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 Chapter 7
Common Stock: Characteristics, Valuation and Issuance

CHAPTER 7
COMMON STOCK:
CHARACTERISTICS, VALUATION AND
ISSUANCE
ANSWERS TO QUESTIONS:
1.a. Nonvoting stock - common stock that is issued when the firm wishes to raise additional
equity capital but does not want to give up voting power.

b. Stock split - the issuance of a number of new shares in exchange for each old share held
by a stockholder in order to lower the stock price to a more desirable trading level.

c. Reverse stock split - the issuance of one new share in exchange for a number of old
shares held by a stockholder in order to raise the stock price to a more desirable trading
level.

d. Stock dividend - a dividend to stockholders in the form of additional shares of stock

instead of cash.

e. Book value - total common stockholders' equity divided by the number of shares
outstanding.

f. Treasury stock - shares of common stock that have been repurchased by the company.

2. No, the retained earnings figure on the balance sheet is simply the cumulative amount of
earnings that have been retained over time. At the time when income is retained, these dollars
may be used to purchase additional long-term assets. As a result, the retained earnings amount
is not available for current dividends. Current dividends are paid out of cash (or earnings) and
not out of retained earnings.

3. Reasons for stock repurchases:

•tax considerations – Under current tax laws, capital gains income is taxed at lower rates than
dividend income for individual taxpayers. Also, there is a tax advantage to share repurchases
because taxes on capital gains income can be deferred into the future when the stock is sold.
(See Chapter 14 for additional discussion of this point.)

•financial restructuring - the firm can gain the benefits of increased financial leverage
through the issuance of debt and using the proceeds to repurchase its common stock.

•future corporate needs - repurchased stock can be used in future acquisitions of other
companies, executive stock options, exercise of warrants, and conversion of convertible

7-1
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance
securities.

•disposition of excess cash - funds that the company does not feel can be profitably
invested in the foreseeable future can be used to repurchase stock.

•reduction of takeover risk - by increasing the price of the firm's stock and concentrating
ownership in the hands of a smaller number of investors, share repurchases can be used to
reduce the returns to investors who might be considering acquisition of the firm.

4. For common stock, par value typically is a low figure of little significance. Book value is
common stockholders’ equity divided by the number of common shares issued and outstanding.
The market value of a common stock depends in general on the outlook for the firm and the
economy (i.e. future earnings and dividends and their risk) and normally bears little relationship
to book value and no relationship to par value.

5. Stockholder rights often include the following:

•Dividend rights - right to share equally on a per share basis in any dividend
distributions.

•Asset rights - in the event of liquidation, the right to assets that remain after the
obligations to creditors have been satisfied.

•Voting rights - the right to vote on stockholder matters, such as the election of the
board of directors.

• Preemptive rights - the right to share proportionately in any new stock sold.

6. The valuation of common stock is more complicated than the valuation of bonds and
preferred stocks due to the following factors:

a. Common stock returns can take two different forms--cash dividend payments and/or
increases in the stock price.

b. Common stock dividend payments normally are expected to grow and not remain
constant. Hence the relatively simple annuity and perpetuity formulas used in the
valuation of bonds and preferred stocks are generally not applicable to common stocks.

c. The future returns from common stocks (i.e., cash dividends and/or price appreciation) are
more uncertain than the returns from bonds and preferred stocks.

7. A firm that reinvests all its earnings and pays no cash dividends can still have a value
greater than zero when evaluated using the general dividend valuation model because at some
future point in time it will be able to start paying cash dividends to its stockholders. In addition
to ordinary cash dividends, the stockholders' returns could take the form of liquidating
dividends if the firm sells its assets and goes out of business. Alternatively, the returns could
consist of the proceeds from the sale of its outstanding common stock if the firm is acquired by

7-2
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance
another company.

8. The financial decisions of the firm affect both expected future dividend payments of the firm
(D1, D2,...) as well as the (marginal) investor's required rate of return (ke). Shareholder wealth
(stock price) is a function of these variables and hence is a function of the financial decisions of
the firm.

9. a. An upward shift in interest rates and investors’ required rates of return would cause ke
to increase and the price of the firm's stock (Po) to decrease.

b. A reduction in the future growth potential of the firm's earnings and dividends due to
increased foreign competition would lower the firm's future dividends (D1, D2,...) and
hence decrease the stock price (Po).

c. An increase in the riskiness of the firm's common stock due to larger South American
investments by the firm would increase the (marginal) investor's required rate of return
(ke) and hence decrease the stock price (Po), unless the growth potential of these investments
outweighed the increase risk.

10. a. Dividend yield (D1/Po)

b. Price appreciation yield (g); growth rate of earnings, dividends, and stock price.

11. In the perpetual bond, preferred stock, and (constant dividend) common stock valuation
models, the returns to the investor (i.e., interest, preferred dividends, and common dividends
respectively) are assumed to remain the same each period forever and hence can be treated as a
perpetuity. The only differences in the three models are the symbols used to represent the
returns of the investor (I, Dp, and D respectively) and the investor's required rates of return (kd,
kp, and ke respectively).

12. Book value per share, which equals total common stockholders’ equity divided by the
number of shares outstanding, can change as the result of

* Additions to (or subtractions from) retained earnings provided by current period

earnings (losses)
* Issuance (sale) of new shares of common stock
* Purchase of existing shares of common stock (Treasury stock) by the company
* Payment of dividends, which reduces retained earnings.

13. With majority voting, each stockholder has one vote for each share held. Shareholders are
allowed to cast one vote for each director candidate of their choice. As a result, if two slates of
people are running for the board, the one that receives more than 50% of the vote wins. With
cumulative voting, each shareholder has as many votes as there are directors to be elected,
thereby increasing an individual candidate's chance of being elected. As a result, cumulative
voting makes it easier for stockholders with minority views to elect sympathetic board

7-3
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance
members.

14. An investment banker is a financial institution which acts as a financial advisor to client
businesses. Investment bankers play a key role in assisting corporations in obtaining new
financing. Investment bankers often function as underwriters. In an underwriting, a group of
investment bankers agrees to purchase a new security issue at a set price and then offers it for
sale to investors.

15. In a direct placement (also termed a private placement) the sale of an entire security
offering is made to one or more institutional investors rather than the general public. In a
public cash offering, the securities are offered for sale to the general public. In a rights
offering, a firm issues a security (called a right ) to its existing stockholders, who then may
either sell the right or exercise it to buy additional shares of the firm's stock.

16. A best efforts offering is more risky than an underwritten offering for a firm trying to raise
capital. However, the opposite is true for investment bankers. As a result, well established,
profitable firms normally can raise capital with an underwritten offering while smaller, start-up
firms frequently have to rely on a best efforts offering to raise capital.

17. Direct issuance costs include the underwriting spread and other direct costs, including legal
and accounting fees, taxes, the cost of SEC registration, and printing costs. Other issuance
costs include the cost of management time in preparing the offering, the cost of underpricing a
new (initial) equity offering below the correct market value, the cost of stock price declines for
stock offerings by firms whose shares are already outstanding, and by the cost of other
incentives provided to the investment banker.

18. With a shelf registration, a firm initially files a master registration statement with the SEC.
Then the firm is free to sell small increments of the offering over a 2-year period merely by
filing a brief statement with the SEC. With other public security offerings, the firm has to file a
lengthy registration statement with the SEC each time it wishes to sell securities.

7-4
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance

SOLUTIONS TO PROBLEMS:

1. a. Po = D1/(ke - g)

g = 0.07 Do = $1.70 ke = .12

Dl = Do(1 + g) = 1.70(1 + 0.07) = $1.819

Po = 1.819/(0.12 - 0.07) = $36.38

b. g = 0.09 Do = $1.70 ke = 0.12

D1 = 1.70(1 + 0.09) = $1.853

Po = 1.853/(0.12 - 0.09) = $61.77

c. g = 0.065 Do = $1.70 ke = 0.12

D1 = $1.70(1 + 0.065) = $1.8105

Po = $1.8105/(0.12 - 0.065) = $32.92

2. a. Po = D1/(ke - g)

g = .06 Do = $5 ke = .12

Dl = Do(1 + g) = 5(1 + .06) = $5.30

Po = 5.30/(.12 - .06) = $88.33

b. g = .06 D1 = $5.30 ke = .14

Po = 5.30/(.14 - .06) = $66.25

c. g = .06 Dl = $5.30 ke = .16

Po = 5.30/(.16 - .06) = $53.

7-5
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance

d. g = .06 D1 = $5.30 ke = .06

Po = 5.30/(.06 - .06) = Undefined

ke = g, which violates assumption of constant-growth model.

e. g = .06 D1 = $5.30 ke = .04

Po = 5.30/(.04 - .06) = $-265.

ke < g, which violates assumption of constant-growth model.

3. Po = $25 D1 = $1.25 ke = .12

ke = D1/Po + g

.12 = 1.25/25 + g

g = .07 (or 7%)

4. Present Value of First 6-Years' Dividends:

6
[D0(1 + g1)t/(1 + ke)t]; D0 = $5.00; g1 = .07; ke = .12
t=1

Present Value

Year Dividend Interest Factor Present Value

t Dt = 5.00(1 + .07)t PVIF.12,t Dt x PVIF.12,t

1 5.00(1 + .07)1 = .893 $ 4.778

$5.35

7-6
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance

2 5.00(1 + .07)2 = .797 4.563

5.725

3 5.00(1 + .07)3 = .712 4.361

6.125

4 5.00(1 + .07)4 = .636 4.168

6.554

5 5.00(1 + .07)5 = .567 3.976

7.013

6 5.00(1 + .07)6 = .507 3.805

7.504

PV (First 6-Years' Dividends) $25.651

Value of Stock at End of Year 6:

P6 = D7/(ke - g2) g2 = .00

D7 = D6(1 + g2) = 7.504(1 + .00) = $7.504

P6 = 7.504/(.12 - .00) = $62.533

Present Value of P6:

PV(P6) = P6/(1 + ke)6 = 62.533/(1 + .12)6 = 62.533 x PVIF.12,6

= 62.533 X .507 = $31.704

Value of Common Stock (P0):

P0 = PV (First 6-Years' Dividends) + PV(P6)

= 25.651 + 31.704 = $57.36 (tables)

5. FVn = PVo(1 + g)n

PVo = $.70 FV5 = $1.30 n=5

1.30 = .70(1 + g)5

7-7
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance

(1 + g)5 = 1.857

The term (1 + g)5 represents the future value interest factor

(FVIFg,5) found in Table I at the back of the book. Reading

across the Period = 5 row, one finds (1 + g)5 between the i = 13%

and i = 14% columns. Interpolating between these values yields

i = 13% + 1.857 - 1.842 x (14% - 13%) = 13.2%

1.925 - 1.842
Therefore g = .132 ( or 13.2% -- 13.18% by calculator)

Po = D1/(ke - g) Do = $1.30 ke = .20

D1 = Do(1 + g) = 1.30(1 + .132) = $1.4716

Po = 1.4716/(.20 - .132) = $21.64

6. a. 4
Po = D1/(1 + ke) +  [D1(1 + g1)t-1/(1 + ke)t]
t=2

+ [D5/(ke - g2)]/[(1 + ke)4]

ke = .15 Do = $2.50 D1 = $3.00 g1 = .09 g2 = .06

Present Value of First Year Dividend

PV(D1) = 3.00/(1 + .15) = 3.00(PVIF.15,1)

= 3.00(.870) = $2.610

Present Value of Next 3-Years' Dividends

Year Dividend P.V. Interest Factor Present Value

t Dt = 3.00(1 + .09) t-1 PVIF.15,t Dt x PVIF.15,t
2 3.00(1 + .09)1 = .756 $2.472
$3.270

7-8
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance

3 3.00(1 + .09)2 = .658 2.345

$3.564

4 3.00(1 + .09)3 = .572 2.222

$3.885

PV(Next 3-Years' Dividends) $7.039

Value of Stock at End of Year 4

D5 = D4(1 + g2) = 3.885(1 + .06) = $4.118

P4 = D5/(ke - g2) = 4.118/(.15 - .06) = $45.756

Present Value of P4

PV(P4) = P4/(1 + ke)4 = P4 x PVIF.15,4

= 45.756 x .572 = $26.172

Value of Common Stock:

Po = PV(D1) + PV(Next 3-Years' Dividends) + PV(P4)

= $2.610 + $7.039 + $26.172 = $35.82 (tables)

b. ke = .15 Do = $2.50 D1 = $3.00 g1 = .07 g2 = .06

Present Value of First Year Dividend

PV(D1) = $2.610 (same as part (a))

Present Value of Next 3-Years' Dividends

Year Dividend P.V. Interest Factor Present Value

t Dt=3.00(1 + .07)t-1 PVIF.15,t Dt x PVIF.15,t

2 3.00(1 + .07)1 = .756 $2.427

$3.210

3 3.00(1 + .07)2 = .658 2.260

$3.435

7-9
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance

4 3.00(1 + .07)3 = .572 2.102

$3.675

PV(Next 3-Years' Dividends) $6.789

Value of Stock at End of Year 4

D5 = 3.675(1 + .06) = $3.896

P4 = 3.896/(.15 - .06) = $43.289

Present Value of P4

PV(P4) = 43.289 x .572 = $24.761

Value of Common Stock:

Po = $2.610 + $6.789 + $24.761 = $34.16 (tables)

7. P0 = D/ke

= $2.00/0.16

= $12.50

8. Present Value of First 4-Year's Dividends:

4
 [Do(1 + g1)t/(1 + ke)t]; Do = $1.50; g1 = .11; ke = .14
t=1

Present Value
Year Dividend Interest Factor Present Value
t Dt = 1.50(1 + .11)t PVIF.14,t Dt x PVIF.14,t

1 1.50(1 + .11)1 = .877 1.460

$1.6650

2 1.50(1 + .11)2 = .769 1.421

$1.8482

3 1.50(1 + .11)3 = .675 1.385

7-10
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance
$2.0514

4 1.50(1 + .11)4 = .592 1.348

$2.2771

PV (First 4-Years' Dividends) $5.614

Value of Stock at End of Year 4:

P4 = D5/(ke - g2) g2 = .05

D5 = D4(1 + g2) = 2.2771(1 + .05) = $2.391

P4 = 2.391/(.14 - .05) = $26.567

Present Value of P4:

PV(P4) = P4/(1 + ke)4 = $26.567/(1 + .14)4

= $26.567(PVIF.14,4) = $26.567 x 0.592 = $15.728

Value of Common Stock (Po):

Po = PV(First 4-Years' Dividends) + PV(P4)

= $5.614 + $15.728 = $21.34 (tables)

3 6
9. Po =  [Do(1 + g1)t/(1 + ke)t] +  [D3(1 + g2)t-3/(1 + ke)t]
t=1 t=4
+ [D7/(ke - g3)]/[(1 + ke)6]

ke = 0.18; Do = $1.50; g1 = 0.15; g2 = 0.075; g3 = 0.05

Present Value of First 3-Years' Dividends

Year Dividend P.V. Interest Factor Present Value

t Dt = 1.50(1 + .15)t PVIF.18,t Dt x PVIF.18,t

1 1.50(1 + .15)1 = .847 $1.461

$1.725

2 1.50(1 + .15)2 = .718 1.425

$1.984

7-11
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance

3 1.50(1 + .15)3 = .609 1.389

$2.281

PV (First 3-Years' Dividends) $4.275

Present Value of Next 3-Years' Dividends

Year Dividend P.V. Interest Factor Present Value

t Dt = 2.281(1 + .075)t-3 PVIF.18,t Dt x PVIF.18,t

4 2.281(1 + .075)1 = .516 $1.265

$2.452

5 2.281(1 + .075)2 = .437 1.152

$2.636

6 2.281(1 + .075)3 = .370 1.049

$2.834

PV (Next 3-Years' Dividends) $3.466

Value of Stock at End of Year 6

D7 = D6(1 + g3) = 2.834(1 + .05) = $2.976

P6 = D7/(ke - g3) = 2.976/(.18 - .05) = $22.892

Present Value of P6

PV(P6) = P6/(1 + ke)6 = P6 x PVIF(0.18,6)

= 22.892 x 0.370 = $8.470

7-12
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance

Value of Common Stock

Po = PV(First 3-Years' Dividends) +

PV(Next 3-Years' Dividends) + PV(P6)

= $4.275 + $3.466 + $8.470 = $16.21 (tables)

10. a. FVn = PVo(1+ g)n

PVo = $2.00; FV6 = $4.00; n = 6

4.00 = 2.00(1 + g)6

(1 + g)6 = 2.000

The term (1 + g)6 represents the future value interest factor

(FVIFg,6) in Table I at the back of the book. Reading across
the Period = 6 row, one finds (1 + g)6 in the i  12% column.

Therefore g  0.12 (or 12%).

b. Dt = Do(1 + g)t; Do = $2.00

Year Dividend*
t Dt = 2.00(1 + g)t

1 2.00(1 + .12)1 = $2.240

2 2.00(1 + .12)2 = $2.509

3 2.00(1 + .12)3 = $2.8l0

4 2.00(1 + .12)4 = $3.147

5 2.00(1 + .12)5 = $3.525

6 2.00(1 + .12)6 = $3.948

*Note: The (1 + 0.12)t factors can be obtained from Table I, i.e.,

7-13
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance

(1 + 0.12)t = FVIF.12,t

Earnings per year will be exactly two times the projected dividends.

c. Po = D1/(ke - g)

ke = 0.18; g = 0.12; D1 = $2.240

Po = 2.240/(0.18 - 0.12) = $37.33

d. The firm's earnings and dividends probably cannot continue to

grow indefinitely at 12% (above-normal rate). Eventually the

growth rate will decline - which violates an assumption of

the constant-growth model.

e. Present value of First 6-Years' Dividends:

6
 [Do(1 + g1)t/(1 + ke)t]
t=1
Year Dividend P.V. Interest Factor Present Value
t Dt PVIF.18,t Dt x PVIF.18,t

1 $2.240 .847 $1.897

2 2.509 .718 1.801

3 2.810 .609 1.711

4 3.147 .516 1.624

5 3.525 .437 1.540

6 3.948 .370 1.461

PV (First 6-Years' Dividends) $10.034

Value of Stock at End of Year 6:

P6 = D7/(ke - g2); g2 = 0.06

7-14
 Chapter 7
Common Stock: Characteristics, Valuation and Issuance
D7 = D6(1 + g2) = $3.948(1 + 0.06) = $4.185

P6 = $4.185/(0.18 - 0.06) = $34.875

Present Value of P6:

PV(P6) = P6/(1 + ke)6 = $34.875/(1 + 0.18)6 = $34.875 x PVIF(0.18,6)

= $34.875 X 0.370 = $12.904

Value of Common Stock (Po)

Po = PV(First 6-Year's Dividends) + PV(P6)

= $10.034 + $12.904 = $22.94 (tables)

11. D0 = $1.50

D1 = $1.50(1.15) = $1.725

D2 = $1.72(1.15) = $1.984

D3 = $1.98(1.15) = $2.281

D4 = $2.28(1.10) = $2.509

P4 = 1.5(P0) (Note that the end of year 4 is the same as the

beginning of year 5, in present value terms.)

P0 = $1.725(.893) + $1.984(.797) + $2.281(.712) + $2.509(.636)

+ 1.5P0(.636)

P0 = $137.85 (tables)

12. The dividend at the end of two years = $1 (FVIF0.20,2) = $1.44

D3 = $1.44(1.06) = $1.526

D4 = $1.53(1.06) = $1.618

D5 = $1.62(1.06) = $1.715

The price of the stock at the beginning of year 5 is the same as at

7-15
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COPYRIGHT, 1913, BY F. E. WRIGHT
 VENDOR OF FRUIT AND POTTERY
Like all tropical towns Panama displays interesting bits of outdoor life in its street
markets and vendors. The sidewalks are the true shops and almost the homes of
the people.
 CHAPTER XVI
THE INDIANS OF PANAMA

hile that portion of the Panama territory that

lies along the border of Colombia known as
the Darien is rather ill-defined as to area and
to boundaries, it is known to be rich in timber
and is believed to possess gold mines of great
richness. But it is practically impenetrable by
the white man. Through this country Balboa
led his force on his expedition to the unknown
Pacific, and was followed by the bloodthirsty
Pedrarias who bred up in the Indians a hatred
of the white man that has grown as the ages
passed. No expedition can enter this region even today except as an
armed force ready to fight for the right of passage. In 1786 the
Spaniards sought to subdue the territory, built forts on both the
Atlantic and Pacific coasts and established a line of trading posts
connecting them. But the effort failed. The posts were abandoned.
Today the white man who tries to enter the Darien does so at the
risk of his life.
In 1854 a navy exploring expedition of twenty-seven men, under
command of Lieutenant Isaac C. Strain, entered the jungle of the
Darien at Caledonia Bay, on the Atlantic side, the site of Patterson’s
ill-fated colony. They purposed crossing the Isthmus and making a
survey for a canal route, as an English adventurer not long before
had asserted—falsely as it proved—that he had discovered a route
by which a canal could be built with but three or four miles of
cutting. The party carried ten days’ provisions and forty rounds of
ball cartridge per man. They expected to have to traverse about
forty or fifty miles, for which the supply of provisions seemed wholly
adequate. But when they had cut their way through the jungle,
waded through swamps and climbed hills until their muscles were
exhausted and their clothing torn to tatters, they found themselves
lost in the very interior of the Isthmus with all their food gone.
Diaries kept by members of the party show that they lived in
constant terror of the Indians. But no attack was made upon them.
The inhabitants contented themselves with disappearing before the
white men’s advance, sweeping their huts and fields clear of any sort
of food. The jungle not its people fought the invaders. For food they
had mainly nuts with a few birds and the diet disturbed their
stomachs, caused sores and loosened their teeth. The bite of a
certain insect deposited under the skin a kind of larva, or worm,
which grew to the length of an inch and caused the most frightful
torments. Despairing of getting his full party out alive, after they had
been twenty-three days fighting with the jungle, Strain took three
men and pushed ahead to secure and send back relief. It was thirty-
nine days before the men left behind saw him again.
Photo by Underwood & Underwood
 TRAPPING AN ABORIGINE
In houses and clothing the Darien Indians are decidedly primitive

NATIVE VILLAGE ON PANAMA BAY

Death came fast to those in the jungle.
The agonies they suffered from
starvation, exposure and insect pests
baffle description. “Truxton in casting his eyes on the ground saw a
toad”, wrote the historian. “Instantly snatching it up, he bit off the
head and, spitting it away, devoured the body. Maury looked at him
a moment, and then picked up the rejected head, saying, ‘Well,
Truxton, you are getting quite particular. Something of an epicure,
eh’? With these words he quietly devoured the head himself.”
Nine of the twenty-seven men who entered the Darien with Strain
died. When the leader returned with the relief party they were
found, like Greely at Camp Starvation, unable to move and slowly
dying. Those who retained life never fully regained strength. Every
condition which brought such frightful disaster upon the Strain party
exists in the Darien today. The Indians are as hostile, the trails as
faintly outlined, the jungle as dense, the insects as savage. Only
along the banks of the rivers has civilization made some little
headway, but the richest gold field twenty miles back in the interior
is as safe from civilized workings as though it were walled in with
steel and guarded by dragons. Every speculative man you meet in
Panama will assure you that the gold is there but all agree that
conditions must be radically changed before it can be gotten out
unless a regiment and a subsistence train shall follow the miners.

A RIVER LANDING PLACE

The authorities of Panama estimate that there are about 36,000

tribal Indians, that is to say aborigines, still holding their tribal
organizations and acknowledging fealty to no other government now
in the Isthmus. The estimate is of course largely guesswork, for few
of the wild Indians leave the jungle and fewer still of the census
enumerators enter it. Most of these Indians live in the mountains of
the provinces of Bocas del Toro, Chiriqui and Veragua, or in the
Darien. Their tribes are many and the sources of information
concerning them but few. The most accessible and complete record
of the various tribes is in a pamphlet issued by the Smithsonian
Institution, and now obtainable only through public libraries, as the
edition for distribution has been exhausted. The author, Miss Eleanor
Yorke Bell, beside studies made at first hand has diligently examined
the authorities on the subject and has presented the only
considerable treatise on the subject of which I have knowledge.

THE FALLS AT CHORRERA

 Photo by Underwood, & Underwood
ON THE RIO GRANDE

Of life among the more civilized natives she says:

“The natives of the Isthmus in general, even in the larger towns,
live together without any marriage ceremony, separating at will and
dividing the children. As there is little or no personal property, this is
accomplished amicably as a rule, though should disputes arise the
alcalde of the district is appealed to, who settles the matter. This
informal system is always stoutly defended by the women, even
more than by the men, for, as among all people low in the scale of
civilization, it is generally held that the women receive better
treatment when not bound and therefore free to depart at any time.
Recently an effort has been made to bring more of the inhabitants
under the marriage laws, with rather amusing results in many
instances. The majority of the population is nominally Catholic, but
the teachings of the church are only vaguely understood, and its
practices consist in the adoration of a few battered images of saints
whose particular degree of sanctity is not even guessed at and who,
when their owners are displeased with them, receive rather harsh
treatment, as these people have usually no real idea of Christianity
beyond a few distorted and superstitious beliefs. After the
widespread surveys of the French engineers, a sincere effort was
made to re-Christianize the inhabitants of the towns in Darien as
well as elsewhere, for, until this time, nothing had been done toward
their spiritual welfare since the days of the early Jesuits. In the last
thirty years spasmodic efforts have been made to reach the people
with little result, and, excepting at Penonome, David, and Santiago,
there are few churches where services are held outside of Panama
and the towns along the railroad.

OLD SPANISH CHURCH, CHORRERA

“The chief amusements of the Isthmian are gambling, cock-

fighting, and dancing, the latter assisted by the music of the tom-
tom and by dried beans rattled in a calabash. After feasts or burials,
when much bad rum and whisky is consumed, the hilarity keeps up
all night and can be heard for miles, increased by the incessant
howls of the cur dogs lying under every shack. Seldom does an
opportunity come to the stranger to witness the really characteristic
dances, as the natives do not care to perform before them, though a
little money will sometimes work wonders. Occasionally, their
dancing is really remarkably interesting, when a large amount of
pantomime enters into it and they develop the story of some
primitive action, as, for instance, the drawing of the water, cutting
the wood, making the fire, cooking the food, etc., ending in a burst
of song symbolizing the joys of the new prepared feast. In an
extremely crude form it reminds one of the old opera ballets and
seems to be a composite of the original African and the ancient
Spanish, which is very probably the case.

THE CHURCH AT ANCON

 “The Orientals of the Isthmus deserve a word in passing. They are
chiefly Chinese coolies and form a large part of the small merchant
class. Others, in the hill districts, cultivate large truck gardens,
bringing their produce swinging over the shoulders on poles to the
city markets. Their houses and grounds are very attractive, built of
reed or bamboo in the eastern fashion and marked everywhere by
extreme neatness, contrasting so strikingly with the homes and
surroundings of their negro neighbors. Many cultivate fields of cane
or rice as well, and amidst the silvery greens, stretching for some
distance, the quaint blue figures of the workmen in their huge hats
make a charming picture. Through the rubber sections Chinese
‘middlemen’ are of late frequently found buying that valuable
commodity for their fellow countrymen in Panama City, who are now
doing quite a large business in rubber. These people live much as in
their native land, seldom learning more than a few words of Spanish
(except those living in the towns), and they form a very substantial
and good element of the population”.

THE PEARL ISLAND VILLAGE OF SABOGA

 To enumerate even by names the aboriginal tribes would be
tedious and unavailing. Among the more notable are the Doracho-
Changuina, of Chiriqui, light of color, believing that the Great Spirit
lived in the volcano of Chiriqui, and occasionally showing their
displeasure with him by shooting arrows at the mountain. The
Guaymies, of whom perhaps 6000 are left, are the tribe that buried
with their dead the curious golden images that were once plentiful in
the bazaars of Panama, but are now hard to find. They have a
pleasant practice of putting a calabash of water and some plantains
by a man they think dying and leaving him to his fate, usually in
some lonesome part of the jungle. The Cunas or Caribs are the
tribes inhabiting the Darien. All were, and some are, believed still to
be cannibals. Eleven lesser tribes are grouped under this general
name. As a rule they are small and muscular. Most of them have
abandoned their ancient gaudy dress, and so far as they are clothed
at all wear ordinary cotton clothing. Painting the face and body is
still practiced. The dead often are swung in hammocks from trees
and supplied with fresh provisions until the cords rot and the body
falls to the ground. Then the spirit’s journey to the promised land is
held to be ended and provisions are no longer needed. Sorcery and
soothsaying are much in vogue, and the sorcerers who correspond
to the medicine men of our North American Indians will sometimes
shut themselves up in a small hut shrieking, beating tom-toms and
imitating the cries of wild animals. When they emerge in a sort of
self-hypnotized state they are held to be peculiarly fit for
prophesying.
 NATIVE VILLAGE AT CAPERA

All the Indians drink heavily, and the white man’s rum is to some
extent displacing the native drink of chica. This is manufactured by
the women, usually the old ones, who sit in a circle chewing yam
roots or cassava and expectorating the saliva into a large bowl in the
center. This ferments and is made the basis of a highly intoxicating
drink. Curiously enough the same drink is similarly made in far-away
Samoa. The dutiful wives after thus manufacturing the material upon
which their spouses get drunk complete their service by swinging
their hammocks, sprinkling them with cold water and fanning them
as they lie in a stupor. Smoking is another social custom, but the
cigars are mere hollow rolls of tobacco and the lighted end is held in
the mouth. Among some of the tribes in Comagre the bodies of the
caciques, or chief men, were preserved after death by surrounding
them with a ring of fire built at a sufficient distance to gradually dry
the body until skin and bone alone remained.
The Indians with whom the visitor to Panama most frequently
comes into contact are those of the San Blas or Manzanillo country.
These Indians hover curiously about the bounds of civilization, and
approach without actually crossing them. They are fishermen and
sailors, and many of their young men ship on the vessels touching at
Colon, and, after visiting the chief seaports of the United States, and
even of France and England, are swallowed up again in their tribe
without affecting its customs to any appreciable degree. If in their
wanderings they gain new ideas or new desires they are not
apparent. The man who silently offers you fish, fruits or vegetables
from his cayuca on the beach at Colon may have trod the docks at
Havre or Liverpool, the levee at New Orleans or wandered along
South Street in New York. Not a word of that can you coax from him.
Even in proffering his wares he does so with the fewest possible
words, and an air of lofty indifference. Uncas of the Leather-Stocking
Tales was no more silent and self-possessed a red-skin than he.
Ph t b H Pitti C t N ti lG hi M i
 Photo by H. Pittier Courtesy National Geographic Magazine

A CHOCO INDIAN IN FULL COSTUME

His cuffs are silver; his head adorned with flowers

In physiognomy the San Blas Indians are heavy of feature and

stocky of frame. Their color is dark olive, with no trace of the negro
apparent, for it has been their unceasing study for centuries to
retain their racial purity. Their features are regular and pleasing and,
among the children particularly, a high order of beauty is often
found. To get a glimpse of their women is almost impossible, and a
photograph of one is practically unknown. If overtaken on the water,
to which they often resort in their cayucas, the women will wrap
their clothing about their faces, rather heedless of what other
portions of their bodies may be exposed, and make all speed for the
shore. These women paint their faces in glaring colors, wear nose
rings, and always blacken their teeth on being married. Among them
more pains is taken with clothing than among most of the savage
Indians, many of their garments being made of a sort of appliqué
work in gaudy colors, with figures, often in representation of the
human form, cut out and inset in the garment.
So determined are the men of this tribe to maintain its blood
untarnished by any admixture whatsoever, that they long made it an
invariable rule to expel every white man from their territory at
nightfall. Of late years there has been a very slight relaxation of this
severity. Dr. Henri Pittier of the United States Department of
Agriculture, one of the best-equipped scientific explorers in the
tropics, several of whose photographs elucidate this volume, has
lived much among the San Blas and the Cuna-Cuna Indians and won
their friendship.
 SOME SAN BLAS GIRLS
The dresses are covered with elaborate designs in appliqué work

It was the ancestors of these Indians who made welcome

Patterson and his luckless Scotchmen, and in the 200 years that
have elapsed they have clung to the tradition of friendship for the
Briton and hatred for the Spaniard. Dr. Pittier reports having found
that Queen Victoria occupied in their villages the position of a patron
saint, and that they refused to believe his assertion that she was
dead. His account of the attitude of these Indians toward outsiders,
recently printed in the National Geographic Magazine, is an
authoritative statement on the subject:
“The often circulated reports of the difficulty of penetrating into
the territory of the Cuna-Cuna are true only in part”, he says. “The
backwoods aborigines, in the valleys of the Bayano and Chucunaque
rivers, have nourished to this day their hatred for all strangers,
especially those of Spanish blood. That feeling is not a reasoned
one: it is the instinctive distrust of the savage for the unknown or
inexplicable, intensified in this particular case by the tradition of a
long series of wrongs at the hands of the hated Spaniards.
“So they feel that isolation is their best policy, and it would not be
safe for anybody to penetrate into their forests without a strong
escort and continual watchfulness. Many instances of murders, some
confirmed and others only suspected, are on record, and even the
natives of the San Blas coast are not a little afraid of their brothers
of the mountains.
“Of late, however, conditions seem to have bettered, owing to a
more frequent intercourse with the surrounding settlements. A negro
of La Palma, at the mouth of the Tuyra River, told me of his crossing,
some time ago, from the latter place to Chepo, through the
Chucunaque and Bayano territories, gathering rubber as he went
along with his party. At the headwaters of the Canaza River he and
his companions were held up by the ‘bravos’, who contented
themselves with taking away the rubber and part of the equipment
and then let their prisoners go with the warning not to come again.
Ph t b H Pitti C t f N ti lG hi M i
 Photo by H. Pittier Courtesy of National Geographic Magazine

CHIEF DON CARLOS OF THE CHOCOES AND HIS SON

“The narrative of that expedition was supplemented by the

reflection of an old man among the hearers that twenty years ago
none of the party would have come out alive.

Courtesy of National Geographic Magazine

THE VILLAGE OF PLAYON GRAND, EIGHTY-FIVE MILES EAST OF THE CANAL
The houses are about 150 x 50 feet and each shelters 16 to 20 families. The
members of each family herd together in a single room

“Among the San Blas Indians, who are at a

far higher level of civilization, the exclusion of
aliens is the result of well-founded political
reasons. Their respected traditions are a long
record of proud independence; they have
maintained the purity of their race and enjoyed
freely for hundreds of years every inch of their
territory. They feel that the day the negro or
the white man acquires a foothold in their
midst these privileges will become a thing of
Photo Courtesy Nat’l
by H. Geographic
the past. This is why, without undue hostility
Pittier Magazine to strangers, they discourage their incursions.
“Their means of persuasion are adjusted to
SAN BLAS WOMAN IN the importance of the intruder. They do not
DAILY GARB hesitate to shoot at any negro of the nearby
settlements poaching on their cocoanuts or
other products; the trader or any occasional
visitor is very seldom allowed to stay ashore at
night; the adventurers who try to go
prospecting into Indian territory are invariably
caught and shipped back to the next
Panamanian port”.
Among the men of the San Blas tribe the
land held by their people is regarded as a
sacred trust, bequeathed to them by their
ancestors and to be handed down by them to
the remotest posterity. During the early days Photo Courtesy Nat’l
by H. Geographic
of the Canal project it was desired to dig sand Pittier Magazine
from a beach in the San Blas country. A small
United States man-of-war was sent thither to
A GIRL OF THE CHOCO
broach the subject to the Indians, and the TRIBE
Captain held parley with the chief. After
hearing the plea and all the arguments and promises with which it
was strengthened the old Indian courteously refused the privilege:
“He who made this land”, said he, “made it for Cuna-Cuna who
live no longer, for those who are here today and also for the ones to
come. So it is not ours only and we could not sell it”.
To this decision the tribe adhered, and the wishes of the
aborigines have been respected. It has been the policy of the United
States to avoid any possibility of giving offense to the native
population of the Isthmus, and even a request from the chief that
the war vessel that brought the negotiator on his fruitless errand
should leave was acceded to. It is quite unlikely, however, that the
Indians will be able to maintain their isolation much longer. Already
there are signs of its breaking down. While I was in Panama they
sent a request that a missionary, a woman it is true, who had been
much among them, should come and live with them permanently.
They also expressed a desire that she should bring her melodeon,
thus giving new illustration to the poetic adage, “Music hath charms
to soothe the savage breast”. Perhaps the phonograph may in time
prove the open sesame to many savage bosoms. Among this people
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