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About the Author

Stephen Foerster is a Professor of Finance at the Ivey Business School, Western

University in Ontario, Canada. He currently teaches corporate finance to Exec-
utive MBA students. He received his M.A. and Ph.D. from the University of
Pennsylvania (The Wharton School) and also obtained the Chartered Financial
Analyst designation.
Professor Foerster is a member of the Editorial Board of Financial Analysts
Journal. His research interests include capital markets and household finance.
Major academic journals such as the Journal of Finance and Journal of Financial
Economics have published his research, and he has written over 90 case studies.
Professor Foerster has won numerous teaching and research awards. He has
been a consultant and executive training course designer and facilitator in cor-
porate finance, portfolio management, finance for nonfinancial executives,
value-based management, risk management, and other investment areas. He
also serves on a university pension board and a not-for-profit foundation
board.
Born in Sudbury, Ontario, Professor Foerster is married with four children
and enjoys golfing, hiking, and biking.

vii
Brief Content

Part 1: Assessing and Managing Performance 1

1 Overview of Financial Management 1
2 Sizing-Up a Business: A Nonfinancial
Perspective 18
3 Understanding Financial Statements 45
4 Measuring Financial Performance 65
5 Managing Day-to-Day Cash Flow 87

Part 2: Assessing Future Financial Needs 104

6 Projecting Financial Requirements and
Managing Growth 104
7 Time Value of Money Basics and
Applications 129
8 Making Investment Decisions 151

Part 3: Financing Long-Term Needs 167

9 Overview of Capital Markets: Long-Term
Financing Instruments 167
10 Assessing the Cost of Capital: What Return
Investors Require 194

viii
 Brief Content ix

11 Understanding Financing and Payout

Decisions 215
12 Designing an Optimal Capital Structure 235

Part 4: Creating Value 255

13 Measuring and Creating Value 255
14 Comprehensive Case Study: Wal-Mart Stores,
Inc. 281
Contents

Part 1: Assessing and Managing Performance 1

1 Overview of Financial Management 1
1.1 Financial Management and the Cash Flow Cycle 1

Case Study: Advanced Micro Devices Inc.’s Cash Crunch 2

1.2 The Role of Financial Managers 5

In-Depth: M aximizing Shareholder Value: An Ethical Responsibility? 6

1.3 A Nonfinancial Perspective of Financial Management 7

In the News: Walmart’s Financial Challenges 8

1.4 Financial Management’s Relationship with Accounting and Other

Disciplines 9
1.5 Types of Firms 10
1.6 A Financial Management Framework 12
1.7 Relevance for Managers 16
Summary 16
Additional Readings and Information 17
Problems 17

2 Sizing-Up a Business: A Nonfinancial

Perspective 18
2.1 Sizing-Up the Overall Economy 20
In-Depth: Gathering Information for a Size-Up 20

2.1.1 GDP Components 21

2.1.2 Sector-Related Fluctuations 23

2.1.3 Inflation and Interest Rates 24

Case Study: Sector Performance and Business Cycles: Duke Energy
Corporation and Tiffany & Co. 24

2.1.4 Capital Markets 27

2.1.5 Economic Size-Up Checklist 28

2.2 Sizing-Up the Industry 29

2.2.1 Industry Life Cycles 29

2.2.2 The Competitive Environment 30

2.2.3 Opportunities and Risks 32

2.2.4 Industry Size-Up Checklist 33

x
 Contents xi

2.3 Sizing-Up Operations Management and Supply Risk 33

2.4 Sizing-Up Marketing Management and Demand Risk 36
2.5 Sizing-Up Human Resource Management and Strategy 38
2.6 Sizing-Up Home Depot: An Example 40
2.7 Relevance for Managers 42
Summary 43
Additional Readings and Information 43
Problems 44

3 Understanding Financial Statements 45

3.1 Understanding Balance Sheets 45
3.1.1 Understanding Assets 47
3.1.2 Understanding Liabilities 49
3.1.3 Understanding Equity 51

In-Depth: Book Value of Equity versus Market Value of Equity 52

3.2 Understanding Income Statements 53

3.2.1 Understanding Revenues, Costs, Expenses, and Profits 53

In-Depth: EBIT versus EBITDA 55
3.2.2 Connecting a Firm’s Income Statement and Balance Sheet 57

3.3 Understanding Cash Flow Statements 58

3.3.1 Cash Flows Related to Operating Activities 59
3.3.2 Cash Flows from Investing Activities 61
3.3.3 Cash Flows from Financing Activities 61

In-Depth: U.S. versus International Accounting and Financial Statement
Presentation 62

3.4 Relevance for Managers 63

Summary 64
Additional Readings and Information 64
Problems 64

4 Measuring Financial Performance 65

4.1 Performance Measures 65
4.1.1 Return on Equity 66

Case Study: ROE Drivers across Industries: Tiffany and Kroger 69
4.1.2 Profitability Measures 69
4.1.3 Resource Management Measures 72
4.1.4 Liquidity Measures 75
4.1.5 Leverage Measures 76
4.1.6 Application: Home Depot 78
xii Contents

4.2 Reading Annual Reports 83

4.3 Relevance for Managers 84
Summary 85
Additional Readings and Information 85
Problems 86

5 Managing Day-to-Day Cash Flow 87

5.1 Cash Flow Cycles 87
5.2 Working Capital Management 92
5.2.1 Managing Inventory 92

In-Depth: Inventory Management Systems 92
5.2.2 Managing Accounts Receivable 93

In-Depth: Aging Schedules and Bad Debt 93
5.2.3 Managing Accounts Payable 94
5.2.4 Application: Home Depot 94

In-Depth: The Cost of Foregoing Discounts on Payables 94
In-Depth: Working Capital Management Ratios across Industries
98

5.3 Short-Term Financing 99

5.3.1 Bank Loans 99
5.3.2 Commercial Paper 100
5.3.3 Banker’s Acceptance 100

Case Study: Commercial Paper and the 2007–2009
Financial Crisis 101

5.4 Relevance for Managers 101

Summary 102
Additional Readings and Information 102
Problems 103

Part 2: Assessing Future Financial Needs 104

6 Projecting Financial Requirements and
Managing Growth 104
6.1 Generating Pro Forma Income Statements 105
6.1.1 Establishing Cost of Goods Sold and Gross Profit 106
6.1.2 Establishing Expenses 108
6.1.3 Establishing Earnings 108

6.2 Generating Pro Forma Balance Sheets 110

6.2.1 Establishing Assets 110
6.2.2 Establishing Liabilities and Equity 111
 Contents xiii

6.3 Generating Pro Forma Cash Budgets 113

6.3.1 Establishing Cash Inflows 113
6.3.2 Establishing Cash Outflows 113
6.3.3 Establishing Net Cash Flows 114

6.4 Performing Sensitivity Analysis 115

6.4.1 Sales Sensitivity 116
6.4.2 Interest Rate Sensitivity 117
6.4.3 Working Capital Sensitivity 117

6.5 Understanding Sustainable Growth and Managing

Growth 118

Case Study: Home Depot’s Pro Forma Statements and
Sustainable Growth 121

6.6 Relevance for Managers 123

Summary 124
Additional Readings and Information 124
Problems 125
Appendix: Spreadsheet Analysis 125

7 Time Value of Money Basics and

Applications 129
7.1 Exploring Time Value of Money Concepts 129
7.1.1 Future Values 131
7.1.2 Present Values 133
7.1.3 Annuities 135
7.1.4 Perpetuities 136

In-Depth: Spreadsheet and Financial
Calculator Tips 137

7.2 Applying Time Value of Money Concepts to Financial

Securities 139
7.2.1 Bonds 139

In-Depth: Bond Prices and Yields: Home Depot Inc.
Example 143
7.2.2 Preferred Shares 143

In-Depth: Preferred Share Prices and Bond Yields: Kansas City
Railroad 145
7.2.3 Common Equity 146

In-Depth: Multistage Dividend Discount Model 148

7.3 Relevance for Managers 148

Summary 149
Additional Readings and Information 149
Problems 149
xiv Contents

8 Making Investment Decisions 151

8.1 Understanding the Decision-Making Process 151
8.2 Capital Budgeting Techniques 153
8.2.1 Payback 154
8.2.2 Net Present Value 155

In-Depth: Real Options 157
8.2.3 Internal Rate of Return 158

8.3 Capital Budgeting Extensions 161

8.3.1 Profitability Index 161
8.3.2 Equivalent Annual Cost and Project Lengths 162
8.3.3 Mutually Exclusive Projects and Capital Rationing 163

8.4 Relevance for Managers 164

Summary 165
Additional Readings and Information 165
Problems 166

Part 3: Financing Long-Term Needs 167

9 Overview of Capital Markets: Long-Term
Financing Instruments 167
9.1 Bonds 168
9.1.1 Changing Bond Yields 168
9.1.2 Bond Features 169

In the News: The Libor Scandal 170
9.1.3 Bond Ratings 171

In-Depth: What Credit-Rating Agencies Do 172

9.2 Preferred Shares 173

9.3 Common Shares 174
9.3.1 Historical Returns 175

9.4 Capital Markets Overview 177

9.4.1 Private versus Public Markets 177
9.4.2 Venture Capital and Private Equity 178

Case Study: Private Placement Example—Sesac Inc. and the Music of
Bob Dylan and Neil Diamond 179
9.4.3 Initial Offerings versus Seasoned Issues 179

In Depth: SOX and the Cost of Being a Public Firm 181
Case Study: Google and Facebook IPOs 182

9.4.4 Organized Exchanges versus Over-the-Counter Markets 185
9.4.5 Role of Intermediaries 185
 Contents xv

9.5 Market Efficiency 186

9.5.1 Weak Form 187
9.5.2 Semistrong Form 187
9.5.3 Strong Form 188
9.5.4 U.S. Stock Market Efficiency 188

9.6 Relevance for Managers 188

Summary 189
Additional Readings and Information 189
Problems 190
Appendix: Understanding Bond and Stock Investment
Information 191
Bond Information 191
Stock Information 191

10 Assessing the Cost of Capital: What

Return Investors Require 194
10.1 Understanding the Cost of Capital:
An Example 195
10.2 Understanding the Implications of the
Cost of Capital 197
10.3 Defining Risk 198
10.4 Estimating the Cost of Debt 201
10.5 Estimating the Cost of Preferred Shares 202
10.6 Estimating the Cost of Equity 204
10.6.1 Dividend Model Approach 204
10.6.2 Capital Asset Pricing Model 205

In-Depth: Investing in “the Market” 206

10.7 Estimating Component Weights 208

10.8 Home Depot Application 209
10.9 Hurdle Rates 211
10.10 Relevance for Managers 212
Summary 213
Additional Readings and Information 213
Problems 214
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xvi Contents

11 Understanding Financing and Payout

Decisions 215
11.1 Capital Structure Overview 216
11.2 Understanding the Modigliani-Miller Argument: Why Capital
Structure Does Not Matter 218
11.3 Relaxing the Assumptions: Why Capital Structure Does Matter 221
11.3.1 Understanding the Impact of Corporate Taxes 222
11.3.2 Understanding the Impact of Financial Distress 223

In the News: Largest U.S. Bankruptcy 225
11.3.3 Combining Corporate Taxes and Financial Distress Costs 225
11.3.4 Impact of Asymmetric Information 226

11.4 Understanding Payout Policies 227

11.4.1 Paying Dividends 227
11.4.2 Repurchasing Shares 228
11.4.3 Do Dividend Policies Matter? 229

11.5 Relevance for Managers 230

Summary 231
Additional Readings and Information 231
Problems 232
Appendix: Why Dividend Policy Doesn’t Matter: Example 233

12 Designing an Optimal Capital

Structure 235
12.1 Factors Affecting Financing Decisions: The FIRST Approach 235
12.1.1 Maximizing Flexibility 235

Case Study: Ford Motor Company and Financial Flexibility Prior to the
Financial Crisis 237
12.1.2 Impact on EPS: Minimizing Cost 237
12.1.3 Minimizing Risk 241
12.1.4 Maintaining Shareholder Control 242

Case Study: Maintaining Control: Google Inc. and Dual Class
Shares 243
12.1.5 Optimal Timing 244

12.2 Tradeoff Assessment: Evaluating the FIRST Criteria 244

In-Depth: Optimal Amount of Debt at the Firm Level: Six Flags Inc.
Example 245
12.2.1 Example: Optimal Capital Structure and Minimizing the Cost of
Capital 247

Case Study: Changing Capital Structure: The Home
Depot Example 248
In-Depth: The Cost of Equity, Levered Betas, and the Target Capital

Structure 249
 Contents xvii

12.3 Relevance for Managers 250

Summary 252
Additional Readings and Information 252
Problems 253

Part 4: Creating Value 255

13 Measuring and Creating Value 255
13.1 An Overview of Measuring and Creating Value 256
13.2 Measuring Value: The Book Value Plus Adjustments
Method 258
13.2.1 Pros and Cons of the Book Value of Equity Plus Adjustments
Method 259

13.3 Measuring Value: The Discounted Cash Flow

Analysis Method 259
13.3.1 Estimating Free Cash Flows 260

In-Depth: Why Do We Add Back Noncash Items? 261
13.3.2 Estimating the Cost of Capital 262
13.3.3 Estimating the Present Value of Free Cash Flows 263
13.3.4 Estimating the Terminal Value 264

In-Depth: The Most Common DCF Estimation Mistakes 265
13.3.5 Estimating the Value of Equity 265
13.3.6 Pros and Cons of the Free Cash Flow to the
Firm Approach 267

13.4 Measuring Value: Relative Valuations and Comparable

Analysis 267
13.4.1 The Price-Earnings Method 267
13.4.2 Pros and Cons of the Price-Earnings Approach 269

In-Depth: The Price-Earnings Model and the Constant Growth Dividend
Discount Model 270
13.4.3 The Enterprise Value-to-EBITDA Method 270
13.4.4 Pros and Cons of the EV/EBITDA Approach 271

In-Depth: Comparing P/B, P/E, and EV/EBITDA
across Industries 272

13.5 Creating Value and Value-Based Management 273

13.6 Valuing Mergers and Acquisitions 276
13.6.1 Valuing Comparable M&A Transactions 277

13.7 Relevance for Managers 278

Summary 278
Additional Readings and Information 279
Problems 280
xviii Contents

14 Comprehensive Case Study: Wal-Mart Stores,

Inc. 281
14.1 Sizing-Up Walmart 283
14.1.1 Analyzing the Economy 283
14.1.2 Analyzing the Industry 284
14.1.3 Analyzing Walmart’s Strengths and Weaknesses in Operations,
Marketing, Management, and Strategy 286
14.1.4 Analyzing Walmart’s Financial Health 288

In-Depth: Target Corporation: ROIC 294
In-Depth: Target Corporation: ROE 295

14.2 Projecting Walmart’s Future Performance 295

14.2.1 Projecting Walmart’s Income Statement 295
14.2.2 Projecting Walmart’s Balance Sheet 297
14.2.3 Examining Alternate Scenarios 299

14.3 Assessing Walmart’s Long-Term Investing and Financing 300

14.3.1 Assessing Walmart’s Investments 300
14.3.2 Assessing Walmart’s Capital Raising and the Cost of Capital 301

In-Depth: Target Corporation: Cost of Capital 302

14.4 Valuing Walmart 302

14.4.1 Measuring Walmart’s Economic Value Added 302

In-Depth: Target Corporation: EVA 303
14.4.2 Estimating Walmart’s Intrinsic Value: The DCF Approach 304
14.4.3 Estimating Walmart’s Intrinsic Value: Comparable Analysis 304

In-Depth: Target Corporation: EV/EBITDA Analysis 306
14.4.4 Creating Value and an Overall Assessment of Walmart 306

14.5 Relevance for Managers and Final Comments 307

Additional Readings and Information 307
Problems 308

Glossary 309

Index 315
Preface

Welcome to the wonderful world of finance! What is the first thing that comes to your
mind when someone mentions corporate finance or financial management? If you’re
like many students and nonfinancial managers, your initial response may be “It sounds
like something I don’t need to know” or “It sounds complex, and it deals with lots of
numbers” or “It doesn’t sound like the most exciting business subject I have studied.” Yet
my experience teaching business undergraduates, MBAs, and executives has led me to
conclude that virtually everyone can overcome these initial feelings through an educa-
tional process that:
Shows how finance integrates with other areas of business
Shows the practical side of finance, rather than just the theoretical concepts
Shows that finance is a dynamic, interesting, and topical area of study
Understanding finance is critical to understanding business in general, because
finance is a key driver of a firm’s activities. Familiarity with financial concepts also helps
you fully understand many of the stories featured every day in the financial press.

Key Features
Financial Management: Concepts and Applications is made distinctive by incorporation
of the following features:
It introduces a unique financial management framework that serves as a unifying
theme throughout the book. At the beginning of each chapter, we return to the
framework and describe how the concepts in the chapter relate to the unifying
theme. The benefit of this approach is that you won’t get lost in the trees but will
always have an eye on the greater forest.
It emphasizes practical examples and applications of concepts. Throughout the
book, we focus on Home Depot, Inc., the world’s largest home improvement retailer.
For example, after we discuss the topic of cost of capital, we’ll look at how to esti-
mate Home Depot’s cost of capital. The book also includes examples of other firms
and situations relevant to our discussions. Much of this information is conveyed
visually via charts, exhibits, and tables.
It integrates both the nonfinancial and financial areas of business. A unique feature
for a finance textbook is the inclusion of a chapter that presents a nonfinancial per-
spective of financial management to help students identify opportunities and risks
as well as to understand the corresponding financial implications.
It highlights the relevance of the concepts for practicing managers. Whether you are
a nonfinancial manager or an aspiring financial manager, you always want to know
“so what?” Each chapter includes a summary section that describes the relevance of
the concepts and ideas and the key take-aways for managers.
It concludes with a comprehensive case study that summarizes the major concepts
addressed throughout the book and presented in the unifying theme. The last chap-
ter focuses on a well-known retail giant, Wal-Mart Stores, Inc. (Walmart), and

xix
xx Preface

shows how we can apply all of the concepts introduced in the book to assess
Walmart’s performance and to identify ways that Walmart can create value for its
shareholders.
It is relatively short in length for a finance textbook, compared to many traditional
finance texts with over 1,200 pages.
This text is aimed primarily at nonfinancial executives and managers, as well as cur-
rent MBA and undergraduate students who are aspiring managers and want to be in a
position to better communicate with financial managers, accountants, and controllers.
The book is meant to be a practical guide to financial management, for those have never
had direct exposure to the field of finance. The emphasis is on the application of tools to
better understand a firm’s financial situation.
Thus, the three major objectives of the book are as follows:
To provide nonfinancial managers with insight into the various activities of a firm
that affect cash flows
To assist current and future managers in developing the analytical skills necessary for
evaluating business problems and opportunities from a financial perspective
To help nonfinancial managers better understand key concepts related to some of
the major decisions facing financial managers

How This Book Is Organized

Financial Management: Concepts and Applications is divided into four parts. Part One,
Assessing and Managing Performance, consists of Chapters 1 through 5. Chapter 1 pro-
vides an overview of finance and financial management. Chapters 2 through 5 focus on
assessing a firm’s current business from both the nonfinancial and financial perspectives.
This assessment is critical to understanding the firm’s financial health and managing its
performance. To begin, Chapter 2 looks at sizing up a business by examining external
factors, such as the economy and the industry in which the firm operates, as well as the
firm’s strengths and weaknesses in nonfinancial areas like marketing, operations, and
human resources management. Chapters 3 and 4 explore assessing a business from a
financial perspective. Chapter 3 presents key financial statements, whereas Chapter 4
examines historical ratios or measures of performance in order to determine the firm’s
liquidity, efficiency, capacity to take on more debt, and overall profitability. Finally,
Chapter 5 focuses on day-to-day cash flow management, including management of
accounts receivable, inventory, and accounts payable.
Part Two, Assessing Future Financial Needs, consists of Chapters 6 through 8.
Chapter 6 focuses on projecting a firm’s financial requirements through pro forma
income statements, balance sheets, and cash budgets. The importance of spreadsheet
analysis is also discussed. Chapter 7 summarizes time value of money concepts, which
form the basis for bond and equity valuation. The investment decision process is exam-
ined in Chapter 8.
Part Three, Financing Long-Term Needs, consists of Chapters 9 through 12. First,
Chapter 9 provides a bridge from short-term to long-term financing needs by presenting
an overview of capital markets, as well as various debt and equity issues. Next, Chapter
10 focuses on assessing a firm’s cost of capital by estimating the costs of debt and equity.
The financing and payout decisions that a firm faces are examined in Chapter 11. Chap-
ter 12 then looks at issues related to designing an optimal capital structure, including
such trade-offs as cost, risk, and flexibility.
Exploring the Variety of Random
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 The sappers hacked holes through the side of the house; by
squads the men dived in. Jerry stayed out with the rest of Company
B, his eye again glued to Lieutenant Grant.
Through the houses, and behind walls and around corners, the
First Brigade slowly traveled on. The houses stood more and more
closely, so that the burrowers darted safely across the narrow
spaces. The enemy atop was helpless to stop them—and had no
time to attend to them anyway. Jerry soon overtook Lieutenant
Grant, who had halted at one side and was gazing before from the
angle of a garden wall.
He saw Jerry at his elbow.
“You’re here, are you, young bodyguard?”
“Yes, sir.”
“That’s all right. I can use you. Supposing some of us mounted a
light gun in the belfry of that church yonder. We ought to do
execution. What do you think?”
“Yes, sir. That would be a fine place,” Jerry agreed.
The church was located one hundred yards toward the city wall
and off at the south side of the road. It had a flat roof and a belfry;
but the Mexican sharpshooters favored the houses that commanded
the road and had let the church alone.
Lieutenant Grant acted at once.
“Very well, we’ll try it if we can get the gun. You run back, sir, to the
howitzer battery, and ask for a gun and gun crew. Tell them I’ll be
responsible for the report to General Worth.”
Jerry ran, ducking, and wondering whether he would have to cross
that fearful road up which iron and lead were streaming from the San
Cosme gate battery. He was lucky; met, first, a lieutenant of
Voltigeurs—
“Here! Where you going, bub?”
“I want a howitzer, sir. I’m under orders from Lieutenant Grant, of
the Fourth.”
 “You are? What’s the trouble?”
“He’s going to put it in the belfry of that church, sir. Then we’ll be
above the roofs and the gate.”
The lieutenant took a look. He was as smart as a whip.
“By thunder, a good idea! I’ll get the howitzer. You wait here.”
“And a squad to serve it, sir,” Jerry anxiously called after.
“Oh, we’ll serve it, you bet!”
The lieutenant returned at full speed with the gun dismantled and
a squad carrying the pieces. Lieutenant Grant’s face lighted as he
saw them hustling in to him.
“Now for it, then! You’re Lieutenant——?”
“Lieutenant Fry, of the Voltigeurs.”
“I’m Grant, of the Fourth Infantry. Shall you take command, or I,
sir?”
“You, of course, lieutenant.”
“Follow me with the gun, men.”
They all made a wide detour to the south to avoid bullets. The
ground was a marshy meadowland, knee-deep with ooze, and cut by
the usual ditches, some of them breast deep. But nobody stopped
for these. When they arrived at the church they were a slimy party.
The rear door was locked. Lieutenant Grant rapped with the hilt of
his sword. A priest opened, for barely a crack.
“You speak Spanish?” the lieutenant asked of Jerry.
“Yes, sir.”
“Good! Tell the father that we wish to get inside.”
“He says that he’s sorry, but it’s impossible at this hour,” Jerry
interpreted after the priest’s answer.
“Tell him that nothing is impossible to Americans. Tell him we
regret to trouble him and we do not wish to damage property
needlessly, but if he doesn’t open the door we’ll break it down and he
may find himself a prisoner.”
The priest opened and stood aside. He did not look especially
friendly as they trooped by him. Up into the belfry they climbed, led
still by Lieutenant Grant. The men had hard work to hoist the pieces
of the howitzer up the ladder, but they did it. They put the barrel upon
the carriage and the carriage upon the wheels, and proceeded to
pass up the powder cartridges and shells.
When the gun had been assembled and the gun squad was
prepared, the belfry had little spare space in it.
The gun was loaded, pointed—Lieutenant Grant himself squinted
over the barrel. He stood back.
“Give it to ’em!” he barked. “Fire!”
“Bang!” The lock string had been jerked. The shell flew true;
exploded in the very midst of the gateway battery.
It created a little panic. The Mexicans seemed to think that it had
dropped from the sky. The belfry squad cheered and reloaded.
“Bang!”
The lieutenant occasionally changed to the roof-tops and sprinkled
them with canister. He was enjoying himself immensely. So was
Lieutenant Fry. Jerry likewise was glad that he had come. Below the
belfry the whole battlefield was outspread. The church was almost
directly south of the breastworks that had been taken and left again.
The gateway—arched over between towers, was two hundred and
fifty yards at the rear of the breastworks. It had mounted a heavy gun
and a howitzer, emplaced behind sandbags and stone abutments
and scoured the road with shell and canister and grape. The square
towers and the parapets of the wall on either side of the gate were
volleying with musketry; the roofs of the houses along the road
gushed smoke. The figures of the Mexican defenders, lying flat or
crouching, or stealing from point to point, could be plainly seen
amidst smoke spume.
 Up the street there were the Voltigeurs, supporting the howitzers
and springing from arch to arch. Duncan’s battery, posted farther
back but gradually coming nearer, was responding hotly to the
Mexican battery. In the yards of the houses the skirmishers of the
Fourth, and of the Second and Third Artillery, darted hither thither,
picking off the Mexican sharpshooters before them; every now and
then the burrowing squads burst out in a new spot.
Across the street the Clarke brigade was doing the same work. A
second howitzer had been mounted upon a high roof over there, in
rivalry with Lieutenant Grant’s howitzer. It, too, was dropping shells
into the enemy.
And yonder, a mile and a half or two miles in the southeast at the
Belen gate, the other battle was being waged, where the General
Quitman column appeared to have gained a foothold.
The sun was touching the western horizon. The ammunition for
the little howitzer was almost spent. But a great cheer arose from
below. They gazed quickly. Drawn by galloping horses, the gunners
astride and lashing, or sitting upon the caisson, a six-pounder from
Duncan’s battery was charging down the road for the abandoned
breastworks.
The city gate spouted flame and smoke afresh. Every Mexican
musket, as seemed, was brought to bear upon the bounding,
thundering gun. Would the gun make it—would it—would it? The two
lead horses were fairly lifted from their feet by the canister; the other
two horses dragged them, a mass of mangled flesh. The gunners
astride had been hurled from their seats; the caisson showed gaps,
as the gunners sitting upon it wilted. Down sprawled the horse of the
young officer who commanded. He staggered to his feet and ran on.
An instant more and the gun was safely within the shelter of the
battery parapet—was being unlimbered and turned muzzle to muzzle
with the gateway guns.
Of the nine artillerists, five were out of action.
“That,” said Lieutenant Grant, breathing fast, “is Lieutenant Harry
Hunt, of the Second. I never saw a braver deed.”
 The roofs of the houses had been cleared well-nigh to the city
wall. Lieutenant Hunt’s gun opened point blank upon the gateway
battery. And listen! See! There was another great cheer—suddenly
the roofs right against the wall on either side of the gate had
upheaved, a torrent of blue caps and blue jackets spurted out like
bursts of water, and broke white with a terrific fire into the gateway
battery and even over the wall itself.
The battery was silenced in a moment as the gunners fell or
frantically scuttled back through the arched passage. Lieutenant
Hunt’s gun again belched grape. And here came the stormers, out
from among the houses and down the road, yelling, firing, pouring
through between the gate towers.
“The gate’s taken, and so is the city,” Lieutenant Grant rapped.
“Come on, Fry. We’d better join our commands. Disassemble the
piece, men, and report with it to Lieutenant Reno.”
He and Lieutenant Fry and Jerry tumbled below; ran for the road.
The Fourth Infantry was well inside the gate; the men, breathless,
laughing, peering, asking what next. Save for a few shots the place
was singularly silent. General Worth arrived in haste.
“What regiment is this?”
“Fourth Infantry, sir.”
“God bless the Fourth Infantry. Where’s Major Lee? Hold your
position, major; you will be supported.”
“B’gorry, first in, an’ here we stay,” cried old Sergeant Mulligan.
“Hooray for the Fourth!”
The enemy was rallying. His bugles pealed, his officers were
shouting and urging, a column boiled into the street before. As quick
as thought the two guns of the gateway battery had been reversed
—“Clear the way, there!”—and a shower of grape scattered the
column.
The bugles sounded again, with the Mexican signal for recall.
The other regiments thronged in: the Second Artillery, the Sixth
Infantry, the Eighth (with Hannibal rolling his drum and cheering
lustily), the Third Artillery, the Fifth Infantry, the Voltigeurs; all the
Worth foot. Then, after the troops had been assigned to position,
Captain Huger, of the ordnance, and two heavy guns, a twenty-four-
pounder and a ten-inch mortar came on; were planted in the
gateway, General Worth overseeing.
Save for the tolling of bells, the distant cries of frightened people,
and the muffled notes of Mexican drums and bugles, the city was
quiet. Now what?
“Get your range by the map, captain,” spoke General Worth to
Captain Huger. “Then throw a few shell in the direction of the plaza
and capital buildings. I don’t particularly care where they land, as
long as they notify the authorities that we are here and have the city
at our mercy.”
“Cut your fuses for sixteen hundred yards,” Captain Huger
ordered. “With shell, load!”
“Number One, ready! Fire!”
“Boom!” The twenty-four-pounder had spoken. “Crash!”
“Number Two, ready! Fire!”
“Boom-m!” And—“Crash!”
That was the big mortar bomb. Darkness had gathered. The
flames from the two guns redly illuminated the gateway littered with
spoil—shone upon the bodies of the Mexican gunners who had
fallen, rammers in hands; the explosions of the shells lighted the
roofs and towers in the center of the city, almost a mile eastward.
The distant cries of alarm echoed anew. Three shells were thrown
from the twenty-four-pounder, five from the mortar.
“That will do,” General Worth bade.
An aide from General Scott raced in.
“General Worth! The general commanding sends his compliments,
and the information that General Quitman is in possession of the
Belen gateway. You are directed to entrench yourself here before the
San Cosme gate, and await further orders in preparation for a final
assault in the morning, if necessary.”
General Worth smiled.
“My compliments to General Scott. As you see, we have entered
the city and have a clear road to the plaza. My instructions were to
penetrate as far as the Alameda; but owing to the darkness we will
establish ourselves where we are, and march on by daylight.”
The aide delayed a moment.
“General Quitman forced the Belen gate shortly after one o’clock,
general,” he said. “But he has been held fast ever since, unable to
advance by reason of batteries opposing him. My congratulations to
you, sir.”
“He was simply to threaten the gate, I understood.”
“I had the honor of bearing him those very instructions,” laughed
the aide; “with the commander-in-chief’s compliments. But before I
had delivered the message he snapped: ‘Tell General Scott I have
no time to listen to compliments,’ and on he went.”
“Well, sir,” General Worth responded, “you will please inform
Major-General Scott that there is nothing to obstruct my command in
a forward movement to the plaza at daybreak.”
The Colonel Riley brigade, of the Fourth Artillery, Second and
Seventh Infantry, and Taylor’s battery, from the Second Division,
marched in. This night the Fourth Infantry was quartered in a large
house on the main street from the gateway. The men reveled in the
luxury of soft beds, thick carpets, and rich food. They searched the
rooms for money but found none; and they did nothing worse than
pillage a pantry of sweet preserves.
Major Lee and invited officers fell heirs to a supper waiting for one
of the Mexican generals.
Jerry met Pompey wandering about, his black face smeared.
“Am dis one ob the Halls ob Montyzumy?” Pompey asked.
“I don’t think so, Pompey. But we’ll be there in the morning.”
 “Not dis chile. No, suh! You-all can have the rest ob dose Halls; I
gwine to stay hyar as long as dar’s any platters to lick.”
 XXIV
IN THE HALLS OF MONTEZUMA

At reveille it was reported that shortly after midnight the mayor and
city council had surrendered the city to General Worth. They said
that Santa Anna had withdrawn his army into the country. General
Worth forwarded the delegates to General Scott at Tacubaya, and he
had just been directed to march his troops to the Alameda. The
Quitman column was to occupy the plaza and raise the flag.
This seemed hard, but General Quitman had been first to seize a
gate, and had lost heavily. Besides, with his Mohawks and Marines
he had guarded the rear, at San Augustine, through a long period,
while other troops were winning honors.
The First Division, the Voltigeurs and the Riley brigade were halted
in column of companies in the green square or Alameda. Now all the
way on to the plaza, three blocks, the broad street was crowded with
the Mexican citizens, jostling along the walks and thronging the
balconies. The front of many of the buildings flew the neutral flags of
England, France, Spain, Portugal, Italy.
At seven o’clock music was heard and cheering. The Quitman
column appeared in sight: the handsome General Quitman and bluff
General Twiggs, and staffs, with escort of cavalry, at its head; then in
serried ranks the Rifles, with the regimental flags of the First Artillery,
the Third Infantry, the New Yorkers, the Marines, and the Ninth
Infantry following at the fore of their commands. Sections of the
Drum and Steptoe batteries rumbled behind.
The drums of the Worth regiments rolled, the men cheered
gallantly. With measured tread the Quitman column passed on, its
bands playing “Hail, Columbia!,” “Washington’s March,” and “Yankee
Doodle.” Presently there was a still louder burst of cheers, and the
united strains of the “Star Spangled Banner.” From the flag pole of
the national palace the Stars and Stripes had broken out; raised, as
was afterward learned, by Captain Roberts of the Rifles. He had
been foremost in the Quitman storming columns up Chapultepec hill.
Lieutenant Beauregard, of the engineers, bandaged from a wound,
dashed from the plaza, evidently bearing dispatches. About eight
o’clock the clatter of hoofs sounded. The Dragoons were coming.
Then—
“Huzzah! Huzzah! Huzzah! Huzzah for Old Fuss and Feathers!”
General Scott, plumed and girted and gloved, in full uniform
complete, towered at the front. Led by Colonel Harney and Major
Sumner, the dragoons, their mounted band in the advance, at a carry
sabers, filled the street from curb to curb. They, too, were spick and
span.
“Hail to the Chief!” That was the tune being played. The general
and escort swept by at a rapid trot, while the bands and the field
music of the Worth column likewise played “Hail to the Chief.” The
Mexican spectators forgot themselves, and cheered and clapped. No
one could deny that the chief and his cavalry made a splendid sight.
“Column—forward—quick time—march!”
The Worth men might move in at last. The street was so blocked
that the end files of the companies were obliged to brush the people
from the way. In the plaza the Second Dragoons band was playing
“Yankee Doodle.” The plaza also was crowded. There seemed to be
hundreds of blanketed, dirty beggars under foot. The dragoons rode
right and left, clearing the plaza with the flats of their sabers, but
careful to harm nobody.
“Column, halt!”
Just as General Worth was about to give orders a volley burst
from the top of a building; the balls pelted in, aimed at him and his
staff; but they passed over. Colonel Garland clapped his hand to his
side, and in Company B Lieutenant Sidney Smith sank limply.
As if the volley had been a signal other shots sounded; paving
stones rained down. It looked like a trap. Here were five thousand
Americans, almost the whole army, in the plaza and surrounded by
buildings and two hundred thousand people.
The orders were quick. In an instant Duncan’s battery and the
Reno howitzers galloped to the plaza corners; Steptoe’s and Drum’s
and Taylor’s guns were being unlimbered. Aides from General Scott
were spurring hither thither; skirmish squads were being told off, and
ordered to search the streets and buildings. The dragoons galloped.
The howitzers battered the building from which the first volley had
issued. Now all around the plaza there echoed the clatter of hoofs,
the thud of running feet, and the ringing reports of musket and rifle.
A number of leading Mexican citizens apologized to General
Worth and General Scott, and offered help to put down the
insurrection. The trouble-makers were two thousand convicts who
had been set free by Santa Anna.
The firing in the streets continued throughout the day, while the
reserves waited under arms. At night things had quieted somewhat.
The First Division bivouacked in the Alameda. After strong outposts
had been placed the men might talk again. What a two days,
September 13 and 14, that had been! And this was the end of the
campaign in the Halls of Montezuma.
The Riley men, quartered with the First, could tell the news from
the Quitman column. They had been at Chapultepec, and upon the
road to the Belen gate. The casualties were heavy. Major Loring, of
the Rifles, had lost an arm. The Drum battery had been cut to pieces
at the gate—Captain Drum and First Lieutenant Benjamin killed.
Lieutenant-Colonel Baxter, commanding the New Yorkers, was
dying; Major Gladden, commanding the Palmettos, was wounded.
General Shields’ wounded arm was in bad shape. General Pillow
would recover; was in the hospital at Chapultepec. The South
Carolinans were holding the Belen gate; the Second Pennsylvanians
were garrisoning the fort inside.
Colonel Garland, it was said, would get well; but Lieutenant Smith
was dead.
 Jerry looked at his own mess. Brave Scotty MacPheel was gone;
so was Henry Brewer—he had been shot down yesterday. Corporal
Finerty bore an honorable wound; Fifer O’Toole’s head was
bandaged—a musket ball had scraped it.
In taking Chapultepec and the city ten officers and one hundred
and twenty rank and file had been killed; sixty-eight officers and six
hundred and thirty-five rank and file had been wounded; twenty-nine
men were missing; total, eight hundred and sixty-two, of whom
almost a tenth were officers. The loss to the army since it had
marched out of Puebla was three hundred and eighty-three officers,
two thousand, three hundred and twenty rank and file. Subtracting
the garrisons and rear guards, Old Fuss and Feathers had marched
into Mexico City with less than six thousand out of his ten thousand
with which he had left Puebla six weeks before.
And according to estimates, in the same time the Mexicans had
lost more than seven thousand killed and wounded, thirty-seven
hundred prisoners including thirteen generals, some twenty flags,
one hundred and thirty-two pieces of artillery, and twenty thousand
small arms.
So here the “gringo” army was.
Instead of permitting his men to pillage the city, General Scott
levied a money contribution upon it of one hundred and fifty
thousand dollars, for the support of the troops. Adjutant Mackall read
to the First Division, paraded to listen, the following orders:

Headquarters of the Army,

Mexico, Sept. 14, 1847.
General Orders No. 284.
1. Under the favor of God, the valor of this army, after many
glorious victories, has hoisted the colors of our country in the capital
of Mexico and on the palace of the Government.
2. But the war is not ended. The Mexican army and Government
have fled, only to watch an opportunity to return upon us in
vengeance. We must, then, be upon our guard. Companies and
regiments will be kept together and all stand on the alert. Our safety
is in military discipline.
3. Let there be no drunkenness, no disorders, and no straggling.
Stragglers will be in great danger of assassination, and marauders
shall be punished by court-martial.
4. All the rules so honorably observed by this glorious army in
Puebla must be observed here. The honor of the army and the honor
of our country call for the best behavior on the part of all. The valiant
must, to win the approbation of God and our country, be sober,
orderly, and merciful. My noble brethren in arms will not be deaf to
this hasty appeal from their general and friend.
5. Major-General Quitman is appointed the civil and military
Governor of Mexico.
By command of
Major-General Scott.
H. L. Scott,
Act’g Ass’t Adj. Gen.

“Well, boy,” said Hannibal, when he and Jerry got together after
dismissal, “you heard those orders. Maybe the war’s not ended for
General Scott, but it’s ended for me. I want to rest up.”
“It’s ended for Pompey, too, all right,” Jerry added. “He’s still crying
about Lieutenant Smith. Says he’s lost his ‘offercer,’ and he wants to
go home.”
“Yes,” Hannibal mused. “And the war’s been ended for Lieutenant
Smith and a lot of good men before him. That’s the way. War costs.”

End
 Transcriber’s Notes:
Except for the frontispiece, illustrations have been moved to follow the text
that they illustrate, so the page number of the illustration may not match the
page number in the Illustrations.
Obvious printer’s, punctuation and spelling inaccuracies were silently
corrected.
Archaic and variable spelling has been preserved.
Variations in hyphenation and compound words have been preserved.
*** END OF THE PROJECT GUTENBERG EBOOK INTO MEXICO
WITH GENERAL SCOTT ***

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