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Appendixes
APPENDIX A Solutions to Self-Test Questions and Problems A-1
APPENDIX B Answers to Selected End-of-Chapter Problems
APPENDIX C Selected Equations and Tables
Preface xxviii
About the Authors xxxviii
Part 1
Introduction to Financial Management 1
ChaP t E r 1
an overview of Financial management 2
Striking the Right Balance 2
PUTTING THINGS IN PERSPECTIVE 4
1-1 What Is Finance? 4
1-1A Areas of Finance 4
1-1B Finance Within an Organization 5
1-1C Finance Versus Economics and Accounting 5
1-2 Jobs in Finance 6
1-3 Forms of Business Organization 7
1-4 The Main Financial Goal: Creating Value for Investors 9
1-4A Determinants of Value 9
1-4B Intrinsic Value 10
1-4C Consequences of Having a Short-Run Focus 12
1-5
Stockholder–Manager Conflicts 13
1-5A Compensation Packages 13
1-5B Direct Stockholder Intervention 13 Are CEOs Overpaid? 14
1-5C Managers’ Response 15
1-6 Stockholder–Debtholder Conflicts 16
1-7 Balancing Shareholder Interests and the Interests of Society 18
Investing In Socially Responsible Funds 18
1-8 Business Ethics 20
1-8A What Companies Are Doing 21
1-8B Consequences of Unethical Behavior 21
1-8C How Should Employees Deal With Unethical Behavior? 23
TYING IT ALL TOGETHER 24
ChaP t E r 2
Financial markets and institutions 27
The Economy Depends on a Strong Financial System 27
PUTTING THINGS IN PERSPECTIVE 28
2-1 The Capital Allocation Process 29
2-2 Financial Markets 31
2-2A Types of Markets 31
2-2B Recent Trends 32
2-3 Financial Institutions 37
Lower Fees Motivate Investors to Move Toward Index Funds 40
Securitization Has Dramatically Transformed the Banking Industry 43
2-4 The Stock Market 43
2-4A Physical Location Stock Exchanges 44
Global Perspectives: The NYSE and NASDAQ Go Global 45
2-4B Over-the-Counter (OTC) and the Nasdaq Stock Markets 45
2-5 The Market for Common Stock 46
2-5A Types of Stock Market Transactions 47
Initial Buzz Surrounding IPOs Doesn’t Always Translate Into Long-Lasting Success 48
2-6 Stock Markets and Returns 49
2-6A Stock Market Reporting 49 Measuring the Market 51
2-6B Stock Market Returns 52
2-7 Stock Market Efficiency 52
2-7A Behavioral Finance Theory 54
2-7B Conclusions About Market Efficiency 56
TYING IT ALL TOGETHER 57
intEgratED CasE smyth Barry & Company 58
Part 2 Fundamental Concepts in Financial Management 61
ChaP t E r 3
Financial statements, Cash Flow, and taxes 62 Unlocking the Valuable Information in Financial Statements 62 PUTTING THINGS IN PERSPECTIVE 63 3-1 Financial Statements and Reports 64
Global Perspectives: Global Accounting Standards: Will It Ever Happen? 65
3-2 The Balance Sheet 65
3-2A Allied’s Balance Sheet 67 The Balance Sheet of an Average American Household 72 3-3 The Income Statement 73
3-4 Statement of Cash Flows 75
3-5 Statement of Stockholders’ Equity 79
3-6 Uses and Limitations of Financial Statements 80
3-7 Free Cash Flow 81
Free Cash Flow Is Important for Businesses Both Small and Large 83
3-8 MVA and EVA 84
3-9 Income Taxes 86
Congress Considers Significant Changes to the Tax Code 86
3-9A Individual Taxes 87
3-9B Corporate Taxes 90
TYING IT ALL TOGETHER 94
intEgratED CasE D’leon inc., Part i 101
taking a Closer look Exploring Dunkin’ Brands Group’s Financial Statements 104
ChaP t E r 4 analysis of Financial statements 105 Can You Make Money Analyzing Stocks? 105
PUTTING THINGS IN PERSPECTIVE 106
4-1 Ratio Analysis 107
4-2 Liquidity Ratios 108
4-2A Current Ratio 108 Financial Analysis on the Internet 109
4-2B Quick, or Acid Test, Ratio 110
4-3 Asset Management Ratios 111
4-3A Inventory Turnover Ratio 111
4-3B Days Sales Outstanding 112
4-3C Fixed Assets Turnover Ratio 113
4-3D Total Assets Turnover Ratio 113
4-4 Debt Management Ratios 114
4-4A Total Debt to Total Capital 116
4-4B Times-Interest-Earned Ratio 116
Household Debt Burdens have Declined in Recent Years 117
4-5 Profitability Ratios 118
4-5A Operating Margin 118
4-5B Profit Margin 118
4-5C Return on Total Assets 119
4-5D Return on Common Equity 119
4-5E Return on Invested Capital 119
4-5F Basic Earning Power (BEP) Ratio 120
4-6 Market Value Ratios 121
4-6A Price/Earnings Ratio 121
4-6B Market/Book Ratio 122
4-6C Enterprise Value/EBITDA Ratio 123
4-7 Tying the Ratios Together: The DuPont Equation 124
Microsoft Excel: A Truly Essential Tool 125
4-8 Potential Misuses of ROE 126
Economic Value Added (EVA) Versus Net Income 127
4-9 Using Financial Ratios to Assess Performance 128
4-9A Comparison to Industry Average 128
4-9B Benchmarking 128
4-9C Trend Analysis 130
4-10 Uses and Limitations of Ratios 131
Looking for Warning Signs within the Financial Statements 133
4-11 Looking Beyond the Numbers 133 TYING IT ALL TOGETHER 135
intEgratED CasE D’leon inc., Part ii 144
taking a Closer look Conducting A Financial Ratio Analysis on HP Inc. 147
WEB a PPE n D i X 4a Common Size and Percent Change Analyses
ChaP t E r 5 time Value of money 148 Will You Be Able to Retire? 148
PUTTING THINGS IN PERSPECTIVE 149
5-1 Time Lines 150
5-2 Future Values 151
5-2A Step-By-Step Approach 152
5-2B Formula Approach 152 Simple Versus Compound Interest 152
5-2C Financial Calculators 153
5-2D Spreadsheets 153
5-2E Graphic View of the Compounding Process 155
5-3 Present Values 157
5-3A Graphic View of the Discounting Process 159
5-4 Finding the Interest Rate, I 160
5-5 Finding the Number of Years, N 161
5-6 Annuities 161
5-7 Future Value of an Ordinary Annuity 162
5-8 Future Value of an Annuity Due 165
5-9 Present Value of an Ordinary Annuity 166
5-10 Finding Annuity Payments, Periods, and Interest Rates 168
5-10A Finding Annuity Payments, PMT 168
5-10B Finding the Number of Periods, N 169
5-10C Finding the Interest Rate, I 169
5-11 Perpetuities 170
5-12 Uneven Cash Flows 171
5-13 Future Value of an Uneven Cash Flow Stream 173
5-14 Solving for I with Uneven Cash Flows 174
5-15 Semiannual and Other Compounding Periods 175
5-16 Comparing Interest Rates 177
5-17 Fractional Time Periods 180
5-18 Amortized Loans 180
TYING IT ALL TOGETHER 182
intEgratED CasE First national Bank 190
W EB aPPE n D i X 5a
Continuous Compounding and Discounting
W EB aPPE n D i X 5B
Growing Annuities
Part 3 Financial Assets 193
ChaP t E r 6
interest rates 194
The Fed Contemplates an Increase in Interest Rates as the U.S. Economy Shows Signs of a Strong Rebound 194
PUTTING THINGS IN PERSPECTIVE 195
6-1 The Cost of Money 196
6-2 Interest Rate Levels 197
6-3 The Determinants of Market Interest Rates 201
6-3A The Real Risk-Free Rate of Interest, r* 201 Global Perspectives: European Banks Confront the Reality of Negative Interest Rates 202
6-3B The Nominal, or Quoted, Risk-Free Rate of Interest, rRF 5 r* 1 IP 203
6-3C Inflation Premium (IP) 203
6-3D Default Risk Premium (DRP) 204
6-3E Liquidity Premium (LP) 204
6-3F Interest Rate Risk and the Maturity Risk Premium (MRP) 205
An Almost Riskless Treasury Bond 206
6-4 The Term Structure of Interest Rates 208
6-5 What Determines the Shape of the Yield Curve? 210
The Links Between Expected Inflation and Interest Rates: A Closer Look 212
6-6 Using the Yield Curve to Estimate Future Interest Rates 214
6-7 Macroeconomic Factors that Influence Interest Rate Levels 217
6-7A Federal Reserve Policy 217
6-7B Federal Budget Deficits or Surpluses 217
6-7C International Factors 218
6-7D Business Activity 218
6-8 Interest Rates and Business Decisions 219
TYING IT ALL TOGETHER 220
intEgratED CasE morton handley & Company 226
taking a Closer look
Using the New York Times Bond Market Page to Understand Interest Rates 227
ChaP t E r 7
Bonds and their Valuation 228
Sizing Up Risk in the Bond Market 228
PUTTING THINGS IN PERSPECTIVE 229
7-1 Who Issues Bonds? 230
7-2 Key Characteristics of Bonds 231
7-2A Par Value 231
7-2B Coupon Interest Rate 231
7-2C Maturity Date 232
7-2D Call Provisions 232
7-2E Sinking Funds 233
7-2F Other Features 234
7-3 Bond Valuation 234
7-4 Bond Yields 238
7-4A Yield to Maturity 239
7-4B Yield to Call 240
7-5 Changes in Bond Values over Time 242
7-6 Bonds with Semiannual Coupons 245
7-7 Assessing a Bond’s Riskiness 247
7-7A Price Risk 248
7-7B Reinvestment Risk 249
7-7C Comparing Price Risk and Reinvestment Risk 250
7-8 Default Risk 252
7-8A Various Types of Corporate Bonds 252
7-8B Bond Ratings 253
7-8C Bankruptcy and Reorganization 258
7-9 Bond Markets 259
Accrued Interest and the Pricing of Coupon Bonds 260
TYING IT ALL TOGETHER 262
intEgratED CasE Western money management inc. 268 taking a Closer look Using Online Resources to Understand the Impact of Interest Rates on Bond Valuation 269
W EB aPPE n D i X 7a Zero Coupon Bonds
W EB aPPE n D i X 7B Bond Risk and Duration
W EB aPPE n D i X 7C Bankruptcy and Reorganization
ChaP t E r 8 risk and rates of return 270 Managing Risk in Difficult Times 270
PUTTING THINGS IN PERSPECTIVE 271
8-1 The Risk-Return Trade-Off 272
8-2 Stand-Alone Risk 274
8-2A Statistical Measures of Stand-Alone Risk 275
8-2B Measuring Stand-Alone Risk: The Standard Deviation 277
8-2C Using Historical Data to Measure Risk 279
8-2D Other Measures of Stand-Alone Risk: The Coefficient of Variation and the Sharpe Ratio 280
8-2E Risk Aversion and Required Returns 281 The Historical Trade-Off Between Risk and Return 282
8-3 Risk in a Portfolio Context: The CAPM 283
8-3A Expected Portfolio Returns, r ⁄ p 284
8-3B Portfolio Risk 285 Adding More Stocks Doesn’t Always Reduce The Risk of Your Portfolio 289
8-3C Risk in a Portfolio Context: The Beta Coefficient 289 Global Perspectives: The Benefits of Diversifying Overseas 294
8-4 The Relationship between Risk and Rates of Return 295
Estimating The Market Risk Premium 298
8-4A The Impact of Expected Inflation 298
8-4B Changes in Risk Aversion 300
8-4C Changes in a Stock’s Beta Coefficient 302
8-5 Some Concerns about Beta and the CAPM 303
8-6 Some Concluding Thoughts: Implications for Corporate Managers and Investors 303
TYING IT ALL TOGETHER 305
INTEGRATED CASE Merrill Finch Inc. 312
Taking a Closer Look
Using Past Information to Estimate Required Returns 314
W E b App ENDI x 8A Calculating Beta Coefficients
Ch Ap TER 9
Stocks and Their Valuation 316 Searching for the Right Stock 316
PUTTING THINGS IN PERSPECTIVE 317
9-1 Legal Rights and Privileges of Common Stockholders 317
9-1A Control of the Firm 317
9-1B The Preemptive Right 319
9-2 Types of Common Stock 319
9-3 Stock Price versus Intrinsic Value 320 Are “Smart Beta” Funds A Smart Idea? 321
9-3A Why Do Investors and Companies Care about Intrinsic Value? 322
9-4 The Discounted Dividend Model 323
9-4A Expected Dividends as the Basis for Stock Values 325
9-5 Constant Growth Stocks 326
9-5A Illustration of a Constant Growth Stock 327
9-5B Dividends Versus Growth 328
9-5C Which is Better: Current Dividends or Growth? 330
9-5D Required Conditions for the Constant Growth Model 330
9-6 Valuing Nonconstant Growth Stocks 331 Evaluating Stocks That Don’t Pay Dividends 335
9-7 Enterprise-Based Approach to Valuation 335
9-7A The Corporate Valuation Model 336
9-7B Comparing the Corporate Valuation and Discounted Dividend Models 339 Other Approaches to Valuing Common Stocks 340
9-8 Preferred Stock 341
TYING IT ALL TOGETHER 342
INTEGRATED CASE Mutual of Chicago Insurance Company 348
Taking a Closer Look Estimating Exxon Mobil Corporation’s Intrinsic Stock Value 349
A pp ENDI x 9A Stock Market Equilibrium 351
Part 4
Investing in Long-Term Assets: Capital Budgeting 355
Ch Ap TER 10
The Cost of Capital 356 Creating Value at Disney 356
PUTTING THINGS IN PERSPECTIVE 357
10-1 An Overview of the Weighted Average Cost of Capital (WACC) 358
10-2 Basic Definitions 359
10-3 Cost of Debt, rd(12T) 361
10-4 Cost of Preferred Stock, rp 362
10-5 Cost of Retained Earnings, rs 363
10-5A CAPM Approach 364
10-5B Bond-Yield-Plus-Risk-Premium Approach 365
10-5C Dividend-Yield-Plus-Growth-Rate, or Discounted Cash Flow (DCF), Approach 366
10-5D Averaging the Alternative Estimates 367
10-6 Cost of New Common Stock, re 368
10-6A Add Flotation Costs to a Project’s Cost 368
10-6B Increase the Cost of Capital 369
10-6C When Must External Equity Be Used? 370
10-7 Composite, or Weighted Average, Cost of Capital, WACC 371
10-8 Factors that Affect the WACC 371
10-8A Factors the Firm Cannot Control 371
Some Real-World Estimates of the WACC 372
10-8B Factors the Firm Can Control 373
10-9 Adjusting the Cost of Capital for Risk 373
10-10 Some Other Problems with Cost of Capital Estimates 375
TYING IT ALL TOGETHER 376
intEgratED CasE Coleman technologies inc. 382
taking a Closer look
Calculating 3M’s Cost of Capital 383
W EB aPPE n D i X 10a The Cost of New Common Stock and WACC
ChaP t E r 11 the Basics of Capital Budgeting 385
Competition in the Aircraft Industry: Airbus versus Boeing 385
PUTTING THINGS IN PERSPECTIVE 386
11-1 An Overview of Capital Budgeting 386
11-2 Net Present Value (NPV) 388
11-3 Internal Rate of Return (IRR) 392 Why NPV Is Better Than IRR 395
11-4 Multiple Internal Rates of Return 395
11-5 Reinvestment Rate Assumptions 397
11-6 Modified Internal Rate of Return (MIRR) 398
11-7 NPV Profiles 402
11-8 Payback Period 405
11-9 Conclusions on Capital Budgeting Methods 407
11-10 Decision Criteria Used in Practice 408
TYING IT ALL TOGETHER 409
intEgratED CasE allied Components Company 415
ChaP t E r 12
Cash Flow Estimation and risk analysis 417 Home Depot Carefully Evaluates New Investments 417
PUTTING THINGS IN PERSPECTIVE 418
12-1 Conceptual Issues in Cash Flow Estimation 418
12-1A Free Cash Flow Versus Accounting Income 419 12-1B Timing of Cash Flows 420
12-1C Incremental Cash Flows 420
12-1D Replacement Projects 420
12-1E Sunk Costs 420
12-1F Opportunity Costs Associated With Assets the Firm Owns 421
12-1G Externalities 421
12-2 Analysis of an Expansion Project 423
12-2A Effect of Different Depreciation Rates 426
12-2B Cannibalization 426
12-2C Opportunity Costs 426
12-2D Sunk Costs 426
12-2E Other Changes to the Inputs 427
12-3 Replacement Analysis 427
12-4 Risk Analysis in Capital Budgeting 430
12-5 Measuring Stand-Alone Risk 431
12-5A Sensitivity Analysis 431
12-5B Scenario Analysis 433
12-5C Monte Carlo Simulation 435
12-6 Within-Firm and Beta Risk 435
12-7 Unequal Project Lives 436
12-7A Replacement Chains 438
12-7B Equivalent Annual Annuities (EAA) 438
12-7C Conclusions about Unequal Lives 438
TYING IT ALL TOGETHER 439
intEgratED CasE allied Food Products 448
a PPE n D i X 12a Tax Depreciation 451
W EB aPPE n D i X 12B Refunding Operations
W EB aPPE n D i X 12C Using the CAPM to Estimate the Risk-Adjusted Cost of Capital
W EB aPPE n D i X 12D Techniques for Measuring Beta Risk
ChaP t E r 13 real options and o ther topics in Capital Budgeting 453
Anheuser-Busch Used Real Options to Enhance Its Value 453
PUTTING THINGS IN PERSPECTIVE 454
13-1 Introduction to Real Options 454
13-2 Growth (Expansion) Options 455
13-3 Abandonment/Shutdown Options 458
13-4 Investment Timing Options 460
13-5 Flexibility Options 462
13-6 The Optimal Capital Budget 463
13-7 The Post-Audit 466
TYING IT ALL TOGETHER 467
intEgratED CasE 21st Century Education Products 471
Part 5
Capital Structure and Dividend Policy
473
ChaP t E r 14
Capital structure and leverage 474
Debt: Rocket Booster or Anchor? Caterpillar Inc. 474
PUTTING THINGS IN PERSPECTIVE 475
14-1 Book, Market, or “Target” Weights? 475
14-1A Measuring the Capital Structure 476
14-1B Capital Structure Changes Over Time 478
14-2 Business and Financial Risk 478
14-2A Business Risk 479
14-2B Factors That Affect Business Risk 480
14-2C Operating Leverage 481
14-2D Financial Risk 485
14-3 Determining the Optimal Capital Structure 490
14-3A WACC and Capital Structure Changes 490
14-3B The Hamada Equation 490
14-3C The Optimal Capital Structure 494
14-4 Capital Structure Theory 495
Yogi Berra on the MM Proposition 496
14-4A The Effect of Taxes 497
14-4B The Effect of Potential Bankruptcy 498
14-4C Trade-off Theory 498
14-4D Signaling Theory 499
14-4E Using Debt Financing to Constrain Managers 500
14-4F Pecking Order Hypothesis 501
14-4G Windows of Opportunity 502
14-5 Checklist for Capital Structure Decisions 502
14-6 Variations in Capital Structures 505
TYING IT ALL TOGETHER 506
intEgratED CasE Campus Deli inc. 513
taking a Closer look
Exploring the Capital Structures for Four Restaurant Companies 516
W EB aPPE n D i X 14a Degree of Leverage
ChaP t E r 15
Distributions to shareholders: Dividends and share repurchases 517
Apple Shifts Gears and Begins to Unload Part of Its Vast Cash Hoard 517
PUTTING THINGS IN PERSPECTIVE 518
15-1 Dividends versus Capital Gains: What Do Investors Prefer? 519
15-1A Dividend Irrelevance Theory 519
15-1B Reasons Some Investors Prefer Dividends 520
15-1C Reasons Some Investors Prefer Capital Gains 520
15-2
Other Dividend Policy Issues 521
15-2A Information Content, or Signaling, Hypothesis 521
15-2B Clientele Effect 522
15-3 Establishing the Dividend Policy in Practice 523
15-3A Setting the Target Payout Ratio: The Residual Dividend Model 523
15-3B Earnings, Cash Flows, and Dividends 528
Global Perspectives: Dividend Yields around the World 530
15-3C Payment Procedures 532
15-4 Dividend Reinvestment Plans 533
15-5 Summary of Factors Influencing Dividend Policy 535
15-5A Constraints 535
15-5B Investment Opportunities 535
15-5C Alternative Sources of Capital 536
15-5D Effects of Dividend Policy on rs 536
15-6 Stock Dividends and Stock Splits 536
15-6A Stock Splits 537
15-6B Stock Dividends 537
15-6C Effect on Stock Prices 538
15-7
Stock Repurchases 539
15-7A The Effects of Stock Repurchases 539
15-7B Advantages of Repurchases 541
15-7C Disadvantages of Repurchases 541
15-7D Conclusions on Stock Repurchases 542
TYING IT ALL TOGETHER 543
intEgratED CasE southeastern steel Company 548
taking a Closer look Apple’s Dividend Policy 549
W EB aPPE n D i X 15a The Residual Dividend Model: An Example
Part 6
Working Capital Management and Financial Forecasting 551
ChaP t E r 16
Working Capital management 552 Successful Firms Efficiently Manage Their Working Capital 552
PUTTING THINGS IN PERSPECTIVE 553
16-1 Background on Working Capital 553
16-2 Current Assets Investment Policies 554
16-3 Current Assets Financing Policies 556
16-3A Maturity Matching, or “SelfLiquidating,” Approach 556
16-3B Aggressive Approach 556
16-3C Conservative Approach 558
16-3D Choosing Between the Approaches 558
16-4 The Cash Conversion Cycle 559
16-4A Calculating the Targeted CCC 559
16-4B Calculating the CCC from Financial Statements 560
Some Real-World Examples of the Cash Conversion Cycle 561
16-5 The Cash Budget 563
16-6 Cash and Marketable Securities 567
16-6A Currency 567
16-6B Demand Deposits 567
16-6C Marketable Securities 569
16-7 Inventories 570
16-8 Accounts Receivable 571
16-8A Credit Policy 571
16-8B Setting and Implementing the Credit Policy 572
16-8C Monitoring Accounts Receivable 573
16-9 Accounts Payable (Trade Credit) 574 A Difficult Balancing Act 576
16-10 Bank Loans 577
16-10A Promissory Note 577
16-10B Line of Credit 578
16-10C Revolving Credit Agreement 579
16-10D Costs of Bank Loans 579
16-11 Commercial Paper 581
16-12 Accruals (Accrued Liabilities) 582
16-13 Use of Security in Short-Term Financing 582
TYING IT ALL TOGETHER 583
intEgratED CasE ski Equipment inc. 589
W EB aPPE n D i X 16a Inventory Management
W EB aPPE n D i X 16B Short-Term Loans and Bank Financing
ChaP t E r 17
Financial Planning and Forecasting 592
Effective Forecasting is an Important Component of Strong Performance 592
PUTTING THINGS IN PERSPECTIVE 593
17-1 Strategic Planning 593
17-2 The Sales Forecast 595
17-3 The AFN Equation 597
17-3A Excess Capacity Adjustments 599
17-4 Forecasted Financial Statements 602
17-4A Part I. Inputs 604
17-4B Part II. Forecasted Income Statement 604
17-4C Part III. Forecasted Balance Sheet 605
17-4D Part IV. Ratios and EPS 605
17-4E Using the Forecast to Improve Operations 606
17-5 Using Regression to Improve Forecasts 606
17-6 Analyzing the Effects of Changing Ratios 608
17-6A Modifying Accounts Receivable 608
17-6B Modifying Inventories 608
17-6C Other “Special Studies” 608
TYING IT ALL TOGETHER 609
intEgratED C asE new World Chemicals i nc. 615
taking a Closer look Forecasting the Future Performance of Abercrombie & Fitch 617
W EB aPPE n D i X 17a Forecasting Financial Requirements When Financial Ratios Change
Part 7
Special Topics in Financial Management 619
ChaP t E r 18
Derivatives and risk management 620 Using Derivatives to Manage Risk 620
PUTTING THINGS IN PERSPECTIVE 621
18-1 Reasons to Manage Risk 622
CFOs Assess the Costs and Benefits of Risk Management 624
18-2 Background on Derivatives 625
18-3 Options 627
18-3A Option Types and Markets 627
18-3B Factors that Affect the Value of a Call Option 629
18-3C Exercise Value Versus Option Price 629
18-4 Introduction to Option Pricing Models 632 Expensing Executive Stock Options 635
18-5 The Black–Scholes Option Pricing Model (OPM) 635
18-5A OPM Assumptions and Equations 635
18-5B OPM Illustration 637 Using the Vix as a Measure of Investors’ Fears 638
18-6 Forward and Futures Contracts 640
18-7 Other Types of Derivatives 644
18-7A SWAPS 644
Credit Instruments Create New Opportunities and Risks 645
18-7B Structured Notes 645
18-7C Inverse Floaters 647
18-8 Using Derivatives to Reduce Risks 647
18-8A Security Price Exposure 647
18-8B Futures 648
18-8C SWAPS 649
18-8D Commodity Price Exposure 650
18-8E The Use and Misuse of Derivatives 650
18-9 Risk Management 651
18-9A An Approach to Risk Management 652
PWC’s Guide for Assessing and Managing Risk 653
TYING IT ALL TOGETHER 655
intEgratED CasE tropical sweets inc. 659
taking a Closer look NETFLIX, Inc.: Call and Put Option Pricing and Interest Rate Futures 660
a PPE n D i X 18a Valuation of Put Options 662
ChaP t E r 19
multinational Financial management 664
U.S. Firms Look Overseas to Enhance Shareholder Value 664
PUTTING THINGS IN PERSPECTIVE 665
19-1 Multinational, or Global, Corporations 665
Corporate Inversions Have Attracted Increased Criticism 669
19-2 Multinational versus Domestic Financial Management 669
19-3 The International Monetary System 671
19-3A International Monetary Terminology 671
19-3B Current Monetary Arrangements 672
Brexit Shakes Europe 673
19-4 Foreign Exchange Rate Quotations 674
19-4A Cross Rates 674
19-4B Interbank Foreign Currency Quotations 675
19-5 Trading in Foreign Exchange 676
19-5A Spot Rates and Forward Rates 677
19-6 Interest Rate Parity 678
19-7 Purchasing Power Parity 680 Hungry for a Big Mac? Go to Hong Kong! 682
19-8 Inflation, Interest Rates, and Exchange Rates 684
19-9 International Money and Capital Markets 685
19-9A International Credit Markets 685
19-9B International Stock Markets 686
Stock Market Indexes around the World 687
19-10 Investing Overseas 688
Global Perspectives: Measuring Country Risk 688
Global Perspectives: Investing in International Stocks 689
19-11 International Capital Budgeting 691
19-12 International Capital Structures 692
TYING IT ALL TOGETHER 694
intEgratED CasE Citrus Products inc. 698
taking a Closer look
Using the Internet to Follow Exchange Rates and International Indexes 699
ChaP t E r 20
hybrid Financing: Preferred stock, leasing, Warrants, and Convertibles 700
Tesla’s Investors Love the Convertible 700
PUTTING THINGS IN PERSPECTIVE 701
20-1
Preferred Stock 701
20-1A Basic Features 701
Preferred Stock: Does It Make Sense for Individual Investors? 702
20-1B Adjustable-Rate Preferred Stock 704
20-1C Advantages and Disadvantages of Preferred Stock 704
20-2 Leasing 705
20-2A Types of Leases 705
Changes to the Financial Reporting of Leases Coming Soon 706
20-2B Financial Statement Effects 707
20-2C Evaluation by the Lessee 709
20-2D Other Factors that Affect Leasing Decisions 712
20-3 Warrants 713
20-3A Initial Market Price of a Bond with Warrants 713
20-3B Use of Warrants in Financing 714
20-3C The Component Cost of Bonds with Warrants 715
20-3D Problems with Warrant Issues 716
20-4 Convertibles 717
20-4A Conversion Ratio and Conversion Price 717
20-4B The Component Cost of Convertibles 718
20-4C Use of Convertibles in Financing 721
20-4D Convertibles Can Reduce Agency Costs 722
20-5 A Final Comparison of Warrants and Convertibles 723
20-6 Reporting Earnings When Warrants or Convertibles Are Outstanding 724
TYING IT ALL TOGETHER 724
intEgratED CasE Fish & Chips inc., Part i 730
Fish & Chips inc., Part ii 731
taking a Closer look
Using the Internet to Follow Hybrid Securities 732
ChaP t E r 21 mergers and acquisitions 734
Amazon Announces Plans to Acquire Whole Foods 734
PUTTING THINGS IN PERSPECTIVE 735
21-1 Rationale for Mergers 736
21-1A Synergy 736
21-1B Tax Considerations 736
21-1C Purchase of Assets Below Their Replacement Cost 737
21-1D Diversification 737
21-1E Managers’ Personal Incentives 737
21-1F Breakup Value 738
21-2 Types of Mergers 738
21-3 Level of Merger Activity 738
21-4 Hostile Versus Friendly Takeovers 740
21-5 Merger Analysis 741
21-5A Valuing the Target Firm 741
21-5B Setting the Bid Price 745 More than just Financial Statements 747
21-5C Post-Merger Control 747
21-6 The Role of Investment Bankers 748
21-6A Arranging Mergers 748
21-6B Developing Defensive Tactics 749
21-6C Establishing a Fair Value 750
21-6D Financing Mergers 750
21-6E Arbitrage Operations 751
21-7 Do Mergers Create Value? The Empirical Evidence 751
The Track Record of Large Mergers 752
21-8 Corporate Alliances 753
21-9 Private Equity Investments 754
21-10 Divestitures 754
21-10A Types of Divestitures 754
21-10B Divestiture Illustrations 755
TYING IT ALL TOGETHER 757
intEgratED CasE smitty’s home repair Company 760
taking a Closer look Using Dealbook to Follow Recent Merger and Acquisition Announcements 761
W EB aPPE n D i X 21a Merger Regulation
W EB aPPE n D i X 21B Holding Companies
Appendixes
APPENDIX A Solutions to Self-Test Questions and Problems A-1
APPENDIX B Answers to Selected End-of-Chapter Problems B-1
APPENDIX C Selected Equations and Tables C-1
Index I-1
Another random document with no related content on Scribd:
weight; 1880-1884, at 40 per cent.; before 1880, at 20 per cent."
By this mode of reckoning, the table of battleships is converted to the following exhibit of estimated "naval strength":
Count adjusted fighting weight
Great Britain. 70 604,141
France. 35 220,635
Russia. 24 221,988
Germany. 25 152,929
Italy. 19 112,899
United States. 16 176,708
Japan. 7 88,088
This method of depreciating the tonnage on the basis of the age of a ship causes the respective proportions of Great Britain, France and Italy, in battle-ships, to become smaller, while the respective proportions of Russia, Germany, United States and Japan become larger. The United States lose but 4 per cent. of the nominal value of their battle-ships; Japan, 5 per cent.; Russia, 16; Germany, 20; Great Britain, 26; France, 35; Italy, 42.
Applying the same arithmetic to the returns of armored and protected cruisers, the writer shows that Japan suffers a loss of 10 per cent. of their nominal fighting weight, France 14, United States 14, Italy 18, Great Britain 21, Russia 23, Germany 24.
Reducing in like manner all the remaining returns, he arrives at the following summary of "the seven navies arranged in the order of their strength" taking the navy of Japan as the unit:
Degree of strength.
Great Britain, 6.38
France, 2.57
Russia, 1.88
United States, 1.65
Germany, 1.34
Italy, 1.03
Japan, 1.00.
Stated in "tons of fighting weight," his comparison stands:
Great Britain, 1,347,000
France, 543,000
Russia, 397,000
United States, 349,000
Germany, 282,000
Italy, 218,000
Japan, 211,000.
Turning next to the consideration of armaments, the writer has compiled the following table, which shows "for each class of gun separately, and for all classes of guns combined, the number of these guns that are possessed by the seven naval powers":
POWER Breech Quick Muzzle
Torpedo All Classes
Loading Firing Loading
Tubes of Guns
Guns Guns Guns
Great Britain. 912 7,454 340 1,534 10,240
France. 471 3,653 -
928 5,052
Russia. 393 2,589625 3,607
Germany. 258 1,995611 2,864
Italy. 140 1,791 4 573 2,508
United States. 303 1,791230 2,324
Japan. 110 1,168314 1,592 ----------
All the Powers combined. 2,587 20,441 344 4,815 28,187
In this comparison the United States drops from the fourth rank to the sixth. For a comparison of the naval expenditure of the Powers,
See (in this volume) WAR BUDGETS.
NEBUCHADREZZAR, Exploration of the ruins of the palace of.
See (in this volume) ARCHÆOLOGICAL RESEARCH: BABYLONIA; GERMAN EXPLORATION.
NEELY EXTRADITION CASE, The.
See (in this volume) CUBA: A. D. 1900-1901. {319}
NEGRITOS.
See (in this volume)
PHILIPPINE ISLANDS: THE NATIVE INHABITANTS.
NEGRO, Disfranchisement of the.
See (in this volume)
MARYLAND, MISSISSIPPI, NORTH CAROLINA: A. D. 1900; SOUTH CAROLINA: A. D. 1896; LOUISIANA: A. D. 1898; and UNITED STATES OF AMERICA: A. D. 1901 (JANUARY).
NEGROS, The island of: American occupation.
See (in this volume)
PHILIPPINE ISLANDS: A. D. 1899 (JANUARY-NOVEMBER).
Acceptance of American sovereignty. Establishment of provisional government.
See (in this volume)
PHILIPPINE ISLANDS: A. D. 1899 (MARCH-JULY).
NEMI, Lake: Sunken Roman vessels found in.
See (in this volume)
ARCHÆOLOGICAL RESEARCH: ITALY.
NETHERLANDS, The Kingdom of the (Holland): A. D. 1894. War in Lombok.
See (in this volume)
DUTCH EAST INDIES: A. D. 1894.
-------NETHERLANDS, The Kingdom of the (Holland): Start------
NETHERLANDS, The Kingdom of the (Holland): A. D. 1896. Electoral Reform Act.
A notable extension of the franchise was accomplished by an Act passed this year by the States General, to have effect in the elections of 1897. It made voters of all Dutch citizens not under 25 years of age who present "certain outward and positive signs of capacity and well-being. The chief sign is the fact of payment of one or more direct State taxes (for the land tax an amount of 1 florin is sufficient). Besides these, the Reform Act admits as electors all those who can prove that they are householders, and have paid rent of houses or lodgings during a fixed term, or that they are owners or tenants of boats of not less than 24 tons capacity, or that they have been during a fixed term in employment with an annual wage or salary of at least £22 18s. 4d., or possess a certificate of State interest of at least 100 florins, or a State savings bank deposit of at least 50 florins, or the legal qualifications for any profession or employment."
Statesman's Year-Book, 1899, page 807.
NETHERLANDS, The Kingdom of the (Holland): A. D. 1897. First election under the new Franchise Law.
The first election in Holland under the new franchise law, held June 15-25, 1897, returned to the Chamber 47 Liberals, 22 Catholics, 22 Protestant anti-Revolutionists, 4 Radicals, and one deputy who is styled an Historic Christian.
NETHERLANDS, The Kingdom of the (Holland):A. D. 1898. Enthronement of Queen Wilhelmina.
Queen Wilhelmina, who succeeded to the crown on the death of
her father, William III., in 1890, reached the age of 18 on the 31st of August, 1898, and received the reins of government from her mother, Queen Emma, who had acted as Regent until that time. The young Queen was enthroned September 6 in the New Church at Amsterdam, where she delivered, with a simplicity and fervor which impressed those present, her address to the States-General and took her oath of allegiance to the Constitution. "I am happy and thankful," the Queen said, "to rule over the people of the Netherlands, who, although small in numbers, are great in virtue and strong by nature and character. I esteem it a great privilege that it is my life's task and duty to dedicate all my powers to the prosperity and interests of my dear fatherland; and I adopt the words of my beloved father, 'Yes, Orange can never do enough for the Netherlands.'" After the Queen and the Queen-Mother, the most striking figures at the ceremony were the Princes from the Dutch Indies.
NETHERLANDS, The Kingdom of the (Holland): A. D. 1898 (June). The Sugar Conference at Brussels.
See (in this volume) SUGAR BOUNTIES.
NETHERLANDS, The Kingdom of the (Holland): A. D. 1899 (April). Invitation to the Peace Conference to be held at The Hague.
See (in this volume) PEACE CONFERENCE.
NETHERLANDS, The Kingdom of the (Holland): A. D. 1899 (May-July). Representation in the Peace Conference at The Hague.
See,(in this volume) PEACE CONFERENCE.
NETHERLANDS, The Kingdom of the (Holland): A. D. 1899 (May-
August).
Advice to President Kruger of the South African Republic.
See (in this volume)
SOUTH AFRICA (THE TRANSVAAL): A. D. 1899 (MAY-AuGUST).
NETHERLANDS, The Kingdom of the (Holland):A. D. 1901. Marriage of Queen Wilhelmina.
Queen Wilhelmina was married, on the 7th of February, to Duke Henry of Mecklenburg-Schwerin, who received the title of Prince of the Netherlands by proclamation on the same day. Both civil and religious ceremonies of marriage were performed.
--------NETHERLANDS, The Kingdom of the (Holland): End------
NEW BRUNSWICK.
See (in this volume) CANADA.
NEWEL, Stanford:
American Commissioner to the Peace Conference at The Hague.
See (in this volume) PEACE CONFERENCE.
NEWFOUNDLAND: A. D. 1895. Union with Canada refused.
Terms proposed for the union of Newfoundland with the Dominion of Canada were rejected, and negotiations abandoned.
NEWFOUNDLAND: A. D. 1897. Conference of colonial premiers with the British Colonial Secretary.
See (in this volume)
ENGLAND: A. D. 1897 (JUNE-JULY).
NEWFOUNDLAND: A. D. 1897-1900.
The Reid contract.
The question in politics.
In the fall of 1897 a line of narrow-gauge railway, with branches over six hundred miles in total length, was completed and opened to traffic. The main line of rail extends from the capital, St. Johns, to Port aux Basques, at the southwestern extremity of the island, and is expected to produce an important development of resources from the forests and mines, as well as from agricultural lands. The railway was constructed by a contractor, Mr. Reid, who agreed to operate it for seven years at his own expense, receiving therefor a land grant of 5000 acres per mile. In 1898 a new contract was made with Mr. Reid, which placed most of the resources of the island under his control. For an additional land-grant of 2500 acres per mile of road he undertook to operate the road for fifty years. By a present cash payment of $1,000,000 to the colony treasury, he purchased the reversion of its right to the possession of the road at the end of that period. At the same time he secured the right to purchase from the government its telegraph lines and the dry-dock at St. Johns, for half a million of dollars, and was given a monopoly for 30 years of the coast mail steam service, with an annual subsidy of $150,000, he undertaking to maintain in it eight steamers, well equipped. This remarkable contract was bitterly denounced by a large party in the island, and the Imperial government was strongly petitioned to nullify the whole transaction: but the British Colonial Secretary, Mr. Chamberlain, while he characterized the contract as representing "the most unparalleled abrogation of its functions by a responsible government," decided that he could not properly interfere. {320}
The "Reid Deal," as it was known, then became a burning issue in Newfoundland politics, and the Ministry responsible for it, led by Sir James Winter, was ousted from the government in February, 1900. Mr. Reid was then arranging to transfer his Newfoundland contract and franchises to a company, which required the sanction of the colonial government. The new (Liberal) Ministry, of which Mr. Robert Bond was Premier, refused consent to the transfer unless Mr. Reid would amend his bargain with the colony in several very important particulars. He offered some concessions, but not to the extent demanded; and so the question between him and the Bond Ministry went into the canvass of 1900, for the election of a new Assembly, and the Conservatives, heavily backed by Mr. Reid, were defeated overwhelmingly, winning but 4 seats out of 36 in the Lower House of the Legislature. On this result of the elections the "London Times" of November 26, 1900, comments as follows: "The course which the victorious Bond Ministry will now take must be awaited with interest. … A policy of compromise would certainly appear to be the wisest and the safest for all parties. Mr. Reid, it seems to be acknowledged, has carried out his part of the bargain of 1898 fully and even generously, and the colony, it is stated, has profited largely in consequence. In the absence of actual fraud or corruption it would be difficult in these circumstances to justify the rescission or even the material modification of the agreement, on the faith of which he has spent his money, without his assent. A repeal of the Act of 1898 against his will would savour of repudiation. It would assuredly damage the credit of the colony very seriously."
NEWFOUNDLAND: A. D. 1899-1901.
The French Shore Question. The Modus Vivendi.
"At the period of the negotiation of the Treaty of Utrecht, in 1713, by which the rights of the French fishermen were regulated [see, in volume 4, NEWFOUNDLAND: A. D. 1713], thousands of
French fishing vessels availed themselves of the inshore fisheries about the island; and that they might be not altogether without facilities for the drying and curing of their fish, they were granted under the Treaty the 'right to use a strip of the coast seven hundred miles long and half a mile wide.' Accompanying the Treaty, but, be it noted, not a part of it, was a declaration of King George, that British subjects on the island were not to interfere with these French coast rights by erecting permanent structures upon it, calculated to obstruct the operations of the French fishermen. This Royal declaration was harmless and unimportant when the population of the island was very small, and the French fishermen resorted to the inshore fisheries of Newfoundland. But to-day, a different condition exists. The French fishermen no longer use the inshore fisheries of the island, but prosecute, instead, their fishing operations on the Grand Banks, several hundred miles distant, drying their product either at the French islands of St. Pierre and Miquelon, which are more adjacent to the Banks, or transporting the fish direct to France. … The need for which the French shore right was granted has practically ceased to exist; and inasmuch as the prohibition to the people of the island from erecting permanent structures on the island was merely a mandate emanating from the King, and not an integral part of the Treaty itself; and because the reason for the observance of the mandate has thus ceased to exist, it is imperative that, in the interests of the prosperity of the island, this Royal concession should be revoked. … But what, it may be asked, on a perusal of the whole case, has caused the Newfoundland question to suddenly become paramount? Why is its urgency greater in 1899 than it was in 1889? Is there not some concentrated force, some propelling power, at work behind the scenes? There is and that power is a millionaire. The name of this millionaire is Robert Gillespie Reid, who, having voluntarily assumed, by means of the measure known as the Reid contract, the responsibility of developing the island's resources, finds himself, at the outset, confronted by a
situation which precludes all present enterprise. This gentleman has acquired, in fee simple, some three or four million acres of land in Newfoundland; and where the islanders were content to wait patiently for justice, he, as a business-man, eager to exploit his mines and timber, can hardly be expected to pin his faith to assurances so frail, and of fulfilment so remote."
B. Wilson, Newfoundland's Opportunity (Fortnightly Review, February, 1899).
A royal commission which lately investigated the situation of affairs on the Treaty Coast of Newfoundland found that the coast "is 800 miles in extent, with a permanent population of 13,300, all but 76 of whom are native-born, while the total of French frequenting the territory during the fishing season does not exceed 600 men. The French, last year, according to the official reports furnished to the Admiralty, occupied only eight cod and nine lobster stations, with a personnel as above, while their catch of cod was but 18,000 qtls., worth about 36,000 dollars, and their pack of lobsters about 7,000 cases, of about equal value. And is it not monstrous that, in order to satisfy vexatious French claims and perpetuate obsolete treaty claims, the people of the Treaty Coast should he coerced and victimised, and the development of the whole colony retarded, as has been the case? The Commissioners found that, despite the liberal bounties given by France for fishing on the Treaty Coast, the allowance of 50 francs per head by the St. Pierre municipality for the same purpose, and the special appropriation the past two seasons in the French colonial grant 'for extending operations on the Newfoundland coast, 4,000 francs,' the number of men frequenting there and the number of stations operated are steadily declining every year, and in ten years' time it is doubtful if there would be a Frenchman on the coast. Still, so powerful is the French fetish that the shore is tabooed as far as industrial
development is concerned, and the hinterland likewise. No grant of land can be given there except with the stipulation that it is subject to French rights. No permanent building can be erected within half a mile of high-water mark, because the French claim the strand for drying their fish. No wharves can be built by which to load minerals, because they will interfere with the French fishery. (Only last year they stopped the erection of one which was twenty-two miles from their nearest station, and Mr. Reid, the railway contractor, when he wanted to build a wharf at Bay St. George to land construction materials, had to seize the opportunity of the French warship in the Bay leaving to coal and renew stores, and put an army of men to work, who built it in seventeen days, so that it was completed when the Frenchmen returned.)
{321}
No mineral developments are permitted because they may hamper the French. Competition on near-by fishing grounds is prohibited for the same reason. Illicit (?) lobster packers are hunted like malefactors for disregarding a 'modus vivendi' as unjust as it is ridiculous. Bait-selling is only possible by permission of the French and on their terms. The railway was deflected 120 miles out of its proper course because of French objection to a terminus on the shore. In fact, fishing is only pursued with the greatest difficulty, while the land is closed to agricultural settlement and mining enterprise. And that, too, in the face of the fact that the French 'army of occupation' consists of about one vessel, one station, and about sixty fishermen on every 100 miles of coast, whose annual catch is worth about 10,000 dollars."
P. T. McGrath, France in Newfoundland (Nineteenth Century, January, 1899).
In 1890, a temporary agreement ("modus vivendi") concerning the lobster packing and other questions, was arranged between the British and French governments, which has been extended from time to time, very much to the dissatisfaction of the
Province. The last extension expired at the end of the year 1900, and the Newfoundlanders showed a strong disposition to resist any renewal of it. A letter from St. Johns, in December, 1900, stated the feeling of the colony as follows: "Last year the term of the 'modus vivendi' was allowed to run out, and a deadlock, such as now seems inevitable, would doubtless have been created; but when the end of December came the reverses in South Africa appealed to our patriotism as the oldest British colony, and the Legislature unanimously passed at one sitting a Bill renewing the arrangement for another year. The colony was unable to afford any more substantial aid at the time, as her naval reserve had not then been inaugurated, but this course on her part testified to her sympathy with the Imperial mother, and her readiness to relieve her from other difficulties. This year Newfoundland is taking the bit between her teeth, and the result must be a complication which, however unwelcome to the Imperial Cabinet, cannot but have been regarded as inevitable sooner or later. If our case is as strong as we are led to believe that the Royal Commission represents it to be, there is certainly good ground for our insisting upon remedial measures. It must not be forgotten that the French now keep up less than 15 cod and lobster stations altogether on the treaty coast, and that about 550 men is the number they had there last season. As against this the resident population is nearly 14,000, and the objections which they urged against the 'modus vivendi' in its early days apply with equal strength now. These people are shamefully treated, the colony as a whole is humiliated, and the recognition of such conditions by England without making an attempt to get rid of them is a cause of reproach which she should remove without delay."
Much newspaper discussion of the subject has been going on in both England and France, with an apparent showing of readiness on the part of the latter country to bargain with the British for cessions in West Africa or elsewhere. How much of a price Great Britain is willing to pay for release from the treaty of
Utrecht is a question the answer to which cannot be forever postponed.
Despite its reluctance, the Newfoundland Legislature was prevailed upon, in February, 1901, to pass an Act renewing the "modus vivendi" for another year. Several members who supported the measure declared that they did so for the last time, and only because of an unwillingness to embarrass the British government during the continuance of the South African war.
NEWFOUNDLAND: A. D. 1901.
Change of Government.
Early in the year, Sir Henry McCallum was transferred from the governorship of Newfoundland to that of Natal, and Sir Cavendish Boyle was appointed to succeed him.
NEW JERSEY: A. D. 1897. Constitutional Amendments.
On the 28th of September, several proposals of constitutional amendment were voted on in New Jersey. One prohibitory of gambling was adopted by a small majority. Another, that would give the suffrage in school elections to women, was rejected by about 10,000 majority.
NEW SOUTH WALES.
See (in this volume) AUSTRALIA; and CONSTITUTION OF AUSTRALIA.
NEW YORK CITY: A. D. 1894-1895. The Lexow Investigation of Tammany government. Election of Mayor Strong.
"On the second Sunday in February 1892 the minister of a
wealthy Presbyterian church, Dr. Charles Parkhurst, startled his congregation by preaching an outspoken political sermon, in which he attacked the Tammany administration in most unmeasured language. 'The mayor and those associated with him are polluted harpies [he declared]. Under the pretence of governing this city they are feeding day and night on its quivering vitals. They are a lying, perjured, rum-soaked, and libidinous lot. … Every effort to make men respectable, honest, temperate, and sexually clean is a direct blow between the eyes of the mayor and his whole gang of lecherous subordinates, in the sense that while we fight iniquity they shield and patronise it; while we try to convert criminals they manufacture them, and they have a hundred dollars invested in the manufacturing business to every one invested in converting machinery. … Police and criminals all stand in with each other. It is simply one solid gang of criminals, one half in office and the other half out.' This sermon was the starting point of the new anti-Tammany movement. Dr. Parkhurst was called before the grand jury to prove his words, but he was obliged to admit that all he knew was the repeated accusations that appeared in almost every local newspaper. Thereupon the grand jury publicly rebuked him, and sent a formal presentment to the Recorder declaring their 'disapproval and condemnation' of the sermon. Everyone at once concluded that no more would be heard of Parkhurst in politics, but they did not know the man. The clergyman called a couple of detectives to his aid, and personally visited the lowest resorts, to obtain the necessary evidences of corruption. A month later he preached a second political sermon, and this time he took into the pulpit with him a bundle of affidavits. He repeated and emphasised his former accusations, and again he was summoned before the grand jury. This time the result was different. 'The police are either incompetent or corrupt,' the jury declared, and citizens generally agreed. …
{322}
"In 1894, the State Senate … appointed a committee, this time under Senator Lexow, to inquire into New York municipal affairs. Soon after the committee was appointed Mr. Croker found it convenient to hastily resign the leadership of Tammany and go to Europe. The worst accusations of the bitterest enemies of Crokerism were almost all more than substantiated by the evidence given before the committee. It was found that the police were utterly corrupt, that they extorted blackmail from gambling house keepers, women of ill fame, saloon keepers, and others, and in return gave them their protection. Even thieves, in some instances, were found to be regularly paying their police dues in return for immunity from arrest. One police justice had to admit that he received a hundred dollars from a keeper of a disorderly house. Everywhere that the Lexow Committee probed, or that other competent critics examined, the same thing was found. For several years New York had been living under a system of universal blackmail. Saloon keepers had to pay Tammany to be allowed to evade the Sunday closing law, merchants to be granted the simplest conveniences for getting their goods into their premises. But in the case of Mr. Croker no dishonesty could be proved. It was known that he had in a few years risen from a poor man to a millionaire, but in no instance could it be shown that he had acquired this wealth by corruption. His friends said he had made his money by horse-racing and real estate speculation, but unfortunately Mr. Croker did not go before the witness stand to finally clear up the matter. While the committee was sitting he remained in Europe.
"The usual storm of indignation followed the 'Lexow' exposure, and most reputable citizens united once more to overthrow Tammany. Colonel Strong, a well-known banker, was chosen reform candidate for mayor, and secured a majority of fifty thousand. In 1895 he began his administration, and initiated a vigorous reform movement. The police force was entirely reorganised; municipal offices were given for merit rather
than political reward; the streets, for the first time in the memory of the oldest inhabitant, were really kept clean, and the whole local government was taken out of politics. Mayor Strong's time of office has not been without its faults, but among those faults dishonesty has not been one. Rather the mistake has been to enforce all laws too rigidly, and make too few allowances for the weaknesses of human nature in a cosmopolitan resort. Police President Roosevelt's strict enforcement of the Sunday closing and social purity laws was only his duty, but yet it cost the reformers many votes. Although the report of the 'Lexow' Committee did Tammany much temporary harm, it recovered quickly. After the mayoral defeat of 1894 it pulled its forces together again, and rallied around it all the ambitions men who were disappointed in Mayor Strong's bestowal of his patronage. In the autumn of 1895 it was able to score a minor victory at the polls, and it carefully nursed its strength for the election of November 1897. Mr. Croker, notwithstanding his repeated declarations that he was 'out of politics,' came back to New York, and at once took over command of his party."
F. A. McKenzie, Tammany (Nineteenth Century, December, 1897).
NEW YORK CITY: A. D. 1895.
Consolidation of the Astor, Lenox and Tilden foundations to form the New York Public Library.
See (in this volume) LIBRARY, NEW YORK PUBLIC.
NEW YORK CITY: A. D. 1896-1897.
Consolidation of New York, Brooklyn, and neighboring towns, in the Greater New York.
"The project of uniting the cities of New York, Brooklyn, and
the cities, towns and villages contiguous to the same, into one great municipality, although long mooted before 1890, first took definite form in that year, by the passage on May 8th, by the Legislature, of Laws 1890, Chapter 11, entitled 'An Act to create a commission to inquire into the expediency of consolidating the various municipalities in the State of New York, occupying the several islands in the harbor of New York.' …
Pursuant to the provisions of this act, a commission consisting of the following members was appointed, viz.: Andrew H. Green, Frederick W. Devoe, John L. Hamilton, J. Seaver Page of New York; J. S. T. Stranahan, Edward F. Linton, William D. Veeder of Brooklyn; John H. Brinkerhoff of Queen's county; George G. Greenfield of Richmond county; Charles P. McClelland of Westchester county; and Campbell W. Adams, State Engineer and Surveyor, ex officio, and Albert E. Henschel acting as secretary. In 1893, the commission presented to the Legislature a bill providing for the submission of the question of consolidation to a vote of the residents of the various municipalities proposed to be united into one city.
The following year the Legislature provided for the referendum suggested by the commission. … The following vote was cast upon the question of consolidation in the ensuing election on November 6, 1894: for consolidation; against; New York, 96,938; 59,959; Kings, 64,744; 64,467; Queens, 7,712; 4,741; Richmond, 5,531; 1,505; Mount Vernon, 873; 1,603; Eastchester, 374; 260; Westchester, 620; 621; Pelham, 261; 153.
At the opening of the Legislature in 1895, the Commission of Municipal Consolidation Inquiry presented a report with a proposed bill declaring the entire district before mentioned (with the exception of the city of Mount Vernon) consolidated with the city of New York. The bill, however, failed of passage because of the addition of an amendment of referendum in the last hours of the session of 1895, too late for further action. The Legislature, as a result no doubt of this vote on consolidation, did annex to New York city the towns of Westchester, Eastchester, Pelham and other parts of Westchester county.
"Early in January, 1896, the Legislature appointed a joint sub-committee of the Cities Committees of both Houses to inquire into the subject of the proposed consolidation and report March 1, 1806. The committee made a report and submitted a bill favoring consolidation. The bill as reported was passed by the Legislature and was submitted to the Mayors of the cities of New York and Brooklyn, and to the Mayor and Common Council of Long Island City pursuant to the provisions of the Constitution.
{323}
The bill was returned to the Legislature without the acceptance of the cities of New York and Brooklyn. The Legislature repassed the bill over the vetoes of the Mayors of New York and Brooklyn, and it became a law May 11, 1896, with the approval of the Governor. This act (L. 1896, ch. 488) is entitled, 'An Act consolidating the local governments of the territory within the city and county of New York, the counties of Kings and Richmond and Long Island City and the towns of Newtown, Flushing and Jamaica and part of the town of Hempstead, in the county of Queens, and providing for the preparation of bills for enactment into laws for the government thereof.' … Pursuant to the act of consolidation, the Governor (Levi P. Morton) appointed on June 9, 1896, the following members of the commission to draft the proposed charter, viz.: Seth Low, Benjamin F. Tracy, John F. Dillon,
Ashbel P. Fitch, Stewart L. Woodford, Silas B. Dutcher, William. C. De Witt, George M. Pinney, Jr., Harrison S. Moore. Mr. Fitch having resigned from the commission, the Governor appointed Thomas F. Gilroy in his place. By virtue of the act, the following gentlemen were members of the commission: Andrew H. Green, president of the commission appointed by L. 1890, ch. 311; Campbell W. Adams, State Engineer; Theodore E. Hancock, Attorney-General; William L. Strong, Mayor of New York; Frederick W. Wurster, Mayor of Brooklyn; and Patrick Jerome Gleason, Mayor of Long Island City. The commission organized on June 25, 1896, appointed Benjamin F. Tracy as president and George M. Pinney, Jr., as secretary, and named William C. De Witt, John F. Dillon, Thomas F. Gilroy, Seth Low, Andrew H. Green, Benjamin F. Tracy, and George M. Pinney, Jr., as a committee on draft of proposed charter."
M. Ash,
The Greater New York Charter, introduction.
The committee submitted a draft charter to the commission on the 24th of December, with a report in which a fundamental feature of its plan is thus set forth: "It is clear that the work of administering all of the Departments over so large a space of territory, situated on three islands and partly on the main land, must be subdivided in order to be successfully done. The draft, therefore, proposes to divide the city into the five Boroughs which nature and history have already formed; that is to say:
(1.) Manhattan, which consists of the island of Manhattan and the outlying islands naturally related to it.
(2.) The Bronx; that is to say, all that part of the present City of New York lying north of the Harlem, a territory which comprises two-thirds of the area of the present City of New York.
