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Fundamentals of Corporate Finance

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 Preface from the Authors
When the three of us decided to write a book, we were united by one strongly held principle: Corporate
finance should be developed in terms of a few integrated, powerful ideas. We believed that the subject
was all too often presented as a collection of loosely related topics, unified primarily by virtue of being
bound together in one book, and we thought there must be a better way.
One thing we knew for certain was that we didn’t want to write a “me-too” book. So, with a lot of
help, we took a hard look at what was truly important and useful. In doing so, we were led to eliminate
topics of dubious relevance, downplay purely theoretical issues, and minimize the use of extensive
and elaborate calculations to illustrate points that are either intuitively obvious or of limited practical
use.
As a result of this process, three basic themes became our central focus in writing Fundamentals
of Corporate Finance:

AN EMPHASIS ON INTUITION
We always try to separate and explain the principles at work on a common sense, intuitive level
before launching into any specifics. The underlying ideas are discussed first in very general terms
and then by way of examples that illustrate in more concrete terms how a financial manager might
proceed in a given situation.

A UNIFIED VALUATION APPROACH

We treat net present value (NPV) as the basic concept underlying corporate finance. Many texts
stop well short of consistently integrating this important principle. The most basic and important
notion, that NPV represents the excess of market value over cost, often is lost in an overly mechan-
ical approach that emphasizes computation at the expense of comprehension. In contrast, every
subject we cover is firmly rooted in valuation, and care is taken throughout to explain how particular
decisions have valuation effects.

A MANAGERIAL FOCUS
Students shouldn’t lose sight of the fact that financial management concerns management. We
emphasize the role of the financial manager as decision maker, and we stress the need for mana-
gerial input and judgment. We consciously avoid “black box” approaches to finance, and, where
appropriate, the approximate, pragmatic nature of financial analysis is made explicit, possible pit-
falls are described, and limitations are discussed.

In retrospect, looking back to our 1991 first edition IPO, we had the same hopes and fears as any
entrepreneurs. How would we be received in the market? At the time, we had no idea that 23 years
later, we would be working on an eleventh edition. We certainly never dreamed that in those years we
would work with friends and colleagues from around the world to create country-specific Australian,
Canadian, and South African editions, an International edition, Chinese, French, Polish, Portuguese,
Thai, Russian, Korean, and Spanish language editions, and an entirely separate book, Essentials of
Corporate Finance, now in its eighth edition.
Today, as we prepare to once more enter the market, our goal is to stick with the basic principles
that have brought us this far. However, based on the enormous amount of feedback we have received
from you and your colleagues, we have made this edition and its package even more flexible than pre-
vious editions. We offer flexibility in coverage, as customized editions of this text can be crafted in any
combination through McGraw-Hill’s CREATE system, and flexibility in pedagogy, by providing a wide
vii
viii PREFACE FROM THE AUTHORS

variety of features in the book to help students to learn about corporate finance. We also
provide flexibility in package options by offering the most extensive collection of teaching,
learning, and technology aids of any corporate finance text. Whether you use only the text-
book, or the book in conjunction with our other products, we believe you will find a combi-
nation with this edition that will meet your current as well as your changing course needs.

Stephen A. Ross
Randolph W. Westerfield
Bradford D. Jordan
 Coverage
This book was designed and developed explicitly for a first course in business or corporate finance,
for both finance majors and non-majors alike. In terms of background or prerequisites, the book is
nearly self-contained, assuming some familiarity with basic algebra and accounting concepts, while
still reviewing important accounting principles very early on. The organization of this text has been
developed to give instructors the flexibility they need.
The following grid presents, for each chapter, some of the most significant features as well as a few
selected chapter highlights of the 11th edition of Fundamentals. Of course, in every chapter, opening
vignettes, boxed features, in-chapter illustrated examples using real companies, and end-of-chapter
material have been thoroughly updated as well.

Chapters Selected Topics of Interest Benefits to You

PART 1 Overview of Corporate Finance
CHAPTER 1 Goal of the firm and agency problems. Stresses value creation as the most fundamental
aspect of management and describes agency
Introduction to Corporate
issues that can arise.
Finance
Ethics, financial management, and Brings in real-world issues concerning conflicts
executive compensation. of interest and current controversies surrounding
ethical conduct and management pay.
Sarbanes-Oxley. Up-to-date discussion of Sarbanes-Oxley and its
implications and impact.
Minicase: The McGee Cake Company. Examines the choice of organization form for a
small business.

CHAPTER 2 Cash flow vs. earnings. Clearly defines cash flow and spells out the
differences between cash flow and earnings.
Financial Statements, Taxes,
and Cash Flow Market values vs. book values. Emphasizes the relevance of market values over
book values.
Brief discussion of average corporate Highlights the variation in corporate tax rates
tax rates. across industries in practice.
Minicase: Cash Flows and Financial Reinforces key cash flow concepts in a small
Statements at Sunset Boards, Inc. business setting.

PART 2 Financial Statements and Long-Term Financial Planning

CHAPTER 3 Expanded DuPont analysis. Expands the basic DuPont equation to better
explore the interrelationships between operating
Working with Financial
and financial performance.
Statements
DuPont analysis for real companies Analysis shows students how to get and use real-
using data from S&P Market Insight. world data, thereby applying key chapter ideas.
Ratio and financial statement analysis Uses firm data from RMA to show students how
using smaller firm data. to actually get and evaluate financial statement
benchmarks.
Understanding financial statements. Thorough coverage of standardized financial
statements and key ratios.
The enterprise value–EBITDA ratio. Defines enterprise value (EV) and discusses the
widely used EV–EBITDA ratio.
Minicase: Ratio Analysis at S&S Air, Illustrates the use of ratios and some pitfalls in a
Inc. small business context.

ix
x COVERAGE

Chapters Selected Topics of Interest Benefits to You

CHAPTER 4 Expanded discussion of sustainable Illustrates the importance of financial planning in
growth calculations. a small firm.
Long-Term Financial Planning
and Growth Explanation of alternative formulas for Explanation of growth rate formulas clears up a
sustainable and internal growth rates. common misunderstanding about these formulas
and the circumstances under which alternative
formulas are correct.
Thorough coverage of sustainable Provides a vehicle for examining the interrelation-
growth as a planning tool. ships between operations, financing, and growth.
Long-range financial planning. Covers percentage of sales approach to creating
pro forma statements.
Minicase: Planning for Growth at S&S Discusses the importance of financial plan and
Air. capacity utilization for a small business.

PART 3 Valuation of Future Cash Flows

CHAPTER 5 First of two chapters on time value of Relatively short chapter introduces just the basic
money. ideas on time value of money to get students
Introduction to Valuation:
started on this traditionally difficult topic.
The Time Value of Money

CHAPTER 6 Growing annuities and perpetuities. Covers more advanced time value topics with
Second of two chapters on time value numerous examples, calculator tips, and Excel
Discounted Cash Flow
of money. spreadsheet exhibits. Contains many real-world
Valuation
examples.
Minicase: The MBA Decision. Explores the financial pros and cons of pursuing
an MBA degree.

CHAPTER 7 Bond valuation. Complete coverage of bond valuation and bond

features.
Interest Rates and Bond
Valuation Interest rates. Discusses real versus nominal rates and the
determinants of the term structure.
“Clean” vs. “dirty” bond prices and Clears up the pricing of bonds between coupon
accrued interest. payment dates and also bond market quoting
conventions.
TRACE system and transparency in Up-to-date discussion of new developments in
the corporate bond market. fixed income with regard to price, volume, and
transactions reporting.
“Make-whole” call provisions. Up-to-date discussion of a relatively new type of
call provision that has become very common.
Islamic finance
Minicase: Financing S&S Air’s Discusses the issues that come up in selling
Expansion Plans with a Bond Issue. bonds to the public.

CHAPTER 8 Stock valuation. Thorough coverage of constant and non-

constant growth models.
Stock Valuation
New! NYSE market operations. Up-to-date description of major stock market
operations.
Valuation using multiples. lllustrates using PE and price/sales ratios for
equity valuation.
Minicase: Stock Valuation at Illustrates the difficulties and issues surrounding
Ragan, Inc. small business valuation.
 COVERAGE xi

Chapters Selected Topics of Interest Benefits to You

PART 4 Capital Budgeting
CHAPTER 9 First of three chapters on capital Relatively short chapter introduces key ideas
budgeting. on an intuitive level to help students with this
Net Present Value and Other
traditionally difficult topic.
Investment Criteria
NPV, IRR, payback, discounted Consistent, balanced examination of advantages
payback, and accounting rate of and disadvantages of various criteria.
return.
Minicase: Bullock Gold Mining. Explores different capital budgeting techniques
with nonstandard cash flows.

CHAPTER 10 Project cash flow. Thorough coverage of project cash flows and the
relevant numbers for a project analysis.
Making Capital Investment
Decisions Alternative cash flow definitions. Emphasizes the equivalence of various formulas,
thereby removing common misunderstandings.
Special cases of DCF analysis. Considers important applications of chapter
tools.
Minicase: Conch Republic Electronics, Analyzes capital budgeting issues and
Part 1. complexities.

CHAPTER 11 Sources of value. Stresses the need to understand the economic

basis for value creation in a project.
Project Analysis and Evaluation
Scenario and sensitivity “what-if” Illustrates how to actually apply and interpret
analyses. these tools in a project analysis.
Break-even analysis. Covers cash, accounting, and financial break-
even levels.
Minicase: Conch Republic Electronics, Illustrates the use of sensitivity analysis in capital
Part 2. budgeting.

PART 5 Risk and Return

CHAPTER 12 Expanded discussion of geometric Discusses calculation and interpretation
vs. arithmetic returns. of geometric returns. Clarifies common
Some Lessons from Capital
misconceptions regarding appropriate use of
Market History
arithmetic vs. geometric average returns.
Capital market history. Extensive coverage of historical returns,
volatilities, and risk premiums.
Market efficiency. Efficient markets hypothesis discussed along
with common misconceptions.
The equity risk premium. Section discusses the equity premium puzzle and
latest international evidence.
The 2008 experience. Section on the stock market turmoil of 2008.
Minicase: A Job at S&S Air. Discusses selection of investments for a 401(k)
plan.

CHAPTER 13 Diversification, systematic and Illustrates basics of risk and return in a

unsystematic risk. straightforward fashion.
Return, Risk, and the Security
Market Line Beta and the security market line. Develops the security market line with an intuitive
approach that bypasses much of the usual
portfolio theory and statistics.
Minicase: The Beta for Detailed discussion of beta estimation.
Colgate-Palmolive.
xii COVERAGE

Chapters Selected Topics of Interest Benefits to You

PART 6 Cost of Capital and Long-Term Financial Policy
CHAPTER 14 Cost of capital estimation. Contains a complete, Web-based illustration of
cost of capital for a real company.
Cost of Capital
Geometric vs. arithmetic growth rates. Both approaches are used in practice. Clears up
issues surrounding growth rate estimates.
New! Firm valuation. Illustrates the free cash flow approach to firm
valuation.
Minicase: Cost of Capital for Hubbard Covers pure play approach to cost of capital
Computer, Inc. estimation.

CHAPTER 15 Dutch auction IPOs. Explains uniform price auctions using recent
Google IPO as an example.
Raising Capital
IPO “quiet periods.” Explains the SEC’s quiet period rules.
Rights vs. warrants. Clarifies the optionlike nature of rights prior to
their expiration dates.
IPO valuation. Extensive, up-to-date discussion of IPOs,
including the 1999–2000 period.
Minicase: S&S Air Goes Public. Covers the key parts of the IPO process for a
small firm.

CHAPTER 16 Basics of financial leverage. Illustrates effect of leverage on risk and return.
Financial Leverage and Capital Optimal capital structure. Describes the basic trade-offs leading to an
Structure Policy optimal capital structure.
Financial distress and bankruptcy. Briefly surveys the bankruptcy process.
Minicase: Stephenson Real Estate Discusses optimal capital structure for a medium-
Recapitalization. sized firm.

CHAPTER 17 Very recent survey evidence on New survey results show the most important (and
dividend policy. least important) factors considered by financial
Dividends and Payout Policy
managers in setting dividend policy.
Effect of new tax laws. Discusses implications of new, lower dividend
and capital gains rates.
Dividends and dividend policy. Describes dividend payments and the factors
favoring higher and lower payout policies.
Optimal payout policy. Extensive discussion of the latest research and
survey evidence on dividend policy, including
life-cycle theory.
Stock repurchases. Thorough coverage of buybacks as an alternative
to cash dividends.
Minicase: Electronic Timing, Inc. Describes the dividend/share repurchase issue
for a small company.
 COVERAGE xiii

Chapters Selected Topics of Interest Benefits to You

PART 7 Short-Term Financial Planning and Management
CHAPTER 18 Operating and cash cycles. Stresses the importance of cash flow timing.
Short-Term Finance Short-term financial planning. Illustrates creation of cash budgets and potential
and Planning need for financing.
Purchase order financing. Brief discussion of PO financing, which is popular
with small and medium-sized firms.
Minicase: Piepkorn Manufacturing Illustrates the construction of a cash budget and
Working Capital Management. short-term financial plan for a small company.

CHAPTER 19 Float management. Thorough coverage of float management and

potential ethical issues.
Cash and Liquidity
Management Cash collection and disbursement. Examination of systems used by firms to handle
cash inflows and outflows.
Minicase: Cash Management at Webb Evaluates alternative cash concentration systems
Corporation. for a small firm.

CHAPTER 20 Credit management Analysis of credit policy and implementation.

Credit and Inventory Inventory management Brief overview of important inventory concepts.
Management Minicase: Credit Policy at Howlett Evaluates working capital issues for a small
Industries. firm.

PART 8 Topics in Corporate Finance

CHAPTER 21 Foreign exchange. Covers essentials of exchange rates and their
determination.
International Corporate Finance
International capital budgeting. Shows how to adapt basic DCF approach
to handle exchange rates.
Exchange rate and political risk. Discusses hedging and issues surrounding
sovereign risk.
Minicase: S&S Air Goes International. Discusses factors in an international expansion
for a small firm.

CHAPTER 22 Behavioral finance. Unique and innovative coverage of the effects of

biases and heuristics on financial management
Behavioral Finance:
decisions. “In Their Own Words” box by Hersh
Implications for Financial
Shefrin.
Management
Case against efficient markets. Presents the behavioral case for market
inefficiency and related evidence pro and con.

CHAPTER 23 Volatility and risk. Illustrates need to manage risk and some of the
most important types of risk.
Enterprise Risk Management
Hedging with forwards, options, and Shows how many risks can be managed with
swaps. financial derivatives.
Minicase: Chatman Mortgage, Inc. Analyzes hedging of interest rate risk.
xiv COVERAGE

Chapters Selected Topics of Interest Benefits to You

CHAPTER 24 Stock options, employee stock options, Discusses the basics of these important option
and real options. types.
Options and Corporate Finance
Option-embedded securities. Describes the different types of option found in
corporate securities.
Minicase: S&S Air’s Convertible Bond. Examines security issuance issues for a
small firm.

CHAPTER 25 Put–call parity and Black–Scholes. Develops modern option valuation and factors
influencing option values.
Option Valuation
Options and corporate finance. Applies option valuation to a variety of corporate
issues, including mergers and capital budgeting.
Minicase: Exotic Cuisines Employee Illustrates complexities that arise in valuing
Stock Options. employee stock options.

CHAPTER 26 Alternatives to mergers and Covers strategic alliances and joint ventures and
acquisitions. why they are important alternatives.
Mergers and Acquisitions
Defensive tactics. Expanded discussion of antitakeover provisions.
Divestitures and restructurings. Important actions such as equity carve-outs,
spins-offs, and split-ups are examined.
Mergers and acquisitions. Develops essentials of M&A analysis, including
financial, tax, and accounting issues.
Minicase: The Birdie Golf–Hybrid Golf Covers small business valuation for acquisition
Merger. purposes.

CHAPTER 27 Synthetic leases. Discusses controversial practice of custom-

tailored, “off-balance-sheet” financing.
Leasing
Leases and lease valuation. Essentials of leasing, good and bad reasons for
leasing, and NPV of leasing are examined.
Minicase: The Decision to Lease or Covers lease-or-buy and related issues for a
Buy at Warf Computers. small business.
 In-Text Study Features
To meet the varied needs of its intended audience, Fundamentals of Corporate Finance is rich in valu-
able learning tools and support.

CHAPTER-OPENING VIGNETTES
Vignettes drawn from real-world events introduce students to the chapter concepts.

CHAPTER LEARNING OBJECTIVES

C

12
PART 5 Risk and Return T
This feature maps out the topics and learning
goals in every chapter. Each end-of-chapter
g
problem and test bank question is linked to a
p
Some Lessons from learning objective, to help you organize your
le

Capital Market History assessment of knowledge and comprehension.

a

WITH THE S&P 500 UP about 32 percent and the NASDAQ index up about 38 percent in 2013, stock
market performance overall was well above average for the year. However, investors in Fannie Mae had to be
thrilled with the 1,333 percent gain in that stock, and investors in Freddie Mac had to feel pleased with its 963
percent gain. Of course, not all stocks increased during the year. Stock in communications services company NII
Holdings fell 63 percent during the year, and stock in retailer JC Penney fell 54 percent. These examples show that
there were tremendous potential profits to be made during 2013, but there was also the risk of losing money—
lots of it. So what should you, as a stock market investor, expect when you invest your own money? In this chapter,
we study almost nine decades of market history to find out.

Learning Objectives

After studying this chapter, you should understand:

LO1 How to calculate the LO3 The historical risks on
For updates
on the latest return on an investment. various important types of
happenings in
finance, visit LO2 The historical returns on investments.
www.fundamentals
ofcorporate
various important types of LO4 The implications of
finance.blogspot investments. market efficiency.
.com.

PEDAGOGICAL USE OF COLOR FIGURE 9.3

This learning tool continues to be an important Future Value of Project
Cash Flows 700
feature of Fundamentals of Corporate Finance. $642
In almost every chapter, color plays an 600
$541
extensive, nonschematic, and largely self-
Future value ($)

500
evident role. A guide to the functional use of FV of initial investment $481
400
color is on the endsheets of the text.
300
FV of projected cash flow
200

100

0 1 2 3 4 5
Year

Future Value at 12.5%

$100 Annuity $300 Lump Sum
Year (Projected Cash Flow) (Projected Investment)
0 $ 0 $300
1 100 338
2 213 380
3 339 427
4 481 481
5 642 541

xv
xvi IN-TEXT STUDY FEATURES

IN THEIR OWN
IN THEIR OWN WORDS …
WORDS BOXES Robert C. Higgins on Sustainable Growth
This series of boxes are the
popular articles updated from Most financial officers know intuitively that it takes money to make money. Rapid sales growth requires
increased assets in the form of accounts receivable, inventory, and fixed plant, which, in turn, require money to pay
previous editions written by for assets. They also know that if their company does not have the money when needed, it can literally “grow broke.”
a distinguished scholar or The sustainable growth equation states these intuitive truths explicitly.
Sustainable growth is often used by bankers and other external analysts to assess a company’s credit-worthiness.
practitioner on key topics They are aided in this exercise by several sophisticated computer software packages that provide detailed analyses
in the text. Boxes include of the company’s past financial performance, including its annual sustainable growth rate.
Bankers use this information in several ways. Quick comparison of a company’s actual growth rate to its sustainable
essays by Merton Miller on rate tells the banker what issues will be at the top of management’s financial agenda. If actual growth consistently
capital structure, Fischer exceeds sustainable growth, management’s problem will be where to get the cash to finance growth. The banker thus
can anticipate interest in loan products. Conversely, if sustainable growth consistently exceeds actual, the banker had
Black on dividends, and best be prepared to talk about investment products, because management’s problem will be what to do with all the
cash that keeps piling up in the till.
Roger Ibbotson on capital Bankers also find the sustainable growth equation useful for explaining to financially inexperienced small business
market history. A complete owners and overly optimistic entrepreneurs that, for the long-run viability of their business, it is necessary to keep
growth and profitability in proper balance.
list of “In Their Own Words” Finally, comparison of actual to sustainable growth rates helps a banker understand why a loan applicant needs
boxes appears on page xlv. money and for how long the need might continue. In one instance, a loan applicant requested $100,000 to pay off
several insistent suppliers and promised to repay in a few months when he collected some accounts receivable that
were coming due. A sustainable growth analysis revealed that the firm had been growing at four to six times its
sustainable growth rate and that this pattern was likely to continue in the foreseeable future. This alerted the banker to
the fact that impatient suppliers were only a symptom of the much more fundamental disease of overly rapid growth,
and that a $100,000 loan would likely prove to be only the down payment on a much larger, multiyear commitment.

Robert C. Higgins is the Marguerite Reimers Professor of Finance, Emeritus, at the Foster School of Business at the University of Washington.
He pioneered the use of sustainable growth as a tool for financial analysis.

A NOTE ABOUT SUSTAINABLE GROWTH RATE CALCULATIONS

Very commonly, the sustainable growth rate is calculated using just the numerator in our
expression, ROE 3 b. This causes some confusion, which we can clear up here. The issue
has to do with how ROE is computed. Recall that ROE is calculated as net income divided
by total equity. If total equity is taken from an ending balance sheet (as we have done con-
sistently, and is commonly done in practice), then our formula is the right one. However, if
total equity is from the beginning of the period, then the simpler formula is the correct one.
I i i l ’ll l h i bl h dl f hi h

WORK THE WEB WORK THE

As we discussed in this chapter, ratios are an important tool for examining a company’s performance.
Gathering the necessary financial statements to calculate ratios can be tedious and time-consuming.
WEB BOXES
Fortunately many sites on the Web provide this information for free. One of the best is www.reuters These boxes show students
.com. We went there, entered the ticker symbol “HD” (for Home Depot), and then went to the ratio
page. Here is an abbreviated look at the results: how to research financial
issues using the Web
and then how to use the
information they find to
make business decisions.
Work the Web boxes also
include interactive follow-up
questions and exercises.

The website reports the company, industry, and sector ratios. As you can see, Home Depot has
higher quick and current ratios than the industry.

Questions
1. Go to www.reuters.com and find the major ratio categories listed on this website. How do the categories
differ from the categories listed in this textbook?
2. Go to www.reuters.com and find all the ratios for Home Depot. How does the company compare to the
industry for the ratios presented on this website?
 IN-TEXT STUDY FEATURES xvii

REAL-WORLD EXAMPLES
Actual events are integrated throughout the text, tying chapter concepts to real life through illustration and
reinforcing the relevance of the material. Some examples tie into the chapter-opening vignette for added
reinforcement.

SPREADSHEET STRATEGIES SPREADSHEET

How to Calculate Present Values with Multiple STRATEGIES
Future Cash Flows Using a Spreadsheet
Just as we did in our previous chapter, we can set up a basic spreadsheet to calculate the present values of T
This feature introduces
the individual cash flows as follows. Notice that we have simply calculated the present values one at a time students to Excel and
and added them up:
shows them how to set up
spreadsheets in order to
analyze common financial
problems—a vital part of
every business student’s
education.

CALCULATOR HINTS
Brief calculator tutorials appear in selected chapters to help
students learn or brush up on their financial calculator skills.
These complement the Spreadsheet Strategies.

CALCULATOR HINTS
How to Calculate Present Values with Multiple Future
Cash Flows Using a Financial Calculator
To calculate the present value of multiple cash flows with a financial calculator, we will simply discount the
individual cash flows one at a time using the same technique we used in our previous chapter, so this is not
really new. However, we can show you a shortcut. We will use the numbers in Example 6.3 to illustrate.
To begin, of course we first remember to clear out the calculator! Next, from Example 6.3, the first cash
flow is $200 to be received in one year and the discount rate is 12 percent, so we do the following:

Enter 1 12 200
N I/Y PMT PV FV
Solve for 2178.57

Now, you can write down this answer to save it, but that’s inefficient. All calculators have a memory where
you can store numbers. Why not just save it there? Doing so cuts way down on mistakes because you don’t
have to write down andyor rekey numbers, and it’s much faster.
Next we value the second cash flow. We need to change N to 2 and FV to 400. As long as we haven’t
changed anything else, we don’t have to reenter IyY or clear out the calculator, so we have:

Enter 2 400
N I/Y PMT PV FV
Solve for 2318.88
xviii IN-TEXT STUDY FEATURES

CONCEPT BUILDING
Chapter sections are intentionally kept short to promote a step-by-step, building block approach to learning. Each section is then
followed by a series of short concept questions that highlight the key ideas just presented. Students use these questions to make
sure they can identify and understand the most important concepts as they read.

Concept Questions
3.3a What are the five groups of ratios? Give two or three examples of each kind.
3.3b Given the total debt ratio, what other two ratios can be computed? Explain
how.
3.3c Turnover ratios all have one of two figures as the numerator. What are these
two figures? What do these ratios measure? How do you interpret the results?
3.3d Profitability ratios all have the same figure in the numerator. What is it? What do
these ratios measure? How do you interpret the results?

SUMMARY TABLES
These tables succinctly restate key principles, results, and equations. They appear whenever it is useful to emphasize and
summarize a group of related concepts. For an example, see Chapter 3, page 69.

PV for a perpetuity 5 C r [6.4] LABELED EXAMPLES

For example, an investment offers a perpetual cash flow of $500 every year. The return you Separate numbered and titled
require on such an investment is 8 percent. What is the value of this investment? The value examples are extensively
of this perpetuity is: integrated into the chapters.
Perpetuity PV 5 Cyr 5 $500y.08 5 $6,250 These examples provide detailed
For future reference, Table 6.2 contains a summary of the annuity and perpetuity basic applications and illustrations of
calculations we described. By now, you probably think that you’ll just use online calcula- the text material in a step-by-
tors to handle annuity problems. Before you do, see our nearby Work the Web box! step format. Each example is
completely self-contained so
students don’t have to search
Preferred Stock EXAMPLE 6.7 for additional information. Based
Preferred stock (or preference stock) is an important example of a perpetuity. When a
on our classroom testing, these
corporation sells preferred stock, the buyer is promised a fixed cash dividend every period examples are among the most
(usually every quarter) forever. This dividend must be paid before any dividend can be paid useful learning aids because
to regular stockholders—hence the term preferred. they provide both detail and
Suppose the Fellini Co. wants to sell preferred stock at $100 per share. A similar issue of
preferred stock already outstanding has a price of $40 per share and offers a dividend of $1 explanation.
every quarter. What dividend will Fellini have to offer if the preferred stock is going to sell?
 IN-TEXT STUDY FEATURES xix

KEY TERMS
Key Terms are printed in bold type and defined within the text the first time they appear. They also
appear in the margins with definitions for easy location and identification by the student.

EXPLANATORY WEB LINKS

These Web links are provided in the margins of the text. They are specifically selected to accompany text
material and provide students and instructors with a quick way to check for additional information using
the Internet.

1. A petition is filed in a federal court. Corporations may file a voluntary petition, or

involuntary petitions may be filed against the corporation by several of its creditors.
2. A trustee-in-bankruptcy is elected by the creditors to take over the assets of the debtor
The SEC has a good overview corporation. The trustee will attempt to liquidate the assets.
of the bankruptcy process in its 3. When the assets are liquidated, after payment of the bankruptcy administration costs,
“Online Publications” section at
www.sec.gov.
the proceeds are distributed among the creditors.
4. If any proceeds remain, after expenses and payments to creditors, they are distributed
to the shareholders.

KEY EQUATIONS
Called out in the text, key equations are identified by an equation number. The list in Appendix B
shows the key equations by chapter, providing students with a convenient reference.

Based on our examples, we can now write the general expression for the value of a bond.
If a bond has (1) a face value of F paid at maturity, (2) a coupon of C paid per period, (3) t
periods to maturity, and (4) a yield of r per period, its value is:
Bond value 5 C 3 [1 2 1y(1 1 r)t ]yr 1 Fy(1 1 r)t [7.1]
Present value Present value
Bond value 5 of the coupons 1 of the face amount

HIGHLIGHTED CONCEPTS
Throughout the text, important ideas
Average Returns: The First Lesson 12.3
are pulled out and presented in a As you’ve probably begun to notice, the history of capital market returns is too complicated Excel Master It!
to be of much use in its undigested form. We need to begin summarizing all these numbers. Excel Master
highlighted box—signaling to students Accordingly, we discuss how to go about condensing the detailed data. We start out by coverage online
that this material is particularly relevant calculating average returns.
and critical for their understanding.
CALCULATING AVERAGE RETURNS
For examples, Chapter 10, page 313;
The obvious way to calculate the average returns on the different investments in Table 12.1
Chapter 13, page 434. is simply to add up the yearly returns and divide by 88. The result is the historical average
of the individual values.
EXCEL MASTER For example, if you add up the returns for the large-company stocks in Figure 12.5
for the 88 years, you will get about 10.61. The average annual return is thus 10.61y88 5
Icons in the margin identify concepts 12.1%. You interpret this 12.1 percent just like any other average. If you were to pick a year
and skills covered in our unique, RWJ- at random from the 88-year history and you had to guess what the return in that year was,
the best guess would be 12.1 percent.
created Excel Master program. For
more training in Excel functions for AVERAGE RETURNS: THE HISTORICAL RECORD
finance, and for more practice, log on Table 12.2 shows the average returns for the investments we have discussed. As shown, in a
typical year, the small-company stocks increased in value by 16.9 percent. Notice also how
to McGraw-Hill’s Connect Finance for much larger the stock returns are than the bond returns.
Fundamentals of Corporate Finance These averages are, of course, nominal because we haven’t worried about inflation.
to access the Excel Master files. This Notice that the average inflation rate was 3.0 percent per year over this 88-year span. The
pedagogically superior tool will help get nominal return on U.S. Treasury bills was 3.5 percent per year. The average real return on
Treasury bills was thus approximately .5 percent per year; so the real return on T-bills has
your students the practice they need to been quite low historically.
succeed—and to exceed expectations. At the other extreme, small stocks had an average real return of about 16.9% 2 3.0% 5
13.9%, which is relatively large. If you remember the Rule of 72 (Chapter 5), then you
k h i kb k f h l l l i ll h 13 9 l h
xx IN-TEXT STUDY FEATURES

CHAPTER SUMMARY AND CONCLUSIONS

Every chapter ends with a concise, but thorough, summary of the important ideas—helping
students review the key points and providing closure to the chapter.

CHAPTER REVIEW AND SELF-TEST PROBLEM CHAPTER REVIEW

2.1 Cash Flow for Mara Corporation This problem will give you some practice work- AND SELF-TEST
ing with financial statements and figuring cash flow. Based on the following informa-
tion for Mara Corporation, prepare an income statement for 2015 and balance sheets
PROBLEMS
for 2014 and 2015. Next, following our U.S. Corporation examples in the chapter, Appearing after
calculate cash flow from assets, cash flow to creditors, and cash flow to stockholders the Summary and
for Mara for 2015. Use a 35 percent tax rate throughout. You can check your answers
Conclusions, each chapter
against ours, found in the following section.
includes a Chapter
2014 2015 Review and Self-Test
Sales $4,203 $4,507 Problem section. These
Cost of goods sold 2,422 2,633 questions and answers
Depreciation 785 952
allow students to test
Interest 180 196
Dividends 225 250
their abilities in solving
Current assets 2,205 2,429 key problems related
Net fixed assets 7,344 7,650 to the chapter content
Current liabilities 1,003 1,255 and provide instant
Long-term debt 3,106 2,085
reinforcement.

CONCEPTS CONCEPTS REVIEW AND CRITICAL THINKING QUESTIONS

REVIEW AND 1. Liquidity [LO1] What does liquidity measure? Explain the trade-off a firm faces
between high liquidity and low liquidity levels.
CRITICAL
2. Accounting and Cash Flows [LO2] Why might the revenue and cost figures shown
THINKING on a standard income statement not be representative of the actual cash inflows and
outflows that occurred during a period?
QUESTIONS 3. Book Values versus Market Values [LO1] In preparing a balance sheet, why do
This successful end-of- you think standard accounting practice focuses on historical cost rather than market
chapter section facilitates value?
your students’ knowledge 4. Operating Cash Flow [LO2] In comparing accounting net income and operating
of key principles, as well cash flow, name two items you typically find in net income that are not in operating
cash flow. Explain what each is and why it is excluded in operating cash flow.
as intuitive understanding
5. Book Values versus Market Values [LO1] Under standard accounting rules, it is
of the chapter concepts. possible for a company’s liabilities to exceed its assets. When this occurs, the own-
A number of the questions ers’ equity is negative. Can this happen with market values? Why or why not?
relate to the chapter- 6. Cash Flow from Assets [LO4] Suppose a company’s cash flow from assets is neg-
opening vignette— ative for a particular period. Is this necessarily a good sign or a bad sign?
reinforcing student 7. Operating Cash Flow [LO4] Suppose a company’s operating cash flow has been
critical thinking skills and negative for several years running. Is this necessarily a good sign or a bad sign?
the learning of chapter 8. Net Working Capital and Capital Spending [LO4] Could a company’s change in
NWC be negative in a given year? (Hint: Yes.) Explain how this might come about.
material.
What about net capital spending?
9. Cash Flow to Stockholders and Creditors [LO4] Could a company’s cash flow to
stockholders be negative in a given year? (Hint: Yes.) Explain how this might come
about. What about cash flow to creditors?
10. Firm Values [LO1] Referring back to the Microsoft example used at the beginning
of the chapter, note that we suggested that Microsoft’s stockholders probably didn’t
suffer as a result of the reported loss. What do you think was the basis for our
conclusion?
11 E i V l [LO1] A fi ’ l i l h k l f
 IN-TEXT STUDY FEATURES xxi

END-OF-CHAPTER QUESTIONS AND PROBLEMS

Students learn better when they have plenty of opportunity to practice; therefore, FCF, 11e, provides extensive end-of-chapter
questions and problems. The end-of-chapter support greatly exceeds typical introductory textbooks. The questions and problems
are separated into three learning levels: Basic, Intermediate, and Challenge. Answers to selected end-of-chapter material appear
in Appendix C. Also, most problems are available in McGraw-Hill’s Connect—see page xxiv for details.
p

QUESTIONS AND PROBLEMS

1. Building a Balance Sheet [LO1] KCCO, Inc., has current assets of $5,300, net BASIC
fixed assets of $24,900, current liabilities of $4,600, and long-term debt of $10,300. (Questions 1–12)
What is the value of the shareholders’ equity account for this firm? How much is net
working capital?
2. Building an Income Statement [LO1] Billy’s Exterminators, Inc., has sales of
$817,000, costs of $343,000, depreciation expense of $51,000, interest expense of
$38,000, and a tax rate of 35 percent. What is the net income for this firm?
3. Dividends and Retained Earnings [LO1] Suppose the firm in Problem 2 paid out
$95,000 in cash dividends. What is the addition to retained earnings?
4. Per-Share Earnings and Dividends [LO1] Suppose the firm in Problem 3 had
90,000 shares of common stock outstanding. What is the earnings per share, or EPS,
figure? What is the dividends per share figure?
5. Calculating Taxes [LO3] The Dyrdek Co. had $267,000 in 2014 taxable income.
Using the rates from Table 2.3 in the chapter, calculate the company’s 2014 income
taxes.

END-OF-CHAPTER CASES
Located at the end of the book’s chapters, these minicases focus on real-life company situations that embody important
corporate finance topics. Each case presents a new scenario, data, and a dilemma. Several questions at the end of each case
require students to analyze and focus on all of the material they learned from each chapter.

MINICASE

Bullock Gold Mining

Seth Bullock, the owner of Bullock Gold Mining, is evaluat- Year Cash Flow
ing a new gold mine in South Dakota. Dan Dority, the compa-
0 2$525,000,000
ny’s geologist, has just finished his analysis of the mine site.
1 74,000,000
He has estimated that the mine would be productive for eight
years, after which the gold would be completely mined. Dan 2 97,000,000
has taken an estimate of the gold deposits to Alma Garrett, 3 125,000,000
the company’s financial officer. Alma has been asked by Seth 4 157,000,000
to perform an analysis of the new mine and present her rec- 5 185,000,000
ommendation on whether the company should open the new 6 145,000,000
mine. 7 125,000,000
Alma has used the estimates provided by Dan to determine 8 102,000,000
the revenues that could be expected from the mine. She has 9 235,000,000
also projected the expense of opening the mine and the annual
operating expenses. If the company opens the mine, it will
QUESTIONS
cost $525 million today, and it will have a cash outflow of $35
million nine years from today in costs associated with closing 1. Construct a spreadsheet to calculate the payback period,
the mine and reclaiming the area surrounding it. The expected internal rate of return, modified internal rate of return,
cash flows each year from the mine are shown in the table. and net present value of the proposed mine.
Bullock Mining has a required return of 12 percent on all of 2. Based on your analysis, should the company open the mine?
its gold mines. 3. Bonus question: Most spreadsheets do not have a built-in
formula to calculate the payback period. Write a VBA
script that calculates the payback period for a project.

WEB
WE B EX
EXER
EXERCISES
ERCI
CISE
SESS (O
(ONLINE
(ONL
NLIN
INEE ON
ONLY
ONLY)
LY))
For instructors interested in integrating even more online resources and problems into their course, these Web activities show
students how to learn from the vast amount of financial resources available on the Internet. In the 11th edition of Fundamentals,
these Web exercises are available to students and instructors through Connect.
Comprehensive Teaching
and Learning Package
This edition of Fundamentals has several options in terms of the textbook, instructor supplements,
student supplements, and multimedia products. Mix and match to create a package that is perfect for
your course!

TEXTBOOK
Customize your version of Fundamentals 11e through McGraw-Hill’s Create platform. Teach the
chapters you want in the order you want—your rep can show you how!

INSTRUCTOR RESOURCES
Keep all the supplements in one place! Your Connect Library contains all the necessary supplements—
Instructor’s Manual, Solutions, Test Bank, Computerized Test Bank, and PowerPoint—all in one easy-
to-find, easy-to-use, integrated place: your Connect Finance course.

• Instructor’s Manual (IM)

Prepared by Denver Travis, Eastern Kentucky University
A great place to find new lecture ideas! The annotated outline for each chapter includes lecture
tips, real-world tips, ethics notes, suggested PowerPoint slides, and, when appropriate, a video
synopsis.

• Solutions Manual (SM)

Prepared by Brad Jordan, University of Kentucky, and Joseph Smolira, Belmont University
The Fundamentals Solutions Manual provides detailed solutions to the extensive end-of-chapter
material, including concept review questions, quantitative problems, and cases.

• Test Bank
Prepared by Kay Johnson
Over 100 questions and problems per chapter ! Each chapter includes questions that test the
understanding of key terms in the book; questions patterned after learning objectives, concept
questions, chapter opening vignettes, boxes, and highlighted phrases; multiple-choice problems
patterned after end-of-chapter questions at a variety of skill levels; and essay questions to test
problem-solving skills and more advanced understanding of concepts.

• Computerized Test Bank (Windows)

Create your own tests in a snap! These additional questions are found in a computerized test bank
utilizing McGraw-Hill’s EZ Test testing software to quickly create customized exams. This user-
friendly program allows instructors to sort questions by format; edit existing questions or add new
ones; and scramble questions for multiple versions of the same test.

• PowerPoint Presentations
Prepared by Denver Travis, Eastern Kentucky University
The PowerPoint slides for the 11th edition have been revised to include a wealth of instructor
material, including lecture tips, real-world examples, and international notes. Each presentation
now also includes slides dedicated entirely to ethics notes that relate to the chapter topics. In
addition, the PPTs provide exhibits and examples both from the book and from outside sources.

xxii
 COMPREHENSIVE TEACHING AND LEARNING PACKAGE xxiii

Applicable slides have Web links that take you directly to specific Internet sites, or a
spreadsheet link to show an example in Excel. Go to the Notes Page function for more
tips and information while presenting the slides to your class.

STUDENT RESOURCES
Student resources for this edition can be found through the Library tab in your Connect
Finance course. If you aren’t using Connect, visit us at http://connect.mheducation.com
to learn more, and ask your professor about using it in your course for access to a great
group of supplement resources!

• Excel Resources
For those seeking additional practice, students can access Excel template problems
and Excel Master, designed by Brad Jordan and Joe Smolira.
• Narrated PowerPoint Slides
The Narrated PowerPoints provide real-world examples accompanied by step-by-
step instructions and explanations for solving problems presented in the chapter. The
Concept Checks from the text are also integrated into the slides to reinforce the key
topics in the chapter. Designed specifically to appeal to the different learning methods
of students, the slides provide a visual and audio explanation of topics and problems.
Click on the slide and listen to the accompanying narration!

TEACHING SUPPORT
Along with having access to all of the student resource materials through the Connect
Library tab, you also have password-protected access to the Instructor’s Manual, solutions
to end-of-chapter problems and cases, Instructor’s PowerPoint, Excel Template Solutions,
video clips, and video projects and questions.

HOW THE MARKET WORKS

Students receive free access to this Web-based portfolio simulation with a hypothetical
brokerage account to buy and sell stocks and mutual funds. Students can use the real data
found at this site in conjunction with the chapters on investments. They can also compete
against students in their class, and around the United States to run the most successful
portfolio. This site is powered by Stock-Trak, the leading provider of investment simulation
services to the academic community.

AVAILABLE FOR PURCHASE & PACKAGING

FinGame Online 5.0
By LeRoy Brooks, John Carroll University
(ISBN 10: 0077219880/ISBN 13: 9780077219888)
Just $15.00 when packaged with this text. In this comprehensive simulation game, stu-
dents control a hypothetical company over numerous periods of operation. The game
is now tied to the text by exercises found on the Connect Student Library. As stu-
dents make major financial and operating decisions for their company, they will develop
and enhance their skills in financial management and financial accounting statement
analysis.
xxiv COMPREHENSIVE TEACHING AND LEARNING PACKAGE

FINANCIAL ANALYSIS WITH AN ELECTRONIC

CALCULATOR, SIXTH EDITION
by Mark A. White, University of Virginia, McIntire School of Commerce
(ISBN 10: 0073217093/ISBN 13: 9780073217093)
The information and procedures in this supplementary text enable students to master the
use of financial calculators and develop a working knowledge of financial mathematics and
problem solving. Complete instructions are included for solving all major problem types
on four popular models: HP 10B and 12C, TI BA II Plus, and TI-84. Hands-on problems
with detailed solutions allow students to practice the skills outlined in the text and obtain
instant reinforcement. Financial Analysis with an Electronic Calculator is a self-contained
supplement to the introductory financial management course.

MCGRAW-HILL’S CONNECT FINANCE

LESS MANAGING. MORE TEACHING. GREATER LEARNING.
McGraw-Hill’s Connect Finance is an online assignment and as-
sessment solution that connects students with the tools and re-
sources they’ll need to achieve success.
McGraw-Hill’s Connect Finance helps prepare students for their future by enabling
faster learning, more efficient studying, and higher retention of knowledge.

MCGRAW-HILL’S CONNECT FINANCE FEATURES

Connect Finance offers a number of powerful tools and features to make managing
assignments easier, so faculty can spend more time teaching. With Connect Finance,
students can engage with their coursework anytime and anywhere, making the learning
process more accessible and efficient. Connect Finance offers you the features
described below.

Simple Assignment Management

With Connect Finance, creating assignments is easier than ever, so you can spend more
time teaching and less time managing. The assignment management function enables
you to:
• Create and deliver assignments easily with selectable end-of-chapter questions and
test bank items.
• Streamline lesson planning, student progress reporting, and assignment grading to
make classroom management more efficient than ever.
• Go paperless with the eBook and online submission and grading of student assignments.

Smart Grading
When it comes to studying, time is precious. Connect Finance helps students learn more
efficiently by providing feedback and practice material when they need it, where they need
it. When it comes to teaching, your time also is precious. The grading function enables
you to:
• Have assignments scored automatically, giving students immediate feedback on their
work and side-by-side comparisons with correct answers.
• Access and review each response; manually change grades or leave comments for
students to review.
• Reinforce classroom concepts with practice tests and instant quizzes.
 COMPREHENSIVE TEACHING AND LEARNING PACKAGE xxv

Instructor Library
The Connect Finance Instructor Library is your repository for additional resources to im-
prove student engagement in and out of class. You can select and use any asset that
enhances your lecture. The Connect Finance Instructor Library includes all of the instructor
supplements for this text.

Student Study Center

The Connect Finance Student Study Center is the place for students to access additional
resources. The Student Study Center:
• Offers students quick access to lectures, practice materials, eBooks, and more.
• Provides instant practice material and study questions, easily accessible on the go.

Student Progress Tracking

Connect Finance keeps instructors informed about how each student, section, and class
is performing, allowing for more productive use of lecture and office hours. The prog-
ress-tracking function enables you to:
• View scored work immediately and track individual or group performance with
assignment and grade reports.
• Access an instant view of student or class performance relative to learning objectives.
• Collect data and generate reports required by many accreditation organizations, such
as AACSB.
Continually evolving, McGraw-Hill Connect has been redesigned to provide the only true
adaptive learning experience delivered within a simple and easy-to-navigate environment,
placing students at the very center.
• Performance Analytics—Now available for both instructors and students, easy-to-
decipher data illuminates course performance. Students always know how they’re
doing in class, while instructors can view student and section performance
at-a-glance.
• Mobile—Available on tablets, students can now access assignments, quizzes, and
results on-the-go, while instructors can assess student and section performance
anytime, anywhere.
• Personalized Learning—Squeezing the most out of study time, the adaptive engine in
Connect creates a highly personalized learning path for each student by identifying
areas of weakness, and surfacing learning resources to assist in the moment of need.
This seamless integration of reading, practice, and assessment, ensures that the focus
is on the most important content for that individual student at that specific time, while
promoting long-term retention of the material.

http://connect.mheducation.com

DIAGNOSTIC AND ADAPTIVE LEARNING OF CONCEPTS: LEARNSMART

Students want to make the best use of
their study time. The LearnSmart adaptive
self-study technology within Connect Finance provides students with a seamless combi-
nation of practice, assessment, and remediation for every concept in the textbook.
LearnSmart’s intelligent software adapts to every student response and automatically
delivers concepts that advance students’ understanding while reducing time devoted to
xxvi COMPREHENSIVE TEACHING AND LEARNING PACKAGE

the concepts already mastered. The result for every student is the fastest path to mastery
of the chapter concepts. LearnSmart:
• Applies an intelligent concept engine to identify the relationships between concepts and
to serve new concepts to each student only when he or she is ready.
• Adapts automatically to each student, so students spend less time on the topics they
understand and practice more those they have yet to master.
• Provides continual reinforcement and remediation, but gives only as much guidance as
students need.
• Integrates diagnostics as part of the learning experience.
• Enables you to assess which concepts students have efficiently learned on their own,
thus freeing class time for more applications and discussion.

SMARTBOOK
Smartbook is an extension of LearnSmart—
an adaptive eBook that helps students focus
their study time more effectively. As students read, Smartbook assesses comprehension
and dynamically highlights where they need to study more.
For more information about Connect, go to http://connect.mheducation.com, or
contact your local McGraw-Hill sales representative.

TEGRITY CAMPUS: LECTURES 24/7

Tegrity Campus is a service that makes class time available
24/7 by automatically capturing every lecture in a search-
able format for students to review when they study and
complete assignments. With a simple one-click start-and-stop process, you capture all
computer screens and corresponding audio. Students can replay any part of the class with
easy-to-use browser-based viewing on a PC or Mac.
Educators know that the more students can see, hear, and experience class resources,
the better they learn. In fact, studies prove it. With Tegrity Campus, students quickly recall
key moments by using Tegrity Campus’s unique search feature. This search helps students
efficiently find what they need, when they need it, across an entire semester of class re-
cordings. Help turn all your students’ study time into learning moments immediately sup-
ported by your lecture.
To learn more about Tegrity, watch a 2-minute Flash demo at www.tegrity.com.

MCGRAW-HILL CUSTOMER CARE CONTACT INFORMATION

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

Assurance of Learning Ready

Assurance of Learning is an important element of many accreditation standards.
Fundamentals of Corporate Finance, 11e, is designed specifically to support your as-
surance of learning initiatives. Each chapter in the book begins with a list of numbered
learning objectives that appear throughout the chapter, as well as in the end-of-chapter
 COMPREHENSIVE TEACHING AND LEARNING PACKAGE xxvii

problems and exercises. Every test bank question is also linked to one of these objec-
tives, in addition to level of difficulty, topic area, Bloom’s Taxonomy level, and AACSB
skill area. Connect, McGraw-Hill’s online homework solution, and EZ Test, McGraw-Hill’s
easy-to-use test bank software, can search the test bank using these and other catego-
ries, providing an engine for targeted Assurance of Learning analysis and assessment.

AACSB Statement
McGraw-Hill Education is a proud corporate member of AACSB International. Under-
standing the importance and value of AACSB Accreditation, Fundamentals of Corporate
Finance, 11e, has sought to recognize the curricula guidelines detailed in the AACSB stan-
dards for business accreditation by connecting selected questions in the test bank to the
general knowledge and skill guidelines found in the AACSB standards.
The statements contained in Fundamentals of Corporate Finance, 11e, are provided
only as a guide for the users of this text. The AACSB leaves content coverage and assess-
ment within the purview of individual schools, the mission of the school, and the faculty.
While Fundamentals of Corporate Finance, 11e, and the teaching package make no claim
of any specific AACSB qualification or evaluation, we have, within the test bank, labeled
selected questions according to the eight general knowledge and skills areas.
Acknowledgments
To borrow a phrase, writing an introductory finance textbook is easy—all you do is sit down at a word
processor and open a vein. We never would have completed this book without the incredible amount
of help and support we received from literally hundreds of our colleagues, students, editors, family
members, and friends. We would like to thank, without implicating, all of you.
Clearly, our greatest debt is to our many colleagues (and their students) who, like us, wanted to try
an alternative to what they were using and made the decision to change. Needless to say, without this
support, we would not be publishing an 11th edition!
A great many of our colleagues read the drafts of our first and subsequent editions. The fact that
this book has so little in common with our earliest drafts, along with the many changes and improve-
ments we have made over the years, is a reflection of the value we placed on the many comments
and suggestions that we received. To the following reviewers, then, we are grateful for their many
contributions:

Ibrahim Affeneh Uchenna Elike Randy Jorgensen

Jan Ambrose Steve Engel Daniel Jubinski
Mike Anderson Angelo V. Esposito Jarl G. Kallberg
Sung C. Bae James Estes Ashok Kapoor
Robert Benecke Cheri Etling Terry Keasler
Gary Benesh Thomas H. Eyssell Howard Keen
Scott Besley Dave Fehr David N. Ketcher
Sanjai Bhaghat Michael Ferguson Jim Keys
Vigdis Boasson Deborah Ann Ford Kee Kim
Elizabeth Booth Jim Forjan Deborah King
Denis Boudreaux Micah Frankel Robert Kleinman
Jim Boyd Jennifer R. Frazier Ladd Kochman
William Brent Deborah M. Giarusso Sophie Kong
Ray Brooks Devra Golbe David Kuipers
Charles C. Brown A. Steven Graham Morris A. Lamberson
Lawrence Byerly Mark Graham Qin Lan
Steve Byers Darryl E. J. Gurley Dina Layish
Steve Caples Wendy D. Habegger Chun Lee
Asim Celik Karen Hallows Adam Y. C. Lei
Christina Cella David Harraway George Lentz
Mary Chaffin John M. Harris, Jr. John Lightstone
Fan Chen R. Stevenson Hawkey Jason Lin
Raju Chenna Delvin D. Hawley Scott Lowe
Barbara J. Childs Eric Haye Robert Lutz
Charles M. Cox Robert C. Higgins Qingzhong Ma
Natalya Delcoure Karen Hogan Pawan Madhogarhia
Michael Dorigan Matthew Hood Timothy Manuel
David A. Dumpe Steve Isberg David G. Martin
Michael Dunn James Jackson Dubos J. Masson
Alan Eastman Pankaj Jain Mario Mastrandrea
Adrian C. Edwards James M. Johnson Leslie Mathis
xxviii
 ACKNOWLEDGMENTS xxix

John McDougald Russ Ray Rhonda Tenkku

Bob McElreath Ron Reiber John G. Thatcher
Bahlous Mejda Thomas Rietz Harry Thiewes
Gordon Melms Jay R. Ritter A. Frank Thompson
Richard R. Mendenhall Ricardo J. Rodriguez Joseph Trefzger
Wayne Mikkelson Stu Rosenstein George Turk
Lalatendu Misra Kenneth Roskelley Michael R. Vetsuypens
Karlyn Mitchell Ivan Roten Joe Walker
Sunil Mohanty Philip Russel Jun Wang
Scott Moore Gary Sanger James Washam
Belinda Mucklow Travis Sapp Alan Weatherford
Barry Mulholland Martha A. Schary Gwendolyn Webb
Frederick H. Mull Robert Schwebach Marsha Weber
Michael J. Murray Roger Severns Jill Wetmore
Randy Nelson Michael Sher Mark White
Oris Odom Dilip K. Shome Susan White
Keith Osher Neil W. Sicherman Annie Wong
Bulent Parker Timothy Smaby Colbrin Wright
Megan Partch Ahmad Sohrabian David J. Wright
Samuel Penkar Michael F. Spivey Steve B. Wyatt
Pamela P. Peterson Vic Stanton Tung-Hsiao Yang
Robert Phillips Charlene Sullivan Morris Yarmish
Greg Pierce Alice Sun Michael Young
Steve Pilloff George S. Swales, Jr. Mei Zhang
Robert Puelz Lee Swartz J. Kenton Zumwalt
George A. Racette Philip Swensen Tom Zwirlein
Charu G. Raheja Philip Swicegood
Narendar V. Rao Brian Tarrant

Several of our most respected colleagues contributed original essays for this edition, which
are entitled “In Their Own Words,” and appear in selected chapters. To these individuals
we extend a special thanks:

Edward I. Altman Robert C. Merton Jeremy Siegel

New York University Harvard University University of Pennsylvania
Robert C. Higgins Jay R. Ritter Hersh Shefrin
University of Washington University of Florida Santa Clara University
Roger Ibbotson Richard Roll Bennett Stewart
Yale University, Ibbotson California Institute of Stern Stewart & Co.
Associates Technology
Samuel C. Weaver
Erik Lie Fischer Black Lehigh University
University of Iowa Merton H. Miller

We are lucky to have had skilled and experienced instructors developing the supplement
material for this edition. Thank you to Eric McLaughlin for his work thoroughly revising and
updating the PowerPoint presentations and for organizing and distributing the wealth of
annotated instructor notes from the book into these teaching materials. We greatly ap-
preciate the contributions of Joe Smolira, Belmont University, who worked closely with
xxx ACKNOWLEDGMENTS

us to develop the Solutions Manual and to create Excel Templates for many of the end-
of-chapter problems. Thank you also to Kay Johnson for thorough updating, revising, and
tagging of every problem in the test bank. Thanks to Denver Travis for expertly developing
and reviewing the PowerPoint slides and Instructor’s Manual for the eleventh edition.
The following University of Kentucky students did outstanding work on this edition of
Fundamentals: Andrew Beeli and Steve Hailey. To them fell the unenviable task of technical
proofreading, and in particular, careful checking of each calculation throughout the text
and Instructor’s Manual.
Finally, in every phase of this project, we have been privileged to have had the complete
and unwavering support of a great organization, McGraw-Hill Education. We especially
thank the sales group. The suggestions they provide, their professionalism in assisting
potential adopters, and the service they provide to current users have been a major factor
in our success.
We are deeply grateful to the select group of professionals who served as our devel-
opment team on this edition: Chuck Synovec, Executive Brand Manager; Jennifer Upton,
Product Developer; Melissa Caughlin, Executive Marketing Manager; Kathryn Wright,
Core Project Manager; Matt Diamond, Designer; Bruce Gin, Assessment Project Manager.
Others at McGraw-Hill/Irwin, too numerous to list here, have improved the book in count-
less ways.
Throughout the development of this edition, we have taken great care to discover and
eliminate errors. Our goal is to provide the best textbook available on the subject. To en-
sure that future editions are error-free, we gladly offer $10 per arithmetic error to the first
individual reporting it as a modest token of our appreciation. More than this, we would like
to hear from instructors and students alike. Please write and tell us how to make this a bet-
ter text. Forward your comments to: Dr. Brad Jordan, c/o Editorial—Finance, McGraw-Hill
Education, 1333 Burr Ridge Parkway, Burr Ridge, IL 60527.

Stephen A. Ross
Randolph W. Westerfield
Bradford D. Jordan
 Brief Contents
PART 1 Overview of Corporate Finance
CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE 1

CHAPTER 2 FINANCIAL STATEMENTS, TAXES, AND CASH FLOW 20

PART 2 Financial Statements and Long-Term Financial Planning

CHAPTER 3 WORKING WITH FINANCIAL STATEMENTS 49

CHAPTER 4 LONG-TERM FINANCIAL PLANNING AND GROWTH 91

PART 3 Valuation of Future Cash Flows

CHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY 124

CHAPTER 6 DISCOUNTED CASH FLOW VALUATION 149

CHAPTER 7 INTEREST RATES AND BOND VALUATION 195

CHAPTER 8 STOCK VALUATION 239

PART 4 Capital Budgeting

CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA 272

CHAPTER 10 MAKING CAPITAL INVESTMENT DECISIONS 312

CHAPTER 11 PROJECT ANALYSIS AND EVALUATION 350

PART 5 Risk and Return

CHAPTER 12 SOME LESSONS FROM CAPITAL MARKET HISTORY 382

CHAPTER 13 RETURN, RISK, AND THE SECURITY MARKET LINE 420

PART 6 Cost of Capital and Long-Term Financial Policy

CHAPTER 14 COST OF CAPITAL 458

CHAPTER 15 RAISING CAPITAL 495

CHAPTER 16 FINANCIAL LEVERAGE AND CAPITAL STRUCTURE POLICY 534

CHAPTER 17 DIVIDENDS AND PAYOUT POLICY 574

xxxi
xxxii BRIEF CONTENTS

PART 7 Short-Term Financial Planning and Management

CHAPTER 18 SHORT-TERM FINANCE AND PLANNING 606

CHAPTER 19 CASH AND LIQUIDITY MANAGEMENT 640

CHAPTER 20 CREDIT AND INVENTORY MANAGEMENT 673

PART 8 Topics in Corporate Finance

CHAPTER 21 INTERNATIONAL CORPORATE FINANCE 711

CHAPTER 22 BEHAVIORAL FINANCE: IMPLICATIONS FOR FINANCIAL MANAGEMENT 740

CHAPTER 23 ENTERPRISE RISK MANAGEMENT 763

CHAPTER 24 OPTIONS AND CORPORATE FINANCE 790

CHAPTER 25 OPTION VALUATION 829

CHAPTER 26 MERGERS AND ACQUISITIONS 862

CHAPTER 27 LEASING 893

 Contents
PART 1 Overview of Corporate Finance
CHAPTER 1 CHAPTER 2
INTRODUCTION TO CORPORATE FINANCE 1 FINANCIAL STATEMENTS, TAXES,
AND CASH FLOW 20
1.1 Corporate Finance and the Financial Manager 2
What Is Corporate Finance? 2 2.1 The Balance Sheet 21
The Financial Manager 2 Assets: The Left Side 21
Financial Management Decisions 2 Liabilities and Owners’ Equity: The Right Side 21
Capital Budgeting 2 Net Working Capital 22
Capital Structure 3 Liquidity 23
Working Capital Management 4 Debt versus Equity 24
Conclusion 4 Market Value versus Book Value 24
1.2 Forms of Business Organization 4 2.2 The Income Statement 25
Sole Proprietorship 4 GAAP and the Income Statement 26
Partnership 5 Noncash Items 27
Corporation 5 Time and Costs 27
A Corporation by Another Name . . . 7 2.3 Taxes 29
1.3 The Goal of Financial Management 7 Corporate Tax Rates 29
Possible Goals 8 Average versus Marginal Tax Rates 30
The Goal of Financial Management 8 2.4 Cash Flow 32
A More General Goal 9 Cash Flow from Assets 32
Sarbanes-Oxley 9 Operating Cash Flow 33
1.4 The Agency Problem and Control of the Capital Spending 33
Corporation 10 Change in Net Working Capital 34
Agency Relationships 10 Conclusion 34
Management Goals 10 A Note about “Free” Cash Flow 34
Do Managers Act in the Stockholders’ Interests? 11 Cash Flow to Creditors and Stockholders 35
Managerial Compensation 11 Cash Flow to Creditors 35
Control of the Firm 12 Cash Flow to Stockholders 35
Conclusion 12 An Example: Cash Flows for Dole Cola 37
Stakeholders 12 Operating Cash Flow 37
1.5 Financial Markets and the Corporation 13 Net Capital Spending 37
Cash Flows to and from the Firm 14 Change in NWC and Cash Flow from Assets 38
Primary versus Secondary Markets 14 Cash Flow to Stockholders and Creditors 38
Primary Markets 14 2.5 Summary and Conclusions 39
Secondary Markets 15
Dealer versus Auction Markets 15
Trading in Corporate Securities 15
Listing 16
1.6 Summary and Conclusions 16

PART 2 Financial Statements and Long-Term Financial Planning

CHAPTER 3 3.2 Standardized Financial Statements 54
Common-Size Statements 54
WORKING WITH FINANCIAL STATEMENTS 49
Common-Size Balance Sheets 54
3.1 Cash Flow and Financial Statements: Common-Size Income Statements 55
A Closer Look 50 Common-Size Statements of Cash Flows 56
Sources and Uses of Cash 50
The Statement of Cash Flows 52
xxxiii
xxxiv CONTENTS

Common-Base Year Financial Statements: CHAPTER 4

Trend Analysis 56
Combined Common-Size and Base Year Analysis 56 LONG-TERM FINANCIAL PLANNING
3.3 Ratio Analysis 57 AND GROWTH 91
Short-Term Solvency, or Liquidity, Measures 58 4.1 What Is Financial Planning? 93
Current Ratio 58 Growth as a Financial Management Goal 93
The Quick (or Acid-Test) Ratio 59 Dimensions of Financial Planning 93
Other Liquidity Ratios 60 What Can Planning Accomplish? 94
Long-Term Solvency Measures 60 Examining Interactions 94
Total Debt Ratio 60 Exploring Options 94
A Brief Digression: Total Capitalization versus Total Avoiding Surprises 94
Assets 61 Ensuring Feasibility and Internal Consistency 95
Times Interest Earned 61 Conclusion 95
Cash Coverage 62 4.2 Financial Planning Models: A First Look 95
Asset Management, or Turnover, Measures 62 A Financial Planning Model: The Ingredients 95
Inventory Turnover and Days’ Sales in Inventory 62 Sales Forecast 96
Receivables Turnover and Days’ Sales in Pro Forma Statements 96
Receivables 63
Asset Requirements 96
Asset Turnover Ratios 64
Financial Requirements 96
Profitability Measures 64
The Plug 96
Profit Margin 65
Economic Assumptions 97
Return on Assets 65
A Simple Financial Planning Model 97
Return on Equity 65
4.3 The Percentage of Sales Approach 98
Market Value Measures 66
The Income Statement 98
Price–Earnings Ratio 66
The Balance Sheet 99
Price–Sales Ratio 66
A Particular Scenario 101
Market-to-Book Ratio 67
An Alternative Scenario 102
Enterprise Value–EBITDA Ratio 67
4.4 External Financing and Growth 105
Conclusion 68
EFN and Growth 105
3.4 The DuPont Identity 69
Financial Policy and Growth 107
A Closer Look at Roe 69
The Internal Growth Rate 107
An Expanded Dupont Analysis 71
The Sustainable Growth Rate 108
3.5 Using Financial Statement Information 73
Determinants of Growth 109
Why Evaluate Financial Statements? 73
A Note about Sustainable Growth Rate
Internal Uses 73 Calculations 111
External Uses 73 4.5 Some Caveats Regarding Financial Planning
Choosing a Benchmark 74 Models 112
Time Trend Analysis 74 4.6 Summary and Conclusions 113
Peer Group Analysis 74
Problems with Financial Statement Analysis 78
3.6 Summary and Conclusions 80

PART 3 Valuation of Future Cash Flows

CHAPTER 5 5.2 Present Value and Discounting 132
The Single-Period Case 132
INTRODUCTION TO VALUATION: THE TIME VALUE
Present Values for Multiple Periods 133
OF MONEY 124
5.3 More about Present and Future Values 136
5.1 Future Value and Compounding 125 Present versus Future Value 136
Investing for a Single Period 125 Determining the Discount Rate 137
Investing for More Than One Period 125 Finding the Number of Periods 140
A Note about Compound Growth 131 5.4 Summary and Conclusions 144
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 DANCE ON STILTS AT THE GIRLS’ UNYAGO, NIUCHI

Newala, too, suffers from the distance of its water-supply—at least

the Newala of to-day does; there was once another Newala in a lovely
valley at the foot of the plateau. I visited it and found scarcely a trace
of houses, only a Christian cemetery, with the graves of several
missionaries and their converts, remaining as a monument of its
former glories. But the surroundings are wonderfully beautiful. A
thick grove of splendid mango-trees closes in the weather-worn
crosses and headstones; behind them, combining the useful and the
agreeable, is a whole plantation of lemon-trees covered with ripe
fruit; not the small African kind, but a much larger and also juicier
imported variety, which drops into the hands of the passing traveller,
without calling for any exertion on his part. Old Newala is now under
the jurisdiction of the native pastor, Daudi, at Chingulungulu, who,
as I am on very friendly terms with him, allows me, as a matter of
course, the use of this lemon-grove during my stay at Newala.
 FEET MUTILATED BY THE RAVAGES OF THE “JIGGER”
(Sarcopsylla penetrans)

The water-supply of New Newala is in the bottom of the valley,

some 1,600 feet lower down. The way is not only long and fatiguing,
but the water, when we get it, is thoroughly bad. We are suffering not
only from this, but from the fact that the arrangements at Newala are
nothing short of luxurious. We have a separate kitchen—a hut built
against the boma palisade on the right of the baraza, the interior of
which is not visible from our usual position. Our two cooks were not
long in finding this out, and they consequently do—or rather neglect
to do—what they please. In any case they do not seem to be very
particular about the boiling of our drinking-water—at least I can
attribute to no other cause certain attacks of a dysenteric nature,
from which both Knudsen and I have suffered for some time. If a
man like Omari has to be left unwatched for a moment, he is capable
of anything. Besides this complaint, we are inconvenienced by the
state of our nails, which have become as hard as glass, and crack on
the slightest provocation, and I have the additional infliction of
pimples all over me. As if all this were not enough, we have also, for
the last week been waging war against the jigger, who has found his
Eldorado in the hot sand of the Makonde plateau. Our men are seen
all day long—whenever their chronic colds and the dysentery likewise
raging among them permit—occupied in removing this scourge of
Africa from their feet and trying to prevent the disastrous
consequences of its presence. It is quite common to see natives of
this place with one or two toes missing; many have lost all their toes,
or even the whole front part of the foot, so that a well-formed leg
ends in a shapeless stump. These ravages are caused by the female of
Sarcopsylla penetrans, which bores its way under the skin and there
develops an egg-sac the size of a pea. In all books on the subject, it is
stated that one’s attention is called to the presence of this parasite by
an intolerable itching. This agrees very well with my experience, so
far as the softer parts of the sole, the spaces between and under the
toes, and the side of the foot are concerned, but if the creature
penetrates through the harder parts of the heel or ball of the foot, it
may escape even the most careful search till it has reached maturity.
Then there is no time to be lost, if the horrible ulceration, of which
we see cases by the dozen every day, is to be prevented. It is much
easier, by the way, to discover the insect on the white skin of a
European than on that of a native, on which the dark speck scarcely
shows. The four or five jiggers which, in spite of the fact that I
constantly wore high laced boots, chose my feet to settle in, were
taken out for me by the all-accomplished Knudsen, after which I
thought it advisable to wash out the cavities with corrosive
sublimate. The natives have a different sort of disinfectant—they fill
the hole with scraped roots. In a tiny Makua village on the slope of
the plateau south of Newala, we saw an old woman who had filled all
the spaces under her toe-nails with powdered roots by way of
prophylactic treatment. What will be the result, if any, who can say?
The rest of the many trifling ills which trouble our existence are
really more comic than serious. In the absence of anything else to
smoke, Knudsen and I at last opened a box of cigars procured from
the Indian store-keeper at Lindi, and tried them, with the most
distressing results. Whether they contain opium or some other
narcotic, neither of us can say, but after the tenth puff we were both
“off,” three-quarters stupefied and unspeakably wretched. Slowly we
recovered—and what happened next? Half-an-hour later we were
once more smoking these poisonous concoctions—so insatiable is the
craving for tobacco in the tropics.
Even my present attacks of fever scarcely deserve to be taken
seriously. I have had no less than three here at Newala, all of which
have run their course in an incredibly short time. In the early
afternoon, I am busy with my old natives, asking questions and
making notes. The strong midday coffee has stimulated my spirits to
an extraordinary degree, the brain is active and vigorous, and work
progresses rapidly, while a pleasant warmth pervades the whole
body. Suddenly this gives place to a violent chill, forcing me to put on
my overcoat, though it is only half-past three and the afternoon sun
is at its hottest. Now the brain no longer works with such acuteness
and logical precision; more especially does it fail me in trying to
establish the syntax of the difficult Makua language on which I have
ventured, as if I had not enough to do without it. Under the
circumstances it seems advisable to take my temperature, and I do
so, to save trouble, without leaving my seat, and while going on with
my work. On examination, I find it to be 101·48°. My tutors are
abruptly dismissed and my bed set up in the baraza; a few minutes
later I am in it and treating myself internally with hot water and
lemon-juice.
Three hours later, the thermometer marks nearly 104°, and I make
them carry me back into the tent, bed and all, as I am now perspiring
heavily, and exposure to the cold wind just beginning to blow might
mean a fatal chill. I lie still for a little while, and then find, to my
great relief, that the temperature is not rising, but rather falling. This
is about 7.30 p.m. At 8 p.m. I find, to my unbounded astonishment,
that it has fallen below 98·6°, and I feel perfectly well. I read for an
hour or two, and could very well enjoy a smoke, if I had the
wherewithal—Indian cigars being out of the question.
Having no medical training, I am at a loss to account for this state
of things. It is impossible that these transitory attacks of high fever
should be malarial; it seems more probable that they are due to a
kind of sunstroke. On consulting my note-book, I become more and
more inclined to think this is the case, for these attacks regularly
follow extreme fatigue and long exposure to strong sunshine. They at
least have the advantage of being only short interruptions to my
work, as on the following morning I am always quite fresh and fit.
My treasure of a cook is suffering from an enormous hydrocele which
makes it difficult for him to get up, and Moritz is obliged to keep in
the dark on account of his inflamed eyes. Knudsen’s cook, a raw boy
from somewhere in the bush, knows still less of cooking than Omari;
consequently Nils Knudsen himself has been promoted to the vacant
post. Finding that we had come to the end of our supplies, he began
by sending to Chingulungulu for the four sucking-pigs which we had
bought from Matola and temporarily left in his charge; and when
they came up, neatly packed in a large crate, he callously slaughtered
the biggest of them. The first joint we were thoughtless enough to
entrust for roasting to Knudsen’s mshenzi cook, and it was
consequently uneatable; but we made the rest of the animal into a
jelly which we ate with great relish after weeks of underfeeding,
consuming incredible helpings of it at both midday and evening
meals. The only drawback is a certain want of variety in the tinned
vegetables. Dr. Jäger, to whom the Geographical Commission
entrusted the provisioning of the expeditions—mine as well as his
own—because he had more time on his hands than the rest of us,
seems to have laid in a huge stock of Teltow turnips,[46] an article of
food which is all very well for occasional use, but which quickly palls
when set before one every day; and we seem to have no other tins
left. There is no help for it—we must put up with the turnips; but I
am certain that, once I am home again, I shall not touch them for ten
years to come.
Amid all these minor evils, which, after all, go to make up the
genuine flavour of Africa, there is at least one cheering touch:
Knudsen has, with the dexterity of a skilled mechanic, repaired my 9
× 12 cm. camera, at least so far that I can use it with a little care.
How, in the absence of finger-nails, he was able to accomplish such a
ticklish piece of work, having no tool but a clumsy screw-driver for
taking to pieces and putting together again the complicated
mechanism of the instantaneous shutter, is still a mystery to me; but
he did it successfully. The loss of his finger-nails shows him in a light
contrasting curiously enough with the intelligence evinced by the
above operation; though, after all, it is scarcely surprising after his
ten years’ residence in the bush. One day, at Lindi, he had occasion
to wash a dog, which must have been in need of very thorough
cleansing, for the bottle handed to our friend for the purpose had an
extremely strong smell. Having performed his task in the most
conscientious manner, he perceived with some surprise that the dog
did not appear much the better for it, and was further surprised by
finding his own nails ulcerating away in the course of the next few
days. “How was I to know that carbolic acid has to be diluted?” he
mutters indignantly, from time to time, with a troubled gaze at his
mutilated finger-tips.
 Since we came to Newala we have been making excursions in all
directions through the surrounding country, in accordance with old
habit, and also because the akida Sefu did not get together the tribal
elders from whom I wanted information so speedily as he had
promised. There is, however, no harm done, as, even if seen only
from the outside, the country and people are interesting enough.
The Makonde plateau is like a large rectangular table rounded off
at the corners. Measured from the Indian Ocean to Newala, it is
about seventy-five miles long, and between the Rovuma and the
Lukuledi it averages fifty miles in breadth, so that its superficial area
is about two-thirds of that of the kingdom of Saxony. The surface,
however, is not level, but uniformly inclined from its south-western
edge to the ocean. From the upper edge, on which Newala lies, the
eye ranges for many miles east and north-east, without encountering
any obstacle, over the Makonde bush. It is a green sea, from which
here and there thick clouds of smoke rise, to show that it, too, is
inhabited by men who carry on their tillage like so many other
primitive peoples, by cutting down and burning the bush, and
manuring with the ashes. Even in the radiant light of a tropical day
such a fire is a grand sight.
Much less effective is the impression produced just now by the
great western plain as seen from the edge of the plateau. As often as
time permits, I stroll along this edge, sometimes in one direction,
sometimes in another, in the hope of finding the air clear enough to
let me enjoy the view; but I have always been disappointed.
Wherever one looks, clouds of smoke rise from the burning bush,
and the air is full of smoke and vapour. It is a pity, for under more
favourable circumstances the panorama of the whole country up to
the distant Majeje hills must be truly magnificent. It is of little use
taking photographs now, and an outline sketch gives a very poor idea
of the scenery. In one of these excursions I went out of my way to
make a personal attempt on the Makonde bush. The present edge of
the plateau is the result of a far-reaching process of destruction
through erosion and denudation. The Makonde strata are
everywhere cut into by ravines, which, though short, are hundreds of
yards in depth. In consequence of the loose stratification of these
beds, not only are the walls of these ravines nearly vertical, but their
upper end is closed by an equally steep escarpment, so that the
western edge of the Makonde plateau is hemmed in by a series of
deep, basin-like valleys. In order to get from one side of such a ravine
to the other, I cut my way through the bush with a dozen of my men.
It was a very open part, with more grass than scrub, but even so the
short stretch of less than two hundred yards was very hard work; at
the end of it the men’s calicoes were in rags and they themselves
bleeding from hundreds of scratches, while even our strong khaki
suits had not escaped scatheless.

NATIVE PATH THROUGH THE MAKONDE BUSH, NEAR

MAHUTA

I see increasing reason to believe that the view formed some time
back as to the origin of the Makonde bush is the correct one. I have
no doubt that it is not a natural product, but the result of human
occupation. Those parts of the high country where man—as a very
slight amount of practice enables the eye to perceive at once—has not
yet penetrated with axe and hoe, are still occupied by a splendid
timber forest quite able to sustain a comparison with our mixed
forests in Germany. But wherever man has once built his hut or tilled
his field, this horrible bush springs up. Every phase of this process
may be seen in the course of a couple of hours’ walk along the main
road. From the bush to right or left, one hears the sound of the axe—
not from one spot only, but from several directions at once. A few
steps further on, we can see what is taking place. The brush has been
cut down and piled up in heaps to the height of a yard or more,
between which the trunks of the large trees stand up like the last
pillars of a magnificent ruined building. These, too, present a
melancholy spectacle: the destructive Makonde have ringed them—
cut a broad strip of bark all round to ensure their dying off—and also
piled up pyramids of brush round them. Father and son, mother and
son-in-law, are chopping away perseveringly in the background—too
busy, almost, to look round at the white stranger, who usually excites
so much interest. If you pass by the same place a week later, the piles
of brushwood have disappeared and a thick layer of ashes has taken
the place of the green forest. The large trees stretch their
smouldering trunks and branches in dumb accusation to heaven—if
they have not already fallen and been more or less reduced to ashes,
perhaps only showing as a white stripe on the dark ground.
This work of destruction is carried out by the Makonde alike on the
virgin forest and on the bush which has sprung up on sites already
cultivated and deserted. In the second case they are saved the trouble
of burning the large trees, these being entirely absent in the
secondary bush.
After burning this piece of forest ground and loosening it with the
hoe, the native sows his corn and plants his vegetables. All over the
country, he goes in for bed-culture, which requires, and, in fact,
receives, the most careful attention. Weeds are nowhere tolerated in
the south of German East Africa. The crops may fail on the plains,
where droughts are frequent, but never on the plateau with its
abundant rains and heavy dews. Its fortunate inhabitants even have
the satisfaction of seeing the proud Wayao and Wamakua working
for them as labourers, driven by hunger to serve where they were
accustomed to rule.
But the light, sandy soil is soon exhausted, and would yield no
harvest the second year if cultivated twice running. This fact has
been familiar to the native for ages; consequently he provides in
time, and, while his crop is growing, prepares the next plot with axe
and firebrand. Next year he plants this with his various crops and
lets the first piece lie fallow. For a short time it remains waste and
desolate; then nature steps in to repair the destruction wrought by
man; a thousand new growths spring out of the exhausted soil, and
even the old stumps put forth fresh shoots. Next year the new growth
is up to one’s knees, and in a few years more it is that terrible,
impenetrable bush, which maintains its position till the black
occupier of the land has made the round of all the available sites and
come back to his starting point.
The Makonde are, body and soul, so to speak, one with this bush.
According to my Yao informants, indeed, their name means nothing
else but “bush people.” Their own tradition says that they have been
settled up here for a very long time, but to my surprise they laid great
stress on an original immigration. Their old homes were in the
south-east, near Mikindani and the mouth of the Rovuma, whence
their peaceful forefathers were driven by the continual raids of the
Sakalavas from Madagascar and the warlike Shirazis[47] of the coast,
to take refuge on the almost inaccessible plateau. I have studied
African ethnology for twenty years, but the fact that changes of
population in this apparently quiet and peaceable corner of the earth
could have been occasioned by outside enterprises taking place on
the high seas, was completely new to me. It is, no doubt, however,
correct.
The charming tribal legend of the Makonde—besides informing us
of other interesting matters—explains why they have to live in the
thickest of the bush and a long way from the edge of the plateau,
instead of making their permanent homes beside the purling brooks
and springs of the low country.
“The place where the tribe originated is Mahuta, on the southern
side of the plateau towards the Rovuma, where of old time there was
nothing but thick bush. Out of this bush came a man who never
washed himself or shaved his head, and who ate and drank but little.
He went out and made a human figure from the wood of a tree
growing in the open country, which he took home to his abode in the
bush and there set it upright. In the night this image came to life and
was a woman. The man and woman went down together to the
Rovuma to wash themselves. Here the woman gave birth to a still-
born child. They left that place and passed over the high land into the
valley of the Mbemkuru, where the woman had another child, which
was also born dead. Then they returned to the high bush country of
Mahuta, where the third child was born, which lived and grew up. In
course of time, the couple had many more children, and called
themselves Wamatanda. These were the ancestral stock of the
Makonde, also called Wamakonde,[48] i.e., aborigines. Their
forefather, the man from the bush, gave his children the command to
bury their dead upright, in memory of the mother of their race who
was cut out of wood and awoke to life when standing upright. He also
warned them against settling in the valleys and near large streams,
for sickness and death dwelt there. They were to make it a rule to
have their huts at least an hour’s walk from the nearest watering-
place; then their children would thrive and escape illness.”
The explanation of the name Makonde given by my informants is
somewhat different from that contained in the above legend, which I
extract from a little book (small, but packed with information), by
Pater Adams, entitled Lindi und sein Hinterland. Otherwise, my
results agree exactly with the statements of the legend. Washing?
Hapana—there is no such thing. Why should they do so? As it is, the
supply of water scarcely suffices for cooking and drinking; other
people do not wash, so why should the Makonde distinguish himself
by such needless eccentricity? As for shaving the head, the short,
woolly crop scarcely needs it,[49] so the second ancestral precept is
likewise easy enough to follow. Beyond this, however, there is
nothing ridiculous in the ancestor’s advice. I have obtained from
various local artists a fairly large number of figures carved in wood,
ranging from fifteen to twenty-three inches in height, and
representing women belonging to the great group of the Mavia,
Makonde, and Matambwe tribes. The carving is remarkably well
done and renders the female type with great accuracy, especially the
keloid ornamentation, to be described later on. As to the object and
meaning of their works the sculptors either could or (more probably)
would tell me nothing, and I was forced to content myself with the
scanty information vouchsafed by one man, who said that the figures
were merely intended to represent the nembo—the artificial
deformations of pelele, ear-discs, and keloids. The legend recorded
by Pater Adams places these figures in a new light. They must surely
be more than mere dolls; and we may even venture to assume that
they are—though the majority of present-day Makonde are probably
unaware of the fact—representations of the tribal ancestress.
 The references in the legend to the descent from Mahuta to the
Rovuma, and to a journey across the highlands into the Mbekuru
valley, undoubtedly indicate the previous history of the tribe, the
travels of the ancestral pair typifying the migrations of their
descendants. The descent to the neighbouring Rovuma valley, with
its extraordinary fertility and great abundance of game, is intelligible
at a glance—but the crossing of the Lukuledi depression, the ascent
to the Rondo Plateau and the descent to the Mbemkuru, also lie
within the bounds of probability, for all these districts have exactly
the same character as the extreme south. Now, however, comes a
point of especial interest for our bacteriological age. The primitive
Makonde did not enjoy their lives in the marshy river-valleys.
Disease raged among them, and many died. It was only after they
had returned to their original home near Mahuta, that the health
conditions of these people improved. We are very apt to think of the
African as a stupid person whose ignorance of nature is only equalled
by his fear of it, and who looks on all mishaps as caused by evil
spirits and malignant natural powers. It is much more correct to
assume in this case that the people very early learnt to distinguish
districts infested with malaria from those where it is absent.
This knowledge is crystallized in the
ancestral warning against settling in the
valleys and near the great waters, the
dwelling-places of disease and death. At the
same time, for security against the hostile
Mavia south of the Rovuma, it was enacted
that every settlement must be not less than a
certain distance from the southern edge of the
plateau. Such in fact is their mode of life at the
present day. It is not such a bad one, and
certainly they are both safer and more
comfortable than the Makua, the recent
intruders from the south, who have made USUAL METHOD OF
good their footing on the western edge of the CLOSING HUT-DOOR
plateau, extending over a fairly wide belt of
country. Neither Makua nor Makonde show in their dwellings
anything of the size and comeliness of the Yao houses in the plain,
especially at Masasi, Chingulungulu and Zuza’s. Jumbe Chauro, a
Makonde hamlet not far from Newala, on the road to Mahuta, is the
most important settlement of the tribe I have yet seen, and has fairly
spacious huts. But how slovenly is their construction compared with
the palatial residences of the elephant-hunters living in the plain.
The roofs are still more untidy than in the general run of huts during
the dry season, the walls show here and there the scanty beginnings
or the lamentable remains of the mud plastering, and the interior is a
veritable dog-kennel; dirt, dust and disorder everywhere. A few huts
only show any attempt at division into rooms, and this consists
merely of very roughly-made bamboo partitions. In one point alone
have I noticed any indication of progress—in the method of fastening
the door. Houses all over the south are secured in a simple but
ingenious manner. The door consists of a set of stout pieces of wood
or bamboo, tied with bark-string to two cross-pieces, and moving in
two grooves round one of the door-posts, so as to open inwards. If
the owner wishes to leave home, he takes two logs as thick as a man’s
upper arm and about a yard long. One of these is placed obliquely
against the middle of the door from the inside, so as to form an angle
of from 60° to 75° with the ground. He then places the second piece
horizontally across the first, pressing it downward with all his might.
It is kept in place by two strong posts planted in the ground a few
inches inside the door. This fastening is absolutely safe, but of course
cannot be applied to both doors at once, otherwise how could the
owner leave or enter his house? I have not yet succeeded in finding
out how the back door is fastened.

MAKONDE LOCK AND KEY AT JUMBE CHAURO

 This is the general way of closing a house. The Makonde at Jumbe
Chauro, however, have a much more complicated, solid and original
one. Here, too, the door is as already described, except that there is
only one post on the inside, standing by itself about six inches from
one side of the doorway. Opposite this post is a hole in the wall just
large enough to admit a man’s arm. The door is closed inside by a
large wooden bolt passing through a hole in this post and pressing
with its free end against the door. The other end has three holes into
which fit three pegs running in vertical grooves inside the post. The
door is opened with a wooden key about a foot long, somewhat
curved and sloped off at the butt; the other end has three pegs
corresponding to the holes, in the bolt, so that, when it is thrust
through the hole in the wall and inserted into the rectangular
opening in the post, the pegs can be lifted and the bolt drawn out.[50]

MODE OF INSERTING THE KEY

With no small pride first one householder and then a second

showed me on the spot the action of this greatest invention of the
Makonde Highlands. To both with an admiring exclamation of
“Vizuri sana!” (“Very fine!”). I expressed the wish to take back these
marvels with me to Ulaya, to show the Wazungu what clever fellows
the Makonde are. Scarcely five minutes after my return to camp at
Newala, the two men came up sweating under the weight of two
heavy logs which they laid down at my feet, handing over at the same
time the keys of the fallen fortress. Arguing, logically enough, that if
the key was wanted, the lock would be wanted with it, they had taken
their axes and chopped down the posts—as it never occurred to them
to dig them out of the ground and so bring them intact. Thus I have
two badly damaged specimens, and the owners, instead of praise,
come in for a blowing-up.
The Makua huts in the environs of Newala are especially
miserable; their more than slovenly construction reminds one of the
temporary erections of the Makua at Hatia’s, though the people here
have not been concerned in a war. It must therefore be due to
congenital idleness, or else to the absence of a powerful chief. Even
the baraza at Mlipa’s, a short hour’s walk south-east of Newala,
shares in this general neglect. While public buildings in this country
are usually looked after more or less carefully, this is in evident
danger of being blown over by the first strong easterly gale. The only
attractive object in this whole district is the grave of the late chief
Mlipa. I visited it in the morning, while the sun was still trying with
partial success to break through the rolling mists, and the circular
grove of tall euphorbias, which, with a broken pot, is all that marks
the old king’s resting-place, impressed one with a touch of pathos.
Even my very materially-minded carriers seemed to feel something
of the sort, for instead of their usual ribald songs, they chanted
solemnly, as we marched on through the dense green of the Makonde
bush:—
 “We shall arrive with the great master; we stand in a row and have
no fear about getting our food and our money from the Serkali (the
Government). We are not afraid; we are going along with the great
master, the lion; we are going down to the coast and back.”
With regard to the characteristic features of the various tribes here
on the western edge of the plateau, I can arrive at no other
conclusion than the one already come to in the plain, viz., that it is
impossible for anyone but a trained anthropologist to assign any
given individual at once to his proper tribe. In fact, I think that even
an anthropological specialist, after the most careful examination,
might find it a difficult task to decide. The whole congeries of peoples
collected in the region bounded on the west by the great Central
African rift, Tanganyika and Nyasa, and on the east by the Indian
Ocean, are closely related to each other—some of their languages are
only distinguished from one another as dialects of the same speech,
and no doubt all the tribes present the same shape of skull and
structure of skeleton. Thus, surely, there can be no very striking
differences in outward appearance.
 Even did such exist, I should have no time
to concern myself with them, for day after day,
I have to see or hear, as the case may be—in
any case to grasp and record—an
extraordinary number of ethnographic
phenomena. I am almost disposed to think it
fortunate that some departments of inquiry, at
least, are barred by external circumstances.
Chief among these is the subject of iron-
working. We are apt to think of Africa as a
country where iron ore is everywhere, so to
speak, to be picked up by the roadside, and
where it would be quite surprising if the
inhabitants had not learnt to smelt the
material ready to their hand. In fact, the
knowledge of this art ranges all over the
continent, from the Kabyles in the north to the
Kafirs in the south. Here between the Rovuma
and the Lukuledi the conditions are not so
favourable. According to the statements of the
Makonde, neither ironstone nor any other
form of iron ore is known to them. They have
not therefore advanced to the art of smelting
the metal, but have hitherto bought all their
THE ANCESTRESS OF
THE MAKONDE
iron implements from neighbouring tribes.
Even in the plain the inhabitants are not much
better off. Only one man now living is said to
understand the art of smelting iron. This old fundi lives close to
Huwe, that isolated, steep-sided block of granite which rises out of
the green solitude between Masasi and Chingulungulu, and whose
jagged and splintered top meets the traveller’s eye everywhere. While
still at Masasi I wished to see this man at work, but was told that,
frightened by the rising, he had retired across the Rovuma, though
he would soon return. All subsequent inquiries as to whether the
fundi had come back met with the genuine African answer, “Bado”
(“Not yet”).
 BRAZIER

Some consolation was afforded me by a brassfounder, whom I

came across in the bush near Akundonde’s. This man is the favourite
of women, and therefore no doubt of the gods; he welds the glittering
brass rods purchased at the coast into those massive, heavy rings
which, on the wrists and ankles of the local fair ones, continually give
me fresh food for admiration. Like every decent master-craftsman he
had all his tools with him, consisting of a pair of bellows, three
crucibles and a hammer—nothing more, apparently. He was quite
willing to show his skill, and in a twinkling had fixed his bellows on
the ground. They are simply two goat-skins, taken off whole, the four
legs being closed by knots, while the upper opening, intended to
admit the air, is kept stretched by two pieces of wood. At the lower
end of the skin a smaller opening is left into which a wooden tube is
stuck. The fundi has quickly borrowed a heap of wood-embers from
the nearest hut; he then fixes the free ends of the two tubes into an
earthen pipe, and clamps them to the ground by means of a bent
piece of wood. Now he fills one of his small clay crucibles, the dross
on which shows that they have been long in use, with the yellow
material, places it in the midst of the embers, which, at present are
only faintly glimmering, and begins his work. In quick alternation
the smith’s two hands move up and down with the open ends of the
bellows; as he raises his hand he holds the slit wide open, so as to let
the air enter the skin bag unhindered. In pressing it down he closes
the bag, and the air puffs through the bamboo tube and clay pipe into
the fire, which quickly burns up. The smith, however, does not keep
on with this work, but beckons to another man, who relieves him at
the bellows, while he takes some more tools out of a large skin pouch
carried on his back. I look on in wonder as, with a smooth round
stick about the thickness of a finger, he bores a few vertical holes into
the clean sand of the soil. This should not be difficult, yet the man
seems to be taking great pains over it. Then he fastens down to the
ground, with a couple of wooden clamps, a neat little trough made by
splitting a joint of bamboo in half, so that the ends are closed by the
two knots. At last the yellow metal has attained the right consistency,
and the fundi lifts the crucible from the fire by means of two sticks
split at the end to serve as tongs. A short swift turn to the left—a
tilting of the crucible—and the molten brass, hissing and giving forth
clouds of smoke, flows first into the bamboo mould and then into the
holes in the ground.
The technique of this backwoods craftsman may not be very far
advanced, but it cannot be denied that he knows how to obtain an
adequate result by the simplest means. The ladies of highest rank in
this country—that is to say, those who can afford it, wear two kinds
of these massive brass rings, one cylindrical, the other semicircular
in section. The latter are cast in the most ingenious way in the
bamboo mould, the former in the circular hole in the sand. It is quite
a simple matter for the fundi to fit these bars to the limbs of his fair
customers; with a few light strokes of his hammer he bends the
pliable brass round arm or ankle without further inconvenience to
the wearer.
SHAPING THE POT

SMOOTHING WITH MAIZE-COB

CUTTING THE EDGE

 FINISHING THE BOTTOM

LAST SMOOTHING BEFORE

BURNING

FIRING THE BRUSH-PILE

 LIGHTING THE FARTHER SIDE OF
THE PILE

TURNING THE RED-HOT VESSEL

NYASA WOMAN MAKING POTS AT MASASI

Pottery is an art which must always and everywhere excite the
interest of the student, just because it is so intimately connected with
the development of human culture, and because its relics are one of
the principal factors in the reconstruction of our own condition in
prehistoric times. I shall always remember with pleasure the two or
three afternoons at Masasi when Salim Matola’s mother, a slightly-
built, graceful, pleasant-looking woman, explained to me with
touching patience, by means of concrete illustrations, the ceramic art
of her people. The only implements for this primitive process were a
lump of clay in her left hand, and in the right a calabash containing
the following valuables: the fragment of a maize-cob stripped of all
its grains, a smooth, oval pebble, about the size of a pigeon’s egg, a
few chips of gourd-shell, a bamboo splinter about the length of one’s
hand, a small shell, and a bunch of some herb resembling spinach.
 Nothing more. The woman scraped with the
shell a round, shallow hole in the soft, fine
sand of the soil, and, when an active young
girl had filled the calabash with water for her,
she began to knead the clay. As if by magic it
gradually assumed the shape of a rough but
already well-shaped vessel, which only wanted
a little touching up with the instruments
before mentioned. I looked out with the
MAKUA WOMAN closest attention for any indication of the use
MAKING A POT. of the potter’s wheel, in however rudimentary
SHOWS THE a form, but no—hapana (there is none). The
BEGINNINGS OF THE embryo pot stood firmly in its little
POTTER’S WHEEL
depression, and the woman walked round it in
a stooping posture, whether she was removing
small stones or similar foreign bodies with the maize-cob, smoothing
the inner or outer surface with the splinter of bamboo, or later, after
letting it dry for a day, pricking in the ornamentation with a pointed
bit of gourd-shell, or working out the bottom, or cutting the edge
with a sharp bamboo knife, or giving the last touches to the finished
vessel. This occupation of the women is infinitely toilsome, but it is
without doubt an accurate reproduction of the process in use among
our ancestors of the Neolithic and Bronze ages.
There is no doubt that the invention of pottery, an item in human
progress whose importance cannot be over-estimated, is due to
women. Rough, coarse and unfeeling, the men of the horde range
over the countryside. When the united cunning of the hunters has
succeeded in killing the game; not one of them thinks of carrying
home the spoil. A bright fire, kindled by a vigorous wielding of the
drill, is crackling beside them; the animal has been cleaned and cut
up secundum artem, and, after a slight singeing, will soon disappear
under their sharp teeth; no one all this time giving a single thought
to wife or child.
To what shifts, on the other hand, the primitive wife, and still more
the primitive mother, was put! Not even prehistoric stomachs could
endure an unvarying diet of raw food. Something or other suggested
the beneficial effect of hot water on the majority of approved but
indigestible dishes. Perhaps a neighbour had tried holding the hard
roots or tubers over the fire in a calabash filled with water—or maybe
an ostrich-egg-shell, or a hastily improvised vessel of bark. They
became much softer and more palatable than they had previously
been; but, unfortunately, the vessel could not stand the fire and got
charred on the outside. That can be remedied, thought our
ancestress, and plastered a layer of wet clay round a similar vessel.
This is an improvement; the cooking utensil remains uninjured, but
the heat of the fire has shrunk it, so that it is loose in its shell. The
next step is to detach it, so, with a firm grip and a jerk, shell and
kernel are separated, and pottery is invented. Perhaps, however, the
discovery which led to an intelligent use of the burnt-clay shell, was
made in a slightly different way. Ostrich-eggs and calabashes are not
to be found in every part of the world, but everywhere mankind has
arrived at the art of making baskets out of pliant materials, such as
bark, bast, strips of palm-leaf, supple twigs, etc. Our inventor has no
water-tight vessel provided by nature. “Never mind, let us line the
basket with clay.” This answers the purpose, but alas! the basket gets
burnt over the blazing fire, the woman watches the process of
cooking with increasing uneasiness, fearing a leak, but no leak
appears. The food, done to a turn, is eaten with peculiar relish; and
the cooking-vessel is examined, half in curiosity, half in satisfaction
at the result. The plastic clay is now hard as stone, and at the same
time looks exceedingly well, for the neat plaiting of the burnt basket
is traced all over it in a pretty pattern. Thus, simultaneously with
pottery, its ornamentation was invented.
Primitive woman has another claim to respect. It was the man,
roving abroad, who invented the art of producing fire at will, but the
woman, unable to imitate him in this, has been a Vestal from the
earliest times. Nothing gives so much trouble as the keeping alight of
the smouldering brand, and, above all, when all the men are absent
from the camp. Heavy rain-clouds gather, already the first large
drops are falling, the first gusts of the storm rage over the plain. The
little flame, a greater anxiety to the woman than her own children,
flickers unsteadily in the blast. What is to be done? A sudden thought
occurs to her, and in an instant she has constructed a primitive hut
out of strips of bark, to protect the flame against rain and wind.
This, or something very like it, was the way in which the principle
of the house was discovered; and even the most hardened misogynist
cannot fairly refuse a woman the credit of it. The protection of the
hearth-fire from the weather is the germ from which the human
dwelling was evolved. Men had little, if any share, in this forward
step, and that only at a late stage. Even at the present day, the
plastering of the housewall with clay and the manufacture of pottery
are exclusively the women’s business. These are two very significant
survivals. Our European kitchen-garden, too, is originally a woman’s
invention, and the hoe, the primitive instrument of agriculture, is,
characteristically enough, still used in this department. But the
noblest achievement which we owe to the other sex is unquestionably
the art of cookery. Roasting alone—the oldest process—is one for
which men took the hint (a very obvious one) from nature. It must
have been suggested by the scorched carcase of some animal
overtaken by the destructive forest-fires. But boiling—the process of
improving organic substances by the help of water heated to boiling-
point—is a much later discovery. It is so recent that it has not even
yet penetrated to all parts of the world. The Polynesians understand
how to steam food, that is, to cook it, neatly wrapped in leaves, in a
hole in the earth between hot stones, the air being excluded, and
(sometimes) a few drops of water sprinkled on the stones; but they
do not understand boiling.
To come back from this digression, we find that the slender Nyasa
woman has, after once more carefully examining the finished pot,
put it aside in the shade to dry. On the following day she sends me
word by her son, Salim Matola, who is always on hand, that she is
going to do the burning, and, on coming out of my house, I find her
already hard at work. She has spread on the ground a layer of very
dry sticks, about as thick as one’s thumb, has laid the pot (now of a
yellowish-grey colour) on them, and is piling brushwood round it.
My faithful Pesa mbili, the mnyampara, who has been standing by,
most obligingly, with a lighted stick, now hands it to her. Both of
them, blowing steadily, light the pile on the lee side, and, when the
flame begins to catch, on the weather side also. Soon the whole is in a
blaze, but the dry fuel is quickly consumed and the fire dies down, so
that we see the red-hot vessel rising from the ashes. The woman
turns it continually with a long stick, sometimes one way and
sometimes another, so that it may be evenly heated all over. In
twenty minutes she rolls it out of the ash-heap, takes up the bundle
of spinach, which has been lying for two days in a jar of water, and
sprinkles the red-hot clay with it. The places where the drops fall are
marked by black spots on the uniform reddish-brown surface. With a
sigh of relief, and with visible satisfaction, the woman rises to an
erect position; she is standing just in a line between me and the fire,
from which a cloud of smoke is just rising: I press the ball of my
camera, the shutter clicks—the apotheosis is achieved! Like a
priestess, representative of her inventive sex, the graceful woman
stands: at her feet the hearth-fire she has given us beside her the
invention she has devised for us, in the background the home she has
built for us.
At Newala, also, I have had the manufacture of pottery carried on
in my presence. Technically the process is better than that already
described, for here we find the beginnings of the potter’s wheel,
which does not seem to exist in the plains; at least I have seen
nothing of the sort. The artist, a frightfully stupid Makua woman, did
not make a depression in the ground to receive the pot she was about
to shape, but used instead a large potsherd. Otherwise, she went to
work in much the same way as Salim’s mother, except that she saved
herself the trouble of walking round and round her work by squatting
at her ease and letting the pot and potsherd rotate round her; this is
surely the first step towards a machine. But it does not follow that
the pot was improved by the process. It is true that it was beautifully
rounded and presented a very creditable appearance when finished,
but the numerous large and small vessels which I have seen, and, in
part, collected, in the “less advanced” districts, are no less so. We
moderns imagine that instruments of precision are necessary to
produce excellent results. Go to the prehistoric collections of our
museums and look at the pots, urns and bowls of our ancestors in the
dim ages of the past, and you will at once perceive your error.
MAKING LONGITUDINAL CUT IN
BARK

DRAWING THE BARK OFF THE LOG

REMOVING THE OUTER BARK

 BEATING THE BARK

WORKING THE BARK-CLOTH AFTER BEATING, TO MAKE IT

SOFT

MANUFACTURE OF BARK-CLOTH AT NEWALA

To-day, nearly the whole population of German East Africa is
clothed in imported calico. This was not always the case; even now in
some parts of the north dressed skins are still the prevailing wear,
and in the north-western districts—east and north of Lake
Tanganyika—lies a zone where bark-cloth has not yet been
superseded. Probably not many generations have passed since such
bark fabrics and kilts of skins were the only clothing even in the
south. Even to-day, large quantities of this bright-red or drab
material are still to be found; but if we wish to see it, we must look in
the granaries and on the drying stages inside the native huts, where
it serves less ambitious uses as wrappings for those seeds and fruits
which require to be packed with special care. The salt produced at
Masasi, too, is packed for transport to a distance in large sheets of
bark-cloth. Wherever I found it in any degree possible, I studied the
process of making this cloth. The native requisitioned for the
purpose arrived, carrying a log between two and three yards long and
as thick as his thigh, and nothing else except a curiously-shaped
mallet and the usual long, sharp and pointed knife which all men and
boys wear in a belt at their backs without a sheath—horribile dictu!
[51]
Silently he squats down before me, and with two rapid cuts has
drawn a couple of circles round the log some two yards apart, and
slits the bark lengthwise between them with the point of his knife.
With evident care, he then scrapes off the outer rind all round the
log, so that in a quarter of an hour the inner red layer of the bark
shows up brightly-coloured between the two untouched ends. With
some trouble and much caution, he now loosens the bark at one end,
and opens the cylinder. He then stands up, takes hold of the free
edge with both hands, and turning it inside out, slowly but steadily
pulls it off in one piece. Now comes the troublesome work of
scraping all superfluous particles of outer bark from the outside of
the long, narrow piece of material, while the inner side is carefully
scrutinised for defective spots. At last it is ready for beating. Having
signalled to a friend, who immediately places a bowl of water beside
him, the artificer damps his sheet of bark all over, seizes his mallet,
lays one end of the stuff on the smoothest spot of the log, and
hammers away slowly but continuously. “Very simple!” I think to
myself. “Why, I could do that, too!”—but I am forced to change my
opinions a little later on; for the beating is quite an art, if the fabric is
not to be beaten to pieces. To prevent the breaking of the fibres, the
stuff is several times folded across, so as to interpose several
thicknesses between the mallet and the block. At last the required
state is reached, and the fundi seizes the sheet, still folded, by both
ends, and wrings it out, or calls an assistant to take one end while he
holds the other. The cloth produced in this way is not nearly so fine
and uniform in texture as the famous Uganda bark-cloth, but it is
quite soft, and, above all, cheap.
Now, too, I examine the mallet. My craftsman has been using the
simpler but better form of this implement, a conical block of some
hard wood, its base—the striking surface—being scored across and
across with more or less deeply-cut grooves, and the handle stuck
into a hole in the middle. The other and earlier form of mallet is
shaped in the same way, but the head is fastened by an ingenious
network of bark strips into the split bamboo serving as a handle. The
observation so often made, that ancient customs persist longest in
connection with religious ceremonies and in the life of children, here
finds confirmation. As we shall soon see, bark-cloth is still worn
during the unyago,[52] having been prepared with special solemn
ceremonies; and many a mother, if she has no other garment handy,
will still put her little one into a kilt of bark-cloth, which, after all,
looks better, besides being more in keeping with its African
surroundings, than the ridiculous bit of print from Ulaya.
MAKUA WOMEN