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vi   Brief Contents

WEB CHAPTERS & WEB EXTENSIONS

Students: Access the Web Chapters and Web Extensions by visiting
[Link], searching ISBN 9781285850030,
and clicking “Access Now” under “Study Tools” to go to the stu-
dent textbook companion site.
Instructors: Access the Web Chapters, Web Extensions, and other
instructor resources by going to [Link]/login,
logging in with your faculty account username and password, and
using ISBN 9781285850030 to search for and to add resources to
your account “Bookshelf.”
Web Chapters
Chapter 28 Time Value of Money
Chapter 29 Basic Financial Tools: A Review
Chapter 30 Pension Plan Management
Chapter 31 Financial Management in Not-for-Profit Businesses

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
 Contents
Preface xvii Risk in a Continuous Distribution 43
Using Historical Data to Estimate
Part I  Fundamental Concepts of Risk 44
Corporate Finance  1 Box: What Does Risk Really
Mean? 45
1 An Overview of Financial
Box: The Historic Trade-Off
Management and the Financial
between Risk and Return 48
Environment 2
Risk in a Portfolio Context 48
Beginning-of-Chapter Questions 2
The Relevant Risk of a Stock:
How to Use this Text 3
The Capital Asset Pricing Model
Box: The Global Economic Crisis 4 (CAPM) 53
Box: Columbus Was Wrong—the Box: The Benefits of Diversifying
World Is Flat! And Hot! And Overseas 59
Crowded! 5
The Relationship between Risk and
The Corporate Life Cycle 5
Return in the Capital Asset Pricing
The Primary Objective of the Corporation: Model 60
Value Maximization 8
The Efficient Markets Hypothesis 68
Box: Ethics for Individuals and
Box: Another Kind of Risk: The
Businesses 9
Bernie Madoff Story 69
Box: Corporate Scandals and
Maximizing Stock Price 11
The Fama-French Three-Factor Model 73
An Overview of the Capital Allocation Behavioral Finance 78
Process 12 The CAPM and Market Efficiency:
Financial Securities 14 Implications for Corporate Managers
and Investors 80
The Cost of Money 18
Summary 81
The Global Economic Crisis 23
Box: Global Economic Crisis— 3 Risk and Return: Part II 91
Anatomy of a Toxic Asset 30 Beginning-of-Chapter Questions 91
The Big Picture 32 Box: Intrinsic Value, Risk, and
e-Resources 33 Return 92
Summary 34 Efficient Portfolios 93
2 Risk and Return: Part I 36 Choosing the Optimal Portfolio 97
Beginning-of-Chapter Questions 36 The Basic Assumptions of the
Capital Asset Pricing Model 101
Investment Returns and Risk 37
Box: Intrinsic Value, Risk, and
The Capital Market Line and
Return 38 the Security Market Line 102
Box: Skill or Luck? 107
Measuring Risk for Discrete
Distributions 39 Calculating Beta Coefficients 107
vii

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viii   Contents

Empirical Tests of the CAPM  115 Financing with Junk Bonds 165
Arbitrage Pricing Theory 118 Bankruptcy and Reorganization 166
Summary 121 Summary 167

4 Bond Valuation 127 5 Financial Options 175

Beginning-of-Chapter Questions 127 Beginning-of-Chapter Questions 175
Box: Intrinsic Value and the Cost Box: The Intrinsic Value of Stock
of Debt 128 Options 176
Who Issues Bonds? 128 Overview of Financial Options 176
Box: The Global Economic Crisis— Box: Financial Reporting for
Betting with or Against the Employee Stock Options 180
U.S. Government: The Case of The Single-Period Binomial Option
Treasury Bond Credit Default Pricing Approach 180
Swaps 130
The Single-Period Binomial Option
Key Characteristics of Bonds 130 Pricing Formula 186
Bond Valuation 135 The Multi-Period Binomial Option
Changes in Bond Values Over Time 140 Pricing Model 189
Box: Drinking Your Coupons 143 The Black-Scholes Option Pricing Model
Bonds with Semiannual Coupons 143 (OPM) 191
Bond Yields 144 Box: Taxes and Stock
The Pre-Tax Cost of Debt: Determinants Options 197
of Market Interest Rates 148 The Valuation of Put Options 198
The Real Risk-Free Rate of Applications of Option Pricing
Interest, r* 149 in Corporate Finance 200
The Inflation Premium (IP) 150 Summary 203
The Nominal, or Quoted, Risk-Free Rate 6 Accounting for Financial
of Interest, rRF 152 Management 207
The Default Risk Premium (DRP) 153 Beginning-of-Chapter Questions 207
Box: The Global Economic Box: Intrinsic Value, Free
Crisis—Insuring with Credit Cash Flow, and Financial
Default Swaps: Let the Buyer Statements 208
Beware! 154
Financial Statements and Reports 209
Box: The Global Economic
Crisis—U.S. Treasury Bonds The Balance Sheet 209
Downgraded! 157 Box: The Global Economic Crisis—
Box: The Few, the Proud, the . . . Let’s Play Hide-and-Seek! 212
AAA-Rated Companies! 158 The Income Statement 213
Box: The Global Economic Crisis— Statement of Stockholders’ Equity 215
Fear and Rationality 159 Box: Financial Analysis on the
The Liquidity Premium (LP) 160 WEB 216
The Maturity Risk Premium (MRP) 160 Statement of Cash Flows 217
The Term Structure of Interest Box: Filling in the GAAP 220
Rates 163 Net Cash Flow 221

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 Contents   ix

Free Cash Flow: The Cash Flow Part II Corporate Valuation 293
Available for Distribution to
Investors 222 8 Basic Stock Valuation 294
Box: Sarbanes-Oxley and Financial Beginning-of-Chapter Questions 294
Fraud 227 Box: Corporate Valuation and
Performance Evaluation 229 Stock Prices 295
The Federal Income Tax System 234 Legal Rights and Privileges of Common
Stockholders 296
Box: When It Comes to Taxes,
History Repeats and Repeals Types of Common Stock 297
Itself! 236 Stock Market Reporting 298
Summary 241 Valuing Common Stocks—Introducing
the Free Cash Flow (FCF) Valuation
7 Analysis of Financial
Model 299
Statements 252
The Constant Growth Model: Valuation
Beginning-of-Chapter Questions 252
When Expected Free Cash Flow Grows
Box: Intrinsic Value and Analysis of at a Constant Rate 303
Financial Statements 253
The Multi-Stage Model: Valuation When
Financial Analysis 254 Expected Short-Term Free Cash Flow
Liquidity Ratios 256 Grows at a Nonconstant Rate 309
Asset Management Ratios 257 Application of the FCF Valuation Model
Box: The Global Economic to MicroDrive 313
Crisis—The Price Is Right! Do Stock Values Reflect Long-Term or
(Or Wrong!) 260 Short-Term Cash Flows? 319
Debt Management Ratios 261 Using the Free Cash Flow Valuation
Profitability Ratios 265 Model to Identify Value Drivers 321
Box: The World Might Be Flat, Why Are Stock Prices so Volatile? 324
but Global Accounting Is
Valuing Common Stocks with the
Bumpy! The Case of IFRS versus
Dividend Growth Model 324
FASB 266
Market Multiple Analysis 333
Market Value Ratios 268
Preferred Stock 334
Trend Analysis, Common Size
Summary 335
Analysis, and Percentage
Change Analysis 271 9 Corporate Valuation and Financial
Tying the Ratios Together: Planning 347
The DuPont Equation 274 Beginning-of-Chapter Questions 347
Comparative Ratios and Box: Corporate Valuation and
Benchmarking 276 Financial Planning 348
Uses and Limitations of Ratio Overview of Financial Planning 349
Analysis 277 Financial Planning at MicroDrive
Box: Ratio Analysis on the Inc. 350
Web 278 Forecasting Operations 351
Looking Beyond the Numbers 279 Projecting MicroDrive’s Financial
Summary 279 Statements 356

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
x   Contents

Analysis and Revision Using the CAPM to Estimate the Cost of

of the Preliminary Plan 361 Common Stock, rs 423
Additional Funds Needed (AFN) Dividend-Yield-Plus-Growth-Rate,
Equation Method 366 or Discounted Cash Flow (DCF),
Forecasting When the Ratios Approach 426
Change 370 The Weighted Average Cost
Summary 374 of Capital (WACC) 428
Box: Global Variations in the Cost
10 Corporate Governance 385
of Capital 431
Beginning-of-Chapter Questions 385
Adjusting the Cost of Equity
Box: Corporate Governance and
for Flotation Costs 431
Corporate Valuation 386
Privately Owned Firms and Small
Agency Conflicts 386
Businesses 433
Corporate Governance 390
Managerial Issues and the Cost of
Box: The Global Economic Crisis—
Capital 435
Would the U.S. Government
Be an Effective Board Summary 441
Director? 394
Box: The Dodd-Frank Act and “Say Part III Project Valuation 451
on Pay” 396
Box: The Sarbanes-Oxley Act 12 Capital Budgeting:
of 2002 and Corporate Decision Criteria 452
Governance 398 Beginning-of-Chapter Questions 452
Box: International Corporate Box: Corporate Valuation and
Governance 400 Capital Budgeting 453
Employee Stock Ownership Plans An Overview of Capital Budgeting 453
(ESOPs) 402
The First Step in Project Analysis 455
Summary 406
Net Present Value (NPV) 456
11 Determining the Cost of Internal Rate of Return (IRR) 459
Capital 409 Modified Internal Rate of Return
Beginning-of-Chapter Questions 409 (MIRR) 466
Box: Corporate Valuation and the Profitability Index (PI) 469
Cost of Capital 410
Payback Period 470
The Weighted Average Cost of
How to Use the Different Capital
Capital 411
Budgeting Methods 472
Choosing Weights for the Weighted
Other Issues in Capital Budgeting 475
Average Cost of Capital 412
Summary 482
After-Tax Cost of Debt: rd(1 2 T)
and rstd(1 2 T) 414 13 Capital Budgeting: Estimating Cash
Box: How Effective is the Effective Flows and Analyzing Risk 493
Corporate Tax Rate? 417 Beginning-of-Chapter Questions 493
Cost of Preferred Stock, rps 418 Box: Project Valuation, Cash Flows,
Cost of Common Stock: The Market Risk and Risk Analysis 494
Premium, RPM 419 Identifying Relevant Cash Flows 494

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
 Contents   xi

Analysis of an Expansion Project 499 Implications for Dividend Stability 582

Box: Mistakes in Cash Flow Box: Will Dividends Ever Be the
Estimation Can Kill Same? 583
Innovation 506 Setting the Target Distribution Level:
Risk Analysis in Capital Budgeting 508 The Residual Distribution Model 583
Measuring Stand-Alone Risk 509 The Residual Distribution Model in
Sensitivity Analysis 509 Practice 585
Scenario Analysis 512 A Tale of Two Cash Distributions:
Monte Carlo Simulation 515 Dividends versus Stock
Project Risk Conclusions 519 Repurchases 586
Replacement Analysis 520 The Pros and Cons of Dividends
Real Options 520 and Repurchases 596
Phased Decisions and Decision Box: Dividend Yields around the
Trees 524 World 598
Summary 527 Other Factors Influencing
Appendix 13A Tax Depreciation 541 Distributions 598
Summarizing the Distribution
14 Real Options 544
Policy Decision 599
Beginning-of-Chapter Questions 544
Stock Splits and Stock Dividends 601
Valuing Real Options 545
Box: The Global Economic
The Investment Timing Option: Crisis—Talk about a Split
An Illustration 546 Personality! 602
The Growth Option: An Illustration 556 Dividend Reinvestment Plans 604
Concluding Thoughts on Real Summary 605
Options 562
Summary 564 16 Capital Structure Decisions 614
Beginning-of-Chapter Questions 614
PART IV Strategic Financing Box: Corporate Valuation and
Decisions 569 Capital Structure 615
15 Distributions to Shareholders: An Overview of Capital Structure 616
Dividends and Business Risk and Financial Risk 617
Repurchases 570 Capital Structure Theory 621
Beginning-of-Chapter Questions 570 Box: Yogi Berra on the MM
Box: Uses of Free Cash Proposition 624
Flow: Distributions to Capital Structure Evidence and
Shareholders 571 Implications 631
An Overview of Cash Distributions 572 Estimating the Optimal Capital
Procedures for Cash Distributions 573 Structure 635
Cash Distributions and Firm Value 577 Anatomy of a Recapitalization 641
Clientele Effect 580 Box: The Global Economic Crisis—
Information Content, or Signaling, Deleveraging 646
Hypothesis 581 Summary 647

Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xii   Contents

17 Dynamic Capital Structures Box: What Was the Role of

and Corporate Valuation 654 Investment Banks? 720
Beginning-of-Chapter Questions 654 The Decision to Go Private 721
Box: Corporate Valuation Managing the Maturity Structure
and Capital Structure of Debt 723
Decisions 655 Refunding Operations 726
The Impact of Growth and Tax Shields Box: TVA Ratchets Down Its
on Value 655 Interest Expenses 730
The Modigliani and Miller Models and Managing the Risk Structure of Debt with
the Compressed Adjusted Present Project Financing 732
Value (APV) Model 658 Summary 734
Dynamic Capital Structures and the
Adjusted Present Value (APV) 19 Lease Financing 742
Model 666 Beginning-of-Chapter Questions 742
Risky Debt and Equity as an Option 670 Types of Leases 743
Introducing Personal Taxes: Tax Effects 746
The Miller Model 675 Financial Statement Effects 747
Capital Structure Theory: Arbitrage Box: Off–Balance Sheet Financing:
Proofs of the Modigliani-Miller Is It Going to Disappear? 750
Theorems 679
Evaluation by the Lessee 750
Summary 686
Evaluation by the Lessor 755
Other Issues in Lease Analysis 758
PART V Tactical Financing Box: What You Don’t Know Can
Decisions 695 Hurt You! 759
18 Initial Public Offerings, Investment Box: Lease Securitization 761
Banking, and Financial Other Reasons for Leasing 762
Restructuring 696 Summary 764
Beginning-of-Chapter Questions 696
The Financial Life Cycle of a Start-up 20 Hybrid Financing: Preferred
Company 697 Stock, Warrants, and
The Decision to Go Public 698 Convertibles 771
The Process of Going Public: An Initial Beginning-of-Chapter Questions 771
Public Offering 699 Preferred Stock 772
Equity Carve-Outs: A Special Type of Box: The Romance Had No
IPO 711 Chemistry, but It Had a Lot of
Preferred Stock! 773
Other Ways to Raise Funds in the Capital
Markets 712 Box: Hybrids Aren’t Only for
Corporations 775
Box: Where There’s Smoke There’s
Fire 717 Warrants 777
Investment Banking Activities and Convertible Securities 784
Their Role in the Global Economic A Final Comparison of Warrants
Crisis 718 and Convertibles 792

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
 Contents   xiii

Reporting Earnings When Warrants Use of Security in Short-Term

or Convertibles Are Outstanding 793 Financing 844
Summary 794 Summary 845

22 Providing and Obtaining

PART VI Working Capital Credit 857
Management 803 Beginning-of-Chapter Questions 857
Credit Policy 858
21 Supply Chains and Working Capital
Setting the Credit Period and
Management 804
Standards 858
Beginning-of-Chapter Questions 804
Setting the Collection Policy 859
Box: Corporate Valuation
and Working Capital Cash Discounts 860
Management 805 Other Factors Influencing Credit
Overview of Working Capital Policy 860
Management 806 The Payments Pattern Approach
Using and Financing Operating to Monitoring Receivables 861
Current Assets 807 Analyzing Proposed Changes in
The Cash Conversion Cycle 812 Credit Policy 866
Box: Some Firms Operate Analyzing Proposed Changes in Credit
with Negative Working Policy: Incremental Analysis 869
Capital! 817 The Cost of Bank Loans 875
The Cash Budget 818 Choosing a Bank 881
Cash Management and the Target Summary 883
Cash Balance 821 23 Other Topics in Working Capital
Cash Management Techniques 823 Management 893
Box: Your Check Isn’t in the Beginning-of-Chapter Questions 893
Mail 825
The Concept of Zero Working
Inventory Management 826 Capital 894
Box: Supply Chain Setting the Target Cash Balance 895
Management 826
Inventory Control Systems 901
Receivables Management 828
Accounting for Inventory 902
Box: Supply Chain Finance 830
The Economic Ordering Quantity (EOQ)
Accruals and Accounts Payable
Model 905
(Trade Credit) 832
EOQ Model Extensions 912
Box: A Wag of the Finger or Tip
Summary 918
of the Hat? The Colbert Report
and Small Business Payment
Terms 834 PART VII Special Topics 923
Managing Short-Term Investments 837 24 Enterprise Risk Management 924
Short-Term Financing 838 Beginning-of-Chapter Questions 924
Short-Term Bank Loans 839 Box: Corporate Valuation and Risk
Commercial Paper 843 Management 925

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xiv   Contents

Reasons to Manage Risk 925 Types of Mergers 999

An Overview of Enterprise Risk Level of Merger Activity 1000
Management 928 Hostile versus Friendly Takeovers 1001
A Framework for Enterprise Merger Regulation 1003
Risk Management 931 Overview of Merger Analysis 1004
Categories of Risk Events 934 The Free Cash Flow to Equity
Foreign Exchange (FX) Risk 936 (FCFE) Approach 1005
Commodity Price Risk 937 Illustration of the Three Valuation
Interest Rate Risk 941 Approaches for a Constant Capital
Box: The Game of Truth or Structure 1008
LIBOR 947 Setting the Bid Price 1014
Project Selection Risks 950 Analysis When There Is a Permanent
Managing Credit Risks 953 Change in Capital Structure 1016
Risk and Human Safety 956 Taxes and the Structure of the
Summary 956 Takeover Bid 1018
Box: Tempest in a Teapot? 1019
25 Bankruptcy, Reorganization, and Financial Reporting for Mergers 1023
Liquidation 961 Analysis for a “True
Beginning-of-Chapter Questions 961 Consolidation” 1025
Financial Distress and Its The Role of Investment Bankers 1026
Consequences 962 Who Wins: The Empirical Evidence 1028
Issues Facing a Firm in Financial Box: Merger Mistakes 1028
Distress 964
Corporate Alliances 1029
Settlements without Going through Divestitures 1030
Formal Bankruptcy 964
Holding Companies 1031
Federal Bankruptcy Law 967 Summary 1033
Reorganization in Bankruptcy 968
Liquidation in Bankruptcy 979
27 Multinational
Box: A Nation of Defaulters? 983
Financial Management 1040
Beginning-of-Chapter Questions 1040
Anatomy of a Bankruptcy: Transforming
Box: Corporate Valuation in a
the GM Corporation into the GM
Global Context 1041
Company 983
Multinational, or Global,
Other Motivations for
Corporations 1041
Bankruptcy 985
Multinational versus Domestic Financial
Some Criticisms of Bankruptcy
Management 1043
Laws 986
Exchange Rates 1044
Summary 987
Exchange Rates and International
26 Mergers and Corporate Trade 1050
Control 995 The International Monetary System
Beginning-of-Chapter Questions 995 and Exchange Rate Policies 1051
Rationale for Mergers 996 Trading in Foreign Exchange 1057

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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 Contents   xv

Interest Rate Parity 1058 faculty account username and password, and using
Purchasing Power Parity 1060 ISBN 9781285850030 to search for and to add re-
Box: Hungry for a Big Mac? Go To sources to your account “Bookshelf.”
Ukraine! 1062 Web Chapters
Inflation, Interest Rates, 28. Time Value of Money
and Exchange Rates 1062 29. Basic Financial Tools: A Review
International Money and Capital 30. Pension Plan Management
Markets 1063
31. Financial Management in
Box: Greasing the Wheels of
Not-for-Profit Businesses
International Business 1064
Box: Stock Market Indices Around Web Extensions
the World 1069 Web Extension 1-A An Overview of
Multinational Capital Budgeting 1070 Derivative
Box: Consumer Finance in Web Extension 1-B A Closer Look at the
China 1071 Stock Markets
Box: Double Irish with a Dutch Web Extension 2-A  Continuous
Twist 1073 Probability Distributions
International Capital Structures 1076 Web Extension 2-B Estimating Beta with
Multinational Working Capital a Financial Calculator
Management 1077 No Web Extension for Chapter 3
Summary 1081 Web Extension 4-A A Closer Look at Zero
Coupon and other OID Bonds
Appendixes Web Extension 4-B A Closer Look at TIPS:
Treasury Inflation-Protected Securities
Appendix A Values of the Areas under
the Standard Normal Distribution Web Extension 4-C A Close Look at Bond
Risk: Duration
Function 1089
Web Extension 4-D The Pure
Appendix B Answers to End-of-Chapter Expectations Theory and Estimation of
Problems 1091 Forward Rates
Appendix C Selected Equations 1103 No Web Extension for Chapter 5
Glossary 1121 Web Extension 6-A The Federal Income
Name Index 1149 Tax System for Individuals
Subject Index 1155 No Web Extension for Chapter 7
Web Extension 8-A  Derivation of
WEB CHAPTERS & WEB EXTENSIONS Valuation Equations
Students: Access the Web Chapters and Web Ex-
No Web Extension for Chapter 9
tensions by visiting [Link],
searching ISBN 9781285850030, and clicking “Access No Web Extension for Chapter 10
Now” under “Study Tools” to go to the student text- Web Extension 11-A The Required Return
book companion site. Assuming Nonconstant Dividends and
Instructors: Access the Web Chapters, Web Ex- Stock Repurchases
tensions, and other instructor resources by going to Web Extension 12-A The Accounting
[Link]/login, logging in with your Rate of Return (ARR)

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xvi   Contents

Web Extension 13-A  Certainty Web Extension 21-A Secured Short-Term

Equivalents and Risk-Adjusted Financing
Discount Rates No Web Extension for Chapter 22
Web Extension 14-A The Abandonment No Web Extension for Chapter 23
Real Option No Web Extension for Chapter 24
Web Extension 14-B Risk-Neutral Web Extension 25-A Multiple
Valuation Discriminant Analysis
No Extension for Chapter 15 Web Extension 26-A  Projecting
Web Extension 16-A  Degree of Leverage Consistent Debt and Interest Expenses
No Web Extension for Chapter 17 No Web Extension for Chapter 27
Web Extension 18-A Rights Offerings Web Extension 28-A The Tabular
Web Extension 19-A Leasing Feedback Approach
Web Extension 19-B Percentage Cost Web Extension 28-B Derivation of
Analysis Annuity Formulas
Web Extension 19-C Leveraged Leases Web Extension 28-C Continuous
Web Extension 20-A  Calling Convertible Compounding
Issues

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 Preface
Much has happened in finance recently. Years ago, when the body of knowledge
WEB
was smaller, the fundamental principles could be covered in a one-term lecture
course and then reinforced in a subsequent case course. This approach is no longer Students: Access
feasible. There is simply too much material to cover in one lecture course. the Intermediate
As the body of knowledge expanded, we and other instructors experienced Financial Management
increasing difficulties. Eventually, we reached these conclusions: 12e companion site
and online student
●● The introductory course should be designed for all business students, not just for resources by visiting
finance majors, and it should provide a broad overview of finance. Therefore, a [Link]
text designed for the first course should cover key concepts but avoid confusing .com, searching for ISBN
students by going beyond basic principles. 9781285850030 and
●● Finance majors need a second course that provides not only greater depth on clicking “Access Now”
the core issues of valuation, capital budgeting, capital structure, cost of capital, under “Study Tools”
and working capital management but also covers such special topics as mergers, to go to the student
multinational finance, leasing, risk management, and bankruptcy. textbook companion site.
●● This second course should also utilize cases that show how finance theory is used Instructors: Access the
in practice to help make better financial decisions. Intermediate Financial
Management 12e
When we began teaching under the two-course structure, we tried two types companion site and
of existing books, but neither worked well. First, there were books that emphasized instructor resources
theory, but they were unsatisfactory because students had difficulty seeing the use- by going to www
fulness of the theory and consequently were not motivated to learn it. Moreover, .[Link]
these books were of limited value in helping students deal with cases. Second, there /login, logging in with
were books designed primarily for the introductory MBA course that contained your faculty account
the required material, but they also contained too much introductory material. We username and password,
and using ISBN
eventually concluded that a new text was needed, one designed specifically for the
9781285850030 to reach
second financial management course, and that led to the creation of Intermediate the site through your
Financial Management, or IFM for short. account “Bookshelf.”

The Next Level: Intermediate Financial

Management
In your introductory finance course you learned a number of terms and concepts.
However, an intro course cannot make you “operational” in the sense of actually
“doing” financial management. For one thing, introductory courses necessarily fo-
cus on individual chapters and even sections of chapters, and first-course exams
generally consist of relatively simple problems plus short-answer questions. As a
result, it is hard to get a good sense of how the various parts of financial man-
agement interact with one another. Second, there is not enough time in the intro
course to allow students to set up and work out realistic problems, nor is there time
to delve into actual cases that illustrate how finance theory is applied in practice.
Now it is time to move on. In Intermediate Financial Management, we first re-
view materials that were covered in the introductory course, then take up new ma-
terial. The review is absolutely essential, because no one can remember everything
xvii

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xviii   Preface

that was covered in the first course, yet all of the introductory material is essential
for a good understanding of the more advanced material. Accordingly, we revisit
topics such as the net present value (NPV) and internal rate of return (IRR) methods,
but now we delve into them more deeply, considering how to streamline and auto-
mate the calculations, how to obtain the necessary data, and how errors in the data
might affect the outcome. We also relate the topics covered in different chapters to
one another, showing, for example, how cost of capital, capital structure, dividend
policy, and capital budgeting combine forces to affect the firm’s value.
Also, because spreadsheets such as Excel, not financial calculators, are used for
most real-world calculations, students need to be proficient with spreadsheets so
that they will be more marketable after graduation. Therefore, we explain how to
do various types of financial analysis with Excel. Working with Excel actually has
two important benefits: (1) a knowledge of Excel is important in the workplace and
the job market, and (2) setting up spreadsheet models and analyzing the results also
provide useful insights into the implications of financial decisions.

Corporate Valuation as a Unifying Theme

Management’s goal is to maximize firm value. Job candidates who understand the
theoretical underpinning for value maximization and have the practical skills to an-
alyze business decisions within this context make better, more valuable employees.
Our goal is to provide you with both this theoretical underpinning and a practical
skill set. To this end, we have developed several integrating features that will help
you keep the big picture of value maximization in mind while you are honing your
analytical skills:
●● Every chapter starts off with a series of integrating Beginning-of-Chapter Ques-
tions that will help you place the material in the broader context of financial
management.
●● Most chapters have a valuation graphic and description that show exactly how
the material relates to corporate valuation.
●● Each chapter has a Mini Case that provides a business context for the material.
●● Each chapter has an Excel spreadsheet Tool Kit that steps through all of the cal-
culations in the chapter.
●● Each chapter has a spreadsheet Build-a-Model that steps you through construct-
ing an Excel model to work problems. We’ve designed these features and tools
so that you’ll finish your course with the skills to analyze business decisions and
the understanding of how these decisions impact corporate value.

Design of the Book

Based on more than 30 years working on Intermediate Financial Management and
teaching the advanced undergraduate financial management course, we have con-
cluded that the book should include the following features:
●● Completeness. Because IFM is designed for finance majors, it should be self-
contained and suitable for reference purposes. Therefore, we specifically and
purposely included: (a) some material that overlaps with introductory finance
texts and (b) more material than can realistically be covered in a single course.
We included in Chapters 2 through 5 some fundamental materials borrowed

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 Preface   xix

directly from other Cengage Learning texts. If an instructor chooses to cover this
material, or if an individual student feels a need to cover it on his or her own,
it is available. In other chapters, we included relatively brief reviews of first-
course topics. This was necessary both to put IFM on a stand-alone basis and to
help students who have a delay between their introductory and second financial
management courses get up to speed before tackling new material. This review
is particularly important for working capital management and such “special top-
ics” as mergers, lease analysis, and convertibles—all of which are often either
touched on only lightly or skipped in the introductory course. Thus, the variety
of topics covered in the text provides adopters with a choice of materials for the
second course, and students can use materials that were not covered for refer-
ence purposes. We note, though, that instructors must be careful not to bite off
more than their students can chew.
●● Theory and applications. Financial theory is useful to financial decision makers,
both for the insights it provides and for direct application in several important
decision areas. However, theory can seem sterile and pointless unless its useful-
ness is made clear. Therefore, in IFM, we present theory in a decision-making
context, which motivates students by showing them how theory can lead to
better decisions. The combination of theory and applications also makes the text
more usable as a reference for case courses as well as for real-world decision
making.
●● Computer orientation. Today, a business that does not use computers in its fi-
nancial planning is about as competitive as a student who tries to take a finance
exam without a financial calculator. Throughout the text, we provide computer
spreadsheet examples for the calculations and spreadsheet problems for the stu-
dents to work. This emphasis on spreadsheets both orients students to the busi-
ness environment they will face upon graduation and helps them understand key
financial concepts better.
●● Global perspective. Successful businesses know that the world’s economies are
rapidly converging, that business is becoming globalized, and that it is difficult
to remain competitive without being a global player. Even purely domestic firms
cannot escape the influence of the global economy, because international events
have a significant effect on domestic interest rates and economic activity. All of
this means that today’s finance students—who are tomorrow’s financial execu-
tives—must develop a global perspective. To this end, IFM also contains an entire
chapter on multinational financial management. In addition, to help students
“think global,” we provide examples throughout the text that focus on the types
of global problems companies face. Of course, we cannot make multinational
finance experts out of students in a conventional corporate finance course, but
we can help them recognize that insular decision making is insufficient in to-
day’s world.

Beginning-of-Chapter Questions
We start each chapter with several Beginning-of-Chapter (BOC) questions. You will
be able to answer some of the questions before you even read the chapter, and you
will be able to give better answers after you have read it. Other questions are harder,
and you won’t feel truly comfortable answering them until after they have been dis-
cussed in class. We considered putting the questions at the ends of the chapters, but

Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xx   Preface

we concluded that they would best serve our purposes if placed at the beginning.
Here is a summary of our thinking as we wrote the questions:
●● The questions indicate to you the key issues covered in the chapter and the
things you should know when you complete the chapter.
●● Some of the questions were designed to help you remember terms and concepts
that were covered in the introductory course. Others indicate where we will be
going beyond the intro course.
●● You need to be able to relate different parts of financial management to one
another, so some of the BOC questions were designed to get you to think about
how the various chapters are related to one another. These questions tend to be
harder, and they can be answered more completely after a classroom discussion.
●● You also need to think about how financial concepts are applied in the real
world, so some of the BOC questions focus on the application of theories to the
decision process. Again, complete answers to these questions require a good bit
of thought and discussion.
●● Some of the BOC questions are designed to help you see how Excel can be used
to make better financial decisions. These questions have accompanying models
that provide tutorials on Excel functions and commands. The completed models
are available on the textbook’s Web site. Going through them will help you learn
how to use Excel as well as give you valuable insights into the financial issues
covered in the chapter. We have also provided an “Excel Tool Locater,” which is
an index of all of the Excel skills that the BOC models go over. This index is in
the Excel file, Excel [Link]. Because recruiters like students who are good
with Excel, this will also help you as you look for a good job. It will also help
you succeed once you are in the workplace.
We personally have used the BOC questions in several different ways:
●● In some classes we simply told students to use the BOC questions or not, as they
wished. Some students did study them and retrieve the Excel models from the
Web, but many just ignored them.
●● We have also assigned selected BOC questions and then used them, along with
the related Excel models, as the basis for some of our lectures.
●● Most recently, we literally built our course around the BOC questions.1 Here we
informed students on day one that we would start each class by calling on them
randomly and grading them on their answers.2 We also informed them that our
exams would be taken verbatim from the BOC questions. They complained a bit
about the quizzes, but the students’ course evaluations stated that the quizzes
should be continued because without them they would have come to class less
well prepared and hence would have learned much less than they did.
●● The best way to prepare for the course as we taught it was by first reading
the questions, then reading the chapter, and then writing out notes outlining

1. Actually, we broke our course into two segments, one where we covered selected text chapters
and another where we covered cases that were related to and illustrated the text chapters. For the
case portion of the course, students made presentations and discussed the cases. All of the cases
required them to use Excel.
2. Most of our students were graduating seniors who were interviewing for jobs. We excused
them from class (and the quizzes) if they informed us by e-mail before class that they were
interviewing.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
 Preface   xxi

answers to the questions in preparation for the oral quiz. We expected students
to give complete answers to “easy” questions, but we gave them good grades if
they could say enough about the harder questions to demonstrate that they had
thought about how to answer them. We would then discuss the harder questions
in lieu of a straight lecture, going into the related Excel models both to explain
Excel features and to provide insights into different issues.
●● Our midterm and final exams consisted of five of the harder BOC questions, of
which three had to be answered in 2 hours in an essay format. It took a much
more complete answer to earn a good grade than would have been required on
the oral quizzes. We also allowed students to use a four-page “cheat sheet” on
the exams.3 That reduced time spent trying to memorize things as opposed to
understanding them. Also, students told us that making up the cheat sheets was
a great way to study.

Major Changes in the Twelfth Edition

As in every revision, we updated and clarified sections throughout the text. Specifi-
cally, we also made the following changes in content:

References to, implications of, and explanations for the global eco-
nomic crisis. Last edition we began using the global economic crisis to illustrate
important learning points, and we have continued that in this edition with new
examples and tie-ins to the chapters’ topics.

Additional integration of the textbook and the accompanying Excel

Tool Kit spreadsheet models for each chapter. Many figures in the textbook
come directly from the chapter’s Excel Tool Kit model. This serves two purposes.
First, it makes the analysis more transparent to the student; the student or instruc-
tor can go to the Tool Kit and see exactly how all of the numbers in a figure were
calculated. Second, it provides an additional resource for students and instructors
to use in learning Excel.

Improvements in the MicroDrive Examples. For many editions, we have

used a hypothetical company, MicroDrive, as a running example. This provides
continuity in the examples from chapter to chapter and helps students apply the
material more quickly. We have improved the integration in this edition and have
made some changes to the financial statements to accommodate our changes.
First, the financial statement values are now all integers and in most cases end
with a zero, which simplifies calculations. Second, we have separated operating
costs into three categories: cost of goods sold (excluding depreciation), other op-
erating costs, and depreciation. This allows for added flexibility when defining
ratios and forecasting financial statements. Third, we have modified the financial
statements to allow MicroDrive to be the illustrative company for more chapters
and more topics than in previous editions. This has been especially important in
the systematic risk topic and the free cash flow valuation topic.

3. We did require that students make up their own “cheat sheets,” and we required them to turn
their sheets in with their exams so we could check for independence.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xxii   Preface

Significant Changes in Selected Chapters

We made many small improvements within each chapter; some of the more notable
ones are discussed below.

Chapter 1: An Overview of Financial Management and the Financial

Environment We added a box on high-frequency trading—“Life in the Fast
Lane: High-Frequency Trading!”—and a box on mortgage-backed securities,
“Anatomy of a Toxic Asset.” We also increased our coverage of the global eco-
nomic crisis to reflect changes in the past 3 years, including a section on the
Dodd-Frank Act.

Chapter 2: Risk and Return: Part I As a part of our effort to integrate

the illustrative company MicroDrive throughout the book, we made significant
changes in this chapter. We begin with a discussion of discrete probability dis-
tributions involving different market scenarios and then segue into continuous
distributions and estimating means and standard deviations using historical data
for MicroDrive. We discuss two-stock portfolios and the impact of diversifica-
tion by using data for MicroDrive and another company. This sets the stage for
a discussion of market risk versus diversifiable risk and the appropriate measure
of market risk, beta. We then describe the risk-return relationship defined by the
CAPM and the basic concept of market equilibrium. This provides a natural tran-
sition into the efficient market hypothesis. We also added optional sections cov-
ering the Fama-French three-factor model and behavioral finance. These optional
sections can be omitted without loss of continuity, or they can be covered to
provide more depth on the topic of market efficiency and asset pricing. This new
organization consolidates our treatment of risk and return and also illustrates
these concepts with MicroDrive, providing a more effective learning experience
for students.

Chapter 4: Bond Valuation We updated the box “Betting With or Against the
U.S. Government: The Case of Treasury Bond Credit Default Swaps” to reflect the
debt-ceiling crisis of July 2011. We added another new box describing the handful
of AAA-rated companies, “The Few, the Proud, the….. AAA-Rated Companies!” We
revised another box, “Fear and Rationality,” to include the TED spread as well as the
Hi-Yield bond spread. We also added a brief discussion of duration and its use as a
measure of risk. MicroDrive is the company used as a running example throughout
the book. We changed its example bond offering to be consistent with MicroDrive’s
revised financial statements.
Chapter 6: Accounting for Financial Management We reorganized and
better integrated the sections on the statement of cash flows, operating cash
flow, and free cash flow. We now have a single section focusing on the use of
free cash flow and its components as performance measures. We added two new
boxes. “Filling in the GAAP” describes the planned convergence of GAAP and
IFRS; “When It Comes to Taxes, History Repeats and Repeals Itself!” discusses
the actual taxes (or lack thereof) paid by many corporations. MicroDrive is
the company used as a running example throughout the book. We changed its
financial statements so that MicroDrive would provide additional learning
points when we cover valuation and forecasting in Chapters 8 and 9.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
 Preface   xxiii

Chapter 7: Analysis of Financial Statements In previous editions, we de-

fined the inventory turnover ratio using sales instead of COGS because some com-
pilers of financial ratio statistics, such as Dun & Bradstreet, use the ratio of sales to
inventories. However, most sources now report the turnover ratio using COGS, so
we have changed our definition to conform to the majority of reporting organiza-
tions and now define the inventory turnover ratio as COGS/Inventories. Also, to be
more consistent with many Web-based reporting organizations, we now define the
debt ratio as total debt divided by total assets, the market debt ratio as total debt
divided by total debt plus the market value of equity, and the debt-to-equity ratio
as total debt divided by total common equity. MicroDrive is the company used as
a running example throughout the book, and we changed its financial statements
(which change its ratios) so that MicroDrive would offer additional learning points
when we cover valuation and forecasting in Chapters 8 and 9.

Chapter 8: Basic Stock Valuation We have substantially restructured the

chapter on stock valuation. Rather than starting with the constant growth dividend
growth model, we begin with the constant growth free cash flow valuation model
and progress to the nonconstant growth version. The dividend growth model is
presented as a special case of the free cash flow model. This change serves two
purposes. First, it makes more sense to begin with a model that has broad applica-
tion, unlike the constant growth dividend model, which can be applied successfully
to only a small minority of companies. Second, it allows the chapter to tie in better
with the earlier and financial statement chapters and the later valuation chapters.
We have re-written the examples to work with MicroDrive, with free cash flows
calculated as in the earlier financial statements chapter. We have also added sec-
tions on identifying value drivers, stock price volatility, and the long-run nature of
stock prices.

Chapter 9: Corporate Valuation and Financial Planning We restructured

this chapter to better integrate with the basic stock valuation chapter and with
later chapters that use stock valuation techniques. We separated financial statement
forecasting into two parts—forecasting operations first, and then forecasting the
remaining parts of the financial statements. Additional funds needed (AFN) calcula-
tions are now an integral part of this step.

Chapter 10: Corporate Governance We moved the valuation material from

the previous edition to the stock valuation chapter (Chapter 8) and to the financial
forecasting chapter (Chapter 9). In addition to better integrating the topics in those
chapters, the move allows us to focus on agency conflicts and corporate governance
in this chapter.

Chapter 11: Determining the Cost of Capital We added a new box, “How
Effective Is the Effective Corporate Tax Rate?” This box shows the differences
between the statutory rate and the effective rate over time; it also compares the
U.S. statutory and effective rate with those of other developed economies. For bet-
ter integration, we now use the company in our running example, MicroDrive,
to illustrate cost of capital estimation. We streamlined the chapter’s coverage
of the forward-looking risk premium by moving the discussion of the relatively
complex multistage model to a Web Extension. This allows the text’s coverage
of the forward-looking premium focus on the concepts all MBA students need to

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Other documents randomly have
different content
 “Fanny,” papa said, “will you come in my study a few moments.”
She put her hand over his shoulder, and his arm was around her
waist. I saw them cross the hall, making such a pretty picture that I
smiled. Then the door shut.
This was what happened.
They walked together to the library table. Papa took up a letter,
fingered it idly and studied Fan’s sweet young face.
“I did not mean to speak of this until Monday,” he began, “but I
have a feeling that it may be best finished at once. I received a letter
a few days ago,—in which there was an enclosure for you—this.”
He took out a folded paper and handed it to her. She opened it
wonderingly. Out fell a faded rose with two or three buds.
She gave a low cry and hid her face on papa’s shoulder. He
smoothed the golden hair and presently said in a tremulous tone—
“Will you read my letter? I should like to have you.”
She raised her scarlet face, still keeping her eyes averted. It was
some seconds before she could begin to distinguish the words.
A manly straight-forward appeal to papa from Winthrop Ogden. He
confessed to having spoken hastily in the summer, and promising to
wait long enough to convince Miss Endicott that he was in earnest.
His mind had not wavered from that hour, and now he asked papa’s
permission to visit her and try his fate, convinced that his love was
loyal and earnest. His family admired Miss Endicott, and such an
engagement would meet with their approval, he knew. Might he hope
for an answer soon?
“My darling!”
“Oh papa!” and the fair head went down again.
“Shall I send this young interloper about his business?”
There was no answer except as the soft arms crept up round his
neck.
 “My dear child, what is it?” finding a little place in the forehead to
kiss.
“Can I—do—” and the faltering voice paused.
“Just as you like, my darling. While I should be sorry to give you—
to another,” and there was a pathetic little break in the voice; “still the
young man is unexceptionable. I believe the Churchills would
welcome you warmly. And marrying and being given in marriage is
the way of the world.”
“Then—papa—” and the remainder of the answer was a long,
tender kiss.
“I thought perhaps—Stephen Duncan—”
“Oh, papa, he doesn’t love me—in that way.
“But I know his secret, that is I once saw it gleam out like a tiny
snow-drop in the sun. I am not to be the only happy girl in the world.”
Papa looked a little puzzled, then he sighed.
“Why,” said he dolorously—“there will be only five left!”
 CHAPTER XIV.

T seemed so strange the next day to look at Fan and

think what had happened to her. I was glad to have it
Sunday. The very church bells appeared to have caught
a deeper tone, an awe and sacredness, a being set
apart as it were from the ordinary uses. It was sweet
and beautiful to me, and I was filled with a kind of quiet excitement, a
great throbbing and trembling in every nerve, as if I stood on the
threshold of a new life. Other girls had been engaged or had lovers,
but it did not enter into my soul like this.
She was sweet and dreamy, saying very little. When she sang in
Church her voice had a peculiar tremulousness in it, as if it swept
through great waves of feeling. Mamma was very tender to her.
When their eyes met it was with a mutual understanding made
manifest in the simplest glance. I did not feel jealous. She and papa
surely had the first right to the mystery and blessedness of the new
relation. Papa watched her with wistful eyes, as if he could hardly
resolve to relinquish her.
Thus two or three days passed. We were up in our room, I dusting,
and Fan folding some clothes, and laying ribbons orderly in a pretty
box.
“That is so lovely,” and she shook out a delicate blonde blue. “Mr.
Duncan chose it for me. We went shopping one day with Mrs.
Whitcomb, to buy some table linen. It was such fun! I told him he
wasted his money in riotous living, the fine linen being a sure sign.”
Just then our heads met, mine going down and hers coming up.
We laughed and looked at each other in great confusion.
“O Fan,” I said just under my breath.
“My dear old darling! I want to tell you—”
 “I have guessed,” I said quickly with conscious color. “It is just
right, you and Stephen will be so happy.”
“Stephen!” and she looked at me in surprise. “And papa thought so
too!” at which she laughed gayly.
“Isn’t it Stephen?” in blank amazement.
“Why, no, and mamma has not even hinted?”
“It cannot be Dick Fairlie,” I said wonderingly. “I am sure Jennie—”
“O you little goose! Now as there is just one other man left in the
world you can surely guess.”
I looked at her with that peculiar mental blindness where one may
see, but the thought is shaped to nothing.
“It is not—Winthrop Ogden.”
A great rift of scarlet rushed over her face. Her eyes were
luminous with the dewiness of joy that misses tears, and her lips
trembled.
“Oh Fanny!”
I could only take her in my arms and kiss her.
“He wrote to papa. He cared more than we thought. And there was
—I did not tell you about the rose then. I felt afraid that he was trifling
with me. And somehow—”
I understood it all when she did tell me in her sweet halting way. A
faint glimmering of love, or what might be love if there was truth for a
foundation stone.
“Are you quite certain that Stephen—?”
“Oh you dear, tender heart! Yes, quite sure that he does not love
me only in a friendly fashion. We suit, and can talk of everything. He
will not be so with the woman he loves—at first.”
“But it is so—queer;” and I smiled reflectively.
“Yes. We are not engaged, you know. He only asked for the
privilege of coming honorably. I thought he would wait a year—but
he has not.”
“He is earnest, if impatient.”
“Yes. I believe I like the imperiousness.”
We went down stairs presently, Papa came in with a letter.
“For you, little woman;” he said, looking curiously at me.
I did not wonder at that. It was in Mr. Duncan’s hand, and of
course he was surprised at Mr. Duncan writing to me. But I knew all
about it and broke open the seal hurriedly. It was very brief.
“My Dear, Dear Friend.
Louis came to me on Sunday evening. I understand how
much of the good work has been yours, and have no words to thank
you as I ought. God bless you, always. Louis is quite ill. With love to
you and yours.
S. Duncan.”
I handed it to papa, saying—
“I shall have to tell you the story, first. I have had a secret since
last week, but I could not help it.”
“God be thanked for restoring this last son. Now what is it, Rose?”
I related the particulars of our meeting, and how I had urged Louis
to return, but that being bound by a promise of secrecy, I could only
wait the result.
“You were quite right;” replied papa. “The good seed has not been
utterly wasted. I have great hopes for this young man, after all.
Perhaps just this shock was needed to bring him to his senses.
Peculiar natures need peculiar discipline.”
“How brave and good you are in your quiet way Rose.” Fan said
with her arms around my neck.
I could not see what particular bravery there was in it. It had just
happened. The work had come to my hand, and I could not have
turned away.
 “I am so glad Mrs. Whitcomb is there;” began mamma thoughtfully.
“It seems a special providence. She has so much wisdom and
patience, she can look beyond the little to-day, to the great end. She
does not show you how weak and miserable you are, but raises you
up to her strength, lends it to you, as it were, until you have some of
your own.”
Then we went our ways again a shade more grave, perhaps, but
with a secret joy in our hearts over the “one sinner.” Just now we did
not need to remember the ninety and nine just ones.
The next event was a letter from Mr. Ogden to papa. He expected
to make a flying visit at the West Side, and would take great
pleasure in calling.
He reached the village late Saturday afternoon, and came over in
the evening. He and papa and Fan had a talk in the study, and then
they spent an hour by themselves. Fan looked bright and funny
when she came up stairs.
“Oh, you dear little grandmother;” she began, “how nice it is to
have some one to confess to, when you feel foolish and half
sentimental. If you want to laugh at me you can, there is no law in
the Constitution to forbid it. I am not very far gone in love yet, but I
expect to be some day. Meanwhile, let us be sensible.”
“I have not the slightest objection;” said I gayly.
“I will make my last will and testament while I am of sound mind,
then. Or rather part of this is papa’s. We are not to be really engaged
before Autumn, and in the meanwhile we are to find out on how
many points we agree. But Mr. Ogden is in desperate earnest.”
“You do not seem to be.”
“I really don’t know what I am. I have been tumbled up and down
in my mind and lost my mental equilibrium. But Rose, to think of
Winthrop that very evening telling his Aunt Lucy! And I have been
there time and again, never suspecting it. She has been very sweet
to me.”
“Why not?”
 “I cannot tell, only they are rich, and grand as people say, and I
feel quite small beside them. He doesn’t mean to tell his mother just
yet, but the rest of the family are—glad that it is so. But when his
Aunt Lucy wrote about Mr. Duncan being here he was in a flame at
once. He spoke last summer because he was jealous of Dick Fairlie,
and now because he was jealous of Mr. Duncan.”
“Do you like that?” I inquired gravely.
“Well—” reflectively, tying her hair ribbon around the pin-cushion,
and going off a step to view it, as if the becomingness of that was the
great point for consideration—“yes, I suppose it is best. He thinks so.
I do believe I have a slight penchant for—flirting. It is abominable in a
clergyman’s daughter! Somehow I do not believe the old Adam has
been entirely eradicated in my case. I shall have to go on fighting it
awhile longer. And so—if I know he is watching me and will be made
miserable over it, I shall be more thoughtful.”
“But if you love him—?”
“It isn’t the love—it is the bits of fun that crop out now and then,
and when I laugh, somebody thinks it means something, when it
does not. I could not help about Dick, and I was very sorry. I am so
glad he has taken to Jennie Ryder. And I know Mr. Duncan never
had a thought about marrying me. But it is best to be careful, since
there are men in the world.”
“I think you had better come to bed,” I rejoined, much amused at
her.
“I suppose I had. Good-bye, moralizing. ‘Be good and you will be
happy.’”
But she came and kissed me with rare tenderness.
Mr. Ogden walked home from church with us on Sunday, and
came to tea in the evening. He was very bright and gracious and
made the children like him.
After this they were to correspond until midsummer, when they
would meet again.
 There was another embarrassment to be gone through with. A few
days afterward Miss Churchill came over. Obeying her first impulse,
Fan ran away with blushing cheeks. Mamma and Miss Churchill had
a good long talk to themselves. But after awhile Fan was compelled
to make her appearance.
“My dear child;” and Miss Churchill just took her in her arms and
kissed her. “We all think it very delightful to have a claim upon you.”
The tears sprang to Fan’s eyes. It was sweet indeed to be so
warmly welcomed. Mamma was a little touched by it, too.
“I was very much surprised, and I scolded Lucy roundly for
keeping the secret from me. But if we had chosen we could not have
suited ourselves better. And now, my dear, go get yourself ready, for
I am going to take you home with me and keep you all night. Lucy is
wild to see you.”
Fanny looked at mamma who nodded assent, so she left us rather
lingeringly.
“My dear Mrs. Endicott,” and Miss Churchill came around, laying
her hand on mamma’s shoulder, “I think if I have ever envied any
one in the world, it is you, since I have come to know you thoroughly.
These charming girls growing up beside you should be a crown of
content to any woman.”
“I have been very happy with my husband and children;” and
mamma’s eyes glistened.
“Circumstances shut me out of such hopes. I suppose we all have
our little romances in youth. I too have had a pleasant life, and my
sister has needed my care, so that I do not feel wasted;” and she
smiled. “But I think I was in danger of making my life rather too
narrow. We need something fresh and different from ourselves. Even
we who have the strength to stand alone, like the sweet, tender
sense of a trailing vine reaching towards our hearts. A breath out of
some other living which enters into or demands our sympathy makes
us so much more of kin to the whole world.”
“Indeed it does,” replied mamma warmly. “When you learn to give
and to take out of each other’s sphere and experience, the actual
richness and breadth of existence is made manifest.”
“You have managed to get so much of real sympathy and
heartiness into your girls’ souls. They are natural. There is no aiming
at any superiority. They will always go into beautiful places because
they fit just like a statue in some niche. I cannot tell you what a
pleasure Fanny has been to us. I do not think Kenton is as fond of
Helen, way down in the depths of his heart, though we always had to
coax her into our lives, and alter the niches a little. So we are doubly
glad to have her.”
It was such a sweet, heart-felt welcome that the tears positively
did come to mamma’s eyes this time.
“Thank you a thousand times for your cordiality;” she murmured
with a great tremble in her voice.
“Winthrop is very young, but the Churchill blood is loyal to the last
drop. I think he will be true as steel through any probation. And since
they can have only one spring-time, one glad season of bright,
eager, joyous youth, we will all try to keep out the thorns and let
them ramble to the very mountain tops if they so elect. I dare say
you fancy me a foolish old woman!”
I thought her just splendid! Fan would be rich in love on every
side.
“They are both young,” returned mamma. “Mr. Endicott considers it
best that there should be no formal engagement for the present, but I
feel as if it was quite a settled matter.”
“You must not become jealous if we should monopolize her a great
deal. She is such a comfort to Lucy, with her bright engaging ways.
And I seem to be almost sharing your bliss of motherhood.”
Fan returned just then fairly bewitching in her new timidity. We
kissed all round, and they drove away. I took up my sewing, but the
house seemed strangely still.
“Rose, dear,” mamma began presently, “this will bring a sense of
lonesomeness to you that may be depressing at first. I had hoped
the circle would not be broken quite so soon. But you must be a
brave little girl.”
“Oh,” I replied, “I am happy because she is. And then she will not
leave us for ever so long. But she is so bright and pretty that some
one would have fallen in love with her if it had not been Mr. Ogden.
You will not be robbed of me so soon—if that is any comfort.”
She smiled a little but did not answer.
The affection and honoring seemed to render Fan more humble
than before. She possessed a truly rich and noble nature which
would not be easily puffed up with pride.
Mrs. Fairlie and Kate returned, and a few days afterward we heard
that Mrs. Ogden was at her brother’s.
Kate came over to see us. She had changed indescribably. A
languid society air enveloped her as a garment. She talked with a
slight drawl, pronouncing her words in a very clear, delicate manner,
as if she was afraid of hurting them, Nelly said. All except the r’s,
which she rather ignored.
The months spent at the South had been just lovely. Such
charming people, (“chawming” she said,) so much cultivation,
elegant, refined manners, and oh, such dressing! How any one could
exist in this dull little town she did not see. And the stay in New York
had been splendid! They had become very intimate with Mrs. Ogden.
We had seen Winthrop, of course. Didn’t we think him a most
entertaining young man? She forgot though that we had but a very
slight opportunity of judging. He had spent a number of evenings
with her, and they had been out together. He was quite an eligible
“parti,” with a strong French accent. The whole Churchill estate
would have to be divided between him and his sister presently, since
there were only old maids and old bachelors in the family. But she
should not make up her mind about marrying until after she had
been abroad. American girls often married very handsomely in
foreign countries.
“French Counts for instance,” said Fan.
 “O, but the real article was to be had. And American gentlemen
traveled abroad now instead of going to native watering places. It
was so much more stylish. If Dick only would go with them! Mother
had tried to persuade him to hire the farm out.”
“He must be very lonesome;” said mamma.
“O, he is such an old hermit! He doesn’t care at all for society. Just
give him a book, or a dog, or a lot of kittens and he is perfectly
happy. He will end by being a bachelor like Mr. Churchill, yet I don’t
know as that is altogether to be deplored. Since mamma has a life
right there, it will be as well if there is no wife to interfere.”
She said this with the utmost complacency. I do not suppose she
imagined that it had a selfish sound.
Fan laughed a little afterward. “I shall tell Winthrop that he had
better wait. She might come home from Europe and marry him.”
“I do not believe they will like Jennie Ryder;” I remarked.
“Kate snubbed her long ago. But Dick and she will have a chance
to get settled, I think, without any one’s interference. It is really
fortunate that they are going.”
We saw Mrs. Ogden twice during her stay. She was not as lovely
as Miss Esther, being more worldly-minded, but she had the
Churchill breeding and was a lady.
There was one little feast that we kept by ourselves—baby’s
birthday. She could walk and began to utter pretty words with one
syllable left off, and was the quaintest, cunningest baby in the wide
world as we knew—very well.
“What a short year;” said Fanny. “How many things have been
crowded into it.”
“And we are glad to have you, dear little Dot, if there are seven of
us,” exclaimed Nelly, kissing her extravagantly.
“But Mr. Duncan said he owned her and that he meant to take her
away some day;” declared tiny Tim, who was fast outgrowing her pet
name. It seemed to me that they were all a great deal taller than a
year ago.
“We won’t let him have her just yet,” answered papa. “Or perhaps
some one might go in her place.”
The children glanced at each other in dismay; and papa laughed
heartily.
The birds began to sing and the trees were coming out again. We
went to the woods for wild flowers and had our house fragrant with
them. But in the wake of spring came house-cleaning and gardening,
and then—all the sewing.
“The same thing year after year;” I said to mamma.
“And yet not quite the same either. There is a gradual outgrowing
and ingrowing. There should be a corresponding strength and
sweetness and patience and faith. By and by we come to the whole
stature. But it is the growth of a good many springs, the heat and toil
and watching of many summers, and the ripening of repeated
autumns.”
“I did not take it as high as that.”
“But are we not to?” and mamma’s face was at its sweetest. “I
often think we work, in types. We clean our houses and dust finds
lodgement in them again, we purify our souls by prayer and good
works, and we find the rubbish of indolence and impatience and
selfishness. So we go at it and have another trial.”
“We ought to get strong;” I said thoughtfully.
“We do grow stronger, I hope. And we become more watchful over
our work. You know when our house is first made nice and tidy how
careful we are of littering it again. And when God has helped us by
his grace to purify our souls how earnestly we should try to keep
them so. For they are His temples.”
I thought it over by myself. Yes, everything spoke. The true
meanings of life were not so hard to get at, after all. It was—believe
and do. They went hand in hand.
 And yet it was a curious jumble. You had to come back from the
grand thoughts to the common every-day doings. Dresses and skirts
and aprons, sheets and towels, washing and ironing, and the
inevitable eating. The charm lay in making it as good and as pretty
as possible, with the outside harmony of taste and appropriateness,
and the minor graces of love and kindness.
Fan had taken upon herself some new, odd ways. She began to
grow very motherly with the children, she spent a part of every day in
the kitchen with Ann, and she had a box in one corner of the bureau-
drawer with which she held mysterious consultations. Wonderful
were the patterns of tatting that went into it, the bits of fine
crocheting, the puffs and rufflings gathered and stitched in dainty
fashionings.
For her there could be no expensive trousseau ordered at some
first class city store. It would have to be a labor of love and
necessity.
She was quite demure and precise for awhile, then Harry Denham
came home from the West, and she broke out into a regular frolic.
Nothing very bad or harmful, but her olden self that could not be
altogether repressed. Mamma came in with a guiding hand, and I
think she understood that she was being led over a dangerous place.
Oh, wise and tender mothers, what should we do without you?
I went to Mrs. Ryder’s one afternoon to tea, Jennie had asked me
specially on Sunday. “Come early,” she said, “so that we can have a
nice talk while mother is taking her rest.”
I could imagine what we were to talk about. Jennie kissed me with
a sweet, earnest tenderness, seated me in a low chair by the window
and began to take off my hat, and shawl.
“Your mother is not any worse?” I began by way of getting into the
common-places of talk before we should feel awkward.
“O no. Indeed I think she improves a little. She walks better than
she did.”
“I am so glad of that.”
 “Not that she will ever regain the entire use of her limbs. That
would be too great a hope. But it is so nice to have her even this
way. I sometimes think how lonely and forlorn I should have been
without one dear friend of my very own.”
“I could not spare any one,” I returned, looking away.
“And you have so many.”
At that I smiled a little.
“A year or so ago mamma used to worry a great deal in her sweet
way that was not actual complaining, about being such a burthen.
She thought it was dreadful to have all my plans brought to nought,
when I loved teaching so much. And sometimes I could not see just
why that misfortune had to happen to me.”
“It is clearer now.”
“The way is clearer,—yes. But it is only lately that I have
understood the great truth.”
“I am sure you were always patient and good-tempered.”
“Isn’t there something still higher than that, or wider, maybe? We
do not live to ourselves, after all, or we ought not.”
“No;” I returned a little wonderingly, studying the bright thoughtful
face.
“The knowledge came—with something else. Every day there is a
new unfolding. And I wanted to tell you—”
Her voice trembled and the sweet eyes were downcast, while a
soft flush crept up to her temples.
“Oh, Jennie, we guessed—and we are all so glad. It is about
Richard.”
“Yes.”
Here I was in the midst of another confidence.
“I wanted you to come alone to-day so that we might talk it over. It
is not that I love Fan any less.”
 It was my turn to blush now. I did it with a sense of pain and
shame. As if she divined my distress, she said—
“Richard told me about the day last summer. He did love Fanny
very much—he loves her still in one way. But he understands how
different their natures are.”
“That is just it;” I exclaimed with a sense of relief.
“She wants some one to guide and strengthen her, to be tender,
and yet self-assertive. I do not believe she could ever have made the
best of Richard. And I love to teach. I like the unfolding, the evolving,
something to do, beside living straight along and enjoying one’s self.
And Richard needs to go to school. That is nothing derogatory to
him.”
“No. It is because he has had a rather repressed life. No one
cared for the things which pleased him, except his father.”
“And the woman who takes it ought to spend all her energy in
making it blossom, in bringing it to its best and richest fruitage.”
“As you will.”
“I hope to try. It is the kind of work that I like. But do you not think
—” with much hesitation in her tone, “that it is great good fortune for
me?”
“But you deserve it, every bit. I rejoice that God did send it to you.
Once in awhile some event comes out just right in this world.”
She smiled. “I want to tell you a few of our plans. I cannot help but
think it best that Mrs. Fairlie and Kate have gone abroad. I shall feel
more free, and he will have no opposition to encounter. Though I
was afraid at first that it was not quite fair nor honest.”
“It certainly was best. And if they consult their own fancies and
leave him alone they cannot blame him for marrying.”
“He wanted it to be very soon, though we have been engaged
barely a month. I put it off until Autumn. There are so many things to
think about. And he is so good.”
“He is. There can be no doubt on that point.”
 “You know I could never leave mother. I told him so when he first
spoke. I must have her with me, do for her while she lives, share part
of my interest with her, and take much of hers. A person who cannot
go out is so very dependant. He said that her home should be
always with us, there was plenty of room in the house, and he meant
to be a son to her; that he had never had a real mother like her. I am
to make over all right in this place to her, and she can sell it or rent it,
and have a little income of her own.”
“It is delightful. I shall be thankful to have you in that house. You
will make a home of it, which it never has been.”
“We are going on in a quiet old fashioned way. I suppose people
will think,” and an arch light crossed her face.
“They have not thought very much about it yet.”
“I wanted to tell you first. And your mother and Fanny.”
“Yes;” I replied softly.
That seemed taking the matter too tamely. I ran to her and clasped
my arms around her neck, making an extravagant speech between
my kisses.
Then we branched into relative topics, side issues that presented
themselves in a chance fashion. How wide her range of sight was!
Some way we touched upon position and station.
“That is part of the knowledge;” she said in her bright, sweet way.
“I have learned a lesson that I mean to put in practice if God does
give me the opportunity. It is—holding up, and not pushing down.”
I understood her inconsequent little speech.
“Rich people can do so many pleasant things. Their position keeps
them quite free. They are not misunderstood, at least no one can
accuse them of unworthy motives. It seems to me that they might
sometimes hold out their hands to the next best. It would not hurt
them. I don’t want ever to forget this.”
I knew she would not.
“It has been hard;” I said softly, thinking of the past.
 “Why was I not as good and refined and lady-like? What difference
was it whether I worked for the mothers of children one way or
another, teaching them, or sewing for them? I was not likely to crowd
in without an invitation. And how much better shall I be as mistress of
Mr. Fairlie’s house than I am now?”
“It is one of the bitter and unjust ways of the world.”
“I feel as if I should not like to be taken into favor again solely for
the money. I know the setting usually displays the stone to a better
advantage, but why cannot people see it before the gold begins to
glitter? The only drawback to perfect happiness is that Richard’s
mother and sister would not approve. Yet once Kate Fairlie and I
were very good friends.”
“Kate is not really a fair test. There are others—”
“I know it. I ought to be ashamed to find any fault. But I hope I
never shall forget how it feels to be crowded out of bright and
pleasant things.”
There was a little stir, and a soft voice called—“Jennie.” Presently
Mrs. Ryder made her appearance, and then the real visiting began.
We chatted about the village people, the sick and the well, the
babies and the old folks, mamma’s visit to New York which was not
an old story here. I could see they too, suspected Stephen Duncan
of a penchant for Fanny.
Jennie walked home with me part of the way for exercise, and we
came back to Richard in our talk. She did love him very much. The
money had not tempted her.
I had a thought that afternoon too. As soon as I was alone with
Fan I put it into execution. First I told her of the engagement, and
she rejoiced as thoroughly as I.
“Fan,” I said, “there is one thing that it would be just lovely to do, if
you could manage it. If Miss Churchill and you could call on Jennie
Ryder, and have it look every-day-like and social.”
“What a bright idea, Rose! Miss Churchill will like her ever so
much. It is odd how many nice things you find in people when you
come to know them well. We will bring the West Side over here and
make them admire us.”
 CHAPTER XV.

HERE was quite a lively time in the parish for a

fortnight. Papa had two marriages in Church, one of
which was Annie Fellows and Mr. Hunter. Then Miss
Maynard was married at home in a very exclusive and
elegant manner. Fifty-five dollars for all of it. Wedding
fees were mamma’s money.
“I don’t know as we need spend it just now;” she said, “I think I will
lay it away against time of necessity;” smilingly.
I imagined what that meant. Days and weeks went on so fast.
Then papa’s sister came from Philadelphia to make us a visit; Aunt
Margaret for whom Daisy had been named. She brought with her a
piece of pretty Nainsook muslin and some laces for gifts. There were
the three younger children provided with new summer dresses.
She was sweet and gracious, with that indescribable lady-like
charm, and then she insisted upon helping everywhere. Altering
dresses, dusting rooms, talking to papa or tying up vines and flowers
in the garden—nothing came amiss to her. She petitioned that Daisy
should be lent to her for the remainder of the summer. She had one
son at home, but her two daughters were married and away.
Papa thought at first that it would not be possible to spare her.
Mamma said that she was not prepared for so long a visit.
“Never mind that, Frances,” returned Aunt Margaret, “I will attend
to what is needful. I don’t see how you get along with such a host of
little ones. If Edith had not come—”
“Oh, but Edith is the crown of all;” declared Fan. “She brought rare
good luck with her. So many lovely things have happened to us
during the year. And now we couldn’t spare her.”
Aunt Margaret smiled. “You have been very fortunate in your
children,” she said, glancing at mamma.
 Miss Churchill came over with the barouche and took the elders
riding. It was a lovely afternoon late in May, and the whole world was
abloom with beauty and sweetness.
She and Fanny had dropped in one day at Mrs. Ryder’s and had a
charming call. Afterward Fan had whispered the secret.
“The young man is to be congratulated;” declared Miss Churchill.
“She will make a pretty, cheerful wife, and that will be much to a man
like Mr. Fairlie. I am glad he has been so sensible and I must see
more of her before she leaves her old station. My dear, I am afraid I
shall turn into a regular village gossip, I am so fond of young girls
and their affairs.”
It began to be guessed at elsewhere as well, for the two went out
driving now and then of an afternoon.
Allie West and Dora Hyde were over one evening and it happened
to be touched upon.
“I don’t believe there is anything in it;” exclaimed Dora. “Dick
Fairlie will not throw himself away in that style! Why, he could have
the best in the town with that handsome place of his.”
“I am sure Jennie is quite pretty;” said Fan, “and nicely educated.
She reads French and German, is well up in history and house-
keeping, sings beautifully and sews in the same fashion. What better
can a man want?”
“O, you know what I mean! And she is poor.”
“He has enough for both. And the Ryders are a respectable old
family.”
“I know she is a favorite of yours,” returned Dora loftily, “but I never
discovered anything special about her. And I do not see how she can
leave her mother, I should think her duty would be there.”
Fan laughed at that.
“I shall not believe it until I hear it from a better source. Some
people make so much out of a trifle of ordinary politeness.”
“Indeed I would not,” Fan continued seriously.