein de ressources et probablement hostile, exposé à
ses incompréhensibles embûches, j’étais en outre privé, à présent
que mon compagnon venait de sombrer dans la démence, du seul
être sur lequel j’aurais pu m’appuyer…
Et la nuit polaire allait revenir ! Bientôt la clarté violette
s’évanouirait, et ce serait la lutte inutile contre l’irrésistible sommeil.
Étais-je destiné à m’en réveiller, cette fois ? S’il était vrai que les
habitants du Pôle nous redoutaient, ne profiteraient-ils pas de notre
impuissance pour nous immoler, ou, — hypothèse plus horrible
encore, — pour nous enchaîner et nous transporter au fond de leurs
demeures souterraines. Et quels supplices nous y attendraient ?
Telles étaient à présent mes pensées. Je me laissai aller à un
découragement morne et bientôt je sentis de grosses larmes
ruisseler le long de mes joues.
Mes nerfs, détraqués par tant d’émotions successives, étaient à
bout de ressort. Je défaillais de fatigue, peut-être aussi de faim, et je
compris soudain que j’allais m’évanouir. Alors, utilisant tout ce qui
me restait d’énergie, je me levai en chancelant et me versai un
grand verre de cognac que je bus d’un trait. Immédiatement, mon
sang courut avec plus de chaleur et de vivacité dans mes veines :
« C’est le seul moyen de reprendre un peu de courage, pensai-je… »
Et, coup sur coup, je bus deux autres lampées.
Ensuite, il me parut que mon sort n’était pas si atroce que je me
l’étais imaginé tout d’abord. Sous l’effet stimulant de l’alcool, de
nouvelles pensées, plus optimistes, se firent jour dans la confusion
de mon esprit, et la crise de désespoir que je venais de traverser ne
me sembla plus que la conséquence d’un trouble cérébral ou d’une
faiblesse physique… La disparition du moteur ? Mais, à moins que la
cruauté des hommes ne fût proportionnelle à leur puissance, il était
probable que le peuple du Pôle consentirait à nous le restituer tôt ou
tard. Sans doute, étant données mes faibles connaissances
mécaniques, il me serait difficile de remettre le ballon en état de
marche et de le diriger convenablement ; mais la folie de Ceintras
était-elle définitive ? Je me rappelai que de tout temps je l’avais jugé
moi-même quelque peu déséquilibré, et, certes, dans les récents
événements, il y avait bien de quoi désorienter et troubler
momentanément l’esprit le plus sain… Enfin, à supposer qu’il me fût
désormais impossible de quitter ce pays, — dussé-je même y
trouver la mort avant l’heure, — valait-il la peine, après tout, de m’en
attrister outre mesure ? Existait-il pour moi aucune raison sérieuse
de tenir à retourner un jour dans ma patrie, à vivre de nouveau au
milieu d’une civilisation familière ? Y avais-je jamais su trouver autre
chose que de l’ennui, de l’écœurement et du dégoût ? Mieux valait,
en somme, jouir sans arrière-pensée du plaisir de voir mon unique
souhait exaucé, et affronter l’aventure en homme qui n’a rien à y
perdre.
Cependant, çà et là, des irisations vertes commençaient à
ondoyer sur le manteau violet du jour polaire. Bientôt elles le
sillonnèrent horizontalement, de plus en plus étendues, de plus en
plus nombreuses, et ce crépuscule de proche en proche se
transformait en nuit avec une incroyable rapidité. Déjà je sentais,
comme la veille, une sorte de vertige s’emparer de moi, un voile
couvrir mon esprit, mes paupières vaciller. « Non ! pas cela, pas
cela ! » m’écriai-je comme si j’avais eu affaire à des ennemis
conscients… Et, comprenant que j’allais encore devenir l’esclave de
la peur, je me remis à boire, en attendant la nuit…
Elle vint et, accroupi dans le coin le plus reculé de la cabine, il
me parut qu’elle allait m’atteindre comme la massue d’un chasseur
s’abat sur une bête traquée. Mes membres s’étaient alourdis, le
moindre mouvement me semblait exiger un effort énorme d’énergie
et de volonté ; mais à ma grande surprise mon cerveau restait lucide
et, dès cet instant, j’eus le pressentiment que le sommeil
magnétique ne s’emparerait pas complètement de moi. Avait-il
moins de prise sur mes nerfs qui l’avaient déjà subi une fois ? Était-
ce une heureuse conséquence de l’alcool absorbé ? Ces deux
explications se présentèrent à mon esprit, mais, à ce moment, je
jugeai superflu de donner la préférence à l’une d’elles.
J’avais chaud et l’air s’était raréfié dans la cabine
hermétiquement close. J’ouvris le hublot ; des bouffées de fraîcheur
arrivèrent du dehors ; la petite sensation d’étouffement qui toute la
journée m’avait étreint la gorge disparut bientôt ; mes poumons se
dilatèrent plus librement et je respirai avec délice cet air qui, en
perdant sa coloration, avait repris sa pureté légère et fluide. Le
paysage du Pôle, pour la première fois, se montrait à moi éclairé
seulement par un vague et lointain soleil. A cela près que mes yeux
déroutés par ces brusques variations de clarté percevaient les
étoiles durant le jour polaire, — au sens humain et habituel du mot,
— je me retrouvai sur la Terre, j’étais chez moi. Au-dessous du
hamac où je venais de m’étendre, Ceintras dormait, d’un sommeil