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 Dedicated to the memory
of my mother, Dr. Edith Gitman,
who instilled in me the importance
of education and hard work.
LJG
Dedicated to my wonderful children,
Logan, Henry, Evelyn, and Oliver, who provide me with
constant commotion, fun, and affection.
CJZ
Our Proven Teaching
and Learning System

U sers of Principles of Managerial Finance, Brief have praised the effectiveness

of the book’s Teaching and Learning System, which they hail as one of its
hallmarks. The system, driven by a set of carefully developed learning goals, has
been retained and polished in this seventh edition. The “walkthrough” on the
pages that follow illustrates and describes the key elements of the Teaching and
Learning System. We encourage both students and instructors to acquaint them-
selves at the start of the semester with the many useful features the book offers.

Six Learning Goals at the start of the

chapter highlight the most important con-
cepts and techniques in the chapter. Students

1 The Role of Managerial are reminded to think about the learning

goals while working through the chapter by
Finance
strategically placed learning goal icons.
Every chapter opens with a feature, titled
Learning Goals Why This Chapter Matters to You
LG 1 Define finance and the
Why This Chapter Matters to You, that
In your professional life
managerial finance
function.
Accounting You need to understand the relationships between the accounting
helps motivate student interest by high-
LG 2 Describe the legal forms
of business organization.
and finance functions within the firm, how decision makers rely on the financial
statements you prepare, why maximizing a firm’s value is not the same as maxi-
lighting both professional and personal
benefits from achieving the chapter learning
mizing its profits, and the ethical duty you have when reporting financial results to
LG 3 Describe the goal of the investors and other stakeholders.
firm, and explain why
maximizing the value of
the firm is an appropriate
informAtion SYStemS You need to understand why financial information is
important to managers in all functional areas, the documentation that firms must goals.
produce to comply with various regulations, and how manipulating information
goal for a business.
Its first part, In Your Professional Life,
for personal gain can get managers into serious trouble.
LG 4 Describe how the mAnAgement You need to understand the various legal forms of a business
managerial finance organization, how to communicate the goal of the firm to employees and other
function is related to
economics and
stakeholders, the advantages and disadvantages of the agency relationship
between a firm’s managers and its owners, and how compensation systems can
discusses the intersection of the finance
accounting. align or misalign the interests of managers and investors.
mArketing You need to understand why increasing a firm’s revenues or market
topics covered in the chapter with the con-
LG 5 identify the primary
activities of the financial
manager.
share is not always a good thing, how financial managers evaluate aspects of
customer relations such as cash and credit management policies, and why a
cerns of other major business disciplines. It
LG 6 Describe the nature of
firm’s brands are an important part of its value to investors.
operAtionS You need to understand the financial benefits of increasing a firm’s
encourages students majoring in accounting,
the principal–agent
relationship between the
owners and managers of
production efficiency, why maximizing profit by cutting costs may not increase
the firm’s value, and how managers act on behalf of investors when operating a information systems, management, mar-
corporation.
a corporation, and
explain how various
keting, and operations to appreciate how
In your personal many of the principles of managerial finance
life also apply to your personal life. Learning a
corporate governance
mechanisms attempt to few simple financial principles can help you manage your own money more
financial acumen will help them achieve
manage agency
problems.
effectively.
their professional goals.
The second part, In Your Personal Life,
identifies topics in the chapter that will have
particular application to personal finance.
This feature also helps students appreciate
2
the tasks performed in a business setting by
pointing out that the tasks are not neces-
sarily different from those that are relevant
M01_GITM7690_14_SE_C01_P001-029.indd 2 26/11/13 2:23 PM in their personal lives.

v
 1989; and May 20, 2013

Yield to Mat
10
TABLE 1.1 ➔ REVIEW
Strengths and Weaknesses of the Common September
QuESTIoNS
Legal 29, 1989
Forms of Business Organization
8 6–1 What is the real rate of interest? Differentiate it from the nominal rate of
interest for the risk-free asset, a 3-month U.S. Treasury bill.
Sole proprietorship Partnership Corporation
6 6–2 What is the term structure of interest rates, and how is it related to the
Strengths • Can raise moreMay
yield curve?
• Owner receives all profits (and funds 20, 2013• Owners have limited liability,
than sole
4
sustains all losses) 6–3 For a given class of similar-risk securities, what does each of the follow-
proprietorships which guarantees that they can-
ing yield curves reflect about interest rates: (a) downward sloping,
• Low organizational costs • Borrowing power enhanced by not lose more than they invested
(b) upward sloping, and (c) flat? What is the “normal” shape of the
2 included and taxedyield
• Income on curve?more owners • Can achieve large size via sale of
proprietor’s personal tax
6–4return • Morethe
Briefly describe available brain
following power
theories of and ownership
the general shape of(stock)
the yield
0
• Independence curve: (a) managerial
expectationsskill
theory, (b) liquidity • Ownership
preference (stock)
theory, andis readily
• Secrecy 5 10 15 included
• Income
(c) market segmentation 20 25 on 30
and taxed
theory. transferable
• Ease of dissolution 6–5 List and briefly describe
partner’s the potential
personal tax issuer- and• issue-related
Long life ofrisk
firmcom-
Time
ponentsto Maturity
that are embodied in
return (years)
the risk premium. • Which areprofessional
Can hire the purely
debt-specific risks? managers
Sources: Data from U.S. Department of the Treasury, Office of Domestic Finance,
• Has better access to financing
Office of Debt Management.
Weaknesses • Owner has unlimited liability in • Owners have unlimited liability • Taxes are generally higher be-

Learning goal icons tie chapter con- LG 2

that total wealth can be taken to
LG 3
satisfy debts6.2 Corporate Bonds
and may have to cover debts of
other partners
cause corporate income is taxed,
and dividends paid to owners

tent to the learning goals and appear • Limited fund-raising power • Partnership is dissolved when a
shown in Figure 6.3. In other words, interest rates in May 2013 were unusually
MyFinanceLab Video A corporate bond ispartner
tends to inhibit growth a long-term
are also taxed at a maximum
dies debt instrument indicating
15% thatrate
a corporation
must behas borrowed a certain amount of money and promises to repay it in the future
low, largely because at that time the economy was still recovering from a deep
next to related text sections and again in corporate• Proprietor
bond jack-of-all- • Difficult to liquidate or transfer • More expensive to organize than
under clearly defined terms. Most bonds are issued with maturities of 10 to
A long-termtrades
debt instrument partnership other business forms
30 years and with a par value, or face value, of $1,000. The coupon interest rate
recession, and the Federal Reserve was exerting downward pressure on interest
• that
indicating Difficult to give employees
a corporation
on a bondlong- • Subject tobe
greater government
the chapter-end summary, end-of-chapter
flat yield curve
has borrowed a certain
represents the percentage of the bond’s par value
rates to stimulate the economy. Sometimes, a flat yield curve, similar to that of
run career opportunities
that will
regulation
amount of money and promises nually, typically in two equal semiannual payments, as interest. The bondholders,
paid an-

to repay•it in
Lacks continuity when propri-
who are • payments
the lenders, are promised the semiannual interest Lacks secrecy because
and, at ma- regula-
homework materials, and supplements
the future under
A yield curve that indicates September 29, 1989, exists. A flat yield curve simply means that rates do not vary
etorterms.
clearly defined dies turity, repayment of the principal amount. tions require firms to disclose
that interest rates do not vary much at different maturities.
financial results
such as the Study Guide, Testmuch Item File,maturities.
at different
The shape of the yield curve may affect the firm’s financing decisions. A fi-
and MyFinanceLab. nancial manager who faces a downward-sloping yield curve may be tempted to
rely more heavily on cheaper, long-term financing. However, a risk in following
M06_GITM7690_14_SE_C06_P225-269.indd 237 26/11/13 3:43 PM

For help in study and review, boldfaced this strategy is thatCorporations

interest rates may fall in the future, so long-term rates that
key terms and their definitions appear seem cheap todayAmay
corporation be relatively
corporation is an entityexpensive
created by law. tomorrow.
A corporation Likewise,
has the legalwhenpowersthe of
yield
An entity curve
created by law.is upward sloping,
an individual theit can
in that manager
sue and be may
sued,believe
make andthat it is
be party wise to and
to contracts, use
in the margin where they are first intro- cheaper, short-term acquire propertyRelying
financing. in its own onname. Although financing
short-term only about 20 has percent
its ownof allrisks.
U.S.
stockholders businesses are incorporated, the largest businesses
ChaPTer 5 Time nearly
Valuealways
of Money are; corpora-175
duced. These terms are also boldfaced in Firms
The owners of athat borrowtions
corporation,
whose ownership, or equity,
on account
a short-term
for roughly basis may see
80 percent their
of total costsrevenues.
business rise if Although
interestcorpo-rates
the book’s index and appear in the end- takes go up.of Even
the form commonmore serious
stock rations is the
engage
Although in risk
theall that
types
cash flows a both
of of firmannuities
businesses, may not
manufacturing be able
in Table firms
5.1 toaccount
total refinance
$5,000, for
thethe a
an-
or, lessshort-term loan when
frequently, preferred largest
nuityitportion
comes
due wouldof due.
corporate
have A business
variety
a higher receipts
of
future factors
value and
thannettheprofits.
influence
ordinary Table
the 1.1 lists
choice
annuity the
of
because
of-book glossary. stock.
loan maturity, but the
key strengths
eachshape and
of its five
ofof
weaknesses
annual
the yield
of
cash flows corporations.
curve canisearn interest forthat
something
stockholders,
1 yearmanagers
more than each must of
limited liability theThe owners
ordinary a corporation
annuity’s cash flows.areIn its
general, as will bewhose ownership,
demonstrated laterorineq-
this
A legalconsider when
provision that limits making
uity, decisions
takes
chapter, the formabout
thevalue (present short-term
of common stock or,
or future) of an versus
less long-term
frequently,
annuity alwaysborrowing.
due ispreferred stock. than
greater Unlikethe
the owners
of anofotherwise
sole proprietorships or partnerships,
annuity. stockholders of a corporation
Matter of Fact boxes provide interesting stockholders’ liability for a
corporation’s debt to the
value
limited liability,
enjoy Because
identical ordinary
ordinary meaning
annuitiesthat they are
are more not personally
frequently liable forunless
used in finance, the firm’s
other-
empirical facts that add background Matter of fact
amount they initially invested in debts. Their losses
wise specified, theare
termlimited
annuityto the amountthroughout
is intended they investedthisinbook
the firm when
to refer to they
ordi-
the firm by purchasing stock. purchased shares
nary annuities. ChaPTer
of stock. In5 Time
Chapter Value
7, you of Money
will learn more about181common
and depth to the material covered in the commonBondstock Yields Hit Record stock, butLowsfor now it is enough to say that common stock is the purest and most
The purest and most basic form basic form of corporate ownership. Stockholders expect to earn a return by re-
chapter.
O
ofComparison n Julyof25, an2012, FindinG
annuity dueThe
the 10-year with FuTure
Treasuryannote VaLue
and
ordinary oF Treasury
30-year an ordinarY
annuity bond
Present yieldsannuiTY
Value reached
corporate ownership. ceiving dividends—periodic distributions of cash—or by realizing gains through
The present
dividends all-time
value lows
ofofan 1.43%
increases
One way
annuity and 2.46%.
intoshare
find the
due is That
price.
future
always was
Becausegood
value the news
of an
greater money forto
ordinary
than thepay
the housing
annuity
present is market.
dividends
to calculate
value Many
generally
of thecomes
an future
Periodic distributions of cash to fromvaluetheofprofits
each ofthat
the aindividual
firm earns, stockholders
cash are sometimes
flows and then add up those referred to as
figures. re-
Fortu-
mortgage
otherwise rates areordinary
identical linked to rates on Treasury
annuity. We securities.
can verify For example,
this statementthe traditional
by comparing30-year
the stockholders of a firm. sidual
nately,claimants, meaning
there are several that stockholders
shortcuts to get to the are paidYou
answer. last,can
after employees,
calculate the fu-
mortgagevalues
the present rate is of
typically
theturelinked
value to
Braden the yield on 10-year
ofCompany’s
an ordinary Treasury
two annuities:
annuity that pays annotes.
annualWith mortgage
cash flow equal rates
to CF by
reaching new lows, potential using Equation 5.3: that they could afford more expensive homes, and
buyers found
Ordinary annuity 5 $2,794.90 versus Annuity due 5 $3,018.49
existing homeowners were able to refinance their existing loans, lowering their monthly mort-
n
Because 3 (1 +beginning
r) - 1 4 of the period
gagethe cash and
payments flowleaving
of thethemannuity due
with more occurs
money
FV at the
to spend
n = CF * e
on other things.
f This kind of activ-(5.3)
rather than at the end, its present value is greater. If we r
calculate therates
percentage
ity is precisely what the Federal Reserve hoped to stimulate by keeping interest low during
difference in the
the economic
M01_GITM7690_14_SE_C01_P001-029.indd values of these two annuities, we will find that the annuity due is
7 recovery. 26/11/13 2:23 PM

8 percent more valuableAsthan theinannuity:

before, this equation r represents the interest rate, and n represents the
number of payments in the annuity (or, equivalently, the number of years over
- $2,794.90)
($3,018.49which the annuity is , $2,794.90
spread). = 0.08required
The calculations = 8,to find the future value of
an ordinary annuity are illustrated in the following example.

Personal Finance Examples demon- Matter of fact

Fran Abrams wishes to determine how much money she will
IRF Personal Finance example 5.7
strate how students can apply managerial
▶

Getting Your (Annuity) Due have at the end of 5 years if she chooses annuity A, the ordinary
annuity. She will deposit $1,000 annually, at the end of each of the next
finance concepts, tools, and techniques to
K
M06_GITM7690_14_SE_C06_P225-269.indd 233 26/11/13 3:43 PM
ansas truck driver Donald
5 years,Damon
into agot the surprise
savings accountof his life when
paying he learned
7% annual that he
interest. This situation is
depicted on the following time line.
their personal financial decisions. held the winning ticket for the Powerball lottery drawing held November 11, 2009. The
advertised lottery jackpot was $96.6 million. Damon could have chosen to collect his prize in
Time
30line for future
annual value of of $3,220,000 (30 3 $3.22 million 5 $96.6 million), but instead
payments $1,310.80he
an ordinary annuity ($1,000 1,225.04
elected to
end-of-year acceptearning
deposit, a lump sum payment of $48,367,329.08, roughly half the stated1,144.90
jackpot
7%,total.
at the end of 5 years) 1,070.00
1,000.00
$5,750.74 Future Value

FindinG The PresenT $1,000

VaLue oF a$1,000
$1,000
PerPeTuiTY
$1,000 $1,000

perpetuity A perpetuity is an annuity0 with1 an infinite

2 life.3 In other4 words, 5 it is an annuity
An annuity with an infinite life, that never stops providing its holder with a End cashof flow
Year at the end of each year (for
providing continual annual example, the right to receive $500 at the end of each year forever).
cash flow.
It is sometimes necessary to find
As the figure shows,the present
at the end of value
year 5, of
Frana will
perpetuity. Fortu-
have $5,750.74 in her ac-
count. Note that because the deposits are made at the end of the year, the first
nately, the calculation for the present value of a perpetuity is one of the easiest in
finance. If a perpetuity pays an annual cash flow of CF, starting 1 year from now,
the present value of the cash flow stream is

Key Equations appear in blue boxes PV = CF , r (5.7)

throughout the text to help readers iden- M05_GITM7690_14_SE_C05_P162-224.indd 175 26/11/13 4:10 PM

tify the most important mathematical

relationships. The variables used in these Ross Clark wishes to endow a chair in finance at his alma
IRF Personal Finance example 5.11 ▶
equations are, for convenience, printed on mater. The university indicated that it requires $200,000 per
year to support the chair, and the endowment would earn 10% per year. To de-
the front endpapers of the book. termine the amount Ross must give the university to fund the chair, we must de-
termine the present value of a $200,000 perpetuity discounted at 10%. Using
Equation 5.7, we can determine that the present value of a perpetuity paying
$200,000 per year is $2 million when the interest rate is 10%:
vi PV = $200,000 , 0.10 = $2,000,000
In other words, to generate $200,000 every year for an indefinite period requires
$2,000,000 today if Ross Clark’s alma mater can earn 10% on its investments. If
 180 ParT 2 Financial Tools

present value each annuity due cash flow is discounted back 1 less year than for an
ordinary annuity. The algebraic formula for the present value of an annuity due is

CF 1
PVn = a b * c1 - d * (1 + r) (5.6)
r (1 + r)n

Notice the similarity between this equation and Equation 5.4 on page 176. The
two equations are identical except that Equation 5.6 has an extra term at the end,
(11r). The reason for this extra term is the same as in the case when we calcu-
lated the future value of the annuity due. In the annuity due, each payment ar-
rives 1 year earlier (compared to the annuity), so each payment is worth a little
more, 1 year’s interest more.

IRF example 5.10 ▶ In Example 5.8 of Braden Company, we found the present value of Braden’s Examples are an important component
$700, 5-year ordinary annuity discounted at 8% to be $2,794.90. If we now as-
sume that Braden’s $700 annual cash flow occurs at the start of each year and is
of the book’s learning system. Numbered
thereby an annuity due. This situation is depicted on the following time line. and clearly set off from the text, they
Time line for present value
of an annuity due ($700 0 1
Beginning of Year
2 3 4 5
provide an immediate and concrete dem-
beginning-of-year cash
$700 $700 $700 $700 $700
onstration of how to apply financial con-
flows, discounted at 8%,
over 5 years)
$ 700
cepts, tools, and techniques.
648.15
600.14 Some examples demonstrate time-value-
555.68
514.52 of-money techniques. These examples
Present Value $3,018.49
often show the use of time lines, equa-
We can calculate its present value using a calculator or a spreadsheet.
tions, financial calculators, and spread-
MyFinanceLab Financial Calculator use Before using your calculator to find the present value of an annuity
Calculator due, you must either switch it to BEGIN mode or use the DUE key, depending on the sheets (with cell formulas).
specifics of your calculator. Then, using the inputs shown at the left, you will find the
New! An IRF icon, which appears
Note: Switch calculator
to BEGIN mode. present value of the annuity due to be $3,018.49 (Note: Because we nearly always
Input Function assume end-of-period cash flows, be sure to switch your calculator back to END
700 PMT mode when you have completed your annuity-due calculations.) with some examples, indicates that the
example can be solved using the interest
5 N
Spreadsheet use The present value of the annuity due also can be calculated as
8 I
shown on the following Excel spreadsheet.
CPT
PV A B
rate factors. The reader can access the
Solution
1
2
PRESENT VALUE OF AN ANNUITY DUE
Annual annuity payment $700
Interest Rate Factor Supplement at
23,018.49
3
4
Annual rate of interest
Number of years
8%
5
MyFinanceLab. The Interest Rate Factor
5 Present value
Entry in Cell B5 is =PV(B3,B4,B2,0,1).
–$3,018.49 Supplement is a self-contained supple-
The minus sign appears before the $3,018.49
in B5 because the annuity’s present value
ment that explains how the reader should
is a cost and therefore a cash outflow. use the interest rate factors and docu-
ments how the in-chapter examples can
be solved by using them.
MyFinanceLab contains additional resources to demonstrate the examples. New!
M05_GITM7690_14_SE_C05_P162-224.indd 180
The MyFinanceLab Financial Calculator reference indicates that the reader
26/11/13 4:10 PM

can use the finance calculator tool in MyFinanceLab to find the solution for an
example by inputting the keystrokes shown in the calculator screenshot. New!
The MyFinanceLab Solution Video reference indicates that the reader can watch
a video in MyFinanceLab of the author discussing or solving the example. New!
182 ParT 2 Financial Tools The MyFinanceLab Video reference indicates that the reader can watch a video
on related core topical areas.
the university earns 10% interest annually on the $2,000,000, it can withdraw
$200,000 per year indefinitely.

➔ reVieW QuesTions Review Questions appear at the end of each major text
5-10 What is the difference between an ordinary annuity and an annuity due? section. These questions challenge readers to stop and test
Which is more valuable? Why?
5-11 What are the most efficient ways to calculate the present value of an their understanding of key concepts, tools, techniques, and
ordinary annuity?
5-12 How can the formula for the future value of an annuity be modified to practices before moving on to the next section.
find the future value of an annuity due?
5-13 How can the formula for the present value of an ordinary annuity be
modified to find the present value of an annuity due? New! Excel Review Questions ask readers to com-
5-14 What is a perpetuity? Why is the present value of a perpetuity equal to
the annual cash payment divided by the interest rate?
plete problems using a simulated Excel spreadsheet in
MyFinanceLab that resemble the examples demonstrated
➔ exCeL reVieW QuesTions MyFinanceLab in the corresponding section. These problems allow stu-
5-15 Since tax time comes around every year you smartly decide to make
equal contributions to your IRA at the end of every year. Based on the dents to gain experience building Excel spreadsheet solu-
information provided at MFL, calculate the future value of annual IRA
contributions grown until retirement.
tions and developing valuable business skill.
5-16 You have just graduated from college, begun your new career, and
now it is time to buy your first home. Based on the information pro-
vided at MFL, determine how much you can spend for your new
dream home.
5-17 Rather than making contributions to an IRA at the end of each year,
you decide to make equal contributions at the beginning of each
year. Based on the information provided at MFL, solve for the future
value of beginning-of-year annual IRA contributions grown until re-
tirement.

LG 4 5.4 Mixed streams

Two types of cash flow streams are possible, the annuity and the mixed stream.
­­vii
mixed stream Whereas an annuity is a pattern of equal periodic cash flows, a mixed stream is a
A stream of unequal periodic stream of unequal periodic cash flows that reflect no particular pattern. Financial
cash flows that reflect no
managers frequently need to evaluate opportunities that are expected to provide
particular pattern.
mixed streams of cash flows. Here we consider both the future value and the
present value of mixed streams.

FuTure VaLue oF a Mixed sTreaM

Determining the future value of a mixed stream of cash flows is straightforward.
 LG 1 8.1 Risk and Return Fundamentals
In most important business decisions there are two key financial considerations:
risk and return. Each financial decision presents certain risk and return characteris-
tics, and the combination of these characteristics can increase or decrease a firm’s
share price. Analysts use different methods to quantify risk, depending on whether
portfolio they are looking at a single asset or a portfolio— a collection or group of assets. We
A collection or group of assets. will look at both, beginning with the risk of a single asset. First, though, it is impor-
tant to introduce some fundamental ideas about risk, return, and risk preferences.

RISk DEFINED
risk In the most basic sense, risk is a measure of the uncertainty surrounding the re-
A measure of the uncertainty turn that an investment will earn. Investments whose returns are more uncertain
surrounding the return that an are generally riskier. More formally, the term risk is used interchangeably with
investment will earn or, more uncertainty to refer to the variability of returns associated with a given asset. A
formally, the variability of
returns associated with a given
$1,000 government bond that guarantees its holder $5 interest after 30 days has
asset. no risk because there is no variability associated with the return. A $1,000 invest-
ment in a firm’s common stock is very risky because the value of that stock may
move up or down substantially overChaPTer
the same 305days.
Time Value of Money 199
In Practice boxes offer insights into impor-
focus on EThICS A B
tant topics in managerial finance through If It Seems Too Good to Be True, REPAY
It Probably
1
Is LOAN AMOUNT
SOLVING FOR THE YEARS TO
A SINGLE
the experiences of real companies, both large in practice For many years, inves- 2 Present
tors around the world
Over thevalue years, suspicions were reported in these statements.
raised about Madoff. He generated high court ruling only permits claims up to the
$25,000 However, a
3 Annual rate of interest 11%
and small. There are three categories of In clamored to invest with Bernard
Madoff. Those fortunate enough to
returns year after year, seemingly with
4 very
Annual payment
little risk. amount
Madoff credited his com-
difference between the amount an inves-
–$4,800.00
tor deposited with Madoff
Chapter 7 Stock Valuation
and the
269
invest with “Bernie” might not have 5 plex
Number
trading of years
strategy for his investment 8.15 The judge
amount the investor withdrew.
Practice boxes: understood his secret trading system,
but they were happy with the double-
performance, but other investors
Entry in Cell B5 is =NPER(B3,B4,B2,0,0).
employed similar strategies with much
also ruled that investors who managed to
withdraw at least their initial investment
The minus sign appears before the $4,800
focus on praCtiCe
digit returns that they earned. Madoff different results than Madoff reported. before the fraud was uncovered are not

Focus on Ethics boxes in every chapter help

was well connected, having been the Harry Markopolos in B4went because
as far as to the sub-loaneligible
payments
to recover additional funds.
chairman of the board of directors of mit a report to the SEC 3 years prior
are treated as to Total out-of-pocket cash losses
cash outflows.
Understanding
the NASDAQ Stock Market and Human a Behavior
Madoff’s Helps
arrest, titled “The World’sUs Larg- Understand
as a result of Madoff’s Investor
fraud were Behavior

readers understand and appreciate important founding member of the International

in practice
Securities
Market anomalies are
Clearing Corporation. His
est Hedge Fund Is a Fraud,” that
embarrassment about losing money on a
detailed his concerns.
patterns inconsistent On June popular stock than about losing tion
estimated to be $17.5 billion. In early
Other investor behaviors are pros-
2013, the Securities Investor Protec-
money pect theory and anchoring. According to
credentials seemed to be impeccable. 29, 2009, after a lengthy Corporation reported that more
ethical issues and problems related to mana- with the efficient
However,
havioral
something
as the old
finance
sounds
market
sayinghypothesis.
goes, if trial
reVieW QuesTions
has atonumber
➔good
too be true, of
Be-and on
it theo-
was sentenced
an unknown
eventual
People
conviction,
to 150 have
years
or unpopular
Madoff
a in
tendency
stock.
prison. to place
prospect
than 53 percent of thetheory,
ent degree
either been returned
people express a differ-
funds had
of emotion
or were in the toward gains than
ries tois.help explain howlearned
human emo- Madoff’sparticular events into mentalto accounts, losses.returned
Individuals are stressed more by
gerial finance. probably
this lesson
Madoff’s
tions influence
the hard way
decision-making
December 11, 2008, the
investors
5-26
people
when, inon
processes.
How
their can
investment
recover you
U.S. Securities account partments
investors are
anddetermine
what the
still working
theydifference
can. Fraudulent
statements sentsometimes
the sizethese
between
just priorinfluences
to
process of being
ofdefrauded
the equal,
com-
behavior
annual,
prospective
customers.
to Madoff’s
lossesend-of-period
than they are buoyed
by the prospect of equal gains. Anchor-
de-
and Exchange Commission (SEC)
posits
Regret theory deals with the emo-
necessary
Madoff’s arrest
to accumulate
indicated that investors’
more than the events themselves.allowing
a certain
▶ What are
Re-
future sum
some hazards at
of the end of a spec-
ing is the tendency of investors to place
investors to pursue claims
Focus on Practice boxes take a corpo- charged
Madoff’s
Madoff
tional
hedgethey
realizing
withpeople
reaction
fund, Ascot
have 5-27
made
ified future
securitiesexperience
fraud.
Partners,
turned out to be a giant Ponzi scheme.
Describe
an
after period
accountssearchers
contained have
lion, in aggregate.
error in the ingprocedure
question:
at
moreaasked
Many
sued claims based on the balance
given
than $64
people
investors
“Would usedyou
annual
bil- thebased
pur-purchase a
to amortize
interest
follow- more
on their
statements?tend
rate?
most
a loan
value on recent
recent
to giveinto
account
too much
information. People
a series
credenceof equal
to recent

rate focus that relates a business event or

judgment. When deciding whether to $20 ticket at the local theater if you real- market opinions and events and mistak-
periodic payments.
sell a stock, investors become emotion- ize after you get there that you have lost enly extrapolate recent trends that differ
a
5-28 How can you determine a $20 bill?” Roughly the
www.sec.gov/news/studies/2009/oig-509/exhibit-0293.pdf
ally affected by the price at which they unknown
88 percent of peo- number of long-term
from historical, periods whenandyou
averages
situation to a specific financial concept or purchased the stock. A saleknow at a lossthe present
ple would and
do so. future values—single
Under another
would confirm that the investor miscalcu- nario, people were asked whether they
sce- amount
probabilities. or annuity—and
Anchoring is a partial ex-
planation for the longevity of some bull
the applicable rate of interest?
technique. lated the value of the stock when it was would buy a second $20 ticket if they
purchased. The correct approach when arrived at the theater and realized that
markets.
Most stock-valuation techniques re-
considering whether to sell a stock is, they had left at home a ticket purchased quire that all relevant information be
“Would I buy➔ thisexCeL
stock today ifreVieW
it were QuesTions
in advance for $20. Only 40 MyFinanceLab
percent of available to properly determine a stock’s
Both types of In Practice boxes end with one already liquidated?” If the answer is
“no,” it is time to 316
M08_GITM7690_14_SE_C08_P312-361.indd
5-29
sell. You
Regret theory want
respondents would buy another. In both
also to buy athenew
scenarios, personcar
is outas
$40,a graduation
but
value and potential for future gain. Be-
havioralpresent
finance may forexplain
yourself,
the connec-
26/11/13
but
2:49 PM

or more critical thinking questions to help holds true for investors whobeforepassed up
buying a stock that now is selling at a
amount.
finalizing a purchase
mental accounting leads you need to consider
to a different tion betweenthe monthly
valuation
outcome. In investing, compartmentaliza- actions based on that valuation.
Based on the information provided at MFL, find
and anpayment
the
investor’s
monthly
much higher price. Again, the correct tion is best illustrated by the hesitation to
readers broaden the lesson from the content approach is to value the stock payment
today amount for thethat
sell an investment caronce
youhadaremon-considering.
▶ Theories of behavioral finance can
apply can
to other areas of human be-
without regard to its5-30 As a savvy finance
prior value. strous gainsmajor
and nowyou has arealize
modest that you quickly estimate your
of the box. Herding is another market behavior
retirement
affecting investor decisions. Some
gain. During bull markets, people get ac- havior in addition to investing. Think
age by knowing how
customed to paper gains. When a mar-
much you ofneed to retire,
a situation how
in which you much
may have you
can contribute
investors rationalize their decision each month
to buy ket correction to yournetretirement
deflates investors’ account,
demonstrated oneand what
of these rate of
behav-
certain stocks with “everyone return you can earn on your retirement investment and solving for the
else is do- worth, they are hesitant to sell, causing iors. Share your situation with a
ing it.” Investors may feel less them to wait for the return of that gain. classmate.
number of years it will take to get there. Based on the information pro-
vided at MFL, estimate the age at which you will be able to retire.

where
P0 = value today of common stock

The end-of-chapter Summary summary

Dt = per @share dividend expected at the end of year t
rs = required return on common stock
consists of two sections. The first The equation can be simplified somewhat by redefining each year’s dividend, Dt,
200 ParT 2 Financial Tools FoCus onconstant
VaLue
in terms of anticipated growth. We will consider three models here: zero growth,
section, Focus on Value, explains growth, and variable growth.
Time value of Zero-Growth
money is anModel
important tool that financial managers and other mar-
how the chapter’s content relates to overall goal Anofapproach
zero-growth model
sharetoketdividend
price maximization.
participants use
The to assess
simplest the effects
It will
approach of proposed
become
to dividend actions.
clear
valuation, Because
in Chapters
the zero-growth firms
model, have
6assumes
and a7
valuation that long lives
assumes a and constant,
some decisions affect theirstream.
long-term cash flows, thealready
effective appli-
the firm’s goal of maximizing owner that the application of time
constant, nongrowing
stream.
cation
nongrowing dividend In terms of the
dividendvalue techniques is a key part of the value determina-
of time-value-of-money techniques D1 =is D
extremely
2 = g = D∞
notation
important. These tech-
introduced,

tion process neededniques to make enableintelligent value-creating decisions.

wealth. This feature helps reinforce financial managers to evaluate cash flows occurring at different
times so as to combine, compare, and evaluate them and link them to the firm’s
understanding of the link between
reVieW oF LearninG GoaLs
the financial manager’s actions and
share value. LG 1 M07_GITM6408_7_SE_C07_P254-292.indd 269 1/15/14 2:38 PM

Discuss the role of time value in finance, the use of computational tools,
and the basic patterns of cash flow. Financial managers and investors use time-
The second part of the Summary, M05_GITM7690_14_SE_C05_P162-224.indd 199 26/11/13 4:10 PM
value-of-money techniques when assessing the value of expected cash flow
the Review of Learning Goals, streams. Alternatives can be assessed by either compounding to find future
restates each learning goal and value or discounting to find present value. Financial managers rely primarily
on present value techniques. Financial calculators, electronic spreadsheets, and
summarizes the key material that financial tables can streamline the application of time value techniques. The
was presented to support mastery cash flow of a firm can be described by its pattern: single amount, annuity, or
of the goal. This review provides mixed stream.
students with an opportunity to rec- LG 2
Understand the concepts of future value and present value, their calcula-
oncile what they have learned with tion for single amounts, and the relationship between them. Future value (FV)
the learning goal and to confirm relies on compound interest to measure future amounts. The initial principal or
deposit in one period, along with the interest earned on it, becomes the begin-
their understanding before moving ning principal of the following period.
forward. The present value (PV) of a future amount is the amount of money today
that is equivalent to the given future amount, considering the return that can be
earned. Present value is the inverse of future value.
LG 3
Find the future value and the present value of both an ordinary annuity
and an annuity due, and find the present value of a perpetuity. An annuity is a
pattern of equal periodic cash flows. For an ordinary annuity, the cash flows
occur at the end of the period. For an annuity due, cash flows occur at the be-
ginning of the period.
The future or present value of an ordinary annuity can be found by using
algebraic equations, a financial calculator, or a spreadsheet program. The value
of an annuity due is always r% greater than the value of an identical annuity.
viii The present value of a perpetuity—an infinite-lived annuity—equals the annual
cash payment divided by the discount rate.
LG 4
Calculate both the future value and the present value of a mixed stream
of cash flows. A mixed stream of cash flows is a stream of unequal periodic cash
flows that reflect no particular pattern. The future value of a mixed stream of
cash flows is the sum of the future values of each individual cash flow. Similarly,
the present value of a mixed stream of cash flows is the sum of the present val-
 ChAPTER 3 Financial Statements and Ratio Analysis 95

responsible for the firm’s financial performance. It enables the firm to break the
return on common equity into three components: profit on sales, efficiency of
asset use, and use of financial leverage.

148 PArT 2 Financial Tools

opener-in-Review
b. How much financing, if any, at a maximum would Carroll Company require to
meet its obligations during this 3-month period?
c.ForAthe
proyear
forma balance
ended sheet dated
December 31,at the end
2012, of JuneDynamics
General is to be prepared from
reported theofin-
sales
formation
$31.5 millionpresented.
and costGive the size
of goods of each
sold of themillion.
of $26.4 following: cash,
What notes
was thepayable,
company’s
marketable
gross securities,
profit margin thatand accounts receivable.
year?

LG 5 ST4–3 Pro forma income statement Euro Designs, Inc., expects sales during 2016 to rise
from the 2015 level of $3.5 million to $3.9 million. Because of a scheduled large
Self-Test Problems, keyed to the
Self-Test Problems
loan payment, the interest expense in 2016 is expected to drop to $325,000. The
(Solutions in Appendix) learning goals, give readers an oppor-
firm plans to increase its cash dividend payments during 2016 to $320,000. The
LG 3 LG 4 ST3–1 company’s year-end
Ratio formulas and 2015 income statement
interpretations Without follows.
referring to the text, indicate for each
of the following ratios the formula for calculating it and the kinds of problems, if
tunity to strengthen their under-
LG 5 Euro Designs, Inc., Income Statement for the
any, the firm may have if that ratio is too high
Year Ended December 31,relative
2015 to the industry average. What standing of topics by doing a sample
if the ratio is too low relative to the industry average? Create a table similar to the
Sales revenue
one that follows and fill in the empty blocks.
Less: Cost of goods sold
$3,500,000
1,925,000
problem. For reinforcement, solutions
Gross profits $1,575,000 to the Self-Test Problems appear in
Less: Operating expenses 420,000
Ratio
Operating profits
Too high Too low
$1,155,000 the appendix at the back of the book.
Current ratio 5
Less: Interest expense
InventoryNet
turnover
profits5before taxes
400,000
$ 755,000
An IRF icon indicates that the Self-
Times interest earned 5
Less: Taxes (rate = 40%)
Gross profit margin 5
302,000 Test Problem can be solved using
the interest rate factors. The reader
Net profits after taxes $ 453,000
Return on total assets 5
Less: Cash dividends 250,000
Price/earnings (P/E) ratio
To retained 5
earnings $ 203,000
can access the Interest Rate Factor
a. Use the percent-of-sales method to prepare a 2016 pro forma income statement
Balance sheet completion
Supplement at MyFinanceLab.
LG 3 LG 4 ST3–2 for Euro Designs, Inc. using ratios Complete the 2015 balance sheet for O’Keefe
Industries
b. Explain using thestatement
why the information
maythat follows it. the company’s actual 2016 pro
underestimate
LG 5
forma income.
O’Keefe Industries
ChAPTEr Balance Sheet December
4 Cash Flow and31, 2015
Financial Planning 157
Assets Liabilities and Stockholders’ Equity Warm-Up Exercises follow the Self-
Warm-up Exercises
(3) ACash All problems
minimum are
cash balanceavailable
$32,720 in MyFinanceLab
Accounts
of $480,000 payable
is desired.
Marketable securities
.
25,000 Notes payable
$120,000
Test Problems. These short, numerical
E4–1 (4)
TheAinstalled
new machine
cost of acosting $650,000 will
new computerized be acquired
controller in 2016,
was $65,000. and equipment
Calculate the de-
LG 1 Accounts receivable
costingschedule
preciation $850,000
Inventories
willChAPTEr
by year be purchased
assuming
Accruals
in 2017.
a4 recovery
Cash
Total
period
Flow
current
Total5 years
depreciation
andofFinancial
liabilities
and usinginthe
Planning
2016 20,000
is
ap- 149 exercises give students practice in
forecast
propriate as $290,000,
MACRS and percentages
depreciation in 2017 $390,000 of depreciation
given in Table 4.2 on page will
120. be taken.
Total current assets Long-term debt
(5) Accruals are expected to rise to $500,000 by the end of 2017. applying tools and techniques presented
LG During
E4–4 Classify the assets
Net fixed year, Xero, Inc., experienced anaccounts
increase
in eachStockholders’ ineither
net fixed assetsor
of$600,000
$300,000
LG 2 E4–2 the following changes of the isequityas an inflow an
2 (6) No
flow
(7)
sale or
NoofTotal
cash.
sale
retirement
orDuring
assets
of long-term
the year
repurchase
debt
$ (a) marketable
of commonTotal
expected.
securities increased,
liabilities and
stock is expected.
out-
and had depreciation of $200,000. It also experienced an increase in current assets
(b) land
stockholders’ equityand
$ build- in the chapter.
of $150,000
ings decreased,and an increase
(c) accounts in accounts
payable payable
increased, and accruals
(d) vehicles of $75,000.
decreased, If operat-
(e) accounts
(8)ingThe
cash dividend
flow payout
(OCF) of 50%
for(f)
the of net
year was profits calculate
$700,000, is expectedthe to continue.
firm’s free cash flow
receivable increased, and dividends were paid.
(9)(FCF)
Salesfor
aretheexpected
year. to be $11 million in 2016 and $12 million in 2017.
LG 2 E4–3(10) The December
Determine 31, 2015,
the operating cash flowbalance
(OCF)sheet follows.Inc., based on the following
for Kleczka,
LG 5 Rimier
E4–5 data. (AllCorp.
valuesforecasts sales of $650,000
are in thousands of dollars.)for 2016.the
During Assume that
year the thehad
firm firm hasof
sales fixed
costs ofcost
$2,500, $250,000
of goodsand variable
sold totaledcosts amounting
$1,800, toexpenses
operating 35% of sales.
totaledOperating
$300, andex-
de-
penses areexpenses
preciation estimated to
were include
$200. fixed
The costs
firm is inof $28,000
the 35% and
tax a variable
bracket.
Peabody & Peabody Balance Sheet December 31, 2015 ($000) portion equal
to 7.5% of sales. Interest expenses for the coming year are estimated to be $20,000.
M03_GITM7690_14_SE_C03_P057-115.indd 95 Assets
Estimate Rimier’s net profits before taxesLiabilities
for 2016. and stockholders’ equity 26/11/13 2:31 PM

Comprehensive Problems, keyed to

Cash $ 400 Accounts payable $1,400

Problems All problems are

Marketable securities
available in MyFinanceLab
200 Accruals
. current liabilities
400
Accounts receivable
Inventories
1,200 Other
1,800 Total current liabilities
80
$1,880
the learning goals, are longer and more
LG 1
M04_GITM7690_14_SE_C04_P116-161.indd P4–1
148 Depreciation On March 20, 2015, Norton
Total current assets $3,600
Systems acquired two new2,000
Long-term debt
assets. Asset
A was research equipment costing $17,000 and having a 3-year recovery period.
26/11/13 2:35 PM
complex than the Warm-Up Exercises.
Net fixed assets 4,000 Total liabilities 3,880
Asset B was duplicating equipment having an installed cost of $45,000 and a 5-year
Total assets
recovery period. Common equity
$7,600 depreciation
Using the MACRS percentages in Table 3,720
4.2 on page
In this section, instructors will find mul-
120, prepare a depreciation schedule for eachTotal liabilities
of these and
assets.
stockholders’ equity $7,600
tiple problems that address the impor-
LG 1 P4–2 Depreciation In early 2015, Sosa Enterprises purchased a new machine for $10,000
to make cork stoppers for wine bottles. The machine has a 3-year recovery period
tant concepts, tools, and techniques in
a. and is expected
Prepare to havebalance
a pro forma a salvagesheet
valuedated
of $2,000. Develop
December 31,a2017.
depreciation schedule the chapter.
b. for this asset
Discuss the using the MACRS
financing changesdepreciation percentages
suggested by in Table
the statement 4.2. in part a.
prepared

LG 5
P4–3 MACRS depreciation expense and accounting cash flow Pavlovich Instruments,
LG 1 LG 2P4–19 Integrative: Pro forma statements Red Queen Restaurants wishes to prepare finan- A short descriptor identifies the
Inc., a maker of precision telescopes, expects to report pretax income of $430,000
cial plans. Use the financial statements and the other information provided below to
this year. The company’s financial manager is considering the timing of a purchase
prepare the financial plans.
essential concept or technique of
of new computerized lens grinders. The grinders will have an installed cost of
The following
$80,000 financial
and a cost recoverydata are also
period available:
of 5 years. They will be depreciated using the the problem. Problems labeled as
(1)MACRS
The firm has estimated that its sales for 2016 will be $900,000.
schedule.
(2)a. The firm
If the expects
firm purchasesto pay
the $35,000 in cash
grinders before dividends
year-end, whatin depreciation
2016. expense will Integrative tie together related topics.
(3) The it befirm
ablewishes
to claim tothis
maintain a minimum
year? (Use Table 4.2cash balance
on page 120.)of $30,000.
(4)b.Accounts
If the firmreceivable
reduces itsrepresent approximately
reported income 18% of
by the amount of annual sales. expense
the depreciation
(5) The calculated in part a,
firm’s ending what taxwill
inventory savings will result?
change directly with changes in sales in 2016.
(6) A new machine costing $42,000 will be purchased in 2016. Total depreciation
LG 1 LG 2 P4–4 Depreciation
for 2016 will andbe accounting
$17,000.cash flow A firm in the third year of depreciating its
(7)only asset, which
Accounts payableoriginally cost $180,000
will change directly and has a 5-year
in response MACRSin
to changes recovery
sales in 2016.
(8)period,
Taxeshas gathered the following data relative to the current year’s operations.
payable will equal one-fourth of the tax liability on the pro forma
income statement.
(9) MarketableAccruals securities, other current liabilities, long-term $debt, 15,000
and common
stock will remain unchanged.
Current assets 120,000
a. Prepare a pro forma income
Interest expense statement for the year ended December
15,000 31, 2016,
using the percent-of-sales
Sales revenue method. 400,000
b. Prepare a pro forma balance sheet dated December 31, 2016,
Inventory using the
70,000
judgmental approach.
Total costs before depreciation, interest, and taxes 290,000
c. Analyze these Taxstatements, andincome
rate on ordinary discuss the resulting external financing40% required.

M04_GITM7690_14_SE_C04_P116-161.indd 157 26/11/13 2:35 PM

M04_GITM7690_14_SE_C04_P116-161.indd 149 26/11/13 2:35 PM

ix
 (1) Projected sales are $6,000,000.
152 PArT 2 (2) Cost of goods sold in 2015 includes $1,000,000 in fixed costs.
Financial Tools
(3) Operating expense in 2015 includes $250,000 in fixed costs.
(4) Interest expense will remain unchanged.
(2) (5)
TheThe
firmfirm
receives other
will pay cashincome of $2,000
dividends per month.
amounting to 40% of net profits after taxes.
(3) (6)
TheCash
firm’sandactual or expected
inventories purchases, all made for cash, are $50,000,
will double.
$70,000,
(7) and $80,000
Marketable fornotes
securities, the months
payable,oflong-term
May throughdebt,July, respectively.
and common stock will
(4) Rent is $3,000
remain per month.
unchanged.
(5) (8)
Wages and salaries are 10% of the previous month’s sales.
Accounts receivable, accounts payable, and other current liabilities will change
(6) Cashin dividends of $3,000
direct response to thewill be paid
change in June.
in sales.
(7) (9)
Payment
A newof principalsystem
computer and interest
costingof $4,000 is
$356,000 due
will beinpurchased
June. during the year.
(8) A cash
Total purchase of equipment
depreciation expense forcosting $6,000
the year is scheduled
will be $110,000.in July.
(9)(10)
Taxes
Theoftax$6,000 areremain
rate will due in atJune.
40%.

Personal Finance
a. Prepare a proProblem
forma income statement for the year ended December 31, 2016, Personal Finance Problems specifi-
LG 4 P4–10 using of
Preparation thecash
method.
fixedbudget
cost data
Samgiven
andto improve
Suzy the accuracy
Sizeman of the percent-of-sales
need to prepare a cash budget
for the last quarter of 2016 to make sure they can cover their expenditures during
cally relate to personal finance situations
the b. Prepare
period. Sama and
tionable
pro forma
giventoand
balance
Suzy have beensheet
the judgmental
as of December
preparing 31,the
budgets for
approach. Include
2016,
pastusing the years
several
a reconciliation
informa
and
of the retained
and Personal Finance Examples in each
have been establish specific percentages for most of their cash outflows.
earnings account.
These percentages are based on their take-home pay (that is, monthly utilities nor- chapter. These problems will help students
c. run
mally Analyze
5% of these statements,
monthly and discuss
take-home theinformation
pay). The resulting external financing table
in the following re-
can be quired.
used to create their fourth-quarter budget for 2016. see how they can apply the tools and
LG 3 P4–21 ETHICS PROBLEM Income
The SEC is trying to get companies to notify the investment techniques of managerial finance in man-
community more quickly
Monthly
financial results.
when pay
take-home a “material change” $4,900
will affect their forthcoming
In what sense might a financial manager be seen as “more ethical”
aging their own finances.
Expenses
if he or she follows
Housingthis directive and issues a press release
30%indicating that sales will
not be as highUtilities
as previously anticipated? 5% The last item in the chapter Problems is
Food 10%
Transportation 7% an Ethics Problem. The ethics problem
Medical/dental .5%
Clothing for October and November 3% gives students another opportunity to
Clothing for December
Property taxes (November only)
$440
11.5%
think about and apply ethics principles to
Appliances
Personal care
1%
2%
managerial financial situations.
Entertainment for October and November 6%
M04_GITM7690_14_SE_C04_P116-161.indd 159 Entertainment for December
Savings
$1,500
7.5%
26/11/13 2:36 PM All exercises and problems are available
Other 5% in MyFinanceLab.
Excess cash 4.5%
ChAPTER 6 Interest Rates and Bond Valuation 269

Spreadsheet
a. PrepareExercise
a quarterly cash budget for Sam and Suzy covering the months October Every chapter includes a Spreadsheet
through December 2016.
CSM Corporation has a bond issue outstanding at the end of 2015. The bond has
b. Are there individual months that incur a deficit?
Exercise. This exercise gives students an oppor-
15 years remaining to maturity and carries a coupon interest rate of 6%. Interest on
c. What is thethecumulative cash surplus
bond is compounded or deficitbasis.
on a semiannual by the
Theend of December
par value of the CSM2016?
bond is tunity to use Excel software to create one or
$1,000, and it is currently selling for $874.42.
LG 4 P4–11 Cash budget: Advanced The actual sales and purchases for Xenocore, Inc., for Sep- more spreadsheets with which to analyze a
To Do
tember and October
November 2015 Create
2015, along with its forecast sales and purchases for the period
a spreadsheet
through Aprilsimilar
2016,tofollow.
the Excel spreadsheet examples located in the chapter
financial problem. The spreadsheet to be created
for yield to maturity and semiannual interest to model the following:
The firm makes 20% of all sales for cash and collects on 40% of its sales in
a. Createfollowing
a spreadsheet similar
is often modeled on a table or Excel screen-
each of the 2 months the sale.toOther
the Excel spreadsheet
cash inflowsexamples located in
are expected tothebe
chapter to solve for the yield to maturity.
$12,000 in September and April, $15,000 in January and March, and $27,000 in
b. Create a spreadsheet similar to the Excel spreadsheet examples located in the
shot located in the chapter. Students can access
February. The firm pays cash for 10% of its purchases. It pays for 50% of its
purchases in the
chapter to solve for the price of the bond if the yield to maturity is 2% higher.
following
c. Create monthsimilar
a spreadsheet and for 40%
to the ofspreadsheet
Excel its purchases 2 months
examples located inlater.
the
working versions of the Excel screenshots in
chapter to solve for the price of the bond if the yield to maturity is 2% lower.
d. What can you summarize about the relationship between the price of the bond, MyFinanceLab.
the par value, the yield to maturity, and the coupon rate?

MyFinanceLab Visit www.myfinancelab.com for Chapter Case: Evaluating Annie Hegg’s Proposed
Investment in Atilier Industries Bonds, group Exercises, and other numerous resources.

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M06_GITM7690_14_SE_C06_P225-269.indd 269 26/11/13 3:43 PM

x
Brief Contents

Detailed Contents xii

About the Authors xxvii
Preface xxix
Supplements to the Seventh Edition xxxiii
Acknowledgments xxxv

Introduction to Managerial
Part 1 Long-Term Investment
Finance 1
Part 5 Decisions 367
1 The Role of Managerial Finance 2
2 The Financial Market Environment 28 10 Capital Budgeting Techniques 368
11 Capital Budgeting Cash Flows and Risk
Refinements 404
Part 2 Financial Tools 51

Long-Term Financial
3 Financial Statements and Ratio Analysis 52 Part 6
Decisions 463
4 Cash Flow and Financial Planning 109
12 Leverage and Capital Structure 464
5 Time Value of Money 153
13 Payout Policy 516

Part 3 Valuation of Securities 211

Short-Term Financial
Part 7
Decisions 549
6 Interest Rates and Bond Valuation 212
14 Working Capital and Current
7 Stock Valuation 254
Assets Management 550
15 Current Liabilities Management 591
Risk and the Required Rate
Part 4
of Return 293 Appendix A-1

8 Risk and Return 294 Glossary G-1

9 The Cost of Capital 340 Index I-1

xi
Contents

About the Authors xxvii

Preface xxix
Supplements to the Seventh Edition xxxiii
Acknowledgments xxxv

Part 1 Introduction to Managerial Finance 1

1 1.1 Finance and Business 3 Relationship to Economics 15

The Role of Relationship to Accounting 15
What Is Finance? 3
Managerial
Primary Activities of the
Finance Career Opportunities in Finance 3
page 2 Financial Manager 17
Legal Forms of Business Organization 4
➔ Review Questions 18
Why Study Managerial Finance? 7
➔ REVIEW QUESTIONS 8 1.4 Governance and Agency 18

1.2
Corporate Governance 18
Goal of the Firm 8
The Agency Issue 20
Maximize Shareholder Wealth 9
➔ REVIEW QUESTIONS 22
Maximize Profit? 9
Summary 23
What About Stakeholders? 11 Self-Test Problem 24
The Role of Business Ethics 11 Warm-Up Exercises 24
Ethics and Share Price 13 Problems 25
in practice Focus on Ethics: Critics See Spreadsheet Exercise 27
Ethical Dilemmas in Google Glass? 13

➔ REVIEW QUESTIONS 14

1.3 Managerial Finance

Function 14
Organization of the Finance
Function 14

xii
 xiii
Contents

2 2.1 Financial Institutions and 2.3 Regulation of Financial

The Financial Markets 29 Institutions and Markets 41
Market Regulations Governing Financial
Financial Institutions 29
Environment
Commercial Banks, Investment Banks, Institutions 41
page 28
and the Shadow Banking System 30 Regulations Governing Financial
Markets 42
Financial Markets 31
The Relationship between Institutions ➔ REVIEW QUESTIONS 42
and Markets 31
2.4 Business Taxes 42
The Money Market 32
The Capital Market 32 Ordinary Income 43
in practice Focus on Practice: Berkshire Capital Gains 45
Hathaway: Can Buffett Be Replaced? 34
➔ REVIEW QUESTIONS 45
➔ REVIEW QUESTIONS 37 Summary 46
Self-Test Problem 47
2.2 The Financial Crisis 37 Warm-Up Exercises 48
Financial Institutions and Real Estate Problems 48
Finance 37 Spreadsheet Exercise 50
Falling Home Prices and Delinquent
Mortgages 38
Crisis of Confidence in Banks 39
Spillover Effects and the Great
Recession 40
➔ REVIEW QUESTIONS 40
xiv Contents

Part 2 Financial Tools 51

3 3.1 The Stockholders’ Report 53 Times Interest Earned Ratio 73

Financial Fixed-Payment Coverage Ratio 74
The Letter to Stockholders 53
Statements and
Ratio Analysis The Four Key Financial Statements 53 ➔ REVIEW QUESTIONS 74
page 52 in practice Focus on Ethics: Taking
Earnings Reports at Face Value 54 3.6 Profitability Ratios 75
Notes to the Financial Statements 61 Common-Size Income Statements 75
Consolidating International Financial Gross Profit Margin 75
Statements 61
Operating Profit Margin 75
➔ REVIEW QUESTIONS 61
Net Profit Margin 76
3.2 Using Financial Ratios 61 Earnings per Share (EPS) 77

Interested Parties 62 Return on Total Assets (ROA) 77

Types of Ratio Comparisons 62 Return on Equity (ROE) 77

Cautions about Using Ratio Analysis 64 ➔ REVIEW QUESTIONS 78

Categories of Financial Ratios 65

3.7 Market Ratios 78
➔ REVIEW QUESTIONS 65
Price/Earnings (P/E) Ratio 78
3.3 Liquidity Ratios 66 Market/Book (M/B) Ratio 79

Current Ratio 66 ➔ REVIEW QUESTION 79

Quick (Acid-Test) Ratio 67

3.8 A Complete Ratio Analysis 79
➔ Review QuestionS 68
Summarizing All Ratios 80
3.4 Activity Ratios 68 DuPont System of Analysis 81
Inventory Turnover 68 ➔ REVIEW QUESTIONS 86

Average Collection Period 69 Summary 86

Self-Test Problems 88
Average Payment Period 70
Warm-Up Exercises 89
Total Asset Turnover 70 Problems 90
➔ Review Question 71 Spreadsheet Exercise 106

3.5 Debt Ratios 71

Debt Ratio 73
Debt-to-Equity Ratio 73
 xv
Contents

4 4.1 Analyzing the Firm’s 4.4 Profit Planning: Pro

Cash Flow and Cash Flow 110 Forma Statements 129
Financial Planning
Depreciation 110 Preceding Year’s Financial
page 109
Statements 130
Depreciation Methods 111
Developing the Statement of Cash Sales Forecast 130
Flows 112 ➔ REVIEW QUESTION 130
Free Cash Flow 117
4.5 Preparing the Pro
➔ REVIEW QUESTIONS 118
Forma Income Statement 131
in practice Focus on Practice: Free Cash
Flow at Cisco Systems 119
Considering Types of Costs
and Expenses 131
4.2 The Financial Planning ➔ Review QuestionS 133
Process 119
4.6 Preparing the Pro Forma
Long-Term (Strategic) Financial Plans 120
Balance Sheet 133
Short-Term (Operating) Financial
Plans 120 ➔ REVIEW QUESTIONS 135

➔ REVIEW QUESTIONS 121 4.7 Evaluation of Pro Forma

4.3 Statements 135
Cash Planning: Cash
Budgets 121 ➔ REVIEW QUESTIONS 136

The Sales Forecast 122 Summary 136

Self-Test Problems 138
Preparing the Cash Budget 122
Warm-Up Exercises 139
Evaluating the Cash Budget 126 Problems 140
Coping with Uncertainty in the Cash Spreadsheet Exercise 151
Budget 128
Cash Flow within the Month 129
➔ REVIEW QUESTIONS 129
xvi Contents

5 5.1 The Role of Time Value in 5.5 Compounding Interest More

Time Value Finance 154 Frequently Than Annually 175
of Money
Future Value Versus Present Value 154 Semiannual Compounding 176
page 153
Computational Tools 155 Quarterly Compounding 176
Basic Patterns of Cash Flow 156 A General Equation for Compounding
More Frequently than Annually 177
➔ REVIEW QUESTIONS 157
Using Computational Tools for
5.2 Compounding More Frequently
Single Amounts 157
than Annually 178
Future Value of a Single Amount 157
Continuous Compounding 178
Present Value of a Single Amount 161
Nominal and Effective Annual Rates
➔ REVIEW QUESTIONS 163 of Interest 179
➔ EXCEL REVIEW QUESTIONS 164 ➔ REVIEW QUESTIONS 181
➔ Excel Review Questions 181
5.3 Annuities 164
Types of Annuities 164 5.6 Special Applications of Time
Finding the Future Value of an Value 182
Ordinary Annuity 165 Determining Deposits Needed to
Finding the Present Value of an Accumulate a Future Sum 182
Ordinary Annuity 166 Loan Amortization 183
Finding the Future Value of an in practice Focus on Practice: New
Annuity Due 168 Century Brings Trouble for Subprime
Mortgages 185
Finding the Present Value of an
Annuity Due 169 Finding Interest or Growth Rates 185
Finding the Present Value of a Finding an Unknown Number of
Perpetuity 171 Periods 186
➔ REVIEW QUESTIONS 172 ➔ REVIEW QUESTIONS 188

➔ Excel Review Questions 172 ➔ EXCEL REVIEW QUESTIONS 188

Summary 188
5.4 Mixed Streams 172 Self-Test Problems 190
Future Value of a Mixed Stream 172 Warm-Up Exercises 191
Problems 192
Present Value of a Mixed Stream 174
Spreadsheet Exercise 209
➔ REVIEW QUESTION 175
➔ EXCEL REVIEW QUESTION 175
 xvii
Contents

Part 3 Valuation of Securities 211

6 6.1 Interest Rates and Required 6.3 Valuation Fundamentals 229

Interest Rates and Returns 213 Key Inputs 230
Bond Valuation
page 212
Interest Rate Fundamentals 213 Basic Valuation Model 231
Term Structure of Interest Rates 216 ➔ REVIEW QUESTIONS 232
Risk Premiums: Issuer and Issue
Characteristics 220 6.4 Bond Valuation 232
➔ REVIEW QUESTIONS 221 Bond Fundamentals 232

6.2 Basic Bond Valuation 232

Corporate Bonds 222
Bond Value Behavior 234
Legal Aspects of Corporate Bonds 222
Yield to Maturity (YTM) 237
Cost of Bonds to the Issuer 223
Semiannual Interest and
General Features of a Bond Issue 224 Bond Values 239
Bond Yields 225 ➔ REVIEW QUESTIONS 240
Bond Prices 225
➔ EXCEL REVIEW QUESTIONS 240
Bond Ratings 226 Summary 241
in practice Focus on Ethics: Can We
Self-Test Problems 242
Trust the Bond Raters? 226
Warm-Up Exercises 243
Common Types of Bonds 227 Problems 244
International Bond Issues 227 Spreadsheet Exercise 253
➔ REVIEW QUESTIONS 228
xviii Contents

7 7.1 Differences between Debt and Free Cash Flow Valuation Model 273
Stock Valuation Equity 255 Other Approaches to Common
page 254 Stock Valuation 276
Voice in Management 255
➔ REVIEW QUESTIONS 278
Claims on Income and Assets 255
Maturity 256 7.4 Decision Making
Tax Treatment 256 and Common Stock Value 278
➔ REVIEW QUESTION 256 Changes in Expected Dividends 279
Changes in Risk 279
7.2 Common and Preferred
Combined Effect 280
Stock 256
➔ REVIEW QUESTIONS 280
Common Stock 257
Summary 281
Preferred Stock 260
Self-Test Problems 283
Issuing Common Stock 262 Warm-Up Exercises 283
➔ REVIEW QUESTIONS 265 Problems 284
Spreadsheet Exercise 291
7.3 Common Stock Valuation 266
Market Efficiency 267
The Efficient-Market Hypothesis 267
Basic Common Stock Valuation
Equation 268
in practice Focus on Practice:
Understanding Human Behavior Helps Us
Understand Investor Behavior 269
 xix
Contents

Part 4 Risk and the Required Rate of Return 293

8 8.1 Risk and Return Diversification 308

Risk and Return Fundamentals 295 Correlation, Diversification, Risk,
page 294 and Return 311
Risk Defined 295
in practice Focus on Ethics: If It Seems International Diversification 312
Too Good to Be True, It Probably Is 295 ➔ REVIEW QUESTIONS 313
Return Defined 296
8.4 Risk and Return: The Capital
Risk Preferences 297
Asset Pricing Model (CAPM) 313
➔ REVIEW QUESTIONS 298
Types of Risk 313
8.2 Risk of a Single Asset 298 The Model: CAPM 314
Risk Assessment 298 ➔ REVIEW QUESTIONS 323
Summary 323
Risk Measurement 300
Self-Test Problems 325
➔ REVIEW QUESTIONS 305
Warm-Up Exercises 326
8.3 Problems 327
Risk of a Portfolio 306
Spreadsheet Exercise 339
Portfolio Return and Standard
Deviation 306
Correlation 308
xx Contents

9 9.1 Overview of the 9.4 Cost of Common Stock 348

The Cost of Cost of Capital 341 Finding the Cost of Common Stock
Capital
The Basic Concept 341 Equity 348
page 340
Sources of Long-Term Capital 342 Cost of Retained Earnings 350
➔ REVIEW QUESTIONS 343 Cost of New Issues of Common
Stock 351
9.2 Cost of Long-Term Debt 343 ➔ REVIEW QUESTIONS 352

Net Proceeds 343 9.5 Weighted Average

Before-Tax Cost of Debt 343 Cost of Capital 352
After-Tax Cost of Debt 346 Calculating Weighted Average Cost
➔ Review Questions 346 of Capital (WACC) 352

➔ Excel Review Question 346 Weighting Schemes 353

in practice Focus on Practice: Uncertain
9.3 Times Make for an Uncertain Weighted
Cost of Preferred Stock 347 Average Cost of Capital 354
Preferred Stock Dividends 347 ➔ REVIEW QUESTIONS 355
Calculating the Cost of Preferred Summary 355
Stock 347
Self-Test Problem 357
➔ REVIEW QUESTION 348 Warm-Up Exercises 358
Problems 358
Spreadsheet Exercise 365
 xxi
Contents

Part 5 Long-Term Investment Decisions 367

10 10.1 Overview of Capital 10.4 Internal Rate of Return

Capital Budgeting Budgeting 369 (IRR) 380
Techniques
Motives for Capital Expenditure 369 Decision Criteria 380
page 368
Steps in the Process 369 Calculating the IRR 380
Basic Terminology 370 ➔ REVIEW QUESTIONS 382
Capital Budgeting Techniques 371 ➔ EXCEL REVIEW QUESTION 383
➔ REVIEW QUESTION 371
10.5 Comparing NPV and IRR
10.2 Payback Period 371 Techniques 383

Decision Criteria 372 Net Present Value Profiles 383

Pros and Cons of Payback Conflicting Rankings 384
Analysis 373 Which Approach Is Better? 388
➔ REVIEW QUESTIONS 375 in practice Focus on Ethics: Nonfinancial
Considerations in Project Selection 389
10.3 Net Present Value (NPV) 375 ➔ REVIEW QUESTIONS 390

Decision Criteria 376 Summary 390

Self-Test Problem 391
NPV and the Profitability Index 377
Warm-Up Exercises 392
NPV and Economic Value Added 378 Problems 393
➔ Review Questions 379 Spreadsheet Exercise 403
➔ Excel Review QUESTION 379
Exploring the Variety of Random
Documents with Different Content
“Then do not doubt me; I will take you to my own home; you shall
be mine and I shall be yours; there is nothing that love can do for
you that shall not be done. Can you not be happy in my love?”
She was silent a few moments, as if too much affected to speak.
Hammond truly and deeply loved this girl, and had all the eagerness
of a young lover to carry away the prize with him. He had spent
several months here, held solely by the magnetism of her presence.
We have described in the first chapter his singular meeting with her,
and the deep impression her appearance and her act of kindness
had made upon him. True to his declaration, he had left his
companions, and had devoted all to searching her out. He knew that
she dwelt somewhere in this neighborhood, but it was a long time
before he could discover her.
Seemingly by pure accident he had encountered her a few days
before. As may be supposed, she was greatly surprised to see him,
and their first interview was quite embarrassing upon both sides.
But their acquaintance rapidly progressed, until we have shown how
he learned much regarding her early history, and finally declared his
love to her.
It was plain, and Hammond saw that he had awakened a tender
interest in her, but she had not yet reached the point of giving her
love unreservedly to him. She was strongly attached to Kipwan and
her Meagan friends, and it was a painful struggle for her to decide to
leave them forever.
“You have grown up among the people who have treated you kindly,
and to whom you feel devotedly attached. It is natural that you
should; I love them because of their kindness to you; but you are
fitted for another life than this; go with me, and you shall never
regret the step.”
Hitherto the two had been standing, but now Hammond conducted
her some distance from the path to a flat rock, where the two
seated themselves.
It was a bright sunshiny day; they were enveloped in shrubbery and
undergrowth, which were so dense about them, that they were
invisible to any one a short distance away.
They sat in silence for a few moments; their hearts too full for
speech. She was thinking how much she loved the noble figure
beside her: how happy she could be to yield her heart to him, and to
go where she could be wholly his. But—
“Can I? Is it best? Heaven direct me!”
She prayed earnestly for guidance, for, like the simple-minded
people among whom she dwelt, she was a devout believer in the
protecting care of heaven.
It was hard for her to decide, and still the struggle went on.
Hammond was partly sitting and reclining, and now and then gazing
up in the face of the maid beside him. It seemed to him that with
each look the wonderful loveliness of her face increased.
“She is beautiful—surpassingly beautiful,” he thought, as he looked,
returning again and again to feast upon the vision. “No one can help
admiring her; no one can deny that she is faultless in form and
feature, and yet it is not that alone which has drawn me toward her.
She is devoutly religious, good, and with a heart of the tenderest
sympathy. I must have her; I can not live without her.”
“Yes, Lamora,” said he, sitting upright, and drawing her to him, “you
must go home with me; you must be my wife; you will find nothing
but kindness awaiting you; you will have the heart of your lover
forever. You must; you shall go.”
The beautiful head, with its wealth of black hair, was now resting
unresistingly upon his shoulder. He gently raised it, and imprinted a
kiss upon the warm cheek.
“Answer me, Lamora,” he said, in the gentlest of voices, “do you love
me, or do you feel indifferent toward me?”
“I love you; I can not help it!”
“Heaven bless you! who wants you to help it?” exclaimed the
delighted Hammond, as he rained his kisses, and she smiled through
her tears, and showed how perfect her happiness was, in confessing
her love.
“Lamora, will you be mine? Will you go home with me?”
She looked at him unflinchingly in the face, and a seraphic light
seemed to suffuse her eyes and countenance as she answered:
“Yes, I will go to your home with you and be yours.”
“Ah! who on earth does not envy me!” exclaimed the overjoyed
lover. “You are mine; your promise is given. You feel no regrets?”
“No; none at all,” she answered, with the same bewitching
sweetness.
“I thank Providence for this,” said Hammond, fervently. “You have
intrusted your happiness into my hands, and never, no, never shall
you regret it.”
Ah! they were happy moments to both. It was “love’s young dream,”
in all its measureless hight and depth; their cup was pressed down
and running over.
They talked and chatted, and billed and cooed, and replighted and
revowed, as only young lovers can in the fulness of their hearts, and
when an hour or two had slipped by in this delightful manner, then
they began to discuss the matter practically.
“Will you leave your friends, without acquainting them of your
determination?” he inquired.
“No; that would be cruel; they would never cease hunting and
searching for me, and it would break Kipwan’s heart.”
“Will you tell him all?”
“Yes.”
“Do you suppose he will object or attempt to dissuade you?”
“He is too good a man to attempt either. He will feel sorrowful, and
so shall I, at the separation from those who have been such friends
to me all my life—but he will wish me good-speed upon my journey.”
“He must be a good man indeed, and I should like to go into the
village and take him by the hand,” said Hammond, who felt just then
that he could take any one in the world by the hand.
“No,” she replied; “do not show yourself in the village. You know
why?”
“No,” he answered, looking inquiringly at her.
“In the first place, they are always uneasy at the approach of
strangers, and then, when it became known that you are the cause
of my leaving them, some of the younger members might not feel so
particularly Christian toward you.”
“I see; it shall be as you say. I will wait your own good time and
pleasure, praying you to remember that the days will drag wearily
until we turn our faces eastward.”
“I shall not be long.”
“Two or three days, I suppose, will be all-sufficient?”
“Perhaps so, but I can not say with certainty.”
“And there is no danger of your desiring to withdraw your consent;
you can never be sorry for your promise.”
“Not so long as you do not forget yours.”
“Then it can never be,” was the ardent reply of Hammond, as he
again pressed her to him, and imprinted a kiss upon her cheek.
She gently freed herself, and rising to her feet, stood calmly before
him, looking lovingly and trustingly in his face.
“No,” she said, after a moment’s pause, “I do not think one of us
ever will be sorry for this. You profess to love me, and I believe you,
and I know, too, that you have the whole, undivided affection of
Cecilia Alamant—that she is yours, now and forever!”
But there must be an end to all things, and the lovers became
sensible that several hours had passed since they met, and it was
now past noon. Lamora moved toward the path, Hammond still
holding her hand and walking beside her.
“I do not know which is the prettiest, your Indian or your Christian
name,” he remarked, as they walked slowly along.
“I am the most accustomed to the first, but I suppose I shall lose
that when I leave them.”
“It was that by which I first knew you, and I never wish to forget it.
There will be a charm clinging to it which can never lose its
fascination for me.”
“Well, you can call me by both,” she laughed; “one will suit me as
well as the other.”
“Lamora,” suddenly spoke up Hammond, “there are three white men
near us; they are searching for gold. If they are successful we may
all return to the States together.”
“That will be safer, I suppose.”
“They have been greatly alarmed by this strange—what shall I call
it?—creature that makes his home near your village.”
“It has not harmed them?” she asked, with a peculiar expression.
“No; but they are much terrified. Why not tell them the secret?”
“You know Kipwan’s wish,” she answered, earnestly. “I could not do
so without his permission.”
“I suppose not; but doubtless you can obtain it. This is an
exceptional instance, and will be to our interest to have them
acquainted with the facts.”
She promised to ask the old chief’s advice, and then moved along
the path more rapidly. A hundred yards or so away her horse was
found quietly cropping the grass and herbage. Without any
assistance from her lover, Lamora vaulted lightly upon his back, bade
Hammond a gay good-by, and the next moment had vanished in the
direction of the Indians’ home.
 CHAPTER IX.
“I HAD A DREAM WHICH WAS NOT ALL A DREAM.”

There could be no doubt that gold in abundance existed in the

section of the country where the three men had located themselves.
We have shown the discovery made by Black Tom, and showed, too,
how narrowly he escaped falling into the hands of his enemies.
Teddy O’Doherty and old Stebbins took a different direction, and
without knowing it reached the same stream in which their comrade
had found his nugget, but at a point considerably lower down. They
were walking along in an indifferent manner, scarcely expecting to
find the precious metal, and yet searching for it on “general
principles.”
“Morra! howly Vargin!”
And with a panther-like leap and screech, the Irishman made a leap
far out in the creek, dashed his hand into the water, as though he
had caught at a salmon, and then he sprung back again.
“What in thunder is the matter?” demanded the amazed trapper, as
he stood wondering whether his friend had suddenly turned crazy, or
whether he had been struck by some silent arrow.
“That’s the matther,” replied Teddy, as he held up an irregular nugget
of gold, the size of a hen’s egg. “Isn’t that ’nough to make a fellow
dance the jig, as me uncle obsarved whin he resaved tidings that his
beloved wife was no more?”
And, without further words, Teddy tipped his hat upon one side of
his head, placed his arms akimbo, a la Barney Williams, and
executed a jig, dancing back and forth and around old Stebbins,
who, having received the yellow nugget from his hand, smelt and
tasted and “hefted” it, until no doubt could remain that they had
secured a most valuable piece of pure virgin gold.
By-and-by Teddy became exhausted and ceased dancing.
“We’ve sthruck luck, haven’t we?” he asked, as he nudged the old
trapper in the ribs.
“Yas; thar ain’t no gitting over that,” he answered, as he handed
back the heavy chunk; “that’s worth several beaver hides. Why don’t
you take it?”
But Teddy declined receiving it.
“It’s a prisent to you, to ’mind yees of this day’s hunt.”
“Thar’s little danger of my furgettin’ it,” returned the trapper, as he
carefully placed the prize in his pocket; “but s’pose we don’t find no
more.”
“Little fear; but let’s folly the sthraam down—hark!”
Both listened. As the channel of the stream was quite smooth at this
point, scarcely any noise was made; but, as they stood motionless
and listening, they heard a distinct roar, the meaning of which was
clear to all.
“The stream kenyons afore it goes much further,” remarked old
Stebbins, as they resumed their progress.
One was on either side the stream, vigilantly searching the bed of
the limpid stream, as they walked along; but they saw nothing more
of the coveted saffron, and every step they took brought them near
the cañon, which could now be at no great distance.
Finally they came in sight of the place, where the stream narrowed
and deepened and increased in velocity, while the banks rose to a
hight of twenty and more feet, so close in some places that a man
could easily leap across.
The instant they caught sight of the cañon, Teddy O’Doherty started
back, with an exclamation of surprise.
“Crazy ag’in!” asked the trapper, somewhat provoked at his
performances.
“I’ve seen that place afore.”
“When?”
“Last night.”
Stebbins looked at him, as if he verily believed his head was turned.
Before he could speak, Teddy added, in a voice free from all jest.
“I saw that place in a dhraam durin’ the little shlaap I secured last
avening. Yis,” he added, “jist exactly as I saa it there.”
“Wal, what of it?”
“And I dhramed that a little ways down the kinyon widened out, so
that the sthraam run slower like, and down thar was goold—yes,
goold enough to make a sootible prisent to the Pope of Rome, and
there it had been layin’ fur miny long years, waitin’ till Teddy
O’Doherty should come along and scoop it up—and that’s jist what
Teddy O’Doherty is goin’ to do this minute.”
And diverging to the right, they began making their way up out of
the valley, so as to come up around to the cañon at the top. Before
they had reached, or were near enough to decide the point, the
Irishman stopped again, and laying his hand upon the arm of his
companion, said, in the same deeply earnest manner:
“Do yees belaave me dhraam, Steb.?”
“I can’t say yet,” returned the trapper, reluctant to confess his faith
in that, which, to say the least, had deeply impressed him.
“I dhraamed that the widenin’ in the kinyon was about a hundred
yards below where the kinyon begins. Let us saa whither it is true.”
With an intensity of interest which it would be difficult to
understand, the two men strode rapidly forward, their gait increasing
almost to a run, as they neared the cañon. A few moments more
and the question was settled.
The widening of the cañon was precisely as Teddy had dreamed!
Both men stood, for several moments too astounded to speak. Then
the Irishman asked, with a strange smile:
“Do yees belave it now?”
“Yes,” was the awed reply.
“And do yees belave thar is goold down there?”
“I am sure of it.”
“Thin all we have to do is to git it.”
“Yes; that’s the difficulty.
“And, be jabers, how is it to be done?” continued Teddy, with
something like his natural joviality of manner. “I didn’t dhraam that!”
They approached the edge of the cañon, and carefully examined it.
At the point referred to it was nearly twenty feet in width; and, as
this was very nearly the usual latitude of the stream, it flowed by
this place as smoothly and quietly as the dead level.
Looking over the edge of the chasm, they could discern the edge of
a table or ledge, which seemed to be the floor of some cavern that
extended quite a distance back into the rocks. This was the point
which Teddy was desirous of reaching.
But how was it to be done? The natural plan was to drop down upon
it; but as it projected at the most only a few inches beyond the
perpendicular wall, it was morally certain that, if he should strike the
edge, he could not “stick,” while, so far as could be ascertained, it
was too high above the stream to be reached by any one standing in
the bed of that.
The only possible way, therefore, was to be lowered by some rope,
or something that would answer the same purpose, and such a thing
was not in the possession of a member of the company.
“What shall we do?”
The two men stood silent, and debating the question with
themselves. Neither had the remotest doubt of there being
unbounded wealth lying within a few feet of them, and they were
determined to reach it by some means or other.
As they stood looking about them, as if in search of something that
would suggest help, the trapper started, and pointed toward the
trees and woods, a short distance away.
“We’ll git in thar,” he said; “it ain’t the time of year fur bark to peel
good, but thar ar’ vines thar.”
The next minute both were running at full speed toward the trees,
where good fortune awaited them. There was found any quantity of
grape-vines, which, by the aid of their knives, were speedily trimmed
into the proper size and length.
They were not as flexible as could be desired, but, with the
assistance of powerful muscles, they could be made to answer their
purpose.
There was considerable to be overcome before they could hope for
success. It was agreed that Teddy should leave his rifle behind upon
the rocks, so as not to be encumbered with it, while he should grasp
the vine in his powerful hands and lower himself to the table, when
he could let go of his support, and be free to make his explorations.
When he chose to ascend to terra firma again, he could do so by
means of the vine, as he proposed to use it in descending in the
cañon.
All this presupposed the fastening of the upper end of the vine, as it
would be rather a too difficult task for old Stebbins to act the part of
windlass.
By twisting it around a projecting point of the rock, this was finally
accomplished, and then Teddy prepared for his descent.
He let himself carefully over the edge of the chasm, and the next
moment was dangling over the cañon, with the trapper anxiously
watching his movements.
Slowly down, down, sunk the Irishman, until half the distance was
descended, and he looked at his feet to make sure of reaching their
support. Carefully the rough vine slid through his hands, until at last
he touched the edge of the table, and believing his support secure,
he let go his hold, and stood at the mouth of the cavern.
As he looked in the twilight of the chasm, he saw something move,
and instantly after, to his unbounded amazement, discerned two
Blackfoot Indians!
“Begorra! but I didn’t dhrame that, either,” he muttered, as he
prepared to defend himself as best he could.
 CHAPTER X.
THE WONDERFUL CAVERN.

Teddy O’Doherty had no time to wonder how these red-skins had

got there. It was sufficient to know that he was thrown among
them, and that there was no retreat for either party.
The Irishman anxiously peered into the cavern to see how many
foes he had, but was somewhat relieved to find that he had but two
to combat.
“Begorra! if ye’d only lay aside yer wippons,” he muttered, “and take
yer shillaleh like a Christian mon, I’d wilcome the chance that threw
me in yer way, and as it is, whoop, hurrah! and come on, and the
divil take yees!”
With which he executed a leap in the air, flipping one of his heels
with the flat of his hand, and uttering a defiant whoop at the same
time, as a challenge for his dusky enemies to advance to the
encounter.
The two Indians were without guns, they having laid them down, no
doubt, at some other place, but each possessed his tomahawk and
knife. Teddy had his cuchillo also in his girdle, although it had not
been left there with any thought that it would be called into
requisition for any such purpose.
Instead of drawing his knife, Teddy placed himself in position, as
though he were some pugilistic champion, with his fists as his
bulwarks.
“Be jabers! if I only had some place to back up ag’inst,” he
muttered, as he glanced over his shoulder. “I have the other side of
this blamed old kinyon, but, as the same is twinty feet away, I can’t
lean against it very well, and at the same time, there’s little danger
of the spalpeens attacking me in the raar.”
There was that consolation, truly, but Teddy stood in a very ticklish
position, where a slight blow was likely to send him over the rock
into the water below.
The Indians evidently looked upon themselves as masters of the
situation; but, at the same time, they were very wary about
attacking a man to whom such a bellicose attitude seemed to come
very natural.
They made no outcry, but grasping their knives, and fixing their dark
eyes upon the white man, like cats about to pounce upon their prey,
they separated from each other, and cautiously advanced to the
assault.
Teddy was no unskilful pugilist, and he saw that, barring any
accident, he had the advantage of these dusky assassins, despite
the knives in their hands; for they knew nothing at all of the art of
self-defense.
Several feet separated the hostile parties, when the Irishman made
a lightning-like leap, sending out a terrific left-hander at the same
time, “straight from the shoulder,” that, striking the nose of the
astonished red-skin, sent him turning several back-somersaults.
Wheeling with the same extraordinary celerity, he bestowed a similar
compliment upon the other red-skin, and vigorously following it up,
forced him over the edge of the rock into the cañon below.
Old Stebbins had not been long in detecting that something was
wrong with his friend. He understood what his defiant whoop meant,
and knew that he had dropped into a nest of Indians.
But how to help him!
There was no possible way open; for, if he should attempt to
descend by means of the grape-vine, he would be at such a
disadvantage that it would be nothing less than suicide. So he could
only hold his rifle ready to seize the first opportunity that should
present itself.
It was not long in coming. When Teddy toppled his man over the
edge of the rock, he had scarcely reached the water below, when
the sharp crack of the trapper’s rifle rung above the din of waters,
and the miserable red-skin floated away, as limp and lifeless as the
garments upon his person.
“Now, give us another, Teddy!” called out old Stebbins, as he caught
up the other gun.
But there was good reason why the other didn’t come.
When Teddy turned to seize him, he saw him spring to his feet, and
start backward into the cave with all speed.
“Be jabers, yees can’t run fur in that direction, as me mither
observed whin the piggy run his head into the pratie-pot,” exclaimed
Teddy, as he dashed after him.
But it was impossible for him to take heed to his feet, and he had
taken scarcely a half dozen steps, when a sudden rise in the floor of
the cavern caused him to trip and fall forward, with no little violence,
upon his face.
“Worrah, worrah, but that rock ain’t very soft,” he muttered, as he
picked himself up, and rubbed his bruised countenance. “Where did
that spalpeen go?”
At his first entrance into the cave, he naturally supposed that it
extended backward but a short distance; but he had already
penetrated a hundred feet, and there were no signs of its ending.
Nor did the light decrease. It was faint; but still, when the eyes
became accustomed to it, sufficient to see one’s surroundings.
Looking ahead, Teddy saw a circular opening, through which this
partial light of day entered.
“Be jabers, but that’s the place where the haythen come in!”
concluded Teddy, as he paused in amazement and looked in that
direction.
And while he thus stood gazing, the opening was darkened by a
moving body, which almost instantly disappeared.
“That’s the rid-skin goin’ out,” rightly concluded the Irishman, as he
hurried along after him.
For fully two hundred feet more, the wondering Teddy made his way
along the subterranean cavern, looking neither to the right nor the
left, but with his eye fixed upon the light opening, which seemed to
shine like a beacon light to him.
When the opening was reached, he unhesitatingly walked out into
the open air, and found himself on the bank of the stream, very near
the point, where he and old Stebbins had left it.
“This route is much aisier than t’other,” concluded Teddy, as he
looked wonderingly about him, “and I rispict the sinse of the
haythen that used it to come in by.”
Fixing the place in his mind, so that there could be no mistake about
finding it again, he hurried to rejoin his friend.
The trapper, as a matter of course, was intensely excited and
apprehensive. The sounds of the tumult below him, having suddenly
died out, made it appear that Teddy had “gone under” by the hands
of the treacherous Blackfeet.
While he was in this distressing uncertitude, he descried the
Irishman hastening toward him. He raised his hands in amazement,
but before Teddy could speak the trapper comprehended how the
thing had come about.
“You’ve allers been a lucky dog, Ted, ever since we knowed you,” he
remarked, as the Irishman came up; “tell me all about it.”
It required Teddy but a few minutes to do this in his own peculiar
manner. He related every thing succinctly, from the moment his feet
rested upon the edge of the rock to the time when he emerged from
the cavern by its back door.
“Quaar that the red-skins war thar,” said old Stebbins. “Thar don’t
seem to be many places in this country whar the varmints ain’t. I
wonder what they war doin’ thar?”
“Don’t yees saa it was the goold?” said Teddy, in a low, delighted
voice.
“Did yer take a look ’round and see any of the yaller stuff?”
Teddy slapped his thigh a tremendous thwack.
“I knowed I’d furgot somethin’, as me father obsarved, whin we
missed the corpse of me mither, afther goin’ a mile to the church
widout it. I was so interested in the haythen that I niver thought of
the goold.”
“I’m afeard you won’t find much thar,” said the trapper, feeling
somewhat of a reaction from the high hopes he had entertained.
“It’s there!” was the confident assertion of Teddy. “I know it; that’s
what brought the haythen there.”
“But they don’t know the valley of gold.”
“They know it’s a handy thing to make ear-rings of, and that they kin
git plenty of powder and lead fur it at the Forts.”
“Wal, we’ll have to take another look in thar. Shall it be you or me?”
“Why not both?”
The trapper shook his head.
“Ef it warn’t fur the varmints we might, but they’re too thick fur as to
give ’em a chance to lock us up in thar.”
“Yees are right,” assented Teddy, who saw the prudence of his
companion; “do yees act the part of sintinel, and I’ll take a betther
look at the insides of the cavern.”
This was agreed upon, and the two set out for the bank of the
stream, where the opening occurred. It was found to be nearly
circular in character, like the mouth of an immense columbiad, so
that an ordinary-sized man was compelled to stoop quite low to
enter. The top of the bank projected over and concealed the orifice,
so that there was little danger of seeing it, unless it was made a
special search, or its existence was previously known.
“Do yer want yer gun?” inquired the trapper, as his friend was ready
to enter.
“No; I kin do betther wid me fists on them spalpeens, ef there
should be any of ’em in there. Do yees mind and not let any of ’em
steal in upon me.”
“Never fear for me.”
With the faithful guard upon the outside, Teddy unhesitatingly re-
entered the cavern, and began his explorations.
The cave in no place was found to be over twenty feet in width. The
bottom was generally level, composed of rock and hard, dry earth.
The sides were the same, the dirt crumbling beneath the touch like
ashes.
Nothing unusual was observed until he had very nearly reached the
scene of his affray with the Blackfeet, and here something was seen.
Teddy’s heart gave a great bound, and his eyes sparkled, as he saw
that he was really in a golden cave. It was all around him, beneath
his feet, over his head, and on every hand.
It was like a gorgeous dream indeed; so like his night vision that he
kept moving about to make sure that it was not a repetition.
But no; he could see the yellow dust shining everywhere—that
bright, glittering yellow, the dearest color in existence to half the
world, and which will set nine-tenths of mankind crazy by the mere
sight of it.
At first glance it seemed to Teddy that the gold existed only in the
shape of dust or sand, deposited plentifully around him; but an
examination revealed altogether a different and curious form of
deposit.
Reaching up his hand, to scoop down some of the auriferous
particles, he grasped instead a loose stone that was loaded with
gold; the same thing was repeated until he made the discovery that
it existed alone in that form.
It was as if a rock, nine-tenths of which was pure gold, had been
blown to fragments in the center of the cave, the pieces burying
themselves on every hand.
There was gold everywhere, and in abundance. There were
thousands of dollars, and the trappers had but to secure it to secure
to themselves comfort and opulence for the rest of their days.
Teddy stood for several minutes in silence, and then he heaved a
great sigh.
“Whin I was at home in ould Ireland, I had two pockets big enough
to thrust in three or four of the goats that war always wandering
about our farm. Ah! if I only had them pockets now!”
And he ruefully ran his hands as far down in his trowsers as they
would go, and found they would not quite reach his knees.
“That’s all, and that ain’t half ’nough.”
But he did the best thing possible under the circumstances. He
began gathering the precious nuggets, and continued the work until
his capacious pockets would hold no more, and there was imminent
risk of their bursting with their overload.
Then he filled his hands and began laboring toward the entrance.
It proved a labor indeed, for the specific gravity of this precious
metal is very great, and it was all he could do to reach the entrance
with his freight.
Here, as may be supposed, the trapper was anxiously awaiting him.
The load was distributed between them, and they set out on their
return. “Headquarters” were reached without any thing unusual
occurring and there they awaited the coming of Black Tom.
 CHAPTER XI.
AROUND THE CAMP-FIRE.

There was an interested and anxious group gathered around the

trappers’ camp-fire, on the evening succeeding the adventures we
have narrated.
The three were together, and they had taken all necessary
precautions against danger from the Indians. The entrance to their
underground house had been securely closed by means of an
immense boulder, that was only shoved into position by means of
their united strength, and the fire was kindled so far back that there
was no danger of its being discovered by any one, not even by
looking down the rent through which the smoke found its way out of
the cavern.
The night was quite cool, and they had an abundance of fuel, so
that every provision had been made for their comfort. They had
eaten supper, too, although neither of the three had much appetite
for it.
They were smoking, and, as a matter of course, discussing the all-
absorbing topic of the day. Black Tom was the first to display his
nugget with a triumphant air, which changed somewhat when old
Stebbins produced a still larger one, and Teddy began to disgorge
from what seemed his inexhaustible pocket.
The entire wealth was emptied into a heap, where the firelight
shone full upon it. The three contemplated it a few moments, and
then removing his pipe, Tom grinned and asked:
“How many skins and peltries would we have to take into St. Louey
to raise that amount of specie?”
“Several years work,” replied his elder companion.
“Don’t it look purty?” asked Teddy, who was stretched full upon his
face, his fists placed one above the other, while his chin rested on
the uppermost. “Begorra, there ain’t any thing this side of ould
Ireland that would do me eyes more good. What is it worth?”
This was the question all three had been turning over in their minds
for some time, and each gave the result of his conjecture.
“I kin hit it purty near,” said Teddy, who was squinting at it as though
it were a target for his rifle. “I was always good at guessin’.”
“Well, what is it?” asked Black Tom.
“Five hundred and fifty-four millions, six hundred and ninety-three
pounds starling, more or less.”
The Irishman was in earnest, and it was a long time before he could
be made to believe that he had not gathered in more than five
thousand dollars.
“It’ll foot up that, any way,” said old Stebbins; “and if we kin keep
that up for a few days, it’ll answer.”
“You’re sartin thar’s plenty more thar?” asked Black Tom, looking
toward the Irishman.
“Sartin!” he exclaimed, in amazement; “it’s all over! There’s tons of
it; there’s enough to make mesilf, and all me grandfathers and
grandmothers, as rich as Queen Victoria, away back to the latest
ginerations of posterity.”
“You’re crazy over it,” replied Tom; “thar ain’t half what you say thar
is.”
“Yees jist go wid me to-morrer, and saa fur yersilf.”
“That’s what I will do, ef the infarnal red-skins don’t get too thick.”
“Or the beast,” suggested old Stebbins.
“Be jabers! but we saad nothing of him,” said Teddy, who had
scarcely thought of the strange animal up to this moment.
“I don’t think he’ll bother us, ef we look out fur him; but what were
them consarned Blackfeet doin’ in thar?”
It was all-important that they should not overlook the personal
danger involved in this matter. The encounter of Teddy O’Doherty
with the Indians proved beyond all doubt that such a peril existed.
Much speculation and conjecture now followed. It was probable that
the Indians had known of the existence of this gold mine for some
time, and no doubt they had turned it to good account.
One of those nuggets, flecked and imbedded through and through
with the pure gold, would purchase many necessaries and luxuries
for whatever red-skin chose to carry it to a trading or frontier post.
It could be easily manufactured into the rude trinkets so prized by all
native Americans.
Such being the case, it might be considered certain that the property
would be disputed. Had old Stebbins been given the opportunity to
finish, not one, but both the Blackfeet, their disappearance
undoubtedly would be laid to the terrible “ringed and streaked”
creature that was dreaded by white and red-men alike.
But the prize was worth fighting for, and the three men were ready
and willing to risk their lives for the purpose of securing what they
had labored so hard for during the many long years of the past.
Teddy proposed that they should visit the cave during the night,
when there was little fear of their being molested, but the other two
were reluctant to make the attempt in the dark.
The Irishman still urged his point with a vehemence that bid fair to
carry the day, when a noise at the entrance silenced every tongue.
“Hello in there! can you give a traveler lodging for the night?”
The voice was recognized as that of Fred Hammond, and all three
instantly sprung to their feet and hurried to the entrance to admit
him. He was regarded with strong friendship by all, from the
unmistakable good will he had manifested toward them from the
beginning.
A few minutes later he joined them round the camp-fire, and
seemed in the best of spirits. Teddy had placed his nuggets, with no
little precipitation, out of sight when Hammond’s voice was first
heard, so that he saw nothing of the real cause of their
conversation.
Scarcely ten minutes had elapsed, when it was palpable to each of
the three trappers that Hammond had been drawn to their retreat by
some extraordinary reason, which would be speedily made known.
Hammond was so well-bred, and so thoroughly self-possessed, that
he made an easy master of what would have been almost
insuperable to another, and gracefully and in good terms he came to
the point.
“Friends,” said he, looking round in their faces with a smile, “you are
hunters and trappers by profession, but you came here in search of
gold—”
“And found it,” interrupted Black Tom.
“Yes; I know you stumbled upon a nice little nugget, and doubtless
you all believe there is plenty more of it in this section.”
“Yis,” answered Teddy, with a significance which the speaker did not
get.
“Well, you are right,” added Hammond, with great earnestness;
“there is enough gold within your reach to make you all rich, and I
have come here on purpose to show you where to find it.”
He paused and looked at them, and they at each other, but never a
syllable was uttered.
“Now,” he resumed, “it may seem that I am not entirely unselfish in
this matter. There is a young lady among the Indian tribe near at
hand, who has consented to accompany me home, and to become
my wife. It was not gold that brought me here—it was she; and,”
said Hammond, his face aglow with pleasure, “I have obtained her.
Well, we are to start eastward, on our horses, never to return here.
You know, as well as I, the dangers that beset such a journey, and
it’s for that reason I wish your company.”
“But how kin we go without the spondulicks?” asked Black Tom.
“I don’t wish you to do so, and therefore I am going to put you in
the way of obtaining all the wealth you want in a few hours.”
“Would you have told us ef it hadn’t been you wanted us to take
care of yerself and gal?” asked old Stebbins, with considerable
bluntness.
“It is not I that wish to be protected and taken care of, but Lamora,
the lady who accompanies me; but I will answer your question.
When I first saw you in this vicinity and suspected what you were
after, I had not the remotest idea of imparting to you the secret I
had obtained from my lady; but, when I had seen enough of you to
believe that you were honest men, and deserving of better success,
I suggested to Lamora that we should put you in the way of
instantly acquiring that for which you were so anxiously searching,
and she gave me permission, without a moment’s hesitation, to do
so.”
“That makes it all right,” said Black Tom, much pleased with the
frankness of their visitor; “we’ll shake hands on that.”
“Yis; that makes things plisent, as me cousin obsarved, whin he and
his gal broke their shillalehs over aich ither’s heads.”
“I exact only one condition,” said Hammond, “and that is that you
will each and all give me your promise to keep this matter a secret.
It has been long known to the friendly Indians near at hand, and to
some of the Blackfeet, and it is worth a great deal to them, while, if
it should become generally known among the hunters and trappers,
you know this place would be overrun with lawless men, and the
Meagans would be compelled to leave the home which they hope to
keep for the remainder of their lives.”
The promise was readily given by all, and then Hammond proceeded
to explain with great minuteness the very cavern which Teddy
O’Doherty had explored. The three listened, until he had finished,
and then the Irishman astounded Hammond, by remarking, with his
peculiar chuckle:
“We’re obleeged to you, Misther Hammond, but we’ve already been
thar!”
 CHAPTER XII.
HUNTING WEALTH BY FIRELIGHT.

Yes, Fred Hammond was not a little astounded, as he learned by

what a singular means Teddy O’Doherty had discovered the cave of
wealth, and he listened to the close of his characteristic narration
without interruption. When he had finished, our hero remarked, with
a laugh:
“Then I have all my pains for nothing, since Teddy has developed
such a remarkable genius for dreams.”
“But yer intentions were honorable, as me father remarked, whin me
mither fired the gun at his head, and by mistake missed him, and
therefur we give you credit.”
“Yes,” assented the others, “we’re jist as pleased as though we had
never heard of the cave afore.”
“Thar’s plinty of goold thar, is thar?” continued Teddy, in his eager
way.
“Yes; I have been in the cave more than once, and have seen that
there is an abundance—far more than you can carry away with you.”
“And haven’t yer taken any?”
“Not an ounce.”
“Why don’t yees?”
“That for which I was searching,” replied Hammond, with a smile,
“was worth more to me than all the gold in the Rocky Mountains.”
“Spoken like a thrue lover; jist as I always respictfully mintioned the
name of me love; but doesn’t yees intind to take any of the yaller
stuff wid yer.”
“Well, perhaps I may pick out a few chunks, although I ain’t
particular.”
Teddy now renewed his proposition to search the cavern at night.
They could build a fire within it, and secure all the gold that was
convenient to carry, and by daylight be ready to start on their
homeward journey, while if they waited until the morrow, they would
doubtless have to make a desperate fight with the Blackfeet, and
very likely would be driven away entirely.
There was wisdom in this, and Hammond joined with him, for, he
knew that, if the trappers should be ready on the morrow to start on
their return, Lamora would be prepared also; and thus, such a
proceeding would be entirely in his favor.
And so, after a few minutes more discussion, it was decided to visit
the cave by night.
It was yet comparatively early in the evening, when the four men
issued like so many shadows from “headquarters,” and noiselessly
made their way up the cañon. Teddy and Black Tom each carried a
large pile of faggots on their shoulders, while the tall stooping form
of old Stebbins took the lead, with his rifle and pick.
The night was quite dark, there being scarcely any moon, while the
sky was swept by numerous dark clouds, that seemed to indicate
that a fierce storm was at no great distance.
They had gone but a short distance, when they paused and listened.
Nothing but the mournful sighing of the wind could be heard, nor
could any indication of danger be detected.
On up through the cañon they made their way—on up until they
stood on the level prairie, when they turned off and plunged anew
into the wild and rugged recesses of the mountains. Down again,
until they seemed like miners descending into the bowels of the
earth, when they reached the small stream in which gold had been
discovered.
Along this they made their way, with the same noiseless celerity, no
one uttering a word, till all four stood around the entrance of the
gold mine.
Here they compared “notes,” and it was found that not one had
detected any thing suspicious; every thing appeared auspicious.
Neither Black Tom nor old Stebbins had seen the interior of the cave,
and they were naturally anxious to explore it. Hammond, therefore,
volunteered to act as sentinel, while the three labored; but, before
doing so, all four went in, and without striking a light, scattered and
carefully reconnoitered the cavern to make sure that no enemies
were within.
Everything proving satisfactory, Hammond returned to his station,
and the fire was started. Teddy knew where to locate it, and when
the flame flared up, the eyes of the hunters sparkled.
“B’ars and bufflers!” exclaimed Black Tom, in a frightened undertone,
as he looked wildly about him, “don’t it beat every thing?”
“It does that,” assented old Stebbins, whose excitement was scarcely
less; “ef we can tote that home, thar’ll be an end to our trappin’.”
Teddy threw on the fuel, and the illumination was found amply
sufficient. The yellow nuggets were shining all about them, and all
that they had to do was to gather them.
There was something grotesque and weird in the scene. The vast,
corridor-like cave, lit up by the burning wood—the shining glitter of
the jagged wall—the three figures with their swarthy faces lit up, not
by the fire alone, but by the eager passion that was stirring each
heart to its utmost depths—all this made up a picture, impressive,
unnatural, and almost appalling.
A spell seemed to rest upon the men for a few minutes. They were
so overcome by this palpable evidence of the immense wealth lying
within their reach, that they were forced to wait for the reaction.
Stepping forward, old Stebbins swung his pick over his head, and
buried its point several inches in the compact earth. Then, as he
forced the handle back, several nuggets dropped to the ground.
“Pick ’em up,” he called out, in a husky voice, “and I’ll keep yer
busy.”
Teddy and Black Tom gathered up the chunks, and deposited them
in the huge sack, made of bear-skin, that had been brought for that
purpose, while the old hunter plied the pick with a vigor that
amounted to fury.
Only now and then did they speak, for they were swayed by strange
emotions. Old Stebbins seemed literally tireless. Thump, thump,
went his implement, like the throbbing of an engine. Now and then
the fire was struck from the hardened point, and once it glanced
with such violence as to fly from his hand, and go spinning, end over
end, several yards away.
He walked to where it had fallen, and picking it up, without a word,
returned to his labor, and drove it in again, the chunks and nuggets
falling with such continuity that the others had little time for rest.
The perspiration streaming from his face, and the dust gathering
about his countenance, gave him a strange and unnatural
appearance, such as is noticed upon the faces of the restrictionists,
when engaged at their hideous labor; but still he toiled on, silent,
grim, and determined.
But the old trapper tired at last, and paused so exhausted that he
could scarcely stand, and was unable to resist Teddy O’Doherty
when he took the pick from his hand.
“It comes aisy to me, as I can swing it the same as a shillaleh.”
His voice sounded like that of another person, and the attempt at
jocularity was terrible from its very ghastliness.
But Teddy swung the pick like a master of the business, and the fire
glanced and flew, as the pieces were chipped off from the stones
and rocks.
At first the work was comparatively easy, but it did not last long. The
pieces were chipped off with greater difficulty, and were much
smaller in size; but they were none the less rich, and the sack was
gradually filled with its auriferous richness.
The fire was kept burning brightly, and by and by their task was
finished. The three had loaded themselves down with the ore, until
they had all they could hope to carry away with them.
Their wealth was now in their hands, and it only remained for them
to transport it to where it could be made available.
They ceased from their toil and prepared to return home.
“Afore we go,” said Black Tom, “I’ll take a look outside.”
“What fur?” asked Teddy, in surprise.
“To see whether thar’s any ‘sign.’”
“But Hammond is there, ain’t he?”
“Yas, but there ain’t no telling what mought have tuk place while
we’ve been peggin’ away inside.”
As Hammond was much less experienced in frontier life than they,
the others saw the cause of Black Tom’s misgiving. The stealthy
Blackfeet might have stolen upon him unawares, and, having silently
slain him, as their race had often done under similar circumstances,
might be lying in wait outside until the trappers should walk into the
ambush.
So it was arranged that old Stebbins and Teddy O’Doherty should
remain where they were, or rather should retreat into the darkness
of the cavern, and await the return of their comrade from his
reconnoissance.
Black Tom moved away with the silence and stealth that had
characterized his approach to an Indian camp, frequently pausing
and listening for some indication of the danger that he feared
menaced them; but nothing reached his ears, save the dull, faint
murmur of the stream behind as it rushed through its narrow cañon.
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