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Answers to Chapter 8
Questions:
1. This is because stock market movements are sometimes seen as predictors of economic activity in a countryand
performance. This is also because corporate stocks may be the most widely held of all financial securities. Most
individuals own stocks securities either directly through stock purchases or indirectly through pension fund and
mutual fund investments, and thus their economic wealth fluctuates closely with the stock market.
2. While common stockholders can potentially receive unlimited dividend payments if the firm is highly profitable,
they have no special or guaranteed dividend rights. The payment and size of dividends is are determined by the
board of directors of the issuing firm. Unlike interest payments on debt, a corporation does not default if it misses a
dividend payment to common stockholders. Thus, common stockholders have no legal recourse if dividends are not
received, even if a company is highly profitable and chooses to use these profits to reinvest in new projects and firm
growth. In fact, many firms pay no dividends, but instead reinvest all of their net earnings in the firm. For example,
in 2016, 101 of the firms listed in the S&P 500 index paid no dividends.
Another characteristic drawback of with common stock dividends, from an investor’s viewpoint, is that they are
taxed twice - --once at the firm level (at the corporate tax rate) and once at the personal level (at the personal income
tax rate). Investors can partially avoid this double taxation effect by holding stocks in growth firms that reinvest
most of their earnings to finance growth rather than paying larger dividends.
3. Common stockholders have the lowest priority claim on a corporation’s assets in the event of bankruptcy. That
is, they have a residual claim. Only after all senior claims are paid (i.e., payments owed to creditors, bond holders,
and preferred stockholders) are common stockholders entitled to what assets of the firm are left, i.e., the residual.
The residual claim feature associated with common stock makes it riskier than debt or bonds as an investable asset.
4. Dual-class firms are corporations in which two classes of common stock are outstanding with differential voting
rights assigned to each class in various ways. For example, inferior voting rights have been assigned by (1i) limiting
the number of votes per share on one class relative to another, (2ii) limiting the fraction of the board of directors
which that one class could can elect relative to another, or (3iii) a combination of these two. To offset the reduced
voting rights, inferior class shares are often assigned higher dividend rights. Dual-class firms have often been used
in corporations owned and controlled by a single family or group turning to the public market to raise capital
through the issue of new shares. To retain voting control over the firm, the family or group issues the dual classes of
stock, keeping the high voting stock for themselves and selling the limited voting shares to the public. In all other
respects the shares of the two classes are often identical. Because dual-classes of stock have often been used by a
small group (i.e., family managers) to entrench themselves in the firm, dual-class firms are controversial.
5. Nonparticipating preferred stock means that the preferred stock dividend is fixed regardless of any increase or
decrease in the issuing firm’s profits. In contrast, participating preferred stock means that actual dividends paid in
any year may be greater than the promised dividends. In some cases, if the issuing firm has an exceptionally
profitable year, preferred stockholders may receive some of the high profits in the form of an extra dividend
payment. In others, the participating preferred stock pays and changes dividends along the same lines as common
stock dividends.
6. Cumulative preferred stock means that any missed dividend payments go into arrears and must be made up
before any common stock dividends can be paid. If preferred stock is noncumulative, missed dividend payments do
not go into arrears and are never paid. Noncumulative preferred stock is generally unattractive to perspective
preferred stockholders. Thus, noncumulative preferred stock generally has some other special features (e.g., voting
rights) to make up for this drawback.
7. In a public sale of stock, once the issuing firm and the investment bank have agreed on the details of the stock
issue, the investment bank must get SEC approval in accordance with the Securities and Exchange Act of 1934.
Registration of a stock can be a lengthy process. The process starts with the preparation of the registration statement
to be filed with the SEC. The registration statement includes information on the nature of the issuer’s business, the
key provisions and features of the security to be issued, the risks involved with the security, and background on the
management. The focus of the registration statement is on full information disclosure about the firm and the

securities issued to the public at large. At the same time that the issuer and its investment bank prepare the
registration statement to be filed with the SEC, they prepare a preliminary version of the public offering’s
prospectus called the red herring prospectus. The red herring prospectus is similar to the registration statement but is
distributed to potential equity buyers. It is a preliminary version of the official or final prospectus that will be printed
upon SEC registration of the issue and makes up the bulk of the registration statement. Firms use the feedback
provided from the distribution of the red herring prospectus to help set the price on the new shares so as to ensure
the sale of the full issue.
After submission of the registration statement, the SEC has 20 days to request additional information or changes
to the registration statement. It generally takes about 20 days for the SEC to declare whether or not a registration
statement is effective. First-time or infrequent issuers can sometimes wait up to several months for SEC
registration, especially if the SEC keeps requesting additional information and revised red herring prospectuses.
However, companies that know the registration process well can generally obtain registration in a few days. This
period of review is called the waiting period.
Once the SEC is satisfied with the registration statement, it registers the issue. At this point, the issuer (along with
its investment bankers) sets the final selling price on the shares, prints the official prospectus describing the issue,
and sends it to all potential buyers of the issue. Upon issuance of the prospectus (generally the day following SEC
registration), the shares can be sold.
The period of time between the company’s filing of the registration statement with the SEC and the selling of
shares is referred to as the “quiet period.” Historically, the issuing company could send no written communication
to the public during the quiet period other than information regarding the normal course of business. Once a
company registered with the SEC for a public offering it could engage in oral communication only. That meant
the company executives could go on so-called roadshows to solicit investors or have brokers call potential
investors to discuss the offering. But they could not provide any written communication, such as faxes or letters,
or give interviews about the company’s offering. These rules, adopted in 1933, did not foresee new technology,
such as the Internet and e-mail. Moreover, these outdated rules may have hurt investors by giving them too little
information. Thus, in December 2005, the SEC enacted a rule change giving large companies (market
capitalization of at least $700 million or with at least $1 billion in debt) more freedom to communicate with
investors during the quiet period. Specifically, these companies are now allowed to communicate with investors at
any time prior to a public offering through e-mail, letters, or even TV ads, as long as the information is also filed
with the SEC. Such communication was previously prohibited.
8. The two major U.S. stock markets are the NYSE Euronext and the NASDAQ system. Prior to its acquisition by
the NYSE in 2008, the American Stock Exchange (AMEX) was a third major stock exchange. Figures 8-6 and 8-7
present data comparing the three stock markets. Figure 8-6 shows dollar volume of trading in each market from
1979 through 2016; and Figure 8-7 shows the number of companies listed in each market from 1975 through
2016. Obvious from these trading volume and listing figures is that, while historically the NYSE was the premier
stock market, the NASDAQ has become a strong second market.
9. A market order is an order for the broker and the designated market maker (DMM) to transact at the best price
available when the order reaches the post. The floor or commission broker will go to the post and conduct the
trade. A limit order is an order to transact only at a specified price (the limit price). When a floor or commission
broker receives a limit order, he or she will stand by the post with the order if the current price is near the limit
price. When the current price is not near the limit price, a floor or commission broker does not want to stand at the
post for hours (and even days) waiting for the current price to equal the limit price on this single limit order. In
this case, the floor broker enters the limit order on the order book of the DMM at the post. The DMM, who is at
the post at all times, will monitor the current price of the stock and conduct the trade when, and if, the it equals the
limit price. Some limit orders are submitted with time limits. If the order is not filled by the time date for
expiration, it is deleted from the market maker’s book.
10. As a result of the potential for increased volatility created by program trading, in 1990 the New York Stock
Exchange introduced trading curbs (or circuit breakers) on trading. Circuit breakers are limitations placed on
program trading when the DJIA falls significantly. Circuit breakers are an imposed halt in trading that gives buyers
and sellers time to assimilate incoming information and make investment choices. Circuit breakers promote investor

confidence by giving investors time to make informed choices during periods of high market volatility.
11. On May 6, 2010, the financial markets experienced a brief but severe drop in prices, falling 998 points (more
than 5 percent) in a matter of minutes, only to recover a short time later. This event became known as the “flash
crash.” Regardless of how the historic drop started, it was exacerbated by computer trading. The initial trading error
triggered a piling-onpyramiding effect from computerized trading programs designed to sell when the market moves
lower.
As a result of the flash crash, circuit breakers, termed in this case limit up-limit down (LULD) rules, were instituted
for individual stocks. Figure 8-12 shows the rules put in place in 2016. Phase I began in April 2013 for Tier I stocks
(S&P 500, Russell 500 1000 stocks, and selected exchange-traded products), while phase II began in August 2013
for Tier II stocks (all other stocks). The LULD band structure is based on percentages away from a “reference
price.” Specifically, trading is halted (put in a “limit state”) if the stock price moves outside the price band,
calculated as follows:
Price Band = (Reference Price) ± ((Reference Price) x (Percentage Parameter))
The reference price is the mean price of reported transactions over the past 5 minutes. If no trades have occurred in
the previous 5 minutes, the previous reference price will remain. The fFirst reference price of the day is set as the
opening price on the stock’s primary listing exchange. When a stock is outside the applicable LULD band, trading is
halted for 15 seconds. For example, an S&P 500 stock with a reference price of $5.00 would see trading halted if its
price moved outside a range of $4.75-$5.25 ($5.00 ± 0.05 x $5.00). Trading may begin after the halt if the entire size
of all limit state quotations is executed or cancelled within 15 seconds of entering the limit state. If the market does
not exit the limit state within 15 seconds, then the primary listing market for the security will declare a five minute
trading pause. During a trading pause, no trades in the security can be executed, but all bids and offers may be
displayed. Percentage parameters are doubled during the first 15 and last 25 minutes of trading.
12. Flash trading is a controversial practice in which, for a fee, traders are allowed to see incoming buy or sell
orders milliseconds earlier than general market traders. With this very slight advance notice of market orders, these
traders can conduct rapid statistical analysis (with the help of powerful computers) and carry out high-frequency
trading (trades involving very short holding periods) ahead of the public market. Exchanges claim that the flash
trading benefits all traders by creating more market liquidity and the opportunity for price improvement, while
cCritics contend that flash trading creates a market in which certain traders can unfairly exploit others. The Wall
Street Reform and Consumer Protection Act of 2010 gave the Commodity Futures Trading Commission (CFTC)
expanded powers to investigate and prosecute disruptive trading practices, including those by high-speed flash
traders. For example, in 2013, the CFTC investigated whether high frequency traders are routinely distorting stock
and futures markets by illegally acting as buyer and seller in the same transactions. Such transactions, known as
wash trades, are banned by U.S. law because they can feed false information into the market and be used to
manipulate prices. CFTC examiners have found that several hundred thousand potential wash trades occur daily on
futures exchanges. Regulators are also requiring exchanges to improve their oversight of high-speed trading in the
wake of computer-driven glitches in 2012, including the case of Knight Capital Group, which incurred losses of
more than $450 million when a high-speed trading algorithm malfunctioned.
Naked access trading allows some traders and others to rapidly buy and sell stocks directly on exchanges using a
broker’s computer code without exchanges or regulators always knowing who is making the trades. The firms,
usually high-frequency traders, are then able to shave microseconds from the time it takes to trade. A report says that
38 percent of all U.S. stock trading is now done by firms that have “naked sponsored access” to markets. The SEC,
fearing that a firm trading anonymously in this way could trigger destabilizing losses and threaten market stability if
its rapid-fire trades go awry, banned naked access trading in late 2010.
Dark pools of liquidity are trading networks that provide liquidity but that do not display trades on order books. This
is useful for traders such as institutional traders who wish to buy and sell large numbers of shares without revealing
their trades to the overall market. In 2016, nearly 42 percent of daily stock trading was processed through dark
pools, up from 3 percent in 2008. Dark pool trading offers institutional investors many of the efficiencies associated
with trading on the NYSE or NASDAQ, but it does not require that they show their transactions to others. Dark pool
trades are recorded to a national database. However, they are recorded as over-the-counter transactions. Thus,
detailed information about the volume and type of transaction is left to the trading network to report to its clients if

they so desire. Dark pool trading has been criticized as unfair. With dark pool trading, traders who use trading
strategies based on liquidity do not have access to all trading information.
Critics contend that activities such as flash trading, naked access, and dark pool trading create a market in which
certain traders can unfairly exploit others. The Wall Street Reform and Consumer Protection Act of 2010 gave the
Commodity Futures Trading Commission (CFTC) expanded powers to investigate and prosecute disruptive trading
practices, including those by high speed flash traders. For example, in 2013, the CFTC investigated whether high
frequency traders are routinely distorting stock and futures markets by illegally acting as buyer and seller in the
same transactions. Such transactions, known as wash trades, are banned by U.S. law because they can feed false
information into the market and be used to manipulate prices. CFTC examiners show that several hundred thousand
potential wash trades occur daily on futures exchanges. Regulators are also requiring exchanges to improve their
oversight of high speed trading in the wake of computer driven glitches in 2012 last year, including the case of
Knight Capital Group which incurred losses of more than $450 million when a high speed trading algorithm
malfunctioned. Also, asAs a result of the Wall Street Reform and Consumer Protection Act, in 2013 these unfair
advantages and the new powers given to regulators (through the Wall Street Reform and Consumer Protection Act),
in 2013 the SEC approved a plan for new rules requiring dark pools to disclose and detail trading activity on their
platforms. Specifically, the SEC called for dark pools and other alternative trading systems to provide more
information on how they work. The new rules require such systems to file detailed information about their
operations including trading by broker dealer operators on the ATS, which could pose conflicts of interest. What
regulators have focused on are the promises the dark pool operators have made to customers about how their orders
are being handled and whether high-speed trading firms have the opportunity to trade against those orders. For
example, in January 2016, the SEC announced that Barclays Capital and Credit Suisse Securities agreed to settle
separate cases finding that they violated federal securities laws while operating dark pools. Barclays agreed to settle
the charges by admitting wrongdoing and paying $35 million penalties to the SEC and the NYAG for a total of $70
million. Credit Suisse agreed to settle the charges by paying a $30 million penalty to the SEC, a $30 million penalty
to the NYAG, and $24.3 million in disgorgement and prejudgment interest to the SEC for a total of $84.3 million.
13. The Dow Jones Industrial Average (the DJIA or the Dow) is the most widely reported stock market index.
The DJIA, fDow was first established published in 1896, i ass an index based on the values of 30 largeof 12
industrial stocks. In 1928, the Dow was expanded to include the values of 30 large (in terms of sales and total
assets) corporations selected by the editors of the The Wall Street Journal (owned by Dow Jones & Company). In
choosing companies to be included in the DJIA, the editors look for the largest industrial companies with a history
of successful growth and with interest among stock investors. Dow indexes are price-weighted averages meaning
that the stock prices of the companies in the indexes are added together and divided by an adjusted value.
In 1966, the NYSE established the NYSE Composite Index to provide a comprehensive measure of the
performance of the overall NYSE market. The index consists of all common stocks listed on the NYSE. In
addition to the composite index, NYSE stocks are divided into four subgroups: industrial, transportation, utility,
and financial companies. The indexed value of each group is also reported daily. The NYSE is a value-weighted
index meaning that the current market values of all stocks in the index are added together and divided by their
value during aon a base perioddate.
Standard & Poor’s established the S&P 500 index (a value-weighted index) consisting of the stocks of 500 ofthe
top 500 of the largest U.S. corporations listed on the NYSE and the NASDAQ. The NYSE stocks included in the
S&P 500 index account for over 80 percent of the total market value of all stocks listed on the NYSE. Thus,
movements in the S&P 500 Index are highly correlated with those of the NYSE Composite Index. Standard &
Poor’s also reports subindexes consisting of industrials and utilities in the S&P 500 Index.
First established in 1971, the NASDAQ Composite Index (a value-weighted index) consists of three categories of
NASDAQ companies: industrials, banks, and insurance companies. All stocks traded through the NASDAQ in these
three industries are included. NASDAQ also reports separate indexes based on industrials, banks, insurance
companies, computers, and telecommunications companies.
The Wilshire 5000 index was created in 1974 (when computers made the daily computation of such a large index
possible) to track the value of the entire stock market. It is the broadest stock market index and possibly the most
accurate reflection of the overall stock market. The Wilshire 5000 index contains virtually every stock that meets

three criteria: the firm is headquartered in the U.S.; the stock is actively traded in a U.S.-based stock market; and the
stock has widely available price information (which rules out the smaller OTC stocks from inclusion). Though the
index started with 5,000 firms, it currently includes over 7,000 stocksbecause of firm delistings, privatizations, and
acquisitions it currently includes just 3,562 stocks. Like the NYSE Composite Iindex, the S&P 500 Iindex, and the
NASDAQ Composite Iindex, the Wilshire 5000 Iindex is a value-weighted index. The Wilshire 5000 index has the
advantage that it is the best index to track the path of the U.S. stock market. Since it includes essentially every
public firm, it is highly representative of the overall market. However, because it is so diverse, it is impossible to tell
which sectors or asset classes are moving the market (technology, industrial, small-cap, large-cap, etc.) are moving
the market.).
14. In a price-weighted index, the stock prices of the companies in the indexes are added together and divided by an
adjusted value, (or divisor). Dow indexes are price-weighted averages. The divisor was set at 30 in 1928, but due to
stock splits, stock dividends, and changes in the 30 firms included in the index, this value dropped to
0.14602128057775 by July 2016.
In a value-weighted index, the current market values (stock price x number of shares outstanding) of all stocks in the
index are added together and divided by their value on a base date. Any changes in the stocks included in the index
are incorporated by adjusting the base value of the index. The NYSE, established in 1966, is a value-weighted index.
To modernize and align the index methodology with those used in other indexes, the NYSE revised its NYSE
Composite Index in January 2003. At this time the composite was recalculated to reflect a new base value of 5,000
rather than the original base value of 50 set in December 1965. The S&P 500 index and the Wilshire 5000 index are
also value-weighted indexes.
15. Households are the single largest holders of corporate stock (holding 39.0 percent of all corporate stock
outstanding in 2016). Mutual funds and foreign investors are also prominent in the stock markets (holding 24.2
percent and 15.7 percent of the $35.5 trillion in corporate stock outstanding, respectively). Households indirectly
invest in corporate stock through investments in mutual funds and pension funds. Together, these holdings totaled
approximately 80 percent in 2016.
As a result of the tremendous increase in stock values in the 1990s, most individuals in the United States either
directly own corporate stock or indirectly own stock via investments in mutual funds and pension funds. Figure 8–
14 shows the percent of Americans with investments in the stock market from 1998 through 2016. Ownership
peaked at 65 percent in 2007 as stock markets reached record highs. As the stock market plummeted in value during
the financial crisis, so did ownership. However, as the stock market recovered in 2010-2016, individual investors did
not reenter the market, falling to a low of 52 percent in April 2016. Despite an improving economy overall,
unemployment remained above 6.0 percent throughout much of this period (not falling to below 5.0 percent until
January 20016), a level still too high to support wide-ranging stock ownership.
Table 8–5 reports characteristics of adult investors in the stock markets, in April 2007 and 2016. Note that in every
category, percentages have dropped over this period. Older investors are the most active. In 2016, sixty-two62
percent of individuals 35 to 54 years old are invested, compared to just 38 percent of those 18 to 34 years old. These
numbers are down from 2007 when 73 percent and 62 percent, respectively, were invested in the stock market. The
higher the income, the higher the percentage of individuals investing in stocks. In 2016, 79 percent of individuals
earning $75,000 and over were invested in stocks, while just 23 percent of individuals earning less than $30,000
were invested.
16. Figure 8-15 shows the relation between stock market movements and economic cycles in the U.S. Notice some
recessionary periods were indeed, preceded by a decline in stock market index values; other recessionary periods
were not preceded by a decline in stock market index values. ; and still other declines in stock market indexes were
not followed by recessionary periods. Figure 8-15 suggests that stock market movements are not consistently
accurate predictors of economic activity. In fact, of the 14 major stock market predicted recessions since 1942, only
eight actually occurred.
17. The degree to which financial security prices adjust to “news” and the degree (and speed) with which stock
prices reflect information about the firm and factors that affect firm value is referred to as market efficiency. Three
measures (weak form, semistrong form, and strong form market efficiency) are commonly used to measure the

degree of stock market efficiency. According to the weak form market efficiency, current stock prices reflect all
historical public information price and volume information about a company. Thus, historical price trends are of no
help in predicting future stock price movements. Under weak form market efficiency, historical news and trends are
already impounded in historical prices and are of no use in predicting today’s or future stock prices. Thus, weak
from market efficiency concludes that investors cannot make more than the fair (required) return using information
based on historical price movements.
The semistrong market efficiency hypothesis focuses on the speed with which public information is impounded into
stock prices. According to the concept of semistrong form market efficiency, as public information arrives about a
company, it is immediately impounded into its stock price. For example, semistrong form market efficiency states
that a common stock’s value should respond immediately to unexpected news announcements by the firm regarding
its expected future earnings. Thus, if an investor calls his or her broker just as the earnings news is released, he or
she cannot earn an abnormal return. Prices have already (immediately) adjusted. According to semistrong form
market efficiency, investors cannot make more than the fair (required) return by trading on public news releases.
The strong form of market efficiency states that stock prices fully reflect all information about the firm,: both public
and private. Thus, according to strong form market efficiency, even learning Ainside@learning private information
about the firm is of no help in earning more than the required rate of return. As insiders individuals get private
information about a firm, the market has already reacted to it and has fully adjusted the firm’=s common stock price
to its new equilibrium level. Thus, strong form market efficiency implies that there is no set of information that
allows investors to make more than the fair (required) rate of return on a stock.
18. Stock markets and stock market participants are subject to regulations imposed by the Securities and Exchange
Commission (SEC) as well as the exchanges on which stocks are traded. The main emphasis of SEC regulations is
on full and fair disclosure of information on securities issues to actual and potential investors. The two major
regulations that were created to prevent unfair and unethical trading practices on security exchanges are the
Securities Act of 1933 and the Securities Exchange Act of 1934. The 1933 act required listed companies to file a
registration statement and to issue a prospectus that details the recent financial history of the company when issuing
new stock. The 1934 act established the SEC as the main administrative agency responsible for the oversight of
secondary stock markets by giving the SEC the authority to monitor the stock market exchanges and administer the
provisions of the 1933 act. SEC regulations are not intended to protect investors against poor investment choices but
rather to ensure that investors have full and accurate information available when making their investment decisions.
For example, in the early 2000s, a number of securities firms received tremendous publicity concerning conflicts of
interest between analysts’ research recommendations on buying or not buying stocks and whether the firm played a
role in underwriting the securities of the firm the analysts were recommending. After an investigation by the New
York State’s attorney general, Merrill Lynch agreed to pay a fine of $100 million and to follow procedures more
clearly separating analysts’ recommendations (and their compensation) from the underwriting activities of the firm.
Major Wall Street firms were also investigated. This investigation was triggered by the dramatic collapse of many
new technology stocks while analysts were still making recommendations to buy or hold them.
Subsequent to these investigations, the SEC instituted rules requiring Wall Street analysts to vouch that their stock
picks have not been influenced by investment banking colleagues and to disclose details of their compensation that
would flag investors to any possible conflicts. Evidence that analysts have falsely attested to the independence of
their work could be used to institute enforcement actions. Violators could face a wide array of sanctions, including
fines and penalties such as a suspension or a bar from the securities industry. In addition, the SEC proposed that top
officials from all public companies sign off on financial statements.
Along with these changes instituted by the SEC, the U.S. Congress passed the Sarbanes-Oxley Act in July 2002.
This act created an independent auditing oversight board under the SEC, increased penalties for corporate
wrongdoers, forced faster and more extensive financial disclosure, and created avenues of recourse for aggrieved
shareholders. Further, in 2002 the NYSE took actions intended to heighten corporate governance standards on
domestic NYSE-listed companies. Key changes included requirements on companies to have a majority of
independent directors, to adopt corporate governance guidelines and codes of ethics and business conduct, to have
shareholders’ approval of all equity-based compensation plans, and to have CEOs annually certify information given
to investors. The goal of the legislation was to prevent deceptive accounting and management practices and to bring

stability to jittery stock markets battered in the summer of 2002 by the corporate governance scandals of Enron,
Global Crossings, Tyco, WorldCom, and others.
The SEC came under fire during the financial crisis for its failure to uncover Bernie Madoff’s Ponzi scheme. The
SEC apparently had evidence as early as 1994 (in relation to another case) that Madoff, a former chairman of the
NASDAQ stock market who was a member of SEC advisory committees, was conducting illegal activities. Further,
Harry Markopolos, who worked for a rival company of Bernard L. Madoff Investment Securities, had written to the
SEC in May 1999, informing them of Madoff’s Ponzi scheme. Markopolos examined the options markets that
Madoff told investors he used to pro- duce his steady stream of returns and concluded that Madoff’s results were
impossible.
On May 19, 2006, when the Securities and Exchange Commission questioned Madoff under oath, he falsely
described how he would buy and sell stock and options contracts in Europe on behalf of his clients. The SEC asked
Madoff: “Is there any documentation generated?” Madoff said yes. But the SEC failed to pursue this further.
Eventually, the SEC recommended closing the investigation “because those violations were not so serious as to
warrant an enforcement action.” Making things worse for the SEC, Madoff’s family had close ties with the SEC.
Madoff’s sons, brother, and niece worked with or advised the SEC on various matters. Madoff’s niece is married to
a former SEC attorney who was part of a team that examined Madoff’s securities brokerage operation in 1999 and
2004. Neither review resulted in an action against Madoff. In the end, it was not the SEC that discovered Madoff’s
Ponzi scheme. Because of large redemption claims that his clients filed during the financial crisis, Madoff’s Ponzi
scheme began to collapse. Madoff admitted to his sons what he had done and they turned him in to authorities.
The SEC’s internal watchdog, Inspector General H. David Kotz, stated that he was so concerned about the agency’s
failure to uncover Madoff’s alleged Ponzi scheme that he expanded an inquiry called for by SEC Chair- man
Christopher Cox. However, in July 2010, nearly 18 months after Madoff’s Ponzi scheme was exposed, lawmakers
were still questioning how the SEC staffers who reviewed the Madoff firm and investigated fraud allegations were
being punished. SEC Chairman Mary Schapiro told Congress during an oversight hearing that 15 of 20 enforcement
attorneys and 19 of 36 examination staffers that dealt with the Madoff matter had left the agency, but the SEC was
still conducting a disciplinary process. Schapiro also said the Madoff incident did change the culture of the SEC. For
example, SEC examiners are now verifying custody of assets with third parties, something the SEC failed to do in its
review of Madoff and something Madoff later told SEC officials he was sure would have led to his scheme’s
unraveling.
The SEC has delegated certain regulatory responsibilities to the markets (e.g., NYSE or NASDAQ). In these
matters, the NYSE and NASDAQ are self-regulatory organizations. Specifically, the NYSE has primary
responsibility for the day-to-day surveillance of trading activity. It monitors specialists to ensure adequate
compliance with their obligation to make a fair and orderly market; monitors all trading to guard against unfair
trading practices; monitors broker-dealer activity with respect to minimum net capital requirements, standards, and
licensing; and enforces various listing and disclosure requirements. For example, in October 2007 NYSE regulators
censured and fined several NYSE member firms for failure to deliver prospectuses to a large number of customers.
The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms
doing business in the United States. FINRA was formed in July 2007 as a result of the merger of the National
Association of Securities Dealers’ (NASD) with the enforcement arm of the New York Stock Exchange. FINRA
oversees all aspects of the securities business, including registering and educating industry participants, examining
securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the
investing public, providing trade reporting and other industry reports, and administering the largest dispute
resolution forum for investors and registered firms.
The Wall Street Reform and Consumer Protection Act of 2010 (passed in response to the financial crisis), gave the
SEC and other regulators new powers to oversee the operations of stock markets. Among these are rules
empowering the SEC to disseminate a fiduciary standard for broker-dealers that provide personalized investment
services, allowing the SEC to require disclosures on broker-dealers that sell only proprietary products, allowing the
SEC to review rule changes of self-regulatory organizations that affect custody of customer securities or funds,
allowing the SEC to facilitate the provision of simple and clear investor disclosures regarding the terms of

relationships with broker-dealers and investment advisers, and requiring the SEC to undertake a study on conflicts
of interest − involving analysts.
Six years after the passage of the Wall Street Reform and Consumer Protection Act, 271 rulemaking deadlines have
passed. Of these, 204 (75.3 percent) have been met with finalized rules and rules have been proposed that would
meet 34 (12.5 percent) more. Rules have not yet been proposed to meet 33 (12.2 percent) passed rulemaking
requirements. Of the 390 total rulemaking requirements, 267 (68.46 percent) have been met with finalized rules and
rules have been proposed that would meet 40 (10.26 percent) more. Rules have not yet been proposed to meet 83
(21.28%) rulemaking requirements. The enormity of the act has taken up theconsumed a vast amounts of SEC’s
resources and has left many pressing issues affecting investor confidence unaddressed.
19. The U.S. stock markets are the world’s largest. However, with the full implementation of a common currency—
the euro—in 2002, European markets grew in importance during the 2000s. Further, economic growth in Pacific
Basin countries, China, and other emerging market countries has resulted in significant growth in their stock
markets. Figure 8–16 shows the proportion of stock market capitalization among various countries in 1990, 2000,
2009, and 2016. The U.S. dominance in the stock markets is best seen in 2000. However, U.S. market capitalization
decreased in size in 2009. Factors behind the U.S. dominance in world stock markets changed in the mid-2000s.
Strict new regulations in the U.S. such as Sarbanes-Oxley (discussed earlier) increased the cost of operating in the
U.S. and resulted in a significant drop in IPOs of foreign firms in the U.S. Further, U.S. economic growth slowed
from an annual rate of over 4 percent in the first two quarters of 2006 to 1¼ percent in the first quarter of 2007. A
sharp downturn in the U.S. subprime housing market was a major factor for the slow U.S. growth. During this
period growth strengthened in most other major countries, including the euro area, China, the United Kingdom, and
Canada. Indeed, in early 2007, growth in the euro area exceeded that in the United States for the first time since
2002. Further, China’s economy continued to expand.
Note also the stock market developments in Europe, the Pacific Basin, and the emerging market countries from 1990
to 2016. European markets increased their market share (from 21.1 percent in 1990 to 30.5 percent of the total in
2000). However, as the U.S. financial crisis spread and Europe then fell into a deep sovereign debt crisis in the late
2010s, European markets fell to just 23.1 percent of the world total. Issues got worse in Europe in 2016 as the
United Kingdom voted to leave the European Union sending British and European markets down further, to 19.8
percent by June 2016. The Asian economic problems that started in 1997 reduced the value of these markets
significantly (for example, Pacific Basin and emerging markets stock markets decreased from 4.6 percent and 2.4
percent in 1990 to 4.4 percent and 1.5 percent in 2000 of the worldwide stock markets, respectively). However,
these regions were less affected by the financial crisis that hit the U.S. and Europe. Thus, they recovered and grew to
20.4 percent and 9.3 percent, respectively, in 2016.
20. An American Depositary Receipt (ADR) is a certificate that represents ownership of a foreign stock. An ADR is
typically created by a U.S. bank, who which buys stock in foreign corporations in their domestic currencies and
places them in its vaultwith a custodian. The bank then issues dollar ADRs backed by the shares of the foreign
stock. These ADRs are then traded in the U.S., in dollars, on and off the organized exchanges. The major attraction
to U.S. investors is that ADRs are claims to foreign companies that trade on domestic (U.S.) exchanges and in
dollars. There are three main types of ADR issuances: Level 1, 2, and 3.
Level 1 ADRs are the most common and most basic of the ADRs. Level 1 ADRs are only traded on the over the
counter (OTC) market and have the least amount of regulatory requirements as stipulated by the SEC. The
companies issuing these ADRs do not have to abide by U.S. accounting (GAAP) standards, nor do they have to
issue annual reports. Companies with shares trading under a Level 1 program may decide to upgrade their program
to a Level 2 or Level 3 program to gain better exposure in U.S. markets.
Level 2 ADRs can be listed on the major stock exchanges (NYSE and NASDAQ), but they have more regulatory
requirements than Level 1 ADRs. Issuers of Level 2 ADRs are required to register with the SEC, to file a form 20-F
(the basic equivalent to the regular 10-K filing by companies in the U.S.), and to file an annual report that complies
with GAAP standards. Due to their listing on the NYSE and Nasdaq markets, Level 2 ADRs have much higher
trading volumes than level 1 ADRs. While listed on these exchanges, the company must meet the exchange’s listing
requirements. If it fails to do so, it may be delisted and forced to downgrade its ADR program.
Level 3 ADRs is the most respected level a foreign company can achieve in the US markets. Like Level 2 ADRs,
companies that issue Level 3 ADRs are required register with the SEC, to file a form 20-F, and to file annual reports

that comply with GAAP standards. Level 3 ADR companies, however, are allowed to issue shares directly into the
U.S. markets, rather than simply allowing the indirect purchase of already created shares. Thus, the foreign company
can actually issue shares to raise capital. Foreign companies with Level 3 programs are required to share any news
that it distributes within its home country to U.S. investors. Thus, foreign companies with a Level 3 program set up
are the easiest on which to find information.
Most ADR programs are subject to possible termination, which results in the cancellation of all the depositary
receipts, and a subsequent delisting from all exchanges on which they trade. The termination can be at the discretion
of the foreign issuer or the depositary bank, but is typically at the request of the issuer. In most cases, some type of
reorganization or merger is the reason for termination of an ADR program.
The major attraction to U.S. investors is that ADRs are claims to foreign companies that trade on domestic (U.S.)
exchanges and in dollars. Further, fees on ADRs are lower than those on many international mutual funds.
Additionally, as mentioned above, investments in foreign securities help diversify a stock portfolio with companies
that spread risk around throughout the globe. However, like all international investments there are unique risks that
are associated with them that are not usually present with domestic securities. For example, investors must consider
country risk, foreign exchange risk, and other attributes when evaluating ADRs. Further, international companies
and their underlying countries are not subject to as strict financial reporting standards as are companies in the U.S.
Thus, investors may experience trouble understanding financial reports, terms, and definitions due to differing
accounting standards as well as language barriers.
Problems:
1. a. With cumulative voting, the total number of votes available is 75,000,000 (= 15 million shares outstanding x 5
directors). If there are six candidates for the five board positions, the five candidates with the highest number of
votes will be elected to the board and the candidate with the least total votes will not be elected. In this example, the
minimum number of votes needed to ensure election is one sixth of the 75 million votes available, or 12,500,000
votes. If one candidate receives 12,500,000, the remaining votes together total 62,500,000. No matter how these
votes are spread over the remaining 5 director candidates, it is mathematically impossible for each of the 5 to
receive more than 12,500,000. This would require more than 5 x 12,500,000 votes, or more than the 62,500,000
votes that remain.
b. With straight voting, the vote on the board of directors occurs one director at a time. Thus, the number of votes
eligible for each director is 15,000,000, the number of shares outstanding. The minimum number of votes needed to
ensure election is one half 15 million votes available, or 7.5 million.
2. a. With cumulative voting, the total number of votes available is 300,000,000 (= 50 million shares outstanding x
6 directors). If there are eight candidates for the six board positions, the six candidates with the highest number of
votes will be elected to the board and the two candidates with the least total votes will not be elected. In this
example, the minimum number of votes needed to ensure election is one eighth of the 300 million votes available, or
37,500,000 votes. If one candidate receives 37,500,000, the remaining votes together total 262,500,000. No matter
how these votes are spread over the remaining 7 director candidates, it is mathematically impossible for each of the
7 to receive more than 37,500,000. This would require more than 7 x 37,500,000 votes, or more than the
262,500,000 votes that remain.
b. With straight voting, the vote on the board of directors occurs one director at a time. Thus, the number of votes
eligible for each director is 50,000,000, the number of shares outstanding. The minimum number of votes needed to
ensure election is one half 50 million votes available, or 25 million.
3. You own 50,000 shares of common stock in a firm with 2.5 million total shares outstanding. The firm announces
its plan to sell an additional 1 million shares through a rights offering. Thus, each shareholder will be sent 0.4 rights
for each share of stock owned. One right can then be exchanged for one share of common stock in the new issue.
a. Your current ownership interest is 2.0 percent (50,000/2.5 million) prior to the rights offering and you receive
20,000 rights (50,000 x 0.4) allowing you to purchase 20,000 of the new shares. If you exercise your rights (buying

the 20,000 shares) your ownership interest in the firm after the rights offering is still 2 percent ((50,000 +
20,000)/(2.5 million + 1 million)).
b. The market value of the common stock is $35 before the rights offering, or the total market value of the firm is
$87.5 million ($35 x 2.5 million), and the 1 million new shares are offered to current stockholders at a $5 discount,
or for $30 per share. The firm receives $30 million. The market value of the firm after the rights offering is $117.5
million (the original $87.5 million plus the $30 million from the new shares), or $33.571 per share ($117.5 million /
3.5 million).
c. Your 50,000 shares are worth $1.75 million ($35 x 50,000) before the rights offering, and you can purchase
20,000 additional shares for $600,000 ($30 x 20,000). Thus, your total investment in the firm after the rights
offering is $2.35 million, or $33.571 per share ($2.35 million / 70,000).
d. Your 50,000 shares are worth $1.75 million ($35 x 50,000) before the rights offering. Since each right allows a
stockholder to buy a new share for $30 per share when the shares are worth $33.571, the value of one right should
be $3.571. Should you sell your rights rather than exercise them, you maintain your original 50,000 shares of stock.
These have a value after the rights offering of $1.679 million (50,000 x 33.571). You also sell your rights for $0.071
million (20,000 x $3.57). You have a total of $1.75 million, or have lost no wealth.
4. You own 100,000 shares of common stock in a firm with 12.5 million total shares outstanding. The firm
announces its plan to sell an additional 2.5 million shares through a rights offering. Thus, each shareholder will be
sent 0.2 rights for each share of stock owned. One right can then be exchanged for one share of common stock in the
new issue.
a. Your current ownership interest is 0.80 percent (100,000/12.5 million) prior to the rights offering and you receive
20,000 rights (100,000 x 0.2) allowing you to purchase 20,000 of the new shares. If you exercise your rights (buying
the 20,000 shares) your ownership interest in the firm after the rights offering is still 0.80 percent ((100,000 +
20,000)/(12.5 million + 2.5 million)).
b. The market value of the common stock is $22.50 before the rights offering, or the total market value of the firm
is $281.25 million ($22.50 x 12.5 million), and the 2.5 million new shares are offered to current stockholders at a
$2.40 discount, or for $20.10 per share. The firm receives $50.25 million. The market value of the firm after the
rights offering is $331.50 million (the original $281.25 million plus the $50.25 million from the new shares), or
$22.10 per share ($331.50 million / 15 million).
c. Your 100,000 shares are worth $2.25 million ($22.50 x 100,000) before the rights offering, and you can purchase
20,000 additional shares for $402,000 ($20.10 x 20,000). Thus, your total investment in the firm after the rights
offering is $2.652 million, or $22.10 per share ($2.652 million / 120,000).
d. Your 100,000 shares are worth $2.25 million ($22.50 x 100,000) before the rights offering. Since each right
allows a stockholder to buy a new share for $20.10 per share when the shares are worth $22.10, the value of one
right should be $2.00. Should you sell your rights rather than exercise them, you maintain your original 100,000
shares of stock. These have a value after the rights offering of $2.210 million (100,000 x 22.10). You also sell your
rights for $0.04 million (20,000 x $2.00). You have a total of $2.25 million, or have lost no wealth.
5. a. Abbott Laboratories closed at $41.36 per share on July 7, 2016.
b. The high for McDonald’s was $131.96 per share and the low was $87.50 per share for the year July 7, 2015
through July 7, 2016.
c. The dividend yield on Waste Management’s stock was $1.64/$67.29 = 2.44%.
6. a. Abmbercrombie & Fitch closed at $18.09 ($18.22 - $0.13) per share on July 6, 2016.
b. The dividend yield on El Paso Electric’s stock was $1.24/$46.46 = 2.67%.

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c. The firm’s P/E ratio is the ratio of the company’s closing price to earnings per share over the previous year.
Well Fargo’s P/E ratio is reported to be 11.41 on July 7, 2016. Wells Fargo’s price—the numerator of the P/E
ratio—is reported as $46.80, Thus, Well Fargo’s earnings per share—the denominator of the P/E ratio—over the
period July 2015 through July 2016 must have been $4.10 per share: E = P ÷ P/E = $46.80 ÷ 11.41).
7. a. Return = $2.75/$35.00 + ($30.00 - $35.00)/$35.00) = -6.43%
b. Return = $2.75/$35.00 + ($40.00 - $35.00)/$35.00) = 22.14%
8. EXCEL Problem: Return = -11.00%
Return = 5.00%
Return = 9.00%
Return = 19.00%
9.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)
A Symbol Open High Low Close
Net
Chg
%Chg Vol
52 Week
High
52 Week
Low
Div Yield PE
YTD
%Chg
McKesson MCK 61.00 61.14 60.28 60.60 -1.01 -1.64 2,719,785 71.49 53.57 0.72 1.19 13.00 -3.04
Column 14 is the McKesson’s P/E ratio, 13.00; Column 6 reports McKesson’s price—the numerator of the P/E
ratio—as $60.60.
Thus, McKesson’s earnings per share—the denominator of the P/E ratio—over the period August 2009 through
August 2010 must have been $4.66 per share: E = P  P/E = $60.60  13.00).
10.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)
A Symbol Open High Low Close
Net
Chg
%Chg Vol
52 Week
High
52 Week
Low
Div Yield PE
YTD
%Chg
Abercrombie&Fitch ANF 37.89 38.41 37.20 37.60 -1.21 -3.12 2,323,747 51.12 28.76 0.70 1.86 55.29 7.89
Column 14 is the Abercrombie & Fitch’s P/E ratio, 55.29; Column 6 reports Abercrombie & Fitch’s price—the
numerator of the P/E ratio—as $37.60.
Thus, Abercrombie & Fitch’s earnings per share—the denominator of the P/E ratio—over the period August 2009
through August 2010 must have been $0.68 per share: E = P  P/E = $37.60  55.29).

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a certain limited shrewdness, but unimaginative; dressed in black
morning-coat, City-tailored; gold “Albert” festooned across his ample
paunch, key-chain drooping from trouser-pocket.
“Well?” he asked, looking up from the smeared typewritten pages
of the Havana mail.
“Got it,” said Peter laconically; hanging hat, coat and stick on the
brass-hook behind the glass door—which he carefully closed.
“No!” Interrogatively.
“Yes.”
“Well I’m damned.” Simpson glanced admiringly at his partner. He
never quite understood Peter; had always been a little afraid of his
“recklessness”; had—for that reason—refused to invest any capital in
the Nirvana cigarette-factory.
Peter drew the contract from his breast-pocket; and they
scrutinized it together. It was written in English, rather Teutonic
English, but absolutely clear.
“Who drew this up?” asked Simpson.
“I did. A German lawyer went over it for me; but it’s enforceable
in London.”
“Good.”
They plunged into details.
“What’s this. Five thousand pounds open account? Anything over
that to be drawn for at six months? We don’t want all that credit,
Peter.”
“Yes, we do. I may have to take some more of my capital out.
The factory, you know.”
Simpson put down the contract. “Of course it’s not for me to
advise you: but aren’t you getting just a little out of your depth?”
“You charge me with interest on the money which I draw out,”
began Peter, temper swiftly frayed. Then relenting, “Oh, it’s quite all
right, old man, I know what I’m doing.”
A huge black outline loomed up against the glass door, knocked,
said in a guttural voice “May I come in?”
Entered Julius Hagenburg: top-hatted, black-moustached, patent-
booted, flower at buttonhole: Hagenburg, naturalized Englishman,
undoubtedly the best salesman of fine cigars in Europe—and the

worst payer. What Peter’s investment in Nirvana meant to Simpson,
Simpson’s credit to Hagenburg meant to Peter. Yet it was a profitable
account, amazingly so. Hagenburg rarely bought less than thirty
thousand cigars at a clip; would pay anything from three to seven
pounds a hundred for them.
How he disposed of the goods, neither of the partners knew;
though Peter, who had met the man frequently on his own
Continental cigarette-expeditions, had a shrewd idea that most of
the cigars—which went, under bond, in plain cases, from London to
Amsterdam—eventually found their way, at entirely fictitious prices,
to such places as the Sporting Club in Monte Carlo, the Jockey Club
in Vienna, and even as far as the gipsy-haunted private rooms in the
night-restaurants of St. Petersburg.
However, this time Hagenburg had brought money, nearly a
thousand pounds of it, in “ready.”
“You will give me a receipt now, please,” he said to Simpson, who
went out of the room, notes rustling in his hands, leaving Peter and
his pet aversion together.
“I hear you got back the sole agency of the Beckmann brand,”
said the German, sitting down and lighting a black cigar from the
box that Peter pushed across to him.
“Where the dickens did you hear that?”
“It’s true then?” Hagenburg smiled.
“Possibly.”
“I can increase my business with Beckmann cigars in—Holland, if
you are in a position to help me with a small discount, say five per
cent. . . .”
“Now I wonder how the hell he found out about that contract?”
Peter said to himself when the man had gone. But Simpson, to
whom he mentioned the matter, made light of it. “There’s been a
good deal of gossip about your going to Hamburg,” he said.
“Probably it was only guess-work.”
Peter put on his hat; wondered, as he walked rapidly along
Fenchurch Street, why Simpson hadn’t possessed enough gumption
to keep the destination of such an important journey secret. “Didn’t
think it mattered. Never thought I’d get that contract,” he decided,

turning down Lombard Court, mounting the carpeted steps to the
upstairs luncheon-room of the Lombard Restaurant.
“Downstairs,” in the Lombard, hatted men jostle at communal
tables; steaks frizzle, crowded, on the grill; joints appear, dwindle,
disappear and are replaced; waiters bustle and the girl at the cash-
desk has barely time to smile. But “upstairs,” luncheon is a solemn
and a costly function.
At the small bar in the corner of the oak-panelled room, one
hand dallying with his vermouth, eye-glassed, faultlessly attired, a
miniature dude though well over middle age, stood Peter’s best
acquaintance (and Jameson’s most aggressive competitor), Maurice
Beresford of “Beresford and Beresford.”
He grinned at Peter, letting the monocle fall from his eye as he
did so; said laconically: “The usual Peter.”
“Thanks,” answered Peter; smiling a greeting to the lady behind
the bar.
“We lunch together, I presume,” quizzed Beresford.
“You presume correctly, Maurice.”
“Toss you who pays—drinks included.”
“Not much. You asked me to have a drink. But I’ll toss you for
lunch.” The sovereign clinked on the bar-top. Peter won.
They finished their drinks; settled themselves at the usual
reserved table by the fire; ordered—after some wrangling—
completely different lunches: for Beresford (who possessed, despite
his size, an enormous appetite) grilled sole, fricassee of veal, and
plum duff; for Peter, surfeited with greasy food, cold beef and
pickled walnuts.
“And now,” said Beresford, sipping his whisky and Perrier, “be a
good boy and tell me all you’ve been up to in Hamburg.”
“Lies, or the truth?”
“The truth. Just for a change.”
Peter cut a morsel of beef with great deliberation; decided that
Beresford probably knew.
“I think I’ve done you in the eye this time, Maurice.”
“I thought you had. We got a cable from Beckmanns this
morning. Nothing definite in it: but putting two and two together,

you know. . . .”
They looked at each other, and laughed. The Beresfords, both
bachelors, were extremely well off; their transactions with the
Beckmann factory of no great importance. Still, by his next remark
Peter knew that Maurice was hit, in his business-vanity if not in his
pocket.
“What I like about you, Peter,” he said, screwing the monocle
back into his eye, “is that although you are every bit as unscrupulous
as the rest of us, you manage to keep up a pose of old-fashioned
respectability, combined with modern straightforwardness, which I,
for one, find it impossible to adopt. How many cases did you have to
guarantee Beckmanns?”
“Oh quite a lot,” parried Peter.
“And what is going to happen about my pending orders? Will
they be shipped, or not?”
This being the crux of the conversation, Peter changed the
subject; began talking about shade-grown wrappers, the new
schedule of Trust prices and other mysteries unintelligible to the
profane.
“It will be very unfair if they aren’t,” interrupted Beresford.
“I’ll have to talk it over with Simpson.”
“Great genius—Simpson,” said Beresford sarcastically.
“And, either way, you’ll have to pay us a profit on them. . . .”
Maurice Beresford walked back to his office distinctly disgruntled.

§ 4
Peter, on the other hand, returned to Lime Street in a state of
quiet elation. Money apart, it was amusing to have scored off
Maurice. Remained now to settle with the Elkinses. He called up
young Charlie Elkins; asked him to come round.
“All right. Four o’clock,” said the voice at the microphone. Then
“Pretty” Bramson rang up from the factory; and, listening to his
report—(“fifty thousand Virginians from Singapore; twenty thousand
Egyptian gold-tips from the Argentine; heaps of export orders but
home trade rather quiet. Are you coming up tomorrow, Sir?”)—
Peter’s new-found interest in Jameson’s suffered eclipse.
He hung up the receiver; looked across at Simpson, rereading
the contract for the tenth time. Undoubtedly the selling of cigars, of
other people’s cigars was—even as a sole agent—a pretty dull affair.
Simpson had been sitting at that very same desk twenty, twenty-
five, thirty years; would sit there till he died.
The bell rang again. Reid this time, of Reid, Chatterton & Reid,
Chartered Accountants. “Mr. Reid wished to ask Mr. Jameson if next
Monday would be convenient for the Nirvana board-meeting.”
“Quite convenient, thank you.”
Entered, from the side door which led to the bookkeeping office,
Miss Macpherson, chief of the clerical staff—a dour loyal
Scotchwoman of forty, dressed in the usual blouse and skirt, the bad
boots of her order. She carried “the post” in one hand, her note-
book in the other; took the vacant stool next to Simpson; said “Your
letters, Mr. Simpson,” in a firm, tired voice.
Simpson began to dictate, hesitatingly; querying this; consulting
her about that.
“In reply to your favour of even date. . . .”
Peter got up; wandered out into the warehouse; began a
leisurely inspection of some newly-arrived dock-samples; pushed an
oily Corona from the centre of a ribboned bundle; lit it.

Came Elkins. “Smooth” is the only adjective applicable to the
new-comer. He had a smooth voice, smooth hair, smooth hands, a
smooth manner and a very smooth silk-hat. He was clean-shaven,
jet-haired; looked more like a junior clerk in Rothschild’s Bank than
junior partner in a mercantile business.
“Good afternoon, Peter,” he said. “What’s the trouble?”
“Afternoon, Elkins. Come inside, won’t you?”
Peter led the way into a tiny room off the warehouse: a room
furnished with two chairs, a small gas-stove, and many cedar
cabinets of cigars.
“Coffin department?” queried Elkins, sitting down. . . .
“I wanted to speak to you about Beckmanns,” began Peter, not
acknowledging the trade jest.
“Oh, we’ve been doing very little with the brand lately. The stuff’s
no good, you know. Too strong. And the dollar-prices on current
sizes too high.”
“Really,” said Peter, who had for some years been drawing a small
clandestine commission on the imports of both his competitors.
“Then of course you won’t mind having to stop importing them.”
At this, it seemed as though little wrinkles creased themselves all
over Elkins’ smoothnesses.
“Stop importing them? What do you mean?”
Peter told him; not omitting to mention that “pending orders”
would not be shipped.
“But this is outrageous,” burst out young Elkins. “Positively
outrageous. Why, we’ve been handling their goods for years. For
years and years. Got customers for them. Customers who won’t take
anything else.”
“Yes, I know,” sympathized Peter: and named them.
Elkins changed his note. “You don’t really mean to cut us off,
Peter.”
“Of course I do.”
“But we’d buy the goods from you; pay you cash for them.”
“Till you’d persuaded your customers to try something else. Not
much. Besides, I want all the profit; not just a percentage.”

“But the pending orders. They’re mostly sold in advance. It will
make us look ridiculous. Positively ridiculous. I don’t know what my
father will say. . . .”
It was five o’clock by the time that Peter—having reluctantly
promised to “think over” the matter of the pending orders—got rid of
him; joined Simpson for a cup of tea.
“You know,” said Simpson, “I simply can’t get over this contract
business.” He pulled a piece of scribbling paper towards him, started
figuring. “It means at least £1500 a year more profit. There’s the
Cunard Company—they’ve been buying from Beresfords. And Towle
at the Midland—that’s Elkins’ account. . . . I must talk to the
travellers about this. Hargreaves is in the suburbs today; he won’t be
in till the morning. I’ve written Mallabone to come up on
Saturday. . . .”
“Oh, damn the travellers,” pronounced Peter. “They’re no good
for this sort of job. We’ll have to do it ourselves.”
He took the Tube as far as Oxford Circus; walked slowly down
Regent Street into Piccadilly Circus. All about him lights blazed,
motors thrummed and hooted, people jostled. London, London as
she was towards the end of the Great Peace! London,—tango-
dancing, theatre-going, night-clubbing London! London! City of the
seven millions, where—scum that floated upwards, glistening, utterly
useless—loose women and vicious politicians, emasculate authors
and popularity-hunting actors, rag-time dancers and company-
promoters, preened and bloated, spent and gambled, fooling away
the night-time. Yet London—for all this scum that fed upon her
fineness—solid at heart, worthy if deceptive capital of an Empire
compared with whose achievements Rome was a weakling and
Athens a nonentity.
But Peter Jameson, worker, cared for none of these things!
He looked up at the electric signs that winked and glinted on the
darkness: at the “Paripan Paint” sign, and the two whirling clock-
faces over Saqui and Lawrences’s, at the snaky twirls of “Oxo” and
the high circles of “O. O.” Whisky. And he visioned—vaguely, for it
was three years since his last visit—Broadway, New York: Rosbach’s

burning fountain, “Owl” Cigars, “Anargyros” Cigarettes, the theatre
lamps and the drugstore lamps. “They, the Americans, understood
advertising; responded to it. Compared with them, we were only
children,” thought Peter Jameson. “Confound it, why should the
home-trade of Nirvana lag behind the export?”
Then he glanced at the watch on his wrist; saw it was nearly half
past seven; remembered—for the first time since leaving Lowndes
Square in the morning—that he possessed a wife.

§ 1
“Pretty” Bramson—black well-oiled hair, curled moustaches, blue
eyes and general dapperness had earned the nickname when, as
East County salesman for his cousin Marcus Bramson, owner of
Bramson’s “Pulman” Virginias, he had first gone “on the road”—sat
pensive in the sales-manager’s office of Nirvana Ltd., Manufacturers
of High Grade Cigarettes. The room was large, well carpeted,
glinting with mahogany. On the walls hung sales-charts, specimen
advertisements for the Press, show cards—gaudy but efficient—for
tobacconists’ windows. Through the thin partition, he heard the
whirr of fly-wheels, subdued chatter of work-girls, Turkovitch’s voice
raised in sharp expostulation, occasionally the thump which told him
that the new “U.K.” machine—their fourth—was being swiftly
erected. But “Pretty” Bramson thought only indirectly of Nirvana.
He had dined, the night before, with his cousin Marcus; and
Marcus had asked, quite casually, about the factory. “Were they
earning dividends yet? Why didn’t one see the stuff about more?
How about the export trade?” Marcus had hinted too, barely hinted,
that if at any time. . . .
“Pretty” Bramson put the temptation resolutely behind him.
Jamesons had plenty of capital; could always find more if they
wanted it. Besides, he had a little money put by himself. Probably, if
things continued to go well, “young Peter” would let him in as a
minority shareholder. Afterwards, they would float it on the public.
Meanwhile, £500 a year plus a sliding-scale commission on the
constantly increasing output was not to be sneezed at by a man of
thirty-two.

§ 2
Peter Jameson paid his taxi; threw away the stump of his after-
breakfast cigar; and walked straight through the open doors of the
goods entrance into his factory.
He was neither an over-imaginative nor a romantic person, this
quiet gray-eyed young man in the bowler hat and the well-cut tweed
overcoat: but he never could look at that big glass-roofed building,
at the work-girls in their clean smocks, at the vague forms of
machinery whirling away behind their frosted-glass partitions, at the
men pricking and soldering the vacuum export-tins (plunged base-
deep in hot sand to expel the corrupting air), at the great bins of
sweet-smelling tobacco,—at the whole paraphernalia of this living
entity he was creating—without a certain thrill of satisfaction. He had
given up a good deal for this same Nirvana—leisure, money, his gun
in the little Norfolkshire shoot, trout fishing, the possibility of a car.
But Nirvana, almost home! was worth it.
Ivan Turkovitch bustled out from behind one of the partitions;
trotted over.
“Vell, Petere. And how are you? Come overe and see de new
machine. Ve are just getting him put up. Peautiful!”
The small hands gesticulated satisfaction; the tawny beard
waggled accompaniment. Like the rest of his “vork-peoples,”
Turkovitch wore a smock. It made him a rather grotesque little
figure.
But Turkovitch’s satisfaction, as an artist, with the growth of the
factory, was only superficial. As a man, a man of small ideas, he
could not grasp the ultimate scheme, the big conception which
inspired Peter. Frankly, it frightened him. More orders and more
orders! More expenses and more expenses! What would be the end?
He—Ivan Turkovitch—had never wanted a vast business; felt himself
incapable of controlling it.
“Peautiful,” he said again, as they stood in the machine-room.
Overhead, fly-wheels whirled, driving-belts clacked. On the clean

hardwood floor, the three machines stamped and clicked at their
endless tasks. Perched on high seats, girls fed the hoppers with
flocky golden armfuls of tobacco. The machines swallowed it;
spewed it forward, forcing it through steel tubes into a rod: drew up
paper from the slow-moving reels; wrapped it about the tobacco;
printed it; chopped the paper-covered rod into cigarettes; delivered
them to the waiting hands of the girls who patted them into wooden
trays. A shirt-sleeved mechanic tended each machine, now this part,
now that. Sparks spurted as deft grindstone met swift-revolving
knife. The fourth and newest “U.K.” was not yet working: by it,
adjusting, measuring, screwing up a bolt here and there, stood a
German workman.
For the “United Kingdom” Cigarette-machine was not made in
this England, where craftsmen starved while Free Traders preached
to them!
Turkovitch spoke to the German; queried something.
“Dass ist mir verboten,” said the man. “Es muss genau so
gemacht werden.”
“What does he say?” asked Peter.
“He says he cannot do what I ask him. It is forbidden. Never
mind, when he goes back to Hamburg, we do it ourselves. They do
not know everything, these Germans.”
They passed on; through the drying-rooms; and the cutting-
rooms where girls picked-over the dried leaves and “blenders” fed
them into presses that forced the thick mass forward to the dropping
knife; through the label-printing room; into the main factory again;
past the box-making tables where more girls laboured with paste-
brush and zinc-board; and the packing tables, piled high with filled
boxes waiting their seals; into the stock-room.
“Rather low, aren’t we?” queried Peter, looking at the half-empty
shelves.
“Very low, Sir?” said the dispatch-forewoman, busy making up
the day’s orders.
“You go on with your vork, Mary,” snapped Turkovitch. The
woman went out of the room, leaving them alone.

“Look here, Turkovitch”—Peter’s gray eyes had grown just a
shade darker—“you know I won’t stand that sort of thing. I spoke to
the girl; and she answered me. You’ve no right to be rude to her.”
The little man became apologetic. . . . “But you do not
understand the vork-peoples, Petere. You have never been one of
the vork-peoples. I have. De vork-peoples they do not respect you
ven you talk nicely to them.”
“Don’t you believe it, Turkovitch”—the quarrel between them was
an old one—“the ‘vork-peoples,’ as you call them, respect a man who
respects them; who knows what he wants, and tells them how he
wants it done—decently.”
Ivan, inventing an excuse, went back to the machine-room. “How
on earth I shall ever be able to introduce the copartnership system
into this place with that Hungarian obstructionist in charge,” thought
Peter, “the Lord knows.” He stood there with his hands in his pockets
for a minute or two: then, lighting a cigar, strode off to Bramson’s
room.

§ 3
“Bramson,” said Peter—greetings over—“how much do you know
about the manufacturing part of this business?”
“Well, Sir. . . .”
“Oh, never mind about the ‘Sir.’ You’re not a clerk.”
“Well, when I was with my cousin, I used to spend a good deal
of time in the various departments.” The Jew looked up shrewdly,
intimately. “Why? Is anything wrong with T.?”
“No. I was asking—for information. One-man shows are never
safe. Supposing Turkovitch were taken ill, could you run the place for
—say three months?”
“I ran it while he was on his holidays.”
“H’m. That’s rather different. Know anything about blending?”
“Not much.”
“We could get a foreman to do that,” remarked Peter reflectively.
“And I’m not entirely ignorant on the subject myself. How about the
rest of it—printing, box-making, looking after the girls? . . . That new
master-printer seems a pretty efficient kind of fellow.” He broke off;
said, “Don’t let this conversation go any further”; and took up the
routine of the day.
Bramson, in addition to his principal duty of sales-manager, acted
as Peter’s right-hand man in the not-always-smooth financing of the
concern: so that their discussion lasted—uninterrupted save for
occasional telephone calls—till the whistle blew, and a shuffle of
moved stools on the hard-wood floor presaged the midday break.
Nirvana provided free cooking for its employés; and the three
principals shared the facility.
“Vell,” said Turkovitch, peeling off his smock as he entered, “now
ve have some lunch. You join us, eh, Petere?”
One of the girls brought in a table; laid it; produced three chops,
potatoes, beer. The Hungarian had apparently got over his huff.
“Orders is plentiful, especially de export,” he said.

“Bramson and I have just been discussing that. Something’s got
to be done about the home trade. We must have two more
travellers. The press-advertising wants gingering up. I’ve telephoned
for Higham to come and see me this afternoon. And I think we
ought to have one or two electric signs. Big ones. Flashing, if we can
afford them.”
“But the money? . . .” remonstrated Turkovitch.
“Oh, damn the money. Don’t you worry about that. I’ll find the
money all right, if you’ll only get the orders out quickly. That last big
lot for the Argentine took nearly six weeks.”
Turkovitch protested; and a wrangle ensued. Bramson sat very
quiet. He was not a shareholder in the concern—yet. But, if he knew
anything about anything, “young Peter” would get his own way;
even if he had to buy Turkovitch out. Then that thousand pounds of
savings would go into “ordinary” shares of Nirvana Ltd. . . .
“We’d better have all this out at the board-meeting next Monday,”
said Peter finally. “Reid will have the year’s figures ready by then.”

§ 4
Reid, Chatterton and Reid, Chartered Accountants, inhabited a
cold gloomy office on the fourth floor of Great Winchester House—
an office by no means in keeping with their status as one of the
premier auditing firms in the City. George Reid himself—a deliberate-
looking middle-aged man of University education, square-chinned,
clean-shaven, lined of face but twinkling of eye—welcomed Peter;
led him into the “board-room”—a shabby apartment furnished with
twelve wood-seated chairs, an enormous table and a rather
gimcrack sofa.
“The others haven’t arrived yet. Have some tea?”
“Thanks,” said Peter. “Tell me,” he went on, after the two cups
had been brought, “has Turkovitch been to see you?”
“Unofficially,” grinned Reid. “Yes. What have you been doing to
the little man? He’s in a rare stew. Says he wishes he could get his
money out.”
“He can,” said Peter laconically. “I’m about through with friend
Ivan. It isn’t that I grudge him the eventual profits. But the chap’s
no good for a show like this. He hasn’t got the spunk.”
“Well, don’t lose your temper with him this afternoon,” warned
Reid, who knew Peter of old. “By the way, how’s Jameson’s getting
on these days? You really ought to have their accounts audited, you
know.”
“Simpson won’t. He’s very old-fashioned; says he can’t stand
outsiders prying into his affairs.”
Bramson and Turkovitch came in, shook hands, sat down. Reid
opened the “minute-book,” gabbled off the minutes of the last
meeting which Peter signed perfunctorily. (Nirvana was a private
company, the requisite number of shareholders being made up by
clerks.)
“And now,” began Reid, “for the accounts. As far as I can see—
there are one or two adjustments still to be made—we have

managed, for the first time, to pay all our expenses and earn a small
dividend.”
“Do ve pay out de dividend?” asked Turkovitch.
“Of course we don’t,” snapped Peter, “the money’s wanted for
expansion.”
“Den vot’s the good of making it?” growled Turkovitch.
“One moment, gentlemen,” went on Reid. “I find, on careful
analysis of the figures, that—had it not been for the high profits
earned on the export trade—we should have made, not a profit, but
a loss.” He gave details, and concluded, “I don’t think that’s a sound
position.”
“Nor I,” commented Peter.
But here Turkovitch—tact thrown to the winds—boiled over. It
was his business; his name was on all the brands; he knew quite
well what “Petere” wanted; “Petere” wanted to be a millionaire;
“Petere” wished to spend all the profit in some crazy scheme of
advertising; why should they advertise? the cigarettes were the
finest cigarettes in the world; he, Turkovitch, guaranteed them. . . .
“Oh, shut up,” muttered Peter, exasperated.
“I vill not shut up. You are always interfering. You interfere with
me and de vork-peoples. You interfere vith my tobacco merchants.
And now you vant to interfere vith de dividends.”
“Damn it, you draw a salary of seven hundred a year; and I
haven’t had a penny piece out of the concern yet.”
Turkovitch became plaintive, even less intelligible than usual.
“But vy not pay out de dividend? A leetle dividend. Drei per cent on
de cabital.”
“Because, there’s no money to do it with: because we’re trading
on bank-credit: because. . . . Oh, you try and explain things to him,
Reid,” said our Mr. Jameson hopelessly.
Reid plunged into an exhaustive bath of facts and figures. There
was big money to be made out of Nirvana. Reid knew it; Peter knew
it; Bramson knew it. The hopeless period of an advertising business,
the pay-pay-pay-and-not-a-jitney-of-it-back stage had been passed.
Now, all they needed was work, a little more capital, and—

supremely—confidence. But the Hungarian didn’t, couldn’t, wouldn’t
see it.
“Dis is not business, eet is gambling,” he kept on saying. “You
spend and you spend. And dere are no deevidends. I vish I had my
cabital out of de gompany. . . .”
Reid glanced at Peter, who took the cue, screwed the butt of his
cigar into the corner of his mouth, and said, very slowly:
“Look here, Turkovitch. You’re being a frightful ass. I don’t like to
see any man who has worked with me throwing away a
fortune. . . .”
“Fortune?” sniffed Turkovitch. “Vith no deevidends.”
“Do let me speak for a minute. As I was saying, you’re being very
foolish. But if you really mean what you say, you shall have your
capital out. I’ll buy your shares off you. At a fair price.”
“Vot price?”
Peter, who had devoted the week-end (Poor Patricia!) to a careful
study of the anticipated problem, drew a piece of paper from his
pocket.
“When I first consented to join you in this show,” he began, “you
were worth, at an outside estimate, two thousand pounds. For six
years, you’ve been drawing £700 a year.”
“Dat,” said Turkovitch, slightly mollified already, “vos for my vork,
for my experience.”
“Quite right. I wasn’t asking you to give it me back, was I? Then
there’s six years’ compound interest at, say, five per cent. Call it two
thousand eight hundred. I’ll give you”—Peter hesitated for a
moment, went up two hundred in his mind—“Three thousand
pounds for your shares in Nirvana. The lot, of course.”
And so—after about a fortnight of negotiation—they got rid of
the obstructionist. He went, in the end, quietly; delighted with his
cheque; saying: “Now, I and my wife, ve take a little trip to Salonica.
Perhaps, ven I come back, ve do some business in de leaf-tobacco,
eh, Petere?”
“Right you are,” said our Mr. Jameson, who had no patience with
fools but never bore malice.

Financial Markets and Institutions 7th Edition Saunders Solutions Manual

PART THREE
THE CREST OF THE WAVE

§ 1
“Limousine-Landaulette body would be best,” said Peter. “We
want something that will do either for town work or touring.”
“How about a cabriolet?” asked Patricia.
“If it’s not too heavy for you to drive.”
It was a Saturday afternoon, the first in July; and they were
lunching in the low-roofed, cabin-like grill-room of the Carlton Hotel.
The brass clock on the white mantelpiece pointed a quarter to three;
most of the tables had emptied; but Peter and his wife sat on. The
choice—that of their first automobile—needed careful discussion.
It pleased her to see him sitting there, boy-like for the moment,
liqueur-glass poised steadily in his firm hand, inevitable cigar
between his lips. The six months since his return from Hamburg had
not been over-happy ones for Patricia. Always, she had felt the City
pulling against her, taking him from her. Always, he grew more
absorbed, more reticent. But now it seemed as though, just for a
flash, the pal she had married was hers again.
“Aren’t I getting a little old to drive a car?” she asked.
He looked at her carefully before he spoke; took in at one glance
smooth complexion, perfect teeth, the clear eyes and the glossy hair
under the gray toque. Then he said, “Don’t talk rot, old thing.”
“And either way,” she went on, “it’s an extravagance.”
“An extravagance we can afford.”
For, really, it looked as though dreams would come true.
Turkovitch’s defection—owing to Bramson’s application for shares—
had only meant two thousand pounds instead of the anticipated
three. Nirvana’s bank, approached with a profit-earning balance-
sheet and guaranteed by Peter, had loaned the five thousand for
their new advertising campaign. Jamesons, in sole control of the
Beckmann brand, were making more money than ever before. Only
that morning, Hagenburg had placed an order on which the profit
made even Peter a little dizzy.

Of course there had been difficulties. Elkins and Beresford did not
surrender their customers without a struggle. The re-organization of
the manufacturing staff proved a shade less simple, Bramson a
shade less capable, than anticipated. Home-trade climbed a trifle too
slowly. Still, it climbed; and Peter was winning, winning all along the
line. Now, only the finest of hairs divided gamble from certainty.
“An extravagance we can afford,” he repeated.
“I’m so glad,” she said, “not for the sake of having a car but
because. . . .” For the first time in their married life, she almost felt
shy with him.
“Because of what?”
“Because I know you can’t bear failure.”
“Failure,” he laughed; then, growing serious, “No. I’ve no use for
failures. The man who ‘goes under’ doesn’t strike me as pathetic—
only as idiotic.”
“You mean the man who fails to make money.”
“Good Lord, no. Money’s nothing. At best, only the counters with
which we are paid for winning certain games. Mine, for instance. By
failure, I mean not getting what you go for. Never mind what it is—
fame, money, tranquillity, distinction. A girl or a seat in the House of
Lords. As long as you know what you want, and get it, you’re a
success.”
“But some people don’t want anything in particular.”
“I’ve no use for that kind.”
Her trained mind told her that the man had voiced his whole
creed. Her woman’s instinct resented it. “He didn’t want her like
that. She was only a side-issue. ‘Something better than his dog, a
little dearer than his’—cigarette-factory.”
“Idiot” said her reason. “Idiot! You’ve been married eight
years. . . .”
“If we want to be with Francis in time for tea,” said her voice,
“you’d better ask for your bill.”
Peter paid; and they passed out, picking up his hat and stick
from the cloak-room; climbed the carpeted stairs into the
Haymarket.

It was the zenith of London’s last, maddest “season”; but her
pleasure crowd—the dancers in her night-clubs; the befeathered
scantily-draped women of her Opera House; the placemen, the
panderers and the nincompoops who made pretence of governing
her—had departed; were “week-ending” in pseudo-rusticity, twenty,
thirty, a hundred miles away. And real London, heart of Empire,
rested quietly in the soft sunshine—glad to be free of such parasites
—as Peter and Patricia made way through her empty streets to
Bloomsbury.

§ 2
When a young man, who has never done a day’s work except “to
amuse himself,” comes down with a crash from ten thousand pounds
a-year to about five hundred, it seems to him at first as though Life
(with a capital L) were finished. Later on, the adaptability of the
human animal begins to assert itself; a new standard of values
replaces the old one; and the man—as apart from his chattels—
emerges. Bruised, broken or strengthened according to his nature.
Peter’s cousin, Francis Gordon, had come down with just such a
crash: but in Francis’ case the human animal had more than altered
conditions to which it needed adapt itself. For Francis Gordon at the
very moment when Life (with a capital L) had looked its blackest,
met a girl, the girl, the ideal to whom his soul had been, was, and
would always be, faithful.
He looked up now—from the papers on the table where he sat
working—at her photograph, the only one in the room.
Beatrice Cochrane! A very ordinary, very human, very idealistic
American girl. The sort of girl a man may meet in her hundreds from
Los Angeles to Atlantic City; from New Orleans to Flushing, Long
Island; from Dubuque, Iowa to Dallas, Texas. A girl still in her ’teens;
slender-handed; with pale-gold hair and pale-gray thoughtful eyes.
A very ordinary American girl, of the old Anglo-Saxon stock—but
tempered and refined by struggle: child of very ordinary American
parents, educated rather to beauty of thought than to “beauty
roses.” But, in the mind of Francis Gordon, she stood for all the
flowers; for poetry and romance, for self-sacrifice and achievement,
for every decent impulse which had helped him through the black
hours of crisis.
He had not married her, not even asked her to marry him. He
had not—in that brief fortnight of a shipboard friendship—deemed
himself worthy. It had seemed to him as though God—a visible
speaking God—forbade their union; commanding His creature,
Francis Gordon, abandon that dream; take up, in its stead, the

burden of vocation, the Work of writing for which He had endowed
him with a tiny spark of His own genius.
And so Francis—who imagined himself to have seen, for a
moment, behind that Veil of God which does not lift until the time
appointed—returned to London; sold his house in Curzon Street, his
cars and his pictures, his gold plate and his Aubusson carpets; and
retired, taking with him only Prout, his old manservant, to this high
apartment at the top of the eighteenth-century Georgian building in
Mecklenburgh Square.
All “literary” London knew a Francis Gordon, a versifier whose
technique they admired, whose pose they applauded. But the
Francis, they did not know. Nor, had they known him, would they
have, at that time, admired.
For the Francis—the man who, for all his fine aspirations, was still
utterly incapable of formulating clean thought into simple words—
had conceived another dream. And this was the shape of it.
He had learned from Beatrice, and from her parents, something
—though very little—of the real America. He had taught her
something—though very little—of the real England. He realized, as
few Englishmen of his time, how the two nations had drifted apart;
misunderstood one another. And it seemed to him, in his
presumption, that a few words, a trumpery poem, could set this
misunderstanding right.
Of course—(he was too much in love with the phantom of
Beatrice for any except a prejudiced judgment)—he blamed his own
countrymen exclusively. Equally of course, the great poem of his
projecting, became—the moment pen touched paper—an artificial
web of phrases through which the man’s real belief in a Spiritual
Federation of the English-speaking Peoples oozed to nothingness.
Still, it says something for the influence of a girl who only wrote in
calm friendship, confident of his ultimate success as a writer, but by
no manner of means—consciously at any rate—in love with him, that
Francis Gordon should have held to this belief, unflinchingly, through
all those weary months when other Englishmen—better informed on
material points though utterly ignorant of the spiritual reluctance to
realize that a world-crime was being committed (which reluctance

alone kept America so long out of the War)—were saying to
themselves, “Can’t they see things? Won’t they see things? Must we
fight this greatest of all battles without them?”
“Mr. and Mrs. Jameson, Sir,” announced the elderly manservant.

§ 3
Nothing in the outward appearance of the Francis Gordon who
rose at the entrance of his cousin’s wife, suggested the conventional
(or unconventional) poet. Short dark hair parted at the side, clipped
moustache, well-cared-for hands, creaseless gold-pinned soft collar,
well-tailored blue suit—all proclaimed the ordinary idle young man of
the period. And as such, to tell the truth, his cousin Peter—to whom,
except for a certain lack of dourness about the expression, he bore
an amazing resemblance—regarded him.
His surroundings, too, helped this illusion of the idle
commonplace. The room was large, white-walled and green-
carpeted; crowded mahogany book-shelves completely lined one
wall; a spacious writing-table—scrupulously tidy—set square in the
centre of two big windows—the other. Chippendale chairs, a tea-
table already laid, and a revolving bookcase filled with foreign
dictionaries, Roget’s Thesaurus, and other reference-works,
completed the furniture. Two mahogany doors—one, through which
Patricia and Peter had just entered, leading to the narrow hall—the
other to the bedroom and bathroom—glowed darkly against the
rough white of the wall-paper.
“This doesn’t look much like poverty,” commented Peter. (Francis
had only just taken the flat. This was their first visit to him.)
“I don’t think you’d make much of a welfare inspector, old man,”
replied Francis. “Fourth floor. No lift. No telephone. Geyser-bath.
Shilling-in-the-slot electric-light meter. A complacent landlord. And
the relics of the Curzon Street furniture. Guess again about my
poverty.”
“And a manservant,” commented Patricia, taking off hat and
gloves, sitting down—as by right—at the tea-table.
“Oh, Prout! Prout would pay to stay on, I believe. Francis Gordon
and his faithful valet; or the loyalty of an old retainer. . . .”
But Patricia knew that the supercilious remark hid real affection
for that “old bounder Prout.” She had seen a good deal of Francis

since his return to England; revised many of her early unfavourable
opinions about him. The good-will was mutual: though Francis, who
still thought “Pat.” rather a commonplace young woman, would have
been more than surprised to know how near she had come to
divining the change in his mentality—and the real reason for that
change.
“Who’s this?” commented Peter, his inspection of the new
quarters having brought him to Beatrice’s photograph.
“Friend of mine,” said Francis curtly. “Don’t touch those papers.”
“I won’t touch your precious papers.”
At which little passage of arms, Patricia’s last doubts settled into
a comfortable certainty.
Prout, bringing tea, restored harmony. They sat long over it,
smoking and talking—mostly, as is the habit of near relations, about
themselves.
“By Jove,” said Peter—interrupting himself in the middle of a long
monologue about advertising—“I almost forgot. We’ve taken a house
at Wargrave for a month. Lodden Lodge. It’s rather a decent place.
Tennis lawn; river-frontage; bath, h. and c.; usual domestic offices;
et cetera et cetera. You are expected to stay with us.”
“Hukkum hai? (Is it an order?),” asked Francis.
“Oh, we all know you spent three months in India,” chaffed Peter.
“Question is: are you coming?”
“Of course I’m coming,” said Francis, “and so is Prout—if Patricia
doesn’t object.”

§ 4
“Some car!” thought Peter as he stepped into the front seat;
slammed the door home; said “You take her for a bit, Murray,” to the
uniformed chauffeur; and acknowledged “Pretty” Bramson’s rather
overdone salute with a wave of his hand. They purred out from the
factory-gates into Brixton Road; swung first right, then left; headed
for Hounslow.
Certainly, “some car”—a long, low stream-lined cabriolet, royal-
blue in colour, the Crossley cross on her radiator. Peter had
discovered her through the advertisement columns of the Morning
Post; clinched the deal a week before. But his thought did not centre
long on the new purchase.
It was the Thursday before August Bank Holiday 1914. To get
away so early, had meant cramming the week’s work into three and
a half days. Still, he could afford to take a rest now. For a few
minutes, he allowed himself the rare luxury of a dream. Nirvana had
arrived! July sales proved it. Nothing could stop their automatic
increase. Already, the capital he had sunk was in sight again. Then—
what a business he would make it! All over the world, too. . . . India,
China, New Zealand, South Africa. He must have his own factory in
the States, in Canada; defeat their confounded protective tariffs. . . .
“Will you take her now, sir?” asked Murray, as they wriggled out
through Hounslow High Street.
“Not for another mile or so.”
Peter’s mind came back to details; wandered off them again.
Nothing could stop that automatic increase. Nothing. The political
situation? Blow the political situation! Nobody with any sense cared
for political situations. Except retail tobacconists, to whom they
furnished a good excuse for curtailing orders.
“I’ll take her now, Murray.”
The chauffeur slowed down sufficiently to allow a change of
places. Peter took the wheel; opened the throttle; slammed her into
“top”; and whisked off down the Bath Road.

For the first time in six years, our Mr. Jameson felt a little above
himself!

§ 5
Lodden Lodge, Wargrave, is a square, comfortable, late Victorian
house, ivy-covered, backing on a quiet side-road and fronting the
Thames mainstream with sloping close-clipped lawns.
Peter arrived towards tea-time; found his wife and Francis (over-
immaculate in creased white trousers and buckskin shoes), just
sitting down to the silver-laid sun-dappled table under the willow-
trees.
“Where’s your brother, Jack?” asked Peter.
“He’s not coming after all,” said Patricia. “I had a wire this
morning. Manœuvres, I expect.”
“Don’t you believe it, Pat,” put in Francis. “He’s off to fight the
good fight in Ulster. What a lark! Fancy Teddy Carson, mounted on a
‘sable destrier,’ charging the guns.”
“Idiot!” commented Peter; and added, “Confound the fellow. That
spoils our four for tennis.”
“We shall be all right for tennis.” Patricia filled the cups; passed
them. “Violet and her husband have invited themselves for the
week-end.”
“Oh Lord,” began Peter; but—catching his wife’s eye—desisted.
After all, Rawlings didn’t play such a bad game of tennis; and Violet’s
bridge, though not pleasant, was perfect. Tea over, Peter changed
into flannels; came down to find Evelyn and Primula, barelegged,
muslin-frocked and sun-bonneted, waiting for him.
“We want to go on the river,” they chorused, “we want to go on
the river.”
“It’s too late for the river,” said Patricia.
“It isn’t too late. It isn’t too late. Is it Daddy? . . .”
“They do like him, don’t they?” Francis said to their mother. Peter,
over-ruling her objections, had picked up the two laughing bundles;
packed them into the cushioned punt; and was now poling slowly
out into main stream.

“Why shouldn’t they?” laughed Patricia. But, all the same, she felt
a little twinge of jealousy. The children meant so much to her, so
little to Peter. Yet, at a lift of the finger, they would desert her for
him. . . . Perhaps it was because that finger so seldom lifted. . . . If
only one of them had been a boy!
She watched her husband’s strong figure, black now against the
glow of the water, bending to the pole as he met the current. The
punt glided under the railway bridge, out of sight.
“Of course they ought to have been boys.” Francis Gordon’s voice
interrupted her reverie. He seemed—as often when they were quite
alone,—to have dropped the mask of superciliousness. She looked at
him; wondered how much he realized. A disturbing person, this new
cousin of hers. Almost uncanny at times, this way in which his mind
seemed to penetrate her thoughts. . . . And again that night, at table
in the long low dining-room, she speculated about this man.
He sat, facing the sunset, immaculate as ever but unusually
silent. Every now and then, it seemed to her as though his eyes saw
—beyond the rose glow of the horizon—into vision-land. “He’s
thinking about that girl,” she reasoned, “the girl whose photograph
we saw at the flat.” And then, remembering the eyes of a man she
had once seen at a revivalist meeting, she began to doubt her
theory of a love-affair.
Sunset darkled to twilight, twilight to blackness, as they finished
dinner.
Patricia, pleading tiredness, went upstairs early; heard, as she
undressed in the cool fragrance of the river-night, the sound of
canvas-chairs, dragging first across the gravel, then over grass; saw
the points of two cigars burning redly under the willow-trees.
“Beckmann, Coronas,” announced Peter. “Good, aren’t they?”
“Very,” admitted Francis.
For nearly ten minutes, neither spoke. It was a night for
confidences. Silent save for the river-chuckle; star-dusted; peaceful.
But the two Englishmen smoked on; reticent, each busy with his
own dreaming: the one seeing a great business, world-wide, endless
in opportunity: the other, vignetted in silver radiance against the
sable background of his thought, the features of a girl—of a girl five

thousand miles removed from England—a girl for whose sake and
without hope of reward he had vowed himself to the dissatisfying
god of Work.
“Why don’t you get married again?” asked Peter suddenly.
“Only because I can’t afford it,” lied Francis Gordon.

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