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Ninth edition

CORPORATE FINANCE
AND INVESTMENT
Decisions and strategies

Richard Pike, Bill Neale

and Saeed Akbar
with Philip Linsley
 Contents

List of figures and tables xii Chapter 3

Prefacexv
Authors’ acknowledgements xix Present values, and bond and share
Publisher’s acknowledgements xx valuation53
3.1 Introduction 54
Part I 3.2 Measuring Wealth 54
A FRAMEWORK FOR FINANCIAL 3.3 Time-value of money 54
3.4 Financial arithmetic for capital growth 55
DECISIONS 3.5 Present value 57
3.6 Present value arithmetic 61
Chapter 1 3.7 Valuing bonds 64
3.8 Valuing shares: the dividend valuation model 67
An overview of financial management 3 3.9 Problems with the dividend growth model 69
1.1 Introduction 4
1.2 The finance function 5 Summary71
1.3 Investment and financial decisions 6 Key points 71
1.4 Cash – the lifeblood of the business 7 Further reading 72
1.5 The emergence of financial management 8 Useful websites 72
1.6 The finance department in the firm 9 Appendix I: The term structure of interest rates
1.7 The financial objective 10 and the yield curve 72
1.8 The agency problem 12 Appendix II: Present value formulae 75
1.9 Managing the agency problem 12 Appendix III: The P:E ratio and the constant
1.10 Social responsibility and shareholder dividend valuation model 76
wealth13 Questions78
1.11 The corporate governance debate 14
1.12 The risk dimension 16 Part II
1.13 The strategic dimension 17
INVESTMENT DECISIONS
Summary19 AND STRATEGIES
Key points 19
Further reading 20 Chapter 4
Useful websites 20
Questions21 Investment appraisal methods 83
4.1 Introduction 84
Chapter 2 4.2 Cash-flow analysis 84
4.3 Net present value 85
The financial environment 23 4.4 Investment techniques – net present value 89
2.1 Introduction 24 4.5 Internal rate of return 91
2.2 Financial markets 24 4.6 Profitability index 93
2.3 The financial services sector 26 4.7 Payback period 94
2.4 The London Stock Exchange (LSE)31 4.8 Accounting rate of return 95
2.5 Are financial markets efficient? 33 4.9 Ranking mutually exclusive projects 96
2.6 Reading the financial pages 38 4.10 Investment evaluation and capital rationing 99
2.7 Taxation and financial decisions 40
Summary103
Summary40 Key points 103
Key points 40 Further reading 104
Further reading 41 Appendix I: Modified IRR104
Useful websites 41 Appendix II: Multi-period capital rationing and
Appendix: Financial statement analysis 41 mathematical programming 105
Questions50 Questions109
viii  Contents

Chapter 5 Chapter 8
Project appraisal – applications 112 Relationships between investments:
5.1 Introduction 113 portfolio theory 187
5.2 Incremental cash-flow analysis 113 8.1 Introduction 188
5.3 Replacement decisions 116 8.2 Portfolio analysis: the basic principles 189
5.4 Inflation cannot be ignored 118 8.3 How to measure portfolio risk 190
5.5 Taxation is a cash flow 120 8.4 Portfolio analysis where risk and return differ 193
5.6 Use of DCF techniques 123 8.5 Different degrees of correlation 195
5.7 Traditional appraisal methods 125 8.6 Worked example: gerrybild plc 197
Summary129 8.7 Portfolios with more than two components 199
Key points 129 8.8 Can we use this for project appraisal?
Further reading 129 some reservations 201
Appendix: The problem of unequal lives: Summary202
Poulter plc 130 Key points 203
Questions132 Further reading 203
Questions204
Chapter 6
Chapter 9
Investment strategy and process 139
6.1 Introduction 140 Setting the risk premium: the Capital
6.2 Strategic considerations 140 Asset Pricing Model (CAPM) 206
6.3 Advanced manufacturing technology 9.1 Introduction 207
(AMT) investment 143 9.2 Security valuation and discount rates 207
6.4 Environmental aspects of investment 146 9.3 Concepts of risk and return 208
6.5 The capital investment process 147 9.4 International portfolio diversification 212
6.6 Post-auditing 152 9.5 Systematic risk 215
9.6 Completing the model 219
Summary154
9.7 Using the CAPM: assessing the
Key points 154
required return 221
Further reading 155
9.8 Worked example 226
Questions156
9.9 The underpinnings of the CAPM227
9.10 Portfolios with many components:
Part III the capital market line 228
9.11 How it all fits together: the key relationships 230
VALUE, RISK AND THE REQUIRED 9.12 Reservations about the CAPM232
RETURN 9.13 Testing the CAPM233
9.14 Factor models 234
Chapter 7 9.15 The Arbitrage Pricing Theory 236
9.16 Fama and French’s three-factor model 237
Analysing investment risk 159 9.17 The four- and five-factor models 238
7.1 Introduction 160 9.18 Issues raised by the CAPM: some
7.2 Expected net present value (ENPV): food for managerial thought 239
Betterway plc 161 Summary241
7.3 Attitudes to risk 161 Key points 242
7.4 Types of risk 163 Further reading 242
7.5 Measurement of risk 164 Appendix: Analysis of variance 243
7.6 Risk description techniques 168 Questions245
7.7 Adjusting the NPV formula for risk 172
7.8 Risk analysis in practice 174 Chapter 10
7.9 Capital investment options 175
Summary179
The required rate of return
Key points 179 on investment 247
Further reading 180 10.1 Introduction 248
Appendix: Multi-period cash flows 10.2 The required return in all-equity firms: the DGM248
and risk 180 10.3 The required return in all-equity firms:
Questions183 the CAPM252
 Contents  ix

10.4 Using ‘tailored’ discount rates 254 13.3 Funding 332

10.5 Worked example: Tieko plc 261 13.4 How firms can use the yield curve 335
10.6 Another problem: taxation and the CAPM262 13.5 Banking relationships 336
10.7 Problems with ‘tailored’ discount rates 263 13.6 Treasury risk management 337
10.8 A critique of divisional hurdle rates 264 13.7 Risk management 347
Summary266 Summary353
Key points 266 Key points 353
Further reading 266 Further reading 353
Questions267 Useful websites 353
Questions354
Chapter 11
Enterprise value and equity value 270 Chapter 14
11.1 Introduction 271 Working capital and short-term
11.2 The valuation problem 271 asset management355
11.3 Valuation using published accounts 272
11.4 Valuing the earnings stream: P:E ratios 278 14.1 Introduction 356
11.5 EBITDA – a halfway house 280 14.2 Working capital management 356
11.6 Valuing cash flows 282 14.3 Predicting corporate failure 357
11.7 The DCF approach 284 14.4 Cash operating cycle 359
11.8 Valuation of unquoted companies 287 14.5 Working capital policy 360
11.9 Shareholder value analysis 288 14.6 Overtrading problems 364
11.10 Using value drivers 290 14.7 Managing trade credit 366
11.11 Worked example: Safa plc 291 14.8 Inventory management 374
11.12 Economic Value Added (EVA)294 14.9 Cash management 379
14.10 Worked example: mangle ltd 382
Summary295 14.11 Cash management models 384
Key points 296
Further reading 296 Summary385
Questions297 Key points 386
Further reading 386
Chapter 12 Useful websites 386
Appendix: Miller–Orr cash management model 387
Identifying and valuing options 302 Questions389
12.1 Introduction 303
12.2 Share options 303 Chapter 15
12.3 Option pricing 311
12.4 Application of option theory to corporate Short- and medium-term finance 396
finance318 15.1 Introduction 397
12.5 Capital investment options (real options) 319 15.2 Trade credit 397
12.6 Why conventional NPV may not tell 15.3 Bank credit facilities 399
the whole story 321 15.4 Invoice finance (or ‘asset-based finance’) 403
15.5 Using the money market: bill finance 406
Summary322
15.6 Hire Purchase (HP)408
Key points 323
15.7 Leasing410
Further reading 323
15.8 Lease evaluation: a simple case 413
Useful websites 323
15.9 Motives for leasing 416
Appendix: Black–scholes option pricing formula 324
15.10 Allowing for corporation tax in lease
Questions325
evaluation418
15.11 Worked example of leasing to include
Part IV taxation: Porlock plc 420
SHORT-TERM FINANCING AND POLICIES 15.12 Policy implications: when should
firms lease? 422
Chapter 13 Summary423
Key points 423
Risk and treasury management 329 Further reading 424
13.1 Introduction 330 Appendix: Financing international trade 424
13.2 The treasury function 330 Questions428
x  Contents

18.5 The ‘traditional’ view of gearing and

Part V
the required return 528
STRATEGIC FINANCIAL DECISIONS 18.6 The cost of debt 531
18.7 The overall cost of capital 533
Chapter 16 18.8 Worked example: damstar plc 536
18.9 More on Economic Value Added (EVA)539
Long-term finance 433 18.10 Financial distress 539
18.11 Two more issues: signalling and
16.1 Introduction 434
agency costs 543
16.2 Guiding lights: corporate aims and
18.12 Conclusions 543
corporate finance 434
16.3 How companies raise long-term finance Summary545
in practice 436 Key points 545
16.4 Shareholders’ funds 436 Further reading 545
16.5 How unquoted firms can raise equity Appendix: Credit ratings 546
finance439 Questions547
16.6 Worked example: YZ and VCI443
16.7 Going public 446 Chapter 19
16.8 Equity issues by quoted companies 449
16.9 Debt instruments: debentures, bonds Does capital structure really matter? 551
and notes 457
19.1 Introduction 552
16.10 Leasing and sale-and-leaseback (SAL)470
19.2 The Modigliani–Miller message 552
16.11 Islamic finance 472
19.3 MM’s propositions 554
Summary474 19.4 Does it work? Impediments to arbitrage 557
Key points 474 19.5 MM with corporate income tax 558
Further reading 475 19.6 Capital structure theory and the CAPM561
Questions476 19.7 Linking the Betas: ungearing and re-gearing564
19.8 MM with financial distress 565
19.9 Calculating the WACC567
Chapter 17
19.10 The Adjusted Present Value Method (APV)570
Returning value to shareholders: 19.11 Worked example: Rigton plc 571
19.12 Further issues with the APV572
the dividend decision 480
19.13 Which discount rate should we use? 573
17.1 Introduction 481 19.14 Valuation of a geared firm 573
17.2 The strategic dimension 483 19.15 Performance evaluation in a geared firm:
17.3 The legal dimension 484 The EVA revisited 575
17.4 The theory: dividend policy and firm value 484
17.5 Objections to dividend irrelevance 492 Summary575
17.6 The information content of dividends: Key points 576
Dividend smoothing 497 Further reading 577
17.7 Worked example 498 Appendix I: Derivation of MM’s Proposition II 577
17.8 Alternatives to cash dividends 500 Appendix II: MM’s Proposition III: The cut-off
17.9 The dividend puzzle 505 rate for new investment 578
17.10 Conclusions 507 Appendix III: Allowing for personal taxation:
Miller’s revision 578
Summary509 Questions580
Key points 509
Further reading 509
Appendix: Home-made dividends 510
Chapter 20
Questions512 Acquisitions and re-structuring 585
20.1 Introduction 586
Chapter 18 20.2 Takeover activity 587
20.3 Motives for takeover 592
Capital structure and the required 20.4 Alternative bid terms 598
return515 20.5 Evaluating a bid: the expected gains
18.1 Introduction 516 from takeovers 600
18.2 Measures of gearing 517 20.6 Worked example: ML plc and CO plc 601
18.3 Operating and financial gearing 522 20.7 The importance of strategy 603
18.4 Financial gearing and risk: Lindley plc 524 20.8 The strategic approach 604
 Contents xi

20.9 Post-merger activities 609 22.4 Additional complexities of foreign

20.10 Assessing the impact of mergers 612 Investment 691
20.11 Value gaps 620 22.5 The discount rate for Foreign Direct
20.12 Corporate restructuring 623 Investment (FDI) 692
20.13 Private equity 628 22.6 Evaluating FDI 694
22.7 Worked example: Sparkes plc
Summary 632
and Zoltan kft 694
Key points 632
22.8 Exposure to foreign exchange risk 697
Further reading 633
22.9 How MNCS manage operating
Questions 634
exposure 701
22.10 Hedging the risk of foreign projects 703
Part VI 22.11 Political and country risk 704
INTERNATIONAL FINANCIAL 22.12 Managing political and country
risk (PCR) 706
MANAGEMENT 22.13 Financing FDI 708
22.14 The WACC for FDI 711
Chapter 21 22.15 Applying the APV to FDI 711
22.16 Worked example: applying the APV 712
Managing currency risk 643
21.1 Introduction 644 Summary 714
21.2 The structure of exchange rates: Key points 714
spot and forward rates 645 Further reading and website 715
21.3 Foreign exchange exposure 647 Questions 716
21.4 Should firms worry about exchange rate
changes? 650 Chapter 23
21.5 Economic theory and exposure
management 653
Key issues in modern finance:
21.6 Exchange rate forecasting 658 a review 719
21.7 Devising a foreign exchange 23.1 Introduction 720
management (FEM) strategy 661 23.2 Understanding individual behaviour 721
21.8 Internal hedging techniques 664 23.3 Understanding corporate behaviour 722
21.9 Simple external hedging techniques 668 23.4 Understanding how markets behave 726
21.10 More complex techniques 670 23.5 Behavioural finance 733
21.11 More complex techniques: Futures
Summary 741
and swaps 673
Key points 742
21.12 Conclusions 676
Further reading 742
Summary 677
Key points 677 Appendices
Further reading 678
Questions 679 A Solutions to self-assessment activities 743
B Solutions to selected questions 761
C Present value interest factor (PVIF) 793
Chapter 22
D Present value interest factor for an
Foreign investment decisions 683 annuity (PVIFA) 795
22.1 Introduction 684 Glossary 797
22.2 Advantages of MNCS over national firms 686 References 811
22.3 Foreign market entry strategies 688 Index 827

Lecturer resources ON THE

WEBSITE
For password-protected online resources tailored to
support the use of this textbook in teaching, please visit
www.pearsoned.co.uk/pikeneale
 List of figures and tables

List of figures and tables

1.1 The finance function in a large organisation 6 12.1 Payoff lines for shares and share options
1.2 Cash – the lifeblood of the business 7 in Enigma Drugs plc 304
1.3 The risk–return trade-off 16 12.2 York plc call option 308
1.4 Main elements in strategic planning 18 12.3 York plc put option 309
1.5 Factors influencing the value of the firm 18 12.4 Option and share price movements for
2.1 Financial markets 24 Bradford plc 313
2.2 Financial markets, institutions, suppliers and users 25 13.1 Financing working capital: the matching approach 333
2.3 Private equity firm 29 13.2 Financing working capital needs: an aggressive
2.4 Chart showing possible breakout beyond strategy334
resistance line 35 13.3 Yield curves 335
3.1 The relationship between present value of £1 13.4 FIRM risk classification system 348
and interest over time 60 13.5 The risk management process 349
4.1 Investment appraisal elements 86 14.1 Cash conversion cycle 360
4.2 Bale proposal NPV–IRR graph 92 14.2 Helsinki plc working capital strategies 361
4.3 NPV and IRR compared 99 14.3 Optimal level of working capital for a ‘relaxed’
6.1 McKinsey–GE portfolio matrix 141 strategy363
6.2 Typical progression of product over time 141 14.4 Optimal level of working capital for an
6.3 Investment strategy 142 ‘aggressive’ strategy 363
6.4 A simple capital budgeting system 148 14.5 The credit management process 367
7.1 Risk profiles 162 14.6 Ordering and debt collection cycle 370
7.2 Risk-averse investor’s utility function 162 14.7 The inventory cycle 376
7.3 Variability of project returns 165 14.8 Cash flow activity for main stakeholders 380
7.4 Mean–variance analysis 167 14.9 Miller–Orr cash management model 387
7.5 Sensitivity graph 169 15.1 How hire purchase works 408
7.6 Simulated probability distributions 172 16.1 How an SPV works 460
7.7 How risk is assumed to increase over time 174 17.1 Five-year average dividend growth rates:
8.1 Equal and offsetting fluctuations in returns 188 FT All-Share companies 483
8.2 Available portfolio risk–return combinations 17.2 The impact of a permanent dividend cut 488
when assets, risks and expected returns 17.3 Dividends as a residual 490
are different 195 18.1 How gearing affects the ROE 528
8.3 The effect on the efficiency frontier of changing 18.2 The ‘traditional’ view of capital structure 531
correlation196 19.1 MM’s Propositions I and II 557
8.4 Gerrybild’s opportunity set 199 19.2 The MM thesis with corporate income tax 560
8.5 Portfolio combinations with three assets 200 19.3 Business and financial risk premia and the
9.1 TSR of D.S. Smith vs. FTSE 250 Index 2010–17 209 required return 564
9.2 Specific vs. market risk of a portfolio 209 19.4 Optimal gearing with liquidation costs 567
9.3 The effect of international diversification on 20.1 A strategic framework 607
portfolio risk 213 20.2 Type of acquisition and integrative complexity  612
9.4 The effects of industry and country 21.1 Interlocking theories in international economics 659
diversification on portfolio risk 214 21.2 Flow chart demonstrating a logical approach
9.5 The characteristics line: no specific risk 216 towards devising a foreign exchange
9.6 The characteristics line: with specific risk 217 management strategy 664
9.7 The security market line 219 21.3 Illustration of multi-lateral netting 667
9.8 The capital market line 229 21.4 Achieving the swap 678
9.9 The CAPM: the three key relationships 231 22.1 Alternative modes of overseas market entry 690
9.10 Theoretical and empirical SMLs 233 22.2 Exporting vs FDI 693
9.11 Alternative characteristics lines 243 22.3 Classification of firms by extent of operating
10.1 Risk premiums for activities of varying risk 255 exposure701
10.2 The Beta pyramid 256 22.4 A simple APV model 715
11.1 Calculating free cash flow (FCF) 285 23.1 Prospect theory 739
11.2 Shareholder value analysis framework 288 A.1 Portfolio combinations with four assets 753

List of tables
2.1 Share price information for the retail sector 3.1 Compound interest on £1,000 over five years
(selected companies) 39 (at 10%) 55
2.2 Foto-U plc 43 3.2 Present value of a single future sum 60
2.3 Foto-U key ratios 45 4.1 Net present value calculations 90
2.4 Foto-U annual corporate performance report 49 4.2 Why NPV makes sense for shareholders 90
 List of figures and tables  xiii

4.3 IRR calculations for Bale proposal 92 12.4 Harlequin plc: call option valuation 321
4.4 Payback period calculation 94 13.1 International comparison of financial
4.5 Calculation of the ARR on initial capital invested 95 derivative usage 344
4.6 Comparison of various appraisal methods 97 13.2 Examples of risk factors for The Coca-Cola
4.7 Comparison of mutually exclusive projects 99 Company350
4.8 Investment opportunities for Mervtech plc 101 13.3 HSBC risk management and the risk appetite 352
4.9 NPV vs. PI for Mervtech plc 102 14.1 Helsinki plc: profitability and risk of working
4.10 Modified IRR for Bale 105 capital strategies 362
4.11 Murray plc: planned investment schedule (£000) 106 14.2 Total inventory levels and stockholding periods 375
4.12 Projects accepted based on LP solution 107 14.3 Thorntons plc consolidated statement of
5.1 Profitability of Ali’s project 117 cash flows 381
5.2 Ali plc solution 118 14.4 Mangle Ltd: production and sales (units) 383
5.3 The money terms approach 119 14.5 Mangle Ltd: cash budget for six months to
5.4 The real terms approach 119 June (£) 383
5.5 Project Tiger 3000 (assuming no capital 15.1 Tax relief on three-year HP contract with
allowances)121 four-year asset lifetime (£) 409
5.6 Casey plc – Tiger 3000 tax reliefs 122 15.2 Hardup plc’s leasing analysis 414
5.7 Casey plc – Tiger 3000 with tax relief  122 15.3 The behaviour of the equivalent loan (£m) 415
5.8 Capital investment evaluation methods in 15.4 Interest charges on a lease contract
large UK firms 123 (figures in £m) 419
5.9 Firms employing investment appraisal techniques 15.5 Changes in tax-allowable lease costs
‘always or almost always %’ 124 (figures in £m) 419
5.10 Relationship between ARR and IRR 125 15.6 Calculation of the tax savings 420
5.11 Poulter plc cash flows for two projects 130 15.7 Present value of the Buy alternative 421
5.12 Profit projection for CNC milling machine (£000) 137 15.8 Behaviour of a loan at 4% interest 421
6.1 The importance of non-financial factors related 15.9 Profile of lease payments 421
to strategic investment projects 146 16.1 History of Microsoft common stock splits 456
7.1 Betterway plc: expected net present values 161 17.1 Scottish and Southern Energy plc Financial
7.2 Effects of cost structure on profits (£000) 163 Calendar 2017 481
7.3 Snowglo plc project data 165 17.2 Rawdon plc 494
7.4 Project risk for Snowglo plc 166 17.3 Scottish and Southern plc and D.S. Smith plc:
7.5 UMK cost structure 170 EPS and DPS 498
7.6 Risk analysis in large UK firms 175 17.4 Analysis of a share repurchase 503
7.7 Bronson project payoffs with independent 18.1 Financial data for D.S. Smith plc as at
cash flows 181 30 April 2017 522
8.1 Returns under different states of the economy 192 18.2 How gearing affects shareholder returns
8.2 Calculating the covariance 192 in Lindley plc 526
8.3 Differing returns and risks 194 18.3 How gearing affects the risk of ordinary shares 527
8.4 Portfolio risk–return combinations 194 18.4 How gearing can affect share price 528
8.5 Returns from Gerrybild 197 19.1 Key definitions in capital structure analysis 555
8.6 Calculation of standard deviations of returns 19.2 The tax shield with finite-life debt 573
from each investment 198 19.3 Valuing a geared firm: the three approaches 575
8.7 Calculation of the covariance 198 20.1 Summary of mergers and acquisitions in the
9.1 How to remove portfolio risk 210 United Kingdom by UK companies 589
9.2 Possible returns from Walkley Wagons 216 20.2 Summary of cross-border mergers,
9.3 Beta values of selected companies 218 acquisitions and disposals 591
9.4 Real investment returns by asset class in the 20.3 Hawk and Vole 689
United Kingdom and the United States (% pa) 223 20.4 Mergers and acquisitions in the United Kingdom
9.5 Real investment returns in the United Kingdom by UK companies: category of expenditure 600
and the United States 224 20.5 Strategic opportunities 609
10.1 The dividend return on Whitbread plc 20.6 Pre- and post-bid returns 617
shares 2007–17 249 20.7 The gains from mergers 618
10.2 Divisional Betas for Whitbread plc 257 20.8 Public vs private equity 633
10.3 The effect of operating gearing (£m) 259 21.1 Net debt of Bunzl plc as at 31 December 2016 651
10.4 Subjective risk categories 260 21.2 Oilex’s internal currency flows 668
11.1 Consolidated statement of financial position 21.3 Sterling vs US dollar options 673
of D.S. Smith plc as at 30 April 2017 273 22.1 Sparkes and Zoltan: project details 698
11.2 EV/EBITDA for companies in carton-board 22.2 Evaluation of the Zoltan project 699
and corrugated sector 281 22.3 Alternative evaluation of the Zoltan project 699
11.3 D.S. Smith plc: cash flow 286 22.4 The world’s ‘safest’ sovereigns 709
11.4 Cash flow profile for Safa plc 293 22.5 International Airlines Group borrowings at 31
11.5 Calculation of EVA 294 December 2016 714
12.1 Option on York plc shares (current price 245p) 306 23.1 Usefulness of DCF methods 727
12.2 Returns on York plc shares and options 308 23.2 Common criticisms of the psychological
12.3 Valuing a call option in Riskitt plc 315 and rational approaches 738
This page intentionally left blank
 Preface

We are very excited that our text, already in its third decade, now enters its ninth edi-
tion. It is unusual for a text to have such longevity, and there are a host of people who
need thanking – our publishers, who continue to support us in our endeavours to
produce a contemporary and informative text, academics who recommend the book,
and students who purchase the book and use it in their studies.
Corporate finance and the financial world continue to develop and change at a
rapid rate, and the dynamic nature of financial markets is evident in movements in
share prices and stock indices across the world. The financial crisis that commenced
in 2007–8 is still having fundamental repercussions and making headlines, not least in
the ongoing debate about the ‘correct’ level of interest rates. The crisis fully underlines
why finance should be widely studied and that the potential consequences of financial
decisions need to be understood, both on the upside and the downside. Further, the
crisis demonstrates that what happens in finance can have important ramifications for
governments and individuals as well as businesses. Risk has always been a key facet
of finance and financial markets but now seems to have even greater significance. As a
consequence, risk management has risen in prominence.
These considerations reinforce our view that finance should be about developing,
explaining and, above all, applying key concepts and techniques to a broad range of
contemporary management and business policy concerns and challenges. It is becom-
ing more appropriate, certainly at the undergraduate level, to demonstrate the role
finance has to play in explaining and shaping business development rather than con-
centrating on rigorous, quantitative aspects.
The focus of the ninth edition, as in previous ones, is distinctly corporate, examin-
ing financial issues from a managerial standpoint. To simplify greatly, we have tried,
wherever possible, to present the reader with the question ‘OK, but how does this
help the managerial decision-maker?’ and also to provide a few answers, or at least
pointers.
Some might say we should include chapters on other financial issues deemed to
have a degree of importance equivalent to those covered here. Yet we believe, as ever,
that there is a trade-off between comprehensiveness and manageability. This edition is
directed at those issues, which in our experience are regarded as the central issues in
finance.

■ Distinctive features
The ninth edition retains a set of distinctive features, including the following:
■ A strategic focus. Students often regard financial management as a subject quite dis-
tinct from management and business policy. We attempt to relate the subject to
these matters, emphasising the integration of the finance function within the con-
text of managerial decision-making and corporate planning, and to the wider exter-
nal environment.
■ A practical approach. Financial theory increasingly dominates some texts. Theory has
its place, and this text covers an appreciable amount; however, we seek to blend
theory and practice: to ask why they sometimes differ, and to assess the role of less-
sophisticated financial approaches. In other words, we do not elevate theory above
common sense and intuition.
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xvi  Preface

■ A clear and accessible style. Personal experience and feedback suggest that much of
our target readership prefers a more descriptive, rather than heavily mathematical,
approach but appreciates worked examples and illustrations. There is a place for
formulae, proofs and quantitative analysis; however, where possible, an alternative
narrative explanation is provided.
■ An international perspective. Although emanating from the United Kingdom, our text
continues to use, where appropriate, examples drawn from other regions and coun-
tries, especially mainland Europe and the United States.

■ Teaching and learning features

A range of teaching and learning features is provided, including the following:
■ Mini case studies. Topical cameos, applying financial management principles to
­well-known companies, are presented at the start of chapters and elsewhere within
the text.
■ Learning objectives. Specified at the outset of each chapter, these highlight what the
reader should achieve in terms of concepts, terminology and skills.
■ Worked examples. Integrated throughout the text to illustrate the key principles.
■ Extracts from the press. Each chapter includes articles mainly from the Financial Times
and The Economist but also includes other media, focusing on key issues addressed
in the chapter.
■ Key revision points. Provided at the end of each chapter to summarise the main
­concepts covered.
■ Annotated further reading. At the end of each chapter, a number of key books and
articles are suggested to offer additional perspectives and enable subjects to be
studied in more depth. Full details of all books and articles are given in the Refer-
ences at the end of the text.
■ A quick reference glossary of simple definitions.

■ Assessment features
Flexible study and assessment is facilitated by a variety of activities:
■ Self-assessment activities (SAAs). These include both short questions and simple
numerical exercises designed to reinforce a point made in the text or to encourage
the reader to pursue a particular line of thought. Questions are inserted in the text at
appropriate points, and the answers are packaged together at the end of the text in
Appendix A.
■ Questions. These test a mix of numerical, analytical and descriptive skills, offering a
spread of difficulty. A selection of solutions is also provided in Appendix B at the
end of the text, making these suitable for self-assessment, tutorial or examination
purposes.
■ Practical assignments. These provide the opportunity to look beyond the confines of
the text to consider the application of concepts to a company or organisation, or to
published financial reports and data, and are suitable where group or individually
assessed coursework is set.

■ Readership
The text has proved successful both for newcomers to finance and also for students
with a prior knowledge of the subject. It is particularly relevant to undergraduate,
MBA and other postgraduate and post-experience courses in corporate finance or
financial management. Students seeking a professionally accredited qualification will
also find it especially relevant to the financial management papers of the Association
 Preface  xvii

of Chartered Certified Accountants, Institute of Chartered Secretaries and Administra-

tors, Certified Diploma in Finance and Accounting, Chartered Institute of Manage-
ment Accountants, and the Institute of Chartered Accountants in England and Wales.

■ Changes to the ninth edition

As with previous editions, our revisions are based on extensive market research,
including reviewers’ questionnaires and direct feedback from adopters and users.
Feedback, while always interesting and helpful, was sometimes contradictory. Hope-
fully, we have achieved a balance between academic rigour and practical application.
In preparing this edition, we have battled with two opposing forces. We wanted to
avoid expanding the text to an unmanageable size, yet we have been aware of several
gaps in our coverage in previous editions, and the need for ‘infill’.
The main changes to this edition in structure and in content are summarised here.

■ Structural changes
In the ninth edition, there is more discussion on topics related to capital structure, risk
and return, asset pricing, and behavioural finance. We have built on this from the
eighth edition and further extended the discussions on risk management, capital struc-
ture theories and empirical evidence, recent examples of acquisitions and restructur-
ing, real option and Islamic finance in the ninth edition.
In pursuing the suggested changes, we have made many changes to different parts
of the text. Specific attention is placed on updating financial and accounting data,
removal of tired text and inclusion of fresh discussion in some chapters; updated arti-
cles from the Financial Times and other print and online media; inclusion of the find-
ings of newly published research papers in relevant areas in each chapter; updates of
some of the real-world examples; and inclusion of discussion on relevant recent
changes in financial theory and practice.
Introduction of new author: Perhaps the most notable change in the ninth edition is
the introduction of a new third author to the text. Saeed Akbar is Professor in Account-
ing and Finance at the University of Hull. He has extensive experience of teaching
undergraduate and postgraduate accounting and finance modules in the United King-
dom and abroad. His main research areas cover the relationship between accounting
information and stock prices, corporate governance and risk, empirical finance, per-
formance measurement and accounting regulation.
We ‘older hands’ look forward to a long and productive working relationship with
our new partner.

■ Structure and outline

An outline of the text is given here; however, a further description of the purpose and
content of each section is given in the introduction to each.
Part I considers the underlying framework for corporate financing and investment
decisions; key aspects of this part are the financial objectives of business, the financial
environment within which firms operate, the time-value of money and the concept of
value.
Part II addresses investment decisions and strategies within firms. Emphasis is
placed on evaluation procedures, including treatments of taxation, inflation and capital
rationing. Because, in practice, investment decision-making often bears little relation-
ship to the theoretical approaches outlined in some texts, we persist in our attempt to
promote an understanding of the practical evaluation of investment decisions by firms.
The importance of value, risk and the expected rate of return are examined in
Part III, with six chapters devoted to this theme. Here we consider the investment
xviii  Preface

­ roject in isolation, including the rapidly developing and exciting field of options
p
analysis. Other chapters view risk and return more from a shareholder perspective.
Fundamental to this section are the rate of return on investment required by share-
holders and the valuation of the enterprise.
Part IV discusses the short-term financing decisions and policies for acquiring
assets. It covers treasury and working capital management.
Part V addresses long-term strategic financing and policy issues. What are the main
sources of finance? How much should a company pay in dividends? How much
should it borrow? The culminating chapter focuses on corporate restructuring, with
particular reference to acquisitions.
Part VI examines international financial management issues. It explains the opera-
tion of the foreign currency markets and how firms can hedge against adverse foreign
exchange movements, and sets out the principles underpinning firms’ evaluation of
foreign investment decisions.
A concluding chapter reviews developments in corporate finance, with specific
focus on market efficiency and behavioural finance.
Authors’ acknowledgements

All textbooks include ‘acknowledgements’ but, on reflection, this seems too weak a
word to use when assistance has so often been so freely given. Roget’s Thesaurus
offers as a synonym, ‘the act of admitting to something’, suggesting rather grudging
recognition!
Our recognition of the wide range of people and organisations is anything but
grudging. We extend our warm appreciation of the helpful comments provided by
you over the years, and also for consent to use your material.
To the ever-lengthening roll of honour, we wish to add the following names and
organisations, whom we sincerely hope will be happy to be associated with our efforts:
John Ward – Dealogic
Andrew Carr – CIMA
Janine of the Barclays Capital Equity–Gilt Study Team
Patrick Barber – Bradford University
Kathy Grieve – Birmingham City University
Ahmed El-Masry – University of Plymouth
Christopher Brown – JPMorgan Cazenove
Patrick McColgan – Aberdeen University
Himanshu Dubey
Andrew Barfield
Maxim Kakareka
Professor Colin Mason – University of Strathclyde
Professor Andrew Marshall – University of Strathclyde
Sue Lane
Peter Blankenhorn – E.On AG
Andrew Naughton-Doe – Corus UK plc
Pat Rowham – LBS
Peter Aubusson – D.S. Smith plc
Sue Cox – BAA plc
ASJR Ramsay – International Power plc
‘Sarah’ at British Airways plc
Jane Lanyon – Thorntons plc
Ian Lomas – DTI
Ian Patterson – HM Customs & Excise
As ever, we apologise for any omissions.
Finally, we are especially grateful to the ever-patient, ever-tolerant editorial staff at
Pearson Education, and to the anonymous contributors to the market research con-
ducted by the publisher. We hope that you will agree that your comments have led to
an improvement in the quality of the final product. Naturally, as ever, we claim sole
responsibility for any remaining errors.
Richard Pike, University of Bradford
Bill Neale, Bournemouth University
Saeed Akbar, Professor in Accounting and Finance, University of Hull
Philip Linsley, University of York
Publisher’s acknowledgements

We are grateful to the following for permission to reproduce copyright material:

Figures
Figure 3.3 after YieldCurve.com, Reproduced with permission of YieldCurve.com. ©
Moorad Choudhry 2015; Figure 9.1 from D.S. Smith Annual Report 2017, D.S. Smith
p. 6; Figure 9.4 adapted from The Increasing Importance of Industry Factors, Financial
Analysts Journal, Sep/Oct, Figure 4c, p. 51 (Cavaglia, S., Brightman, C., & Aked, M.
2000), Copyright 2000, CFA Institute. Reproduced and republished with permission
from CFA Institute. All rights reserved; Figure 13.4 from A structured approach to
Enterprise Risk Management and the Requirements of ISO 31000, Institute of Risk
Management (Airmic/Alarm/IRM 2010) p. 14; Figure 13.5 adapted from A structured
approach to Enterprise Risk Management and the Requirements of ISO 31000, Institute of
Risk Management (Airmic/Alarm/IRM 2010) p. 9; Figure 13.5 adapted from BS ISO
31000:2009, Risk management – Principles and guidelines, British Standards Institution
(2009), Permission to reproduce extracts from British Standards is granted by BSI
Standards Limited (BSI). No other use of this material is permitted. British Standards
can be obtained in PDF or hard copy formats from the BSI online shop: http://www.
bsigroup.com/Shop; Figure on page 462 from the return of securitisation: Back from the
dead by The Economist. Copyright © by The Economist, 11 January 2014. Reproduced by
permission of The Economist; Figure 17.1 from Equity Gilt Study 2013, 58th ed., Barclays
(2013) Figure 11, p. 78; Figure on page 508 Credit Suisse Global Investment Returns
Yearbook 2011. Contact London Business School at [email protected]., p. 17; Figure
on page 536 from E.ON Annual Report 2016.

Tables
Table 2.1 from Share price information for the retail sector, Financial Times, 01/07/2014,
© The Financial Times Limited. All Rights Reserved; Table 6.1 from Strategic capital
investment decision­making: A role for emergent analysis tools?: A study of practice in
large UK manufacturing companies, British Accounting Review, Vol. 38(2), pp. 149–173
(Alkaraan, F. & Northcott, D. 2006); Table 7.6 adapted from A longditudinal survey on
capital budgeting practices, Journal of Business Finance and Accounting, Vol. 23(1),
pp. 79–92 (Pike, R. 1996); Table 7.6 adapted from Strategic capital investment decision-
making: A role for emergent analysis tools?: A study of practice in large UK
manufacturing companies, British Accounting Review, Vol. 38(2), pp. 149–173 (Alkaraan,
F. & Northcott, D. 1996); Table 9.3 from Elroy Dimson and Paul Marsh (Eds), Risk
Measure­ment Service, London Business School, January­March 2014; Table 9.4 from
Centre for Research into Security Prices (CRSP), Barclays Research, Equity Gilt Study,
2016, Used with permission from the Barclays Bank PLC; Table 9.5 from Centre for
Research into Security Prices (CRSP), Barclays Research, Equity Gilt Study, 2016, Used
with permission from the Barclays Bank PLC; Table 10.1 from Whitbread plc, Annual
Report/Thomson Reuters Datastream; Table 11.1 from D.S. Smith plc Annual Report
2017; Table 11.2 from https://www.gurufocus.com, 27 July 2017; Table 11.3 from
D.S. Smith plc Annual Report 2017; Table 17.3 from Respective company Annual Reports;
Table 18.1 from D.S. Smith plc, Annual Report, 2017; Tables 20.1, 20.2 from Office for
National Statistics, First Release, March 2014, Source: Office for National Statistics
licensed under the Open Government License v.2.0.; Table 20.4 adapted from Office for
National Statistics, First Release, March 2014, Source: Office for National Statistics
Exploring the Variety of Random
Documents with Different Content
 CHAPTER XXII
CAROLINA CONSTRUCTS A DRAMA

A thunderstorm routed the procession, sending the candle-

bearers helter-skelter into doorways, covered alleys, under the
awnings of the shops. At the first flash and report of the sky’s artillery
Andrea deserted his push-cart and its royal occupant. But the
dauntless leader of the election district was at hand. With heroic
calm he lifted the Queen in his arms and unaided carried her into the
Caffè of the Beautiful Sicilian. Mulberry had but few men who could
do that—she was of solid Carrara—and thoughtful voters saw in the
feat a new mark of his fitness for political chieftainship. She was
placed on a marble-top table in the corner and the crown
straightened on her spotless brow. All night she held court, and until
the vender songs of the morning market were heard in the streets.
Bottle after bottle joined the dead men, the rude quips and quibbles
grew noisy, quarrelsome, yet no man drained a glass without first
tipping it in homage to the snub-nosed damsel whose hollow eyes
stared at every one all the time.
An hour before midnight Bertino and Armando returned to Casa
Di Bello to report to Carolina the lodging place of the Last Lady.
Hardly had the bell sounded when the door flew open, and Carolina
came out, finger at lips, with a great air of mystery, and drawing to
the panelled oak behind her.
“Be off at once!” she said, her voice fluttering. “Here is money. Go
anywhere to-night—anywhere out of Mulberry. You, Bertino, must not
come back until—until I am ready for you. If she saw you it would
ruin all. Go! Ask no questions. To-morrow Armando will tell me where
you are, and we shall meet. Away!”
With puzzled faces and mystified shakes of the head Armando
and Bertino took themselves off, and Carolina re-entered at the
moment that Signor Di Bello was mounting the staircase to his
bedroom. A few minutes before he had taunted her with the failure of
her scheme to cheat him of a wife, and proclaimed again the idiocy
of the priest and all others who asserted that there was a bust or a
husband of Juno. A pretty show they had made of him. All Mulberry
was laughing. But his time would come. Next Sunday he would turn
the tide, for she would be his in spite of them all. Carolina could do
as she liked, go or stay; but a wedding there must and should be, for
that alone could save his good name as a merchant and a signore.
He had spent a busy night with the flasks of the Three Gardens
along with some choice comrades of the Genovese, and the years
had told Carolina that with her brother it was always in vino veritas.
Wherefore she knew that he had spoken naught less than a secret of
his heart—that a wish to wipe out the stain of ridicule was an added
spur to his determination to marry. And this knowledge sparked an
idea that keyed her cunning to its highest pitch. Without an instant’s
delay she began to put the idea into practice. Her first move was to
keep mum about the return of Bertino, although she had waited up to
flaunt in her brother’s face the news that his bride’s husband would
stand before him in a few minutes. But the new design that her crafty
wits had seized upon made that petty triumph seem not worth while
—at least not until the tragic moment she was preparing. Her next
step, as we have seen, was to get Bertino out of the way. The
corners of her closed mouth curved in a smile of wily content as she
watched Signor Di Bello going up to his room in blank ignorance of
the little society drama that was in her head.
“Good night, my dear brother,” she said. “To-morrow I will begin
to make ready for the wedding.”
“Good night.”
On the morrow she gave Angelica orders to prepare a wedding
feast that should be the equal of the one that had gone to Father
Nicodemo’s poor. She ordered her as well to keep her mouth shut
about the turning up of Bertino, and the same command she issued
to Marianna. Neither the girl nor the cook was able to fathom the
purpose of Carolina, but Marianna could not shake off a besetting
fear that it boded no good for her.

It was a bright morning, and bright were the spirits of Signor Di

Bello, and springy his step, as he walked to his shop in Paradise
Park. To his view there was not a speck on the matrimonial prospect,
and he exulted in the promise of laughing last at those who were
now laughing at him. It was the day that the proofs were to be
presented to Father Nicodemo, and he chuckled serenely over the
plight that the banker must be in.
He had gone less than a block when Armando rang the bell of
Casa Di Bello, and Marianna, who had been watching for him
eagerly at the window, threw open the door. Breathlessly she fell to
telling him of the plans for the wedding and her consequent sense of
impending disaster; how Carolina knew that Juno had one husband,
and was helping her to get another! She had closed her and
Angelica’s lips. What did it all mean? Something dreadful, she was
sure. If Armando would only take her away. If——
The interview was cut off by the voice of Carolina, who appeared
with her bonnet on and took charge of Armando.
“Not a word,” she admonished him, “about Bertino’s return or his
marriage to that baggage. Mind you do not tell a living soul. My
reasons you will know at the proper time. Now, lead me to the—Last
Lady.”
Together they walked to the Caffè of the Beautiful Sicilian. On the
threshold they came face to face with the ex-banker. He was in a fine
frenzy of indignation. At daybreak that morning he had started from
what was left of the iron villa with a push-cart load of dandelion
leaves. After visiting the rectory and making to Father Nicodemo the
humiliating report that the proofs had vanished, there had come to
his ear news of the marble Queen of Springtide, and the talk, current
on a thousand tongues, of her strong resemblance to the Neapolitan
who sang at La Scala, and whom the priest had refused to marry to
Signor Di Bello. And here was the bust of which he had been robbed.
Oh, the money it had cost him! One hundred and forty dollars for
duty. Ah! yes; it was the cause of his ruin. But for that cursed marble
he would be still a signore and one of the influential bankers of
Mulberry. He had demanded his property, but the foreman would not
surrender it until he had proved his ownership. What an outrage! But
it mattered not now, for they, Armando and Signorina Di Bello, would
be his witnesses. “Who well does climb is helped in time.”
“Excuse me, signore,” remarked Armando; “this bust does not
belong to you.”
“What!” shrieked the banker.
“No; it is mine.”
“Yours?”
“I made it.”
“You made it, eh?” the banker snapped. “Very good. But who paid
for it? Eh, who paid for it? Answer that. Who paid the one hundred
and forty dollars of Dogana—you or I? Give me back the duty money
and you may have the infernal thing! Ugly yellow snout!”
Now, Carolina had a lively desire to possess the bust, for she
needed it in the avenging play that she had begun to construct.
Nevertheless, her Italian thrift had not been swamped by the wave of
worldly purpose that had of late come over her churchly qualities. To
pay the sum Signor Tomato asked would necessitate an inroad upon
her savings-bank hoard, an act to which she nerved herself only in
the last resort. So she exerted the might of her tongue in behalf of
Armando’s claim, holding with primordial logic that the Last Lady
belonged to the sculptor by divine right of creation. But the foreman,
in his rôle of thief, custodian of the stolen goods, and judge in equity,
had a homelier code of ethics for his guide. It took him not a moment
to decide. He awarded the bust to the banker on the ground that it
was in his wife’s possession at the time of the theft, and must
therefore belong to her husband. It was only the reductio ad maritum
to which all questions are subject in Mulberry. The upshot was that in
the afternoon Carolina paid the one hundred and forty dollars.
 To Signor Tomato it seemed as if some fairy wand had touched
the world and made it a garden of joy. Now they might take away the
other pipe any time, and he did not care. His Bridget and the little
Tomatoes would not be homeless. In his transport of gladness the
rude life about him took on a poetic beauty. The fragrance of
Sorrentine orange groves filled the squalid streets; there was
rapturous music in the shrieks of the parrots on the fire escapes and
window sills; the raucous notes of the hucksters enchanted his ear.
To dear old Mulberry he could return now and resume his proper
estate of banker and signore. Long live the day in his thankfulness!
Never more would he quarrel with his lot. Ah! the grand truth in the
proverb, “Blind eyes lose their night when gold is in sight.”
Straightway he went to the landlord, got the key of the old shop, and,
when darkness had fallen, Bridget and her brood were eating
cabbage soup behind the nankeen sail in the revivified Banca
Tomato.
But the Last Lady was still with them, to the hearty disgust of
Bridget. Not yet had the hour arrived for Carolina to bring the bust on
the scene, and Signor Tomato, with many a word and grimace of
reluctance, consented, under an oath of secrecy, to keep it in his
place until the supreme moment. Pains were taken that it should not
be traced to its new biding place. Armando had pushed it away in a
cart, taking a round-about course from the Caffè of the Beautiful
Sicilian to Paradise Park. Thus it happened that when Signor Di
Bello, to whose ears had come the gossip of a bust that imaged his
lost bride, went to the caffè that morning to see for himself, the bird
had again flown.
“Bah! Another stupid jest!” he muttered, and thrashed out of the
room amid the titters of a group of Sicilians.
Soon afterward Juno, an unwonted air of wide-awake desire
about her, entered the caffè and asked to be shown the Queen of
Springtide. Before Signora Crispina, the proprietor’s peachblow wife,
could answer, there came from a half dozen throats the merry
chorus:
“Long live the Queen of Springtide!”
 “Where is it?” Juno asked.
“She is here, signorina,” said the wit of the company, rising and
tipping his hat. “The lifeless Queen has just left us, but her living
Majesty is here.—It is yourself, beautiful signorina.”
“Bah! Where is the bust?”
No one could answer. Armando was unknown in Mulberry, and
only three persons—Carolina, the banker, and himself—were in the
secret of his destination when he pushed away from the caffè with
the Last Lady in the cart. Juno went back to her lodgings greatly
disappointed. A dread had settled upon her that this marble ghost
would spring up in her path somehow, and foil her plans, after the
manner of all well-ordered avenging spirits. It had been her intention,
when she hurried to the caffè to sound the rumour about the bust, to
get Signor Di Bello to buy it and give it to her. Once in her hands,
she would have seen to it that the thing retired to a safe obscurity.
The bottom of the East River seemed to her a particularly fit place for
Armando’s masterpiece. She doubted no longer that the bust had
arrived in Mulberry, and the mystery of its whereabouts gave her no
peace.
But it was not so with Signor Di Bello. To the mind of the grocer,
put upon so hard by recent events, the talk about the Queen’s
resemblance to his lost bride appeared now as a hoax which had
accomplished its purpose of drawing him to the caffè only to be
laughed at. If not, where was the bust? Surely he knew his people
too well to misinterpret this latest prank. He knew. It was the first joke
of a practical turn that any one had dared play on him since the
blunder at the church marked him for the colony’s ridicule. And he
saw therein a sure omen that flat insult would quickly succeed the
coarse raillery. Before long women would spit at him in the street and
taunting youngsters tag at his heels. Others that he knew of had
tasted the strange persecution. But it should not be his lot, by the tail
of Lucifer! On the Feast of Sunday his marriage must silence every
idle tongue. For then he would cease to be that despised of all
creatures, a bridegroom without a bride.
 That his lively taste for Juno’s grace of person had become
second to a desire to avert the rising gale of mockery, Carolina
understood very well. And upon this change of his nuptial motive she
rested full confidence of success for her own designs. No bar to her
project showed itself until she visited Bertino, at the cheap hotel on
the East Side, whither he and Armando had taken themselves. Then
she found that the leading man of her drama had notions of his own
about his part that would wreck the plot. He was for killing the
feminine villain before the curtain rose. To her directions that he keep
out of sight until Sunday he demurred vehemently. How could he
wait so long when the vendetta was boiling in his veins? His wife had
done him a deadly wrong, and, per Dio! deadly should be the
accounting.
“See the grand trouble she has caused to me, to my friend, and
to poor Marianna!”
“To Marianna?” she asked, in genuine wonder. “What wrong has
she done her?”
“Were not she and Armando to wed when his Presidentessa
should be sold? A long time they must wait now. Thundering
heavens! But she shall pay.”
“You are mistaken,” rejoined Carolina, with a note of authority. “It
would have made no difference to Marianna. She was not to wed
Armando in any case.”
“I know better. Anyway, I shall not sit here biting my lips until the
Feast of Sunday, and perhaps be cheated of my right. Who knows
when she may fly?”
“No fear of that.”
“No? Why not? I tell you she knows what to expect from me, and
is no simpleton.” Then he lowered his voice to a stage whisper, first
opening the door and making sure that there was no listener in the
hall. “Twice I would have killed her, but once I deceived myself, and
the other time she gammoned me with a lie that made me try to kill
my uncle. Don’t you see that I can not wait here while she may be
getting away?”
 “I promise you she will not leave Mulberry. Do you wish to know
why? Well, it is because she thinks you have fled from America and
that she is free to become your uncle’s wife. Ah! don’t you see the
fine vendetta I am hatching for you? On the Feast of Sunday you
appear and stop the wedding. The Neapolitan beast is kicked out of
Casa Di Bello. You follow her and—claim your rights. Is it not a
sweet vendetta?”
“Yes,” said Bertino after a pause. “I will wait.”
 CHAPTER XXIII
A PARTNERSHIP IN TEN-INCH ST. PETERS

Though Carolina had not been blind to the meaning of the

signals flashed by Armando and Marianna’s eyes whenever the
lovers were together, Bertino’s words stirred her to the need of taking
instant measures to smother any marplot that might brew from their
attachment. To this end she resolved to keep them apart until the
final act of her private theatricals should be played. Thus it fell out
that on Friday, two days before the time for Signor Di Bello’s second
essay at a wedding, when Armando called to deliver a most weighty
message to Marianna, he was met at the door with Carolina’s avowal
that the girl was indisposed. He might have credited the dreadful
news but for a face that he saw at the window as he walked away,
and a pair of hands and lips that were telegraphing with much
energy. “Wait, and I shall be out,” was the only part of Marianna’s
excited display that he understood. But it was enough to insure his
waiting a week, had that been necessary. As it was, she did not
come until darkness had called lights to the caffè windows and the
banks and grocery shops had put up their shutters.
“It is finished now,” she said, hatless and breathing hard. “I can
never go back to Casa Di Bello.”
“What matter?” he asked, taking her hand, and for the first time in
many a day showing a joy and contempt for circumstance that
befitted his years. “Come along. I have beautiful news. Let us go to
the gardens of Paradise.”
It was the first music night of the season, and the Park had
become a vast potbouilli of Italy’s children, with a salting from the
Baxter Street Ghetto and a peppering of “Chimmies” and “Mamies”
from the old Fourth Ward. Armando and Marianna made their way
through the seething mass about the band, deaf to the rag-time
melody that filled the sultry air and without eyes for the gorgeous red
coats of the musicians. He was telling her how from the blackness of
his despair the light of knowledge had suddenly broken, and how in
the bitterness of his exile he had found the sweet of content. Far
from the band stand, they crowded on to a bench beside two women
with yellow babies at their breasts, and Armando continued:
“It was last night, and I was here alone, with only the stars for
companions. All Mulberry was asleep. First I thought only of myself,
and my heart was heavy. Then the points of gold in the sky seemed
to whisper—to whisper of you, my precious. After that I was happy.
Do you know why? Ah, it was because I had made up my mind.”
“Yes,” she repeated eagerly; “you made up your mind to——”
“Go home.”
“And I?”
“You go with me. There; do you not see now why I am happy?”
“Madonna-Maria be glorified!” she cried, and the women by their
side exchanged glances and grunts. “When?”
“By the first ship for Genoa.”
“When is that?”
“Some day next week.”
“Joy!”
“Ah! is it not fine? To go back to Italy!”
“Si; fine.” She paused a moment pensively, then asked, “Have
you bought the passage tickets?”
“No; she has not paid me yet for the bust.”
“Who has not paid you?”
“Signorina Di Bello.”
“How do you know she will give you any money?”
“Ah! I saw it in her eye. And did she not say, when I spoke of my
poor marble—did she not say that perhaps it would not prove so
poor, after all? Oh, she will pay, I am sure. How much? Ah! who can
tell that? But surely it will be enough to take us back to Cardinali, and
what more can we ask? There we shall be happy. No more shall you
go to the mill, for have I not my house and workshop, and will not
Genoa be glad again to buy my ten-inch Saint Peters?”
“Ah! si. Genoa will be glad. And I? Shall I not take them to the
Gallery of Cristoforo Colombo and sell them just as old Daniello did?
By my faith, I think I shall bring home as much silver as ever he did,
and more.”
“Si, si; who would not buy of you, angelo d’amore?”
He kissed her lips and fair tresses, and the women with their
nurslings left the bench. Thus, and for hours, the exiles lived in the
new-found bliss of their present while planning a joyous future. Over
the buzz of the grimy, toil-bound multitude the notes of the distant
band came to them vaguely—now in a fugitive creak, then in a faint
rumble or detached crash.
It was long after the music had died out, and the people had gone
to their tenements, and the pale eye of night had peeped tardily over
a zigzag line of low roofs, when Marianna said:
“Dio! So late! She will not let me in.”
They walked to Casa Di Bello at a smart pace, and timidly she
rang the bell, while Armando waited not many yards away. Instantly
the door opened, and he saw the hand of Carolina reach forth, grasp
his love by the shoulder, and jerk her into the house.
 CHAPTER XXIV
TWO TROUBLESOME WEDDING GIFTS

Looking down upon Genoa through the blue reaches of the

upper crests is an Apennine peak which the people, high and low,
call Our Lady of the Windows. Ever mantled in snow, and a fit
emblem of icy virtue, she has for ages inspired a negative chord for
that region’s lyres of passion. The princeling in his hillside palazzo
sings of his dream lady—always an angel as fervid as the glacial
Madonna is cold; the red waterman, in his moonlight barcarole,
swears his love would melt that frozen heart. But she bears no
kinship to this chronicle save that Signor Di Bello, on the afternoon of
the pregnant Feast of Sunday, when all was primed for the wedding,
thus addressed his sister, who sat by a front casement:
“Ha! my Lady of the Windows, it is time to go and fetch my bride.”
Carolina gave back only a silent nod and a closer pressure of the
lips, and he made off to the Santa Lucia, crowing to himself over the
timely bite of his pleasantry. Hour after hour she had been at that
window watching for Bertino, ready to spring to the door and drive
him away should he appear too soon. She was determined that the
play should not be spoiled by the untimely entrance of her star actor.
His cue, as agreed upon, was the exit of Signor Di Bello, but the fear
had haunted her that his itching vendetta might make him forget the
book. That danger was past now, and before his uncle had gone a
block, Bertino was at the door. She bundled him upstairs to her
sanctum, and, turning the key, left him looking out blankly on the
graveyard. “In a little while I shall call you,” she said, after explaining
gravely that she locked him in that his uncle might be kept out. Then
she descended to the street door and waved her hand, a signal that
brought a push-cart out of a near-by alley, with Armando and the
banker at its shafts. Of course, their load was the Last Lady, but no
eye could see her face, for Bridget had given her best and only bed
coverlet to veil it. No easy task to lug the weighty dame upstairs, but
they managed it without mischance, while Carolina stood by
imploring care, and all with an ado of deepest secrecy. At length the
bust was set up in the back room of the second floor. In this room the
bride and groom were to wait before going down to the parlour for
the ceremony. A dressing case near the window answered for a
pedestal. In the bright light that fell upon it the snowy features of
Juno showed bold to the eye, while the mirror rendered back in
softer tone her sturdy neck and shoulders. With a spotless sheet
Carolina covered the bust, and with the others left the room and
locked the door.
Repeated jangling of the bell and a low drone in the parlour told
of arriving guests. Marianna had been cast for the part of door-
opener and welcomer to the first families. Armando, in the best attire
he could muster, had only a meditative rôle. Thus far he had done
naught but sit in the parlour and exchange confident glances with
Marianna whenever she ushered in a distinguished Calabriano,
Siciliano, or Napolitano.
A cab bearing Signor Di Bello and Juno drew up betimes, and
word was passed to Carolina. Instantly she unlocked the door that
shut in Bertino, and bade him be ready for her summons. Then she
called Marianna and Armando to the room where the bust was,
leaving Angelica to let in the bridal pair. Up the staircase they
rustled, Juno first, her skirts held free of the yellow boots, and Signor
Di Bello smiling after her with a quivering bunch of muslin roses.
“They are here,” said the guests, craning their necks and
whispering. “No fiasco this time.”
“This way, signorina,” piped Carolina, with a spidery smile,
stepping aside and waving her fly into the web.
They entered the room prepared for them, and Signor Di Bello
regarded in wonder the white shape on the dressing case. “Soul of a
camel!” he cried. “What is that?”
“A little surprise that we have for the bride,” answered Carolina,
advancing and raising the window shade. “A wedding present, in
fact. Eccolo!”
She drew off the veil quickly, and the Last Lady stood revealed in
the streaming sunlight.
“By the Egg of Columbus!”
Every eye turned from the marble Juno to the Juno of flesh and
blood. She had let fall the counterfeit blossoms that the signore had
just placed in her hand, but gave no other token of disquiet. A glow
of admiration lit up her face as she gazed steadily at her double in
stone.
“It is really beautiful,” she said calmly, moving nearer. “I knew I
should look well in marble.”
She passed one hand behind the bust as though to judge it by
the sense of touch, but before any one could hinder she lifted it to
the window sill and sent it somersaulting into the rear court. The
crash brought a score of heads to the lower windows, and the guests
set up a cry that disaster had again visited the wedding of Signor Di
Bello.
“Infame! infame!” chorused Carolina, Armando, and Marianna
when they looked out and beheld the Last Lady in a dozen pieces on
the flagstones, while the bridegroom merely laughed, for it seemed
to him a capital joke.
Juno was quick to follow her prompt action with suitable words.
“You dogs of Genovese!” she said, sweeping the company with her
flashing eyes. “Do you like the bust now? Did you think I would stand
still and be made a fool of, or that I would fall down and weep?”
Then, turning to Carolina, “And you, Signorina Old Maid, you are a
large piece of stupidity.”
“Ha! You do not like my present!” said Carolina, ready for the
combat. “That is a grand pity. But, mark you, on her wedding day a
married maid must be suited to her heart’s full desire. I will give you
another present—yes, a present that every married maid must have.
Do you guess? No? How strange!” She went into the hall and called,
“Bertino!” Instantly he darted in and stood panting before his wife.
“Here is the other present, my married maid—your husband!”
 At the same moment there arose from the parlour a tumult of
voices, and Angelica entered and said that the priest had arrived.
“Are you her husband?” groaned Signor Di Bello, his hope all
gone.
“Yes,” Bertino answered, glaring at Juno. “She is my wife, the
viper! She put me up to stabbing you, my uncle. She told me you
annoyed her; that she did not want you. But she shall pay!” he cried,
waving his hand above his head. “Do you hear, you Neapolitan thief?
You shall pay. After that to inferno with you, and may you remain
there as long as it takes a crab to go round the world! Figlia of a
priest! Wolf of——”
“Stop!” broke in Signor Di Bello. Going up to Juno, he asked
mournfully, “Is he your husband?”
She answered, tossing her head: “He says so. Let him prove it.”
Signor Di Bello grasped the other end of the straw. “Ah, yes;
prove it,” he roared, while Carolina smiled snugly, for she had looked
to it that the properties for this scene were not lacking.
“You want proof?” asked Bertino. “Well, it is here.” He drew a
marriage certificate from his pocket.
Signor Di Bello seized the document and cast his eye over it. The
disorder below had redoubled, and with the noisy demands for the
bride and groom were mingled derisive shouts of “Long live the
Genovese bachelor!” and “Another fiasco!”
“Soul of the moon! It is true!” breathed Di Bello, crunching the
paper in style theatrical.
“Bah!” returned Juno, moving near to him and putting her hand
on his arm. “You believe that?”
“Believe me, then, signori,” spoke up a strange voice, in
grammatical but English-bred Italian. It was the priest from over the
border of Mulberry, who had come upstairs to learn the reason of the
delay and heard the last few lines of the dialogue—the priest whom
Signor Di Bello had engaged because he would not meddle. Turning
to Juno he continued: “I had the honour, signora, of marrying you to
this man.”
“Padre!” exclaimed Bertino, who knew him at once for the
clergyman he had sought out so hurriedly at the rectory in Second
Avenue that day when, to outwit his uncle—black the hour!—he had
taken Juno to wife.
“I know him not,” said Juno, turning to Signor Di Bello, who had
dropped into a chair. But her game of bluff was lost. “Go!” the grocer
said to her, pointing to the door.
She moved to the threshold, turned about, spat into the room,
and said, “May you all die cross-eyed!”—a Neapolitan figure that
means “Be hanged to you!” since the gallows bird squints when the
noose tightens. Then she rustled downstairs, mindful of her purple
skirts. Bertino would have been at her heels but for Carolina, who
caught his arm.
“Wait,” she whispered. “This is not the time or place.”
“No matter!” he cried, shaking off her hold. “She shall pay, she
shall pay!”
The sight of Juno’s yellow boots on the staircase served to quiet
the troubled parlour for a brief moment, the people thinking that the
bride and groom were coming at last. But she had seen the stiletto in
her husband’s eye, and was out of the door, into the waiting coupé,
and driving off at high speed before the first families had wholly
grasped the scandalous fact. Next moment there was another flying
exit, and Bertino went tearing after the carriage. This was the signal
for unheard-of insults to Casa Di Bello. The men set up a sirocco of
hisses, and the women shouted mock bravoes for the twice-
brideless groom. During the uproar Alessandro the Macaroni Presser
led a push-and-grab attack on a side table heaped with the
kaleidoscopic dainties with which Mulberry loves to tickle its eye as
well as its gullet.
“Dio tremendo!” whimpered Signor Di Bello, the tumult downstairs
assailing his ears. “What a disgrace! what a disgrace!”
 It was Carolina’s cue, and she snapped it up. In a few quick
words she unmasked the marital climax her drama was meant to
produce.
“Disgrace?” she said. “What need of disgrace, my brother? Are
not the guests here, is the feast not waiting, also the priest, and the
bride ready?”
“The bride?”
“Yes, and one that is worth a hundred—nay, a thousand—of the
baggage that you have lost; the bride that I have brought you all the
way from Cardinali. Hear those cattle below, how they bellow and
stamp on your name! But my bride can shut their ugly mouths. Here
is the young and sympathetic Marianna.”
She turned slightly and beckoned Marianna to her side, but the
girl remained where she was, hand in hand with Armando.
“No, no,” said Marianna, recoiling.
“Bah! She is young, my brother, and does not know what she
wants. Can’t you see that if you are not married at once the colony
will always despise you? Never again shall you hold up your head.”
“But the people will know just the same that I have been put in a
sack,” groaned Di Bello.
“Listen,” said Carolina, putting a finger beside her nose shrewdly.
“Those people are fools. They will believe anything you say, if only
you go before them with a bride. Let it be one of your famous jokes.
A little surprise you have prepared for your dear friends. Naturally,
they had you betrothed to the wrong woman, for that was all a part of
the joke. You laugh at them then. You laugh last. How silly they will
feel! What merriment! Ah! they will say it is Signor Di Bello’s
grandest joke!”
“By the stars of heaven, I will!” cried the grocer.—“Here, my pretty
Marianna, do you wish to be a happy wife?”
“Yes,” the girl answered, nestling closer to Armando, “but—but
not yours.”
 The priest, looking out of the window, shook his sides.
“You must be his!” said Carolina, catching hold of her arm and
striving to drag her away from Armando.
“She shall not!” cried the sculptor, placing an arm about
Marianna, authority in his eye and voice. “Take off your hand. No one
else shall have her.”
“Bravo!” exclaimed Signor Di Bello. “Let the pigs squeal. I am not
a man to marry a girl against her will.”
Carolina’s colour ran the scale of red and white, her fingers
writhed, and her eyes set upon Armando’s curling hair. She saw the
curtain ringing down on her self-serving drama, and the cherished
dénouement left out. In her fury she would have tested the roots of
the sculptor’s locks, but the priest stepped between them, and raised
his hand.
“Signorina,” he said, his voice a distinct note of calm above the
storm below, “if you sincerely desire to save your brother from the
contempt of his neighbours it may be done better by the union of
these young hearts than by tearing them asunder. Let us consider.
You speak of the merry jest.” Here the good man’s eyes twinkled his
zest in the wholesome trick to be played. “Would it not be a greater
joke if the people found that they had betrothed not alone the wrong
bride, but the wrong groom as well; in fact, had come to the marriage
of one couple only to find another walk into the parlour with the
priest?”
For a moment no one caught his meaning. Then he went on, with
equal countenance: “What I mean is that you silence the tongue of
scandal by having a wedding at once, with this pair of turtle-doves as
the bride and groom.”
“Bravo!” Signor Di Bello whooped, grasping the priest’s hand.
“Indeed a famous joke. I will tell them that it was all fun about my
getting married; that it was to be my foster niece and her sweetheart
all the time. Ah, the side-splitting joke!”
“Come, then,” said the priest, without waiting for Carolina’s
approval; and the joyous Armando and Marianna, with Signor Di
Bello last in the procession, followed him to the parlour.
Carolina did not go downstairs, but turned into her sanctum, and
with flooding eyes looked out on San Patrizio’s graveyard. She heard
the muffled outburst of wonder that greeted the bridal twain in the
parlour, and alert was her ear to the growing quiet that became
silence when the priest began the nuptial rites. Soon the merriment
of the feast rang beneath her feet. Plainly the lying joke was a great
success. Ah! what a fine vendetta it would be to go down there and
tell them all the truth—even now while her brother was cracking
walnuts on his head and making the table roar! But no; of strife she
was weary. She longed for peace—for the peace that lay beyond
that gray forest of mortuary shafts; the peace beyond that rectory
door, to which the latch string beckoned and a soft voice, clear
above the revelry, seemed calling: “Perpetua, perpetua, riposo,
pace.”

When Armando, with one hundred dollars in his pocket—the

grateful tribute of Signor Di Bello—went to Banca Tomato to buy two
second-class tickets for Genoa, the banker led him behind the
nankeen sail—sewed together again by Bridget—and whispered that
Bertino would be on the same ship in the steerage.
“Did she pay?” asked the sculptor.
“No, not all: a cut on the cheek; a clumsy thrust, dealt in a dark
alley, where he waited for her all night. But mark you, the fool wanted
to stay, to go back—to make her pay more—to pay all. He is not
satisfied; and in truth I do not blame him. She ought to pay all.”
“Si—all.”
“But how could he go back to her, where a dozen man-hunters
are waiting? They have been here, the loons, to see if he bought a
ticket. They will not find him. He will stay where he is until—until it is
time to go on the ship. Ah, my friend, it was grand trouble to make
him do this. He was for going back to her—to the man-hunters. But I
gave him the light of a wise proverb, and he saw: Better an egg to-
day than a hen to-morrow.”