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Financial Analysis with Microsoft Excel 4th Edition
Timothy R.(Timothy R. Mayes) Mayes Digital Instant
Download
Author(s): Timothy R.(Timothy R. Mayes) Mayes, Todd M. Shank
ISBN(s): 9780324407501, 0324407505
Edition: 4
File Details: PDF, 5.39 MB
Year: 2006
Language: english

1
CHAPTER 1 Spreadsheet Basics
The term “spreadsheet” covers a wide variety of elements useful for quantitative
analysis of all kinds. Essentially, a spreadsheet is a simple tool consisting of a
matrix of cells that can store numbers, text, or formulas. The spreadsheet’s power
comes from its ability to recalculate results as you change the contents of other
cells. No longer does the user need to do these calculations by hand or on a
calculator. Instead, with a properly constructed spreadsheet, changing a single
number (say, a sales forecast) can result in literally thousands of automatic changes
in the model. The freedom and productivity enhancement provided by modern
spreadsheets presents an unparalleled opportunity for learning financial analysis.
After studying this chapter, you should be able to:
1. Explain the basic purpose of a spreadsheet program.
2. Identify the various components of the Excel screen.
3. Navigate the Excel worksheet (entering, correcting, and moving data
within the worksheet).
4. Explain the purpose and usage of Excel’s built-in functions and macro
functions.
5. Create graphics and know how to print and save files in Excel.
1
1

CHAPTER 1: Spreadsheet Basics
2
Spreadsheet Uses
Spreadsheets today contain built-in analytical capabilities previously unavailable in
a single package. Users often had to learn a variety of specialized software
packages to do any relatively complex analysis. With the newest versions of
Microsoft Excel, users can perform tasks ranging from the routine maintenance of
financial statements to multivariate regression analysis to Monte Carlo simulations
of various hedging strategies.
It is literally impossible to enumerate all of the possible applications for
spreadsheets. You should keep in mind that spreadsheets are useful not only for
financial analysis, but for any type of quantitative analysis whether your specialty
is in marketing, management, engineering, statistics, or economics. For that matter,
a spreadsheet can also prove valuable for personal uses. With Excel it is a fairly
simple matter to build a spreadsheet to monitor your investment portfolio, do
retirement planning, experiment with various mortgage options when buying a
house, keep a mailing list, etc. The possibilities are quite literally endless. The
more comfortable you become with the spreadsheet, the more valuable uses you
will find. Above all, feel free to experiment! Try new things. Using a spreadsheet
can help you find solutions that you never would have imagined on your own.
Starting Microsoft Excel
Before you can do any work in Excel, you have to run the program. In Windows,
programs are generally started by double-clicking on the program’s icon. The
location of the Excel icon will depend on the organization of your system. You
may have the Excel icon (left) on the desktop. Otherwise, you can start Excel by
clicking the Start button and then choosing Microsoft Excel from the All Programs
menu.
For easier access, you may wish to create a Desktop or Taskbar shortcut. To do this
right-click on the Excel icon in the All Programs menu and either choose Create
Shortcut or drag the icon to the Desktop or Taskbar. Remember that a shortcut is
not the program itself, so you can safely delete the shortcut if you later decide that
you don’t need it.
Excel 2002 Icon
2 Spreadsheet Basics

3
Parts of the Excel Screen
FIGURE 1-1
MICROSOFT EXCEL 2002
The Title Bar
The title bar is the area at the very top of the Excel screen. It serves a number of
functions:
• Identifies the program as Microsoft Excel and displays the name
of the currently active workbook.
• Appears brightly colored when Excel is the active program.
• Can be “grabbed” with the mouse to move the window around
within the Windows environment, if the window is not
maximized.
Spreadsheet Basics 3

4
• Contains the system menu (left corner) and the minimize,
maximize, and close buttons (right corner). The system menu
provides choices for moving the window or changing its size as
well as the ability to switch to or run other programs. The
minimize button will collapse the window down to an icon at the
bottom of the Windows screen where it is still active, but out of
the way. The maximize button causes the program to occupy the
entire screen. The close button will exit the program.
• When double-clicked, the title bar duplicates the functioning of
the maximize button.
The Menu Bar
FIGURE 1-2
THE EXCEL 2002 MAIN MENUS
The main menu bar in Excel provides access to nine menus, each of which leads to
further choices. There are two ways to select a menu: click on the menu of choice
with the mouse, or use the Alt key in combination with the underlined letter in the
menu name. For example, to choose the File menu, you could either click on the
word “File” or press Alt+F on the keyboard. Either method will lead to the File
menu dropping down, allowing you to make another choice.
In Windows, menus are persistent, meaning that they stay visible on the screen until
you either make a selection or cancel the menu by pressing the Esc key. While the
menu is visible, you may use either the arrow keys or the mouse to select a
function.
At times, some menu selections are displayed in a light gray color (grayed). These
options are not available for selection at the time that the menu is selected. For
example, if you have not cut or copied a cell, the Paste option from the Edit menu
has nothing to paste, so it is grayed. Only the menu options displayed in black may
be selected.
Refer to Appendix A for a short description of each menu selection.

5
The Toolbars
FIGURE 1-3
MOST COMMON EXCEL 2002 TOOLBARS
Immediately below the menu bar, Excel displays a series of shortcut buttons on
Toolbars. The exact buttons, and their order, may be different on different
machines. The buttons provide a quick way to carry out certain commands without
wading through menus and dialog boxes. To add, delete, or rearrange buttons
choose View Toolbars Customize from the menus. You can learn what function
each button performs by simply moving the mouse pointer over a button on a
Toolbar. After a few seconds, a message will appear that informs you of the
button’s function. This message is known as a ToolTip. ToolTips are used
frequently by Excel to help you to identify the function of various items on the
screen.
Note that you can move a Toolbar, or make it float over the worksheet, by clicking
on a blank area of the Toolbar and dragging it to the new location. Dropping it over
the worksheet area will leave it floating. The Toolbar will stay wherever you drop
it, even after exiting and restarting Excel.
The Formula Bar
FIGURE 1-4
THE EXCEL 2002 FORMULA BAR
The formula bar displays information about the currently selected cell. The left
part of the formula bar indicates the name of the selected cell. The right part of the
formula bar displays the contents of the selected cell. If the cell contains a formula,
the formula bar displays the formula, and the cell displays the result of the formula.

6
The fx button on the formula bar is used to show the Insert Function dialog box.
This dialog box helps you to enter functions without having to memorize them. See
page 23 for more information.
The Worksheet Area
The worksheet area is where the real work of the spreadsheet is done. The
worksheet is a matrix (256 columns and 65,536 rows) of cells, each of which can
contain text, numbers, formulas, or graphics. Each cell is referred to by a column
letter and a row number. Column letters (A,B,C,.. .,IV) are listed at the top of each
column, and row numbers (1,2,3,. ..,65536) are listed to the left of each row. The
cell in the upper left corner of the worksheet is therefore referred to as cell A1, the
cell immediately below A1 is referred to as cell A2, the cell to the right of A1 is cell
B1, and so on. This naming convention is common to all spreadsheets and will
become comfortable once you have practiced a bit.
The active cell (the one into which any input will be placed) can be identified by a
solid black border around the cell. Note that the active cell is not always visible on
the screen, but it is always named in the leftmost portion of formula bar.
Sheet Tabs
FIGURE 1-5
THE SHEET TABS
Excel worksheets are stored in a format which combines multiple worksheets into
one file known as a workbook. This allows several related worksheets to be
contained in one file. The sheet tabs, near the bottom of the screen, allow you to
switch between sheets in a workbook. You may rename, copy, or delete any
existing sheet or insert a new sheet by clicking a tab with your right mouse button
and making a choice from the resulting menu. You can easily change the order of
the sheet tabs by left-clicking a tab and dragging it to a new position.
It is easy to do any of these operations on multiple worksheets at once, except
renaming. Simply click the first sheet and then Ctrl+click each of the others. (You
can select a contiguous group of sheets by selecting the first, and then Shift+click
the last.) Now, right-click one of the selected sheets and select the appropriate
option from the pop-up menu. When sheets are grouped, anything you do to one

7
Navigating the Worksheet
sheet gets done to all. This is useful if, for example, you need to enter identical data
into multiple sheets or need to perform identical formatting on several sheets. To
ungroup the sheets, either click on any non-grouped sheet or right-click a sheet tab
and choose Ungroup Sheets from the pop-up menu. A new feature in Excel 2002
allows you to choose a color for each tab. To do this just right-click the tab and
choose Tab Color from the pop-up menu.
The VCR-style buttons to the left of the sheet tabs are the sheet tab control buttons;
they allow you to scroll through the list of sheet tabs. Right-clicking on any of the
VCR-style buttons will display a pop-up menu that allows you to quickly jump to
any sheet tab in the workbook. This is especially helpful when you have too many
tabs for them all to be shown.
Status Bar
FIGURE 1-6
THE STATUS BAR
The status bar contains information regarding the current state of Excel, as well as
certain messages. For example, most of the time the only message is “Ready”
indicating that Excel is waiting for input. At other times, Excel may add
“Calculate” to the status bar to indicate that it needs to recalculate the worksheet
because of changes. You can also direct Excel to do certain calculations on the
status bar. For example, in Figure 1-6 Excel is calculating the average of the cells
that are highlighted in the worksheet. By right-clicking on the status bar you can
also get Excel to calculate the sum, count, minimum, or maximum of any
highlighted cells. This is useful when you need a quick calculation, but it doesn’t
need to be in the worksheet. The right side of the status bar shows if the Num Lock
or Scroll Lock keys are on.
There are two principle methods for moving around within the worksheet area: the
arrow keys and the mouse. Generally speaking, for small distances the arrow keys
provide an easy method of changing the active cell, but moving to more distant
cells is usually easier with the mouse.

8
Most keyboards have a separate keypad containing arrows pointing up, down, left,
and right. If your keyboard does not, then the numeric keypad can be used if the
Num Lock function is off (you will see the word NUM in the status bar if Num Lock
is on). To use the arrow keys, simply press the appropriate key once for each cell
that you wish to move across. For example, assuming that the current cell is A1
and you wish to move to cell D1, simply press the Right arrow key three times. To
move from D1 to D5 press the Down arrow key four times. You can also use the
Tab key to move one cell to the right.
The mouse is even easier to use. While the mouse pointer is over the worksheet
area it will be in the shape of a fat cross (see Figure 1-1). To change the active cell
move the mouse pointer over the destination cell and click the left button. To move
to a cell that is not currently displayed on the screen, click on the scroll bars until
the cell is visible and then click on it. For example, if the active cell is A1 and you
wish to make A100 the active cell, merely click on the arrow at the bottom of the
scroll bar on the right-hand part of the screen until A100 is visible. Move the
mouse pointer over cell A100 and click with the left button. Each click on the
scroll bar moves the worksheet up or down one page. If you wish to move up, click
above the thumb. If down, click beneath the thumb. The thumb is the small button
that moves up and down the scroll bar to indicate your position in the worksheet.
To move more quickly, you can drag the thumb to the desired position.
If you know the name or address of the cell to which you wish to move (for large
worksheets remembering the cell address isn’t easy, but you can use named ranges)
use the Go To command. The Go To command will change the active cell to
whatever cell you indicate. The Go To dialog box can be used by choosing the Edit
menu and then the Go To command, by pressing the F5 function key, or by pressing
the Ctrl+G key combination. To move to cell A50, simply press F5, type: A50 in
the Reference box, and then press Enter. You will notice that cell A50 is now
highlighted and visible on the screen. You can also use Go To to find certain
special cells (e.g., the last cell that has data in it) by pressing the Special. ..button
in the Go To dialog box.
Selecting a Range of Cells
Many times you will need to select more than one cell at a time. For example, you
may wish to apply a particular number format to a whole range of cells, or you
might wish to clear a whole range. Since it would be cumbersome to do this one
cell at a time, especially for a large range, Excel allows you to simultaneously
select a whole range and perform various functions on all of the cells at once. The
easiest way to select a contiguous range of cells is to use the mouse. Simply point

9
to the cell in the upper left corner of the range, click and hold down the left button,
and drag the mouse until the entire range is highlighted. As you drag the mouse,
watch the left side of the formula bar. Excel will inform you of the number of
selected rows and columns.
You can also use the keyboard to select a range. First change the active cell to the
upper left corner of the range to be selected, press and hold down the Shift key, and
use the arrow keys to highlight the entire range. Note that if you release the Shift
key while pressing an arrow key you will lose the highlight. A very useful
keyboard shortcut is the Shift+Ctrl+Arrow (any arrow key will work) combination.
This is used to select all of the cells from the active cell up to, but not including, the
first blank cell. For example, if you have 100 numbers in a column and need to
apply a format, just select the first cell and then press Shift+Ctrl+Down Arrow to
select them all. This is faster and more accurate than using the mouse.
Many times it is also useful to select a discontiguous range (i.e., two or more
unconnected ranges) of cells. To do this, simply select the first range as usual, and
then hold down the Ctrl key as you select the other ranges.
The ability to select cells in Excel is crucial because Excel, like most other
Windows applications, works in the “select, then act” mode. (In the old days, users
of DOS programs were familiar with the “act, then select” method of operation.) In
Excel, you first select the cells that you wish to act on, then choose the operation
(e.g., Edit Copy) that you want to perform. This would seem to be a minor point,
but it is actually a big productivity improvement. In the “select, then act” method,
the cells stay selected after the operation has been performed, thereby allowing
another operation on those cells without reselecting them.
Using Named Ranges
A named range is a cell, or group of cells, for which you have supplied a name.
Range names can be useful in a number of different ways, but locating a range on a
big worksheet is probably the most common use. To name a range of cells, start by
selecting the range. For example, select A1:C5 and then choose Insert Name
Define from the menus. In the edit box at the top of the Define Name dialog box,
enter a name, say MyRange (note that a range name cannot contain spaces or most
special characters). Now, click the Add button and the range is named. Figure 1-7

10
shows how the dialog box should look. Note that at the bottom the Refers To edit
box shows the address to which the name refers.1
FIGURE 1-7
THE DEFINE NAME DIALOG BOX
Once the range is named, you can select it using the Go To command. The name
will appear in the list on the Go To dialog box. An even faster method is to use the
Name Box on the left side of the formula bar. Simply drop the list and choose the
named range that you wish to select.
Named ranges can also be used in formulas in place of cell addresses, and can be
used in the ChartSeries function for charts. As useful as they can be at times, there
is no requirement to use them.
Entering Text and Numbers
Each cell in an Excel worksheet can be thought of as a miniature word processor.
Text can be entered directly into the cell and then formatted in a variety of ways.
To enter a text string, first select the cell where you want the text to appear and then
begin typing. It is that simple.
1. Note that the name is actually defined as a formula. This subtle point is important for
some of the more advanced uses of named ranges. For example, the range of cells
referred to by the name can be made to change automatically depending on
circumstances.

11
Excel is smart enough to know the difference between numbers and text, so there
are no extra steps for entering numbers. Let’s try the following example of entering
numbers and text into the worksheet.
Move the cell pointer to cell A1 (using the arrow keys, mouse, or the Go To
command) and type: Microsoft Corporation Sales. In cell A2 enter:
(Millions of Dollars). Select cell A3 and type: 1997 to 2002. Note
that the entry in cell A3 will be treated as text by Excel because of the spaces and
letters included. In cells A4 to F4 we now want to enter the years. In A4 type:
2002, in B4 type: 2001, now select A4:B4 and move the mouse pointer over the
lower right corner of the selection. The mouse pointer will now change to a skinny
cross indicating that you can use the AutoFill feature.2 Click and drag the mouse to
the right to fill in the remaining years. Notice that the most recent data is typically
entered at the left, and the most distant data at the right. This convention allows us
to easily recognize and concentrate on what is usually the most important data.
We have now set up the headings for our first worksheet. Now let’s add Microsoft’s
sales (in millions of dollars) for the years 1997 to 2002 into cells A5 to F5 as shown
in Exhibit 1-1.3
Formatting and Alignment Options
The worksheet in Exhibit 1-1 on page 12 isn’t very attractive. Notice that the text is
displayed at the left side of the cells, while the numbers are at the right. By default
this is the way that Excel aligns text and numbers. However, we can easily change
the way that these entries are displayed through the use of the formatting and
alignment options.
2. The AutoFill feature can be used to fill in any series that Excel can recognize. For
example, type January in one cell and February in an adjacent cell. Select both cells
and drag the AutoFill handle to automatically complete fill in a series of month names.
You can also define your own series by using the Custom Lists tab in the Options dialog
box (Tools Options).
3. All of the data for Microsoft in this chapter was obtained from the Microsoft Corp. Web
site at http://www.microsoft.com/msft/download/financialhistoryFY.xls.
AutoFill Handle

12
EXHIBIT 1-1
THE FIRST WORKSHEET
Before continuing, we should define a few typographical terms. A “typeface” is a
particular style of drawing letters and numbers. For example, the main text of this
book is set in the Times New Roman typeface. However, the text that you are
expected to enter into a worksheet is displayed in the Courier New typeface.
Typeface also refers to whether the text is drawn in bold, italics, or perhaps bold
italics.
The term “type size” refers to the size of the typeface. When typewriters were
commonly used, type size was defined in characters per inch (CPI). This
convention was somewhat confusing because the larger the CPI number, the
smaller was the text. Today, with computers we normally refer to the type size in
“points.” Each point represents an increment of 1/72nd of an inch, so there are
72 points to the inch. A typeface printed at a 12 point size is larger than the same
typeface printed at a size of 10 points.
Generally, we refer to the typeface and type size combination as a font. So when
we say “change the font to 12-point bold Times New Roman,” it is understood that
we are referring to a particular typeface (Times New Roman, bolded) and type size
(12 point).
For text entries, the term “format” refers to the typeface and type size and cell
alignment used to display the text. Let’s change the font of the text that was entered
to Times New Roman, 12-point, bold. First, select the range from A1 to A3 by
clicking on A1 and dragging to A3. Now select the Format menu and choose Cells.
A dialog box allows you to change the various attributes of the cells. Click on the
tab labeled “Font” so that the font choices are displayed. We want to select Times
New Roman from the font list, bold from the style list, and 12 from the size list.
Notice that there is a sample of this font displayed in the lower right corner of the
dialog box, so you can see how the chosen font will look on the worksheet. Since
none of these changes actually take effect until you validate them by clicking the
A B C D E F
1 Microsoft Corporation Sales
2 (Millions of Dollars)
3 1997 to 2002
4 2002 2001 2000 1999 1998 1997
5 28365 25296 22956 19747 15262 11936

13
OK button, you can experiment until the text in the sample window looks right.
Click on the OK button or press the Enter key to make the change take effect. You
can also make all of these changes with the Formatting Toolbar.
We can just as easily change the font for numbers. Suppose that we want to change
the years in cells A4:F4 to 12-point italic Times New Roman. First select the range
A4:F4 by clicking on A4 and dragging the mouse until the highlight extends to F4.
Choose Format Cells (the font dialog box should be displayed since that was the
last change that was made) and select the attributes. Click on the OK button and
the change will be made. Note that this change could also have been made at the
same time as the text was changed, or you could now choose Edit Repeat Font from
the menus. In many cases the Edit menu will contain a choice that allows you to
repeat or undo the last action. In addition, the F4 key, or Ctrl+Y, will repeat the last
action.
Our worksheet is now beginning to take on a better look, but it still isn’t quite right.
We are used to seeing the titles of tables nicely centered over the table, but our title
is way over at the left. We can remedy this by using Excel’s alignment options.
Excel provides for seven different horizontal alignments within a cell. We can have
the text (or numbers) aligned with the left or right sides of the cell or centered
within the cell boundaries. Excel also allows centering text across a range of cells.
Let’s change the alignment of our year numbers first. Highlight cells A4:F4 and
select Format Cells from the menu. Click on the Alignment tab to display the
alignment choices. Horizontal alignment refers to the left and right alignment,
vertical refers to the up and down alignment, and orientation refers to the way that
the font is rotated. For now, we simply want to change the horizontal alignment to
centered. Choose “Center” from the horizontal choices and click on the OK button.
Notice that the numbers are all centered within their respective cells.
Next, we want to center our table title across the whole range of numbers that we
have entered. To do this, we must select the entire range across which we want to
center our titles. Highlight cells A1:F3 and select Format Cells from the menu.
You will again be presented with the alignment dialog box from which you should
select “Center across selection.” Click on the OK button and notice that the titles
are indeed centered across the columns A to F. Note that there is also a button on
the Formatting Toolbar that will “Merge and Center” the selected cells. This button
will have the appearance of doing the same thing as “Center across selection,” but it
doesn’t. In addition to centering the text, it also merges all of the selected cells into
one big cell. Using this button may create alignment problems if you later decide to

14
insert additional columns into the worksheet. Generally speaking, it is better not to
use the Merge and Center button.
Number Formats
Aside from changing the typeface and type size, when dealing with numbers we
can also change their appearance by adding commas and dollar signs, and by
altering the number of decimal places displayed. Furthermore, we can make the
numbers appear different depending on whether they are positive or negative. For
example, we might want negative numbers to be red in color and displayed in
parentheses rather than using the negative sign. You can experiment with designing
your own number formats, but for now we will stick to the more common pre-
defined formats.
Microsoft is a large company, and their sales have ranged from nearly $12 billion to
over $28 billion over the 1997 to 2002 time period. Numbers this large, even when
expressed in millions of dollars, become difficult to read unless they are written
with commas separating every third digit. Let’s format our sales numbers so that
they are easier to read.
Select the range of sales numbers (A5:F5) and choose Format Cells from the menus
and then click on the Number tab. You are presented with the Number Format
dialog box which contains a list of formatting categories. For now, select Number
from the category list. This will give you the option to choose the number of
decimal places displayed, choose whether or not to use a 1000 separator, and select
the format of negative numbers. We want to display the sales numbers with
commas separating every third digit and two decimal places, so change the decimal
places to 2 and check the box to add a 1000 separator.4 Click on the OK button and
notice that the numbers are now displayed in this more readable format.
At this point, we have made several formatting changes to the Microsoft Sales
worksheet. Your worksheet should look like the one in Exhibit 1-2. All of this
formatting may seem tedious at the moment, but it will quickly become easy as you
become more familiar with the menus. Furthermore, the payoff in readability will
be worth far more than the few seconds spent in formatting the worksheet.
4. Note that in the United States we use a comma as a 1000 separator. In many other
countries a decimal point is used instead. Excel determines which to use based on the
settings in the Control Panel’s regional and language settings utility.

15
EXHIBIT 1-2
ORIGINAL WORKSHEET REFORMATTED
Borders and Shading
Text formatting is not the only design element that is available in Excel. We can
also enliven worksheets by placing borders around cells and shading them. In your
worksheet select A4:F4 (the years). From the menus choose Format Cells and then
select the Border tab from the dialog box. There are 13 different line styles that can
be applied, and you can change the color of the lines. Click on the thick solid line
(fifth down on the right side) and then click on both of the top and bottom lines in
the sample view. Click the OK button to see the change.
Next, with A4:F4 still selected, we will add shading. As before, choose Format
Cells from the menus but this time select the Patterns tab. This tab allows you to
set the background color and pattern of the cells. Click on the lightest gray color
and then press the OK button. Now, to make the text more readable make it bold.
Your worksheet should now look like the one in Exhibit 1-3.
EXHIBIT 1-3
THE WORKSHEET WITH BORDERS AND SHADING
A B C D E F
3 1997 to 2002
4 2002 2001 2000 1999 1998 1997
5 28,365.00 25,296.00 22,956.00 19,747.00 15,262.00 11,936.00
A B C D E F
3 1997 to 2002
4 2002 2001 2000 1999 1998 1997
5 28,365.00 25,296.00 22,956.00 19,747.00 15,262.00 11,936.00

16
Entering Formulas
So far, we haven’t done anything that couldn’t just as easily be done in any word-
processing application. The real power of spreadsheets becomes obvious when
formulas are used. Formulas will enable us to convert the data that we have entered
into useful information.
At the moment, our sample worksheet contains only sales data for Microsoft.
Suppose, however, that we are interested in performing a simple analysis of the
profitability of Microsoft over the 1997 to 2002 time period. In this case we would
also need to see the net income for each of the years under study. Let’s make some
modifications to the worksheet to make it more useful.
Add the data from Table 1-1 to the sample worksheet in cells A6:F6, immediately
below the sales data, and apply the same format. Now, we have a couple of
problems. The title of our worksheet, in cell A1, is no longer accurate. We are now
putting together a profitability analysis, so we should change the title to reflect this
change of focus. Select cell A1 (even though the title is centered across A1:F1,
Excel still keeps the data in A1) by clicking on it. Notice that the text appears in the
right-hand side of the formula bar. To edit the title, click on the formula bar just to
the right of the word “Sales.” Backspace over the word “Sales” and then type:
Profitability Analysis, and press Enter to accept the change.
Our only remaining problem is that the data in the table are not clearly identified.
Ideally, we would like to have the data labeled in the column just to the left of the
first data point. But, there is no column to the left of the data! There are several
ways to overcome this problem. The easiest is to simply tell Excel to insert a
TABLE 1-1
MICROSOFT NET INCOME
Year Net Income
2002 7,829.00
2001 7,346.40
2000 9,421.00
1999 7,785.00
1998 4,490.00
1997 3,454.00

17
Entering Formulas
column to the left of column A. To accomplish this feat, select column A entirely
by clicking on the column header where it has an “A.” Notice that the whole
column is highlighted (we can do this with rows as well). Now, from the menus,
choose Insert Columns. The new column is magically inserted, and all of our data
have been moved one column to the right. In cell A5 type: Sales, and in A6 type:
Net Income.
If you are following the examples exactly, the words Net Income probably do not
fit exactly into A6. Instead, part of the text is cut off so as not to overflow onto the
data in B6. We can easily remedy this by changing the width of column A. Again
select column A, and then choose Format Column Width ...which will cause a
dialog box to be displayed. In the edit box type: 20 and press the Enter key.
Column A should now be wide enough to hold the text that we have added and will
add later.
We can now proceed with our profitability analysis. Because of the dramatic
growth in sales over the years, it isn’t immediately clear from the data whether
Microsoft’s profitability has improved or not, even though net income has
increased over this time. In this type of situation, it is generally preferable to look
at net income as a percentage of sales (net profit margin) instead of dollar net
income. Thankfully, we do not have to type in more data to do this. Instead, we
can let Excel calculate these percentages for us. All we need to do is to enter the
formulas.
Formulas in Excel are based upon cell addresses. To add two cells together, we
simply tell Excel to take the contents of the first cell and add it to the contents of the
second. The result of the formula will be placed in the cell in which the formula is
entered. In our problem, we need to find net income as a percentage of sales. We
will do this first for 2002.
Before entering our first formula, we should insert a label identifying the data. In
cell A7 type: Net Profit Margin. Change the active cell to B7 where we want
to place the result of the calculation. The problem that we want to solve is to take
the number in cell B6 and divide it by the number in B5. In Excel, division is
represented by the forward slash (/), so in B7 type: =B6/B5. The equals sign must
precede all formulas in Excel, otherwise it will treat the formula as text and will not
calculate the result. Press the Enter key to make Excel calculate the formula (you
should get 0.2760 as the result).
In this example, we typed the formula directly into the cell because the small size of
our worksheet made it easy to know what cells we wanted to use in the formula. In

18
many instances, this is not the case. In more complicated worksheets it is usually
easier to use the “pointer mode” to enter formulas. In pointer mode, we use the
mouse to point to the cells that we want included, and Excel inserts them into the
formula. Move to C7 and we will enter the formula using the pointer mode. First,
type = which places Excel in edit mode. Now, instead of typing C6, click on C6
with the mouse. Notice that C6 appears in the formula bar to the right of the equals
sign. Press the forward slash key to indicate division and then click on C5. In the
formula bar you should see the formula “=C6/C5.” Press the Enter key to calculate
the result of the formula (you should get 0.2904 as the result).
Let’s change the format of these cells so that they are easier to read. In this case, it
would be nice to see them in percentage format with two decimal places. First,
highlight cells B7:C7. Choose Format Cells and click on the Number tab. From
the Category list click on Percentage and then set the Decimal places to 2. Press
the Enter key or click the OK button. You could also apply this format by using the
Percent Style button on the Formatting Toolbar. To get two decimal places, you
need to click the Increase Decimal button on the same Toolbar. Figure 1-8 shows
these and other formatting icons.
FIGURE 1-8
FORMATTING ICONS
Copying and Moving Formulas
We have now calculated the net profit margin for 2002 and 2001, but that still
leaves four years for which we need to enter formulas. Repeatedly typing
essentially the same formula can get tedious. Fortunately, we can simply copy the
formula, and Excel will update the cell addresses to maintain the same relative
relationships. For example, we know that for 2000 the formula should read “=D6/
D5.” If we copy the formula from C7 to D7, Excel will change the formula from
“=C6/C5” to “=D6/D5,” automatically.
This works because Excel treats all cell references as relative. When you typed the
formula in cell B7 (=B6/B5) Excel read that as “take the contents of the cell that is
one row above the current cell and divide that by the contents of the cell that is two
Currency
Style
Percent
Style
Common
Style
Inc/Dec
Decimals

19
Entering Formulas
rows above the current cell.” When copying formulas, Excel maintains the same
relative cell relationships so that the formulas are updated. When we copy to the
left or right, Excel updates the columns in the formulas. When we copy up or
down, Excel changes the rows.
Rather than retyping the formula for our other cells, let’s simply copy from C7.
First, select C7 and then choose Edit Copy from the menus. Now highlight cells
D7:G7 and choose Edit Paste from the menus. At this point, your worksheet
should closely resemble the one in Exhibit 1-4.
EXHIBIT 1-4
A PROFITABILITY ANALYSIS FOR MICROSOFT
We can see from Exhibit 1-4 that Microsoft’s net profit margin increased from 1997
to 2000, but has been declining since. The declining profit margins in the past two
years are roughly aligned with the economic recession and the beginning of the
bear market in 2000, but they are still quite high compared to many other
company’s margins.
In addition to copying formulas (which maintains the relative cell references) they
can also be moved. Moving a formula to a different cell has no effect on the cell
references. For example, we could move the formula in B7 (=B6/B5) to B8. To do
this, select B7 and then choose Edit Cut from the menus. Next, select B8 and
choose Edit Paste from the menus. Notice that the result in B8 is exactly the same
as before. Furthermore, the formula is unchanged.
Formulas (or anything else) may also be moved with the mouse. Simply select the
cells containing the data that you want to move, position the mouse pointer at the
edge of the cell so that it changes to an arrow, and then click the left mouse button
and drag the cell to its new location. Now move the formula back to B7. Highlight
A B C D E F G
1 Microsoft Corporation Profitability Analysis
3 1997 to 2002
4 2002 2001 2000 1999 1998 1997
5 Sales 28,365.00 25,296.00 22,956.00 19,747.00 15,262.00 11,936.00
6 Net Income 7,829.00 7,346.40 9,421.00 7,785.00 4,490.00 3,454.00
7 Net Profit Margin 27.60% 29.04% 41.04% 39.42% 29.42% 28.94%

20
B8 and drag it back to B7. Or, select B8 and choose Edit Cut, select B7 and choose
Edit Paste. The worksheet should again resemble the one pictured in Exhibit 1-4.
Mathematical Operators
Aside from division, which we have already seen, there are four additional primary
mathematical operations: addition, subtraction, multiplication, and exponentiation.
All of these operations are available in Excel and can be used as easily as division.
Table 1-2 summarizes the five basic operations and the result that you should get
from entering the example formula into cell B8.
Parentheses and the Order of Operations
Using the mathematical operators provided by Excel is straightforward in most
instances. However, there are times when it gets a bit complicated. For example,
let’s calculate the rates of growth of Microsoft’s sales and net income. To calculate
the growth rates we will usually want the compound annual growth rate (geometric
mean growth rate) rather than the arithmetic average growth rate. The general
equation for the geometric mean growth rate is:
(1-1)
where is the geometric mean, N is the count of the numbers in the series, X1 is
the first number in the series (1997 sales in our example), and XN is the last number
in the series (2002 sales).
TABLE 1-2
MATHEMATICAL OPERATIONS
Operation Key Example Result in B8
Addition + =B5+B6 36,194
Subtraction – =B5–B6 20,536
Multiplication * =B5*B7 7,829
Division / =B6/B7 28,365
Exponentiation ^ =15^2 225
G
XN
X1
-----
-
N 1
–
( ) 1
–
XN
X1
-----
-
 
 
1
N 1
–
( )
-----------------
1
–
= =
G

21
Using Excel’s Built-In Functions
Translating this equation into Excel is not as simple as it may at first appear. To do
this correctly requires knowledge of operator precedence. In other words, Excel
doesn’t necessarily evaluate equations from left to right. Instead, some operations
are performed before others. Exponentiation is usually performed first.
Multiplication and division are usually performed next, but they are considered
equal in precedence so any multiplication and division are evaluated from left to
right. Finally addition and subtraction are evaluated, and they are also considered
equal in precedence to each other.
We can modify the order of precedence by using parentheses. Operations enclosed
in parentheses are always evaluated first. As a simple example, how would you
evaluate the following expression?
Is X equal to 2 or 3.33? Algebraically, X is equal to 3.33 because the division
should be performed before the addition (as Excel would do). If the answer we
were seeking was 2, we could rewrite the expression using parentheses to clarify:
The parentheses clearly indicate that the addition should be performed first, so the
answer is 2.
To calculate the compound annual growth rate of sales, move to cell A8 and type:
Sales Growth. Now, enter the following into B8: =(B5/G5)^(1/5)-1.
Pressing the Enter key will reveal that the growth rate of sales for the five-year
period was 18.90% per year (you may have to reformat the cell to display as a
percentage with two decimal places). To determine the average growth rate of net
income, type: Net Income Growth into A9, and then copy the formula from B8
to B9. You should find that the compound annual rate of growth of net income has
been 17.78% per year and that the formula in B9 is: =(B6/G6)^(1/5)-1.
We could build some pretty impressive worksheets with the techniques that we
have examined so far. But why should we have to build all of our formulas from
scratch, especially when some of them can be quite complex and therefore error-
prone? Excel comes with hundreds of built-in functions, more than 50 of them are
X 2 4 3
⁄
+
=
X 2 4
+
( ) 3
⁄
=

22
financial functions. These functions are ready to go; all they need is for you to
supply cell references as inputs. We will be demonstrating the use of many of these
functions throughout the book, but for now let’s redo our growth rate calculations
using the built-in functions.
Since we want to know the compound annual rate of growth, we can use Excel’s
built-in GEOMEAN function.5 To use this function the syntax is:
=GEOMEAN(NUMBER1, NUMBER2,.. .)
The GEOMEAN function takes up to 30 cell addresses separated by commas. As is
usual in Excel, we can also supply a range of cells rather than specifying the cells
individually. Remember, we want to find the geometric mean rate of growth of
sales, not the geometric mean of the dollar amount of sales. Since the GEOMEAN
function simply finds the Nth root of the product of the inputs, we need to redefine
our inputs (we used sales in our custom-built formula). Let’s add a row of
percentage changes in sales to our worksheet.
Move to A10 and enter the label: % Change in Sales, then move to B10 and
enter the formula: =B5/C5-1. The result in B10 should be 0.1213, indicating that
sales grew by 12.13% from 2001 to 2002. Now copy the formula from B10 to each
cell in the C10:F10 range. Note that we don’t copy the formula into G10 because
that would cause an error since H10 doesn’t contain any data (try it, and you will
see #DIV/0! in G10, meaning that your formula tried to divide by zero).
Now, to calculate the compound annual rate of sales growth we need to enter the
GEOMEAN function into B11: =geomean(B10:F10). Since our data points are
in one contiguous range, we chose to specify the range rather than each individual
cell. Let’s also supply a label so that when we come back later we can recall what
this cell represents. Move to A11 and enter: Sales Growth.
Have you noticed any problems with the result of the GEOMEAN function? The
result was 17.51%, rather than the 18.90% which we got when using our custom
formula. Either our custom formula is incorrect, or we have misused the
GEOMEAN function. Actually, this type of error is common, and easily overlooked.
What has happened is that when using the GEOMEAN function, we didn’t fully
understand what goes on behind the scenes. Remember that GEOMEAN simply
5. We could calculate the arithmetic mean using the AVERAGE function, but this would
ignore the compounding and overstate the true average growth rate. This function is
defined as =AVERAGE(NUMBER1, NUMBER2, . . .)

23
takes the Nth root of the product of the numbers. When multiplying numbers that
are less than one, the result is even smaller, not larger as is the case with numbers
greater than one. What we should have done is taken the geometric mean of the
relative changes (i.e., one plus the percentage change).
To correct the error, replace the formula in B10 with: =B5/C5 and copy it to the
other cells. Now replace the formula in B11 with: =geomean(B10:F10)-1.
The result is 18.90%, exactly the same as our previous result. To avoid errors like
this one, you absolutely must understand what the built-in formula is doing. Never
blindly accept results just because Excel has calculated them for you. There is an
old saying in computer science: “garbage in, garbage out.”
At this point, your worksheet should closely resemble the one pictured in Exhibit 1-5.
EXHIBIT 1-5
ANALYSIS OF MICROSOFT’S GROWTH RATES
Using the Insert Function Dialog Box
With the hundreds of built-in functions that are available in Excel, it can be difficult
to remember the name of the one you want to use, or the order of the parameters,
etc. To help you with this problem, Excel provides the Insert Function dialog box,
a series of dialog boxes that guide you through the process of selecting and entering
a built-in formula.
Let’s use Insert Function to insert the GEOMEAN function into B11. First, Select
cell B11 and then clear the current formula by choosing Edit Clear All from the
A B C D E F G
3 1997 to 2002
4 2002 2001 2000 1999 1998 1997
5 Sales 28,365.00 25,296.00 22,956.00 19,747.00 15,262.00 11,936.00
6 Net Income 7,829.00 7,346.40 9,421.00 7,785.00 4,490.00 3,454.00
8 Sales Growth 18.90%
9 Net Income Growth 17.78%
10 % Change in Sales 1.1213 1.1019 1.1625 1.2939 1.2787

24
menus (or, press the Delete key on the keyboard). Find the Insert Function button
(pictured at left) on the Formula Bar. Click this button to bring up the first Insert
Function dialog box.
In the first dialog box click on Statistical in the “select a category” list. The “Select
a function” list will now contain all of the built-in statistical functions. Scroll down
this list and click on GEOMEAN. Notice that there is a definition of the function at
the bottom of the dialog box. Click on the OK button to change to the next dialog
box, which is pictured in Exhibit 1-6.6
EXHIBIT 1-6
THE EXCEL 2002 INSERT FUNCTION DIALOG BOX
In the second dialog box you will see prompts and definitions for each of the inputs
to the selected function. In this case, we want to click and drag the mouse over the
B10:F10 range. This range will appear in the “Number 1” edit box. Click on the
OK button to have the function entered. Notice that the result is 1.1890, not the
0.1890 that we expected. We need to subtract 1 from the result of the function, so
click in the Formula Bar and type -1 after the GEOMEAN function and then press
Enter. The formula in B11 should be: =Geomean(B10:F10)-1.
Insert Function is an easy way to discover new functions and to use familiar ones.
Using it will make Excel much easier for you to learn.
6. Note that this dialog box is frequently in the way of your work. You may click and drag
any portion of the dialog box to move it out of the way.

25
Using Macro Functions
There are times when you need to calculate a complex function and Excel doesn’t
have a built-in function that will do the job. In this case you can either type the
formula into a cell (which can be very tedious) or use a macro function. A macro
function is similar to a built-in function, except that it was created by somebody
other than the Excel development team at Microsoft. Macro functions can be
purchased, downloaded from online services or the Internet, or you can create your
own. Writing macro functions in Excel’s macro language (Visual Basic for
Applications) is beyond the scope of this chapter, but we have included several
functions in the Famefnc.xls file which is on the disk that was supplied with this
book. These functions will be used occasionally throughout the book.
Using a macro function is almost exactly the same as using a built-in function. The
only difference is that the file containing the functions must be opened in order for
the functions to be known to Excel. You can even use the Insert Function dialog
box with macro functions (select the User Defined function category).
As an example of the use of macro functions, we have created a macro to calculate
the geometric mean rate of growth of sales. The macro is defined as:7
FAME_GEOMEAN(SALES)
FAME_GEOMEAN is the name of the function, and SALES is the required range of
cells that contain the sales figures. Before using the function you must open the file
Famefncs.xls. (Note that this file only needs to be opened; you will not need to do
anything with it.) Once the file is opened, switch back to your original worksheet
by choosing Window from the menus and then selecting the workbook from the
bottom of the menu.
Now, in your original worksheet, select cell B12 and then bring up the Insert
Function dialog box. From the “select a category” list choose User Defined
to display a list of the functions that were supplied with this book. In the
“Select a function” list select the macro named FAME_GEOMEAN and then
click the OK button. In the edit box for Dollar Values enter B5:G5 which
is the range that contains Microsoft’s sales. Click on the OK button and see
that the answer is exactly the same as before. The function in B12 is:
=famefnc.xls!FAME_Geomean(B5:G5). The part of the function that reads
7. This function was written specifically for this data. Do not attempt to use it in any other
applications as it may return erroneous results.

26
“famefnc.xls!” simply tells Excel that the function is located in a workbook named
famefnc.xls.
Creating Graphics
In our simple profitability analysis it is obvious that Microsoft’s profit margins
have been growing at a slower rate in the last two years. Many times, you will
build much more complicated worksheets where the key trends are not so easy to
spot; especially for others who didn’t build the worksheet. You may also find that
you need to give a presentation, perhaps to a group of investors to convince them to
invest in your firm. In cases such as these, tables full of numbers may actually
obscure your point. People (and students too!) tend to get a glazed look in their
eyes when examining tables of numbers. The solution to this problem is to present
a chart of the numbers to illustrate your point. Fortunately, high-quality graphics
are a snap with Excel.
There are two ways that charts can be created in Excel: in separate chart sheets, or
embedded in the worksheet. We will cover each of these methods in turn.
Creating Charts in a Chart Sheet
Before the advent of graphical user interfaces (GUIs), worksheets and graphics
were separate entities. The original Lotus 1-2-3 actually used a separate program to
create charts of worksheet data. Today, charts are usually created within the main
program. In Excel, we can create a chart separate from the worksheet by selecting
the data and inserting a new chart sheet. Excel will then help you to create the chart
with the Chart Wizard. Let’s try creating a graph of Sales versus Net Income for
Microsoft.
First select the data in the A5:G6 range and then right-click the tab for the current
worksheet (which is probably labeled “Sheet 1”). From the menu that appears,
choose Insert. You will now be presented with a list of different file types from
which to select. Since we want to create a chart, select Chart from the list and press
Enter or click OK.
The Chart Wizard will guide you through the process of creating the chart. The
first dialog box asks you to choose the type of chart. In this case, a column chart
probably best suits the data, so choose the Column type by double-clicking on it.
The second dialog box asks for your data range; if you have selected A5:G6 the

27
Creating Graphics
range will already be in the edit box. Note that the example of the chart shows that
the X-axis is labeled with the numbers 1 through 6. Since it would be better to have
the years on the X-axis, we need to specify the location of the X-axis labels. Click
the Series tab and enter the range into the edit box labeled “Category (X) axis
labels.” Note that you have to be very specific if you choose to type in the date
range. You must type the range in the form: =Sheet1!B4:G4.8 Alternatively,
you can simply click in the edit box and then select the range. You’ll see that the
axis is now correctly labeled.
FIGURE 1-9
THE SOURCE DATA DIALOG BOX OF THE CHART WIZARD
Click the Next button and you are asked to enter a chart title and titles for the axes.
For the chart title enter: Microsoft Sales vs. Net Income. For the X-axis
enter: Years. For the Y-axis enter: Millions of Dollars.
Press the Finish button, and Excel will open a new chart sheet with a chart
resembling that in Exhibit 1-7.
8. Simply typing B4:G4 will not work. Excel will interpret this as the label for the first data
point. Therefore, you must include the name of the worksheet in the range.

28
EXHIBIT 1-7
A STAND-ALONE CHART
Creating Embedded Charts
You may want to create a chart that will be saved and displayed within the
worksheet itself. Such a chart is referred to as an “embedded chart” because it
appears within the worksheet. Unlike a separate chart sheet, embedded charts can
be displayed and printed on the same page as the worksheet data. Furthermore,
embedded charts don’t require any extra steps to display them. Once created,
embedded charts are always opened and closed along with the worksheet
automatically. If necessary, embedded charts can be saved and printed separately
from the worksheet.
To create an embedded chart, first switch to Sheet 1. Now select the data as before,
click on the Chart Wizard button (on the Toolbar; see icon in margin), and follow
the prompts exactly as you did to create the stand-alone chart. The chart will
appear in the middle of your worksheet. To resize the chart, click and drag any of
the selection boxes on its perimeter. To move the chart, click on a blank area inside
the chart and drag it to wherever you want it to be. Your worksheet should now
resemble the one in Exhibit 1-8, except for some minor formatting changes.

29
Creating Graphics
Note that you can change your embedded chart into a separate chart sheet and vice
versa. There is no need to invoke the Chart Wizard. Just right-click in the chart
and choose Location from the shortcut menu. You can even move your chart to a
different worksheet in this way.
EXHIBIT 1-8
A WORKSHEET WITH AN EMBEDDED CHART
Formatting Charts
We have now created a basic chart of Sales versus Net Income, but it probably isn’t
quite what you expected. First of all, we normally expect that the most recent data
in a chart is at the right side and the oldest at the left. Because we have created our
worksheet data in the opposite direction, our chart is backward and a quick glance
might suggest that sales and profits have been declining.
A B C D E F G
3 1997 to 2002
4 2002 2001 2000 1999 1998 1997
5 Sales 28,365.00 25,296.00 22,956.00 19,747.00 15,262.00 11,936.00
6 Net Income 7,829.00 7,346.40 9,421.00 7,785.00 4,490.00 3,454.00
10 % Change in Sales 1.1213 1.1019 1.1625 1.2939 1.2787
12
13
14
15
16
17
18
19
20
21
Microsoft Sales vs. Net Income
0.00
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00
30,000.00
2002 2001 2000 1999 1998 1997
Years
Millions
of
Dollars
Sales
Net Income

30
In Excel, every element of a chart is treated as a separate “object.” This means that
each element can be selected and edited separately from the other elements. In
addition, these chart objects are somewhat intelligent. They “know” what actions
can be performed on them, and will present a menu of these actions if you click on
them with the right mouse button. The major objects in any chart include each data
series, the plot area, the gridlines, the axes, the axis titles, the chart title, and any
other text strings entered into the chart. To select an object, all you need to do is to
click on it with the left mouse button. Once the object is selected, it will be
redisplayed with small squares (selection boxes) surrounding it. With this
knowledge, let’s edit our chart.
First, we want to turn the x-axis around so that the data are presented in the order
that we normally expect. Click on the x-axis (or axis labels) with the right mouse
button to cause the shortcut menu to appear. You will know that the x-axis is
selected when you see a small square at both ends of the axis. The shortcut menu
will be different depending on which graphic object you click on, so it is important
to click directly on the x-axis.
Once the menu appears, choose Format Axis and then click on the Scale tab. From
the resulting dialog box select “Categories in reverse order” and press Enter.
Notice that the x-axis has reversed, but the y-axis is now on the right side of the
chart. That doesn’t look right, so go back to the scale tab and click on “Value (Y)
axis crosses at maximum category.” We could have checked both of these boxes at
the same time.
If you did not add the titles in the Chart Wizard, adding a title and axis labels to our
chart simply requires a menu choice and a little typing. To add a chart title, select
Chart Chart Options from the menus and then enter the titles in the appropriate edit
boxes. You can also access the Chart Options dialog box by right-clicking in a
blank area of the chart and choosing Chart Options from the shortcut menu. You
can now edit the titles directly in the chart by selecting them, or you can return to
the Chart Options dialog box.
Suppose, for example, that we wanted to change the title so that it mentions the
years that are covered by the data. Simply click on the title to select it, then click at
the end of the title. You could begin typing immediately, but we want to put the
new text on a second line. Press enter to begin a new line, then type: 1997 to
2002 and press the Esc key or click anywhere else on the chart.
Next, let’s move the legend to the bottom of the chart to see if it looks better there.
Click on the legend with the right mouse button and choose Format Legend from

31
Creating Graphics
the shortcut menu. Now, select the Placement tab and select Bottom from the
choices. Press the Enter key to return to the chart. Now the plot area of the chart
looks squashed. To fix this, click in the plot area to select it and drag the selection
boxes until the plot area is the proper size.
To return to editing the worksheet, click anywhere in the worksheet. Your
worksheet should now resemble the one in Exhibit 1-9.
EXHIBIT 1-9
WORKSHEET WITH REFORMATTED CHART
A B C D E F G
3 1997 to 2002
4 2002 2001 2000 1999 1998 1997
5 Sales 28,365.00 25,296.00 22,956.00 19,747.00 15,262.00 11,936.00
6 Net Income 7,829.00 7,346.40 9,421.00 7,785.00 4,490.00 3,454.00
10 % Change in Sales 1.1213 1.1019 1.1625 1.2939 1.2787
12
13
14
15
16
17
18
19
20
21
Microsoft Sales vs. Net Income
1997 to 2002
0.00
10,000.00
20,000.00
30,000.00
2002
2001
2000
1999
1998
1997
Years
Millions
of
Dollars
Sales Net Income

32
Changing the Chart Type
Excel offers many different types of charts, everything from the bar chart that we
have created to 3-dimensional bar charts and radar plots. Some of these chart types
are very sophisticated, even allowing you to rotate them to see a different view of
the data.9 Despite these potential complexities, changing the chart type is very
straightforward.
Let’s assume that we would prefer to see the data in our chart presented as two
lines, rather than as columns. To make this change right-click on a blank area
around the outside edge of the chart and choose Chart Type from the menu. Select
a type of line chart and click on the OK button. The chart is now displayed as a line
chart. You can even change the individual data series chart type. For example, you
might want to see Sales as a column chart and Net Income as a line on the same
chart. Give it a try. Simply right-click on the Net Income data series and change
the chart type to a line. To try other types of charts be sure to select the Custom tab
of the Chart Wizard.
You can also change other formatting in the chart very easily. For example, to
change the color of the bars for Sales, simply right-click on one of the data points
and choose Format Data Series. On the Patterns tab you can choose a different
color and it will be applied to each of the bars for that data series. You can also
change the border around the bars and add a shadow for a three dimensional effect.
Printing
There are many times when a worksheet displayed on screen accomplishes all that
you need. Other times there is no escaping the need for a hard copy. Excel makes
printing a worksheet both easy and flexible. For small worksheets, all that need be
done is to choose File Print from the menus and let Excel worry about the details.
Larger printing tasks are only slightly more complex.
Suppose that our profitability analysis of Microsoft needs to be printed so that it can
be distributed at a meeting. As a first step, we need to decide if we want to print the
entire worksheet, or only a portion of it. In this case, let’s assume that we wish to
9. You can learn about the types of charts that Excel can create, complete with examples, at
http://office.microsoft.com/assistance/2002/articles/ExamplesofChartTypes.aspx.

33
Printing
print the whole worksheet, except that we want to print the graph on a separate page
so that it can more easily be converted to an overhead transparency.
Because we wish to print the numbers and chart separately, we need to tell Excel
the range of cells that we want printed. Select the range A1:G11 and then choose
File Print Area Set Print Area from the menus. Notice that a light gray dashed line
now surrounds the range that we have selected for printing. Before actually
printing a worksheet, it is good practice to preview the output to make sure that it
looks exactly as we want. This practice will save both time and paper. From the
File menu select Print Preview. Excel will now display, on the screen, a likeness of
the actual printed page.
If you have followed the examples to this point, you might, depending on the type
of printer you are using and the font size, notice that our worksheet is too wide to fit
on one page. Since we would ideally like to fit the whole worksheet on one page,
we have some adjustments to make. Essentially we have two options: either
change the page orientation to print sideways (i.e., landscape mode) or have Excel
reduce the printout to fit on one page. Each of these methods is equally viable, but
let’s go for the reduction to one page.
From the Print Preview mode, we can press the Setup button to change various
options for printing. Clicking on Setup brings up the Page Setup dialog box. This
dialog box may also be reached from outside of Print Preview by choosing Page
Setup from the File menu. There are many options available in this dialog box, but
the Scaling options are what we want now. Click on the Page tab and then select
Fit to: pages wide by tall, and enter a 1 in both boxes. We also don’t want the
gridlines to print. Click on the Sheet tab and make sure that the Cell Gridlines
option is deselected (no x in the box.) Press the Enter key to return to Print
Preview. Before actually printing the worksheet, it is a good idea to zoom in and
check more closely that it looks as we want. To zoom in, simply click on the page.
Your view will now be enlarged for closer inspection.
At this point, everything should be ready for printing, so click on the “Print…”
button. Excel now returns to the normal view and presents you with the print
dialog box. Because we want to print the whole range that we have selected, make
sure your printer is ready (turned on, has paper, etc.) and click on the OK button.
Your page should look nearly identical to the on-screen version.
To print the chart on a separate page, we first need to click on it so that it is selected.
Now, to print the chart simply select File Print then from the print dialog box click

34
on the OK button. Presto! The chart prints out on its own page. Of course, you can
use Print Preview and Page Setup for charts just as we did for the worksheet.
What if you wanted to print the chart on the same page as the worksheet? Simple,
just select the entire range that you want to print, including the chart. Now repeat
the steps from above, and the worksheet and chart will print on the same page. An
easier alternative is to select the range to print, choose File Print, and make sure
that Selection is selected in the Print What section of the print dialog box. Now,
click on the OK button.
Saving and Opening Files
Now that we have created a worksheet, you should save it so that it will be
available at a later time. To save this file, choose File Save As… from the menus.
This will cause a dialog box to be displayed which allows you to supply a name for
the file and the location where you would like it stored. For example, to save the
file as MSOFT.XLS on a floppy disk in the A: drive, you would change the Save in
directory to “3½ Floppy (A:)” drive and type: msoft.xls in the File Name edit
box.
After saving a file, you can open it at any time by choosing File Open… from the
menus. This will cause a dialog box to be displayed from which you may select the
file. Once a file has been named and saved the first time, you may save further
changes by choosing File Save.
Saving Worksheets for the Internet
In addition to saving worksheets in Excel’s native file format, you can also save
files as a Web page for the Internet in HTML format. Even better, the HTML file
can be reopened and edited in Excel 2002 without losing any formatting. To save a
file in HTML format, choose File Save as Web Page. In the dialog box you simply
give the page a name and select the location. Click the OK button and you’ve
created a Web version of your worksheet. Note that the dialog box also allows you
to enter a title for the page by clicking the Change Title button. This title will be
displayed in your browser’s title bar when the page is displayed.
Finally, you can also post the worksheet directly to your Web site by clicking the
Publish button. On the Publish as Web Page dialog box, enter the address of your
Web server (or FTP site) in the File name edit box. You can also add nearly

35
Using Excel with Other Applications
complete functionality to your page by checking the box labeled “Add interactivity
with:”.
Using Excel with Other Applications
Suppose that you are writing a report on the profitability of Microsoft for the past
six years. Chances are good that you are writing the report in one of the major
word processing programs. Your word processor probably allows for the creation
of tables that can display all of the information that you have created in Excel, but it
lacks the computational sophistication and graphics power of Excel. Similarly,
Excel lacks the text processing power that you need to write the report.
Fortunately, it is very easy to harness the strengths of both programs and combine
the results.
While some word processors will read Excel files directly from your disk, this is
not usually the easiest way to incorporate spreadsheets into your wordprocessing
files. Instead, it is usually easiest to use some variant of copy and paste, just like
we’ve used within Excel itself. Every time you copy data from Excel, it goes to the
clipboard. The contents of the clipboard are available to any other application that
cares to access them. All you need to do is copy the data from within Excel, switch
to the other application, and then choose Edit Paste from its menus.
Simply pasting the Excel data into a word processor usually results in the word
processor reading the data and creating a table. While this may be all that you need,
many times it would be more convenient if you could still edit the data in its native
environment. In other words, it would be nice if you could still take advantage of
Excel’s built-in functions and recalculation ability. You can. Instead of using Edit
Paste, use Edit Paste Special.
The Paste Special command allows much more freedom in how the data is stored
inside the word processor. For example, if you choose to paste the data as an
“Microsoft Excel Worksheet Object” you will be able to edit the data from within
the word processor by simply double-clicking on it. The menus and toolbars of
your word processor will change to those of Excel, and you can edit the data
exactly as if you were in Excel. This process is known as Object Linking and
Embedding (OLE).
Alternatively, you can link the data to your worksheet so that when you make
changes in Excel, they are automatically reflected in your word processor. Finally,

36
you can paste a non-editable picture of your data into your document. Either of
these last two methods will consume less memory than embedding the worksheet
with the OLE technique.
Quitting Excel
To exit from Excel you can select File Exit from the menus, or double-click on the
system menu box in the upper left corner of the Excel window. Note that if you
attempt to exit Excel without saving your work, Excel will warn you and ask if you
would like to save the file.
Summary
In this chapter we have discussed the basics of Microsoft Excel. You should have
gained a basic understanding of such topics as entering text and numbers, entering
formulas, formatting, graphics, and printing. In the chapters ahead, we will cover
many of these topics in more depth. We will, at the same time, introduce you to
financial analysis and how Excel can make this analysis easier and more
productive. Along the way, we hope to help you develop the reasoning, critical
thinking, and quantitative skills that are so necessary in the field of finance today.
TABLE 1-3
FUNCTIONS INTRODUCED IN THIS CHAPTER
Purpose Function Page
Calculate the
geometric mean
GEOMEAN(NUMBER1, NUMBER2,...) 22
Calculate the
arithmetic mean
AVERAGE(NUMBER1, NUMBER2,...) 22
An alternate way
to calculate the
geometric mean
FAME_GEOMEAN(SALES) 25

37
Problems
Problems
1. Suppose that in August 1997 you purchased shares in Staples,
Inc. (NASDAQ: SPLS). It is now five years later and you decide
to evaluate your holdings to see if you have done well with this
investment. The table below shows the market prices of SPLS.
a. Enter the data, as shown, into a worksheet and format the
prices to display as fractions in sixteenths.
b. Create a formula to calculate your rate of return for each
year.
c. Create a line chart showing the stock price from August
1997 to August 2002. Make sure to title the chart and label
the axes.
d. Experiment with the formatting possibilities of the chart.
For example, you might try changing the line to a three
dimensional line and fill the plot area with a marble
background.
Staples, Inc. Stock Prices*
Date Price
August 1997 12.3125
1998 29.1250
1999 20.7500
2000 11.8125
2001 18.6875
2002 14.0625
*Prices rounded to nearest sixteenth.

38
2. In your position as research assistant to a portfolio manager, you
need to analyze the profitability of the companies in the portfolio.
Using the data for Bed Bath & Beyond, Inc., below:
a. Calculate the net profit margin for each year.
b. Calculate the average annual growth rates for sales and net
income using the GEOMEAN function. Is net income
growing more slowly or faster than sales? Is this a positive
for your investment in the company?
c. Calculate the average annual growth rate of sales using the
AVERAGE function. Is this result more or less accurate than
your result in the previous question? Why?
d. Create a column chart of sales and net income. Be sure to
change the chart so that the x-axis labels contain the year
numbers, and format the axis so that 2002 is on the far right
side of the axis.
3. Repeat Problem 2 using the data below for Lowe’s Companies,
Inc. However, this time you should create a copy of your
worksheet to use as a template. Replace the data for Bed Bath &
Beyond with that of Lowe’s.
a. Do you think that Lowe’s can maintain the current growth
rates of sales and net income over the long run? Why or why
not?
b. Which company was more profitable in 2002? Which was
more profitable if you take a longer view? Would this affect
your desire to invest in one company over the other?
Fiscal Year 2002 2001 2000 1999 1998
Sales 2,928.0 2,396.7 1,878.0 1,397.2 1,066.6
Net Income 219.6 171.9 131.2 97.3 73.1
Fiscal Year 2002 2001 2000 1999 1998
Sales 22,111.1 18,778.6 15,905.6 12,244.9 10,136.9
Net Income 1,023.3 809.9 672.8 482.4 357.5

39
Internet Exercise
Internet Exercise
1. Choose your own company and the repeat the analysis from
Problem 3. You can get the data from MoneyCentral Investor at
http://moneycentral.msn.com/investor/home.asp. To retrieve the
data for your company, go to the Stocks area and enter the ticker
symbol. Now choose Financial Results and then Statements from
the menu on the left side of the screen. Display the annual
income statement and copy the sales and net income data. Now
enter the data into your template.

41
CHAPTER 2 The Basic Financial
Statements
Much of financial analysis takes as its starting point the basic financial statements
of the firm. It is therefore crucial that the analyst have a strong fundamental
understanding of these statements. There are three basic financial statements:
1. The income statement summarizes the results of the firm’s
operations over a period of time. The income statement tells us
the total revenues and expenses for the time period, and also
contains several different measures of the accounting profits
earned by the firm. Typically, income statements are prepared for
different time periods, usually monthly, quarterly, and annually.
After studying this chapter, you should be able to:
1. Explain the purpose and understand the format of the firm’s three
basic financial statements: the income statement, the balance sheet,
and the statement of cash flows.
2. Construct each of these statements in Excel with data for any com-
pany.
3. Link worksheets together so that formulas in one worksheet can refer-
ence data in another.
4. Use Excel’s “Outline” tool to selectively display or hide parts of a
financial statement.
2
41

CHAPTER 2: The Basic Financial Statements
42
2. The balance sheet describes the assets, liabilities, and equity of
the firm at a specific point in time. Assets are the (tangible or
intangible) things that a firm owns. Liabilities are the firm’s
debts. Equity is the difference between what the firm owns and
what it owes to others. Because the balance sheet is specific to a
point in time, it is much like a photograph. What it shows was
true when the snapshot was taken, but is not necessarily true
when it is viewed.
3. The statement of cash flows outlines the sources of the firm’s
cash inflows and shows where the cash outflows went. Activities
that bring cash into the firm are referred to as sources of cash,
while those that take cash out of the firm are referred to as uses of
cash.
In this chapter we will build each of these three statements for Elvis Products
International, a small producer of Elvis paraphernalia. Each financial statement
will be created in its own worksheet in the workbook, and we will create links
between the sheets as necessary. Before beginning, open a new workbook.
The Income Statement
The income statement is a fairly simple document that begins by listing a firm’s
revenues (perhaps by sources or in total) followed by all of the firm’s expenses.
The result of the income statement is the net income for the period. Net income
represents the accounting profit left over after all expenses have been paid from the
revenue for the period.
Building an Income Statement in Excel
Exhibit 2-1 presents the income statement for Elvis Products International (EPI) for
the year ending December 31, 2004. We will build this income statement first, and
then use it as a base for creating the 2003 income statement.
42 The Basic Financial Statements

43
EXHIBIT 2-1
EPI’S INCOME STATEMENT FOR 2004 AND 2003
While we are building the income statement, we want to keep a couple of general
principles in mind. Principle 1 says that we want to make Excel do as much of the
work as possible. Any time a value can be calculated, we should use Excel to do
so. The reasoning behind this principle is that we want to avoid mistakes and
increase productivity. A little thought before beginning the design of a worksheet
can help to minimize data entry errors, and increase productivity by reducing the
amount of data that needs to be entered. Principle 2 says that we should format the
worksheet in such a way as to make it easy to comprehend. There are many times
that you will be creating a worksheet for others to use, or for your own use at a later
date. Properly organizing the cells and judicious use of color and fonts can make
the worksheet easier to use and modify.1
Worksheets that are disorganized and
sloppily formatted do not engender faith in their results.
It is usually helpful when working with multiple worksheets in a workbook for each
sheet to be given a name other than the default. With the right mouse button, click
1. We would like to emphasize the word “judicious.” Many people to whom fonts are a new
idea end up producing documents with a definite ransom note appearance. Do yourself,
and others, a favor by limiting your use of fonts to one or two per document.
Principle 1:
Make Excel do as much of the
work as possible. Whenever
possible, a formula should be
used rather than entering
numbers. In the long run this
will minimize errors.
Principle 2:
Format the worksheet so that
it is easy to understand.
Borders, shading, and font
choices are more than just
decorations. Properly chosen,
they can make important
numbers stand out and get the
attention they deserve.
The Basic Financial Statements 43

CHAPTER 2: The Basic Financial Statements
44
on the sheet tab labeled “Sheet 1.” From the menu choose Rename and then enter
Income Statement when prompted for the new name of the sheet. This step is
important because when we later begin referencing data on this sheet, the
references require the name of the sheet.
We will begin building the income statement with the titles in A1:A3. Remember,
if the need arises, we can always insert new rows or columns into the worksheet at
a later time. In A1 type: Elvis Products International; in A2:
Income Statement; in A3: For the Year Ended Dec. 31, 2004. The
first line of the title identifies the company, the second identifies the type of statement,
and the third identifies the time period that the statement covers. Now center the titles
by selecting A1:C3, choose Format Cells, select the Alignment tab, and then select
“Center Across Selection” under Horizontal. Note that Excel provides an icon on the
formatting toolbar that is titled “Merge and Center” and accomplishes a similar
alignment. However, in addition to centering the titles over the selected columns it
also merges the cells into one. This creates a problem if we later decide to insert a
new column. In general, you should never use the Merge and Center icon.
How to proceed from this point is largely a matter of preference. We could move
line by line through the income statement, entering a label followed by the value.
An alternative is to enter all of the labels and then all of the numbers. The second
method is preferable at this point so that we may concentrate on the numbers. The
labels are going to be stored in column A, and the numbers will be in column B. It
is good practice to enter a label indicating the end of the period above the data, so
move to B4 and type: 2004.
Beginning in A5,enterthe labels exactly astheyappearinExhibit2-1. Once you have
entered the labels, it is likely that you will find that some of these labels are too long
to fit in only one cell. To remedy this problem, we need to change the width of column
A. ThereareseveralwaystoaccomplishthisinExcel. The slowestmethodis toselect
the whole column (click on the column header) choose Format Column Width and
enter: 33.5 in the column width edit box. If you are using some font other than 12
point Times New Roman, you will have to experiment with different numbers to find
the appropriate width for the column. Instead of entering a specific number for the
column width, we can also let Excel determine the appropriate width. Select column
A, and choose Format Column Autofit Selection and Excel will automatically make
the column wide enough to accommodate the longest text in the column.
As usual, there is an alternative for mouse users. If you slowly move the mouse
pointer over the column headers, you will notice that the pointer changes its shape
(to that pictured at left) as it passes over the boundary between columns. Press the
44 The Basic Financial Statements

45
left mouse button while the pointer is over this boundary, and drag until the column
is wide enough to accommodate the text. You can also double-click on the column
boundary and Excel will set the column width to the best fit for the data. Each of
these techniques can also be used to change the height of a row.
When entering data for large companies, it is often preferable to display the
numbers in thousands or millions of dollars, rather than the full amount. For EPI,
we will enter the numbers in full precision, and later display the numbers in
millions to simplify the display. Move to B5 and enter: 3,850,000.2 Keeping
principle 2 in mind, we would like the numbers to display with commas and two
decimal places. Since each cell can maintain a number format, regardless of
whether it contains any numbers, we will preformat the cells that we are going to
use. Select cells B5:C15, choose Format Cells from the menus, click on the
Number tab, and click the Number category. Now set the number of decimal places
to 0 and make sure to click on Use 1000 Separator. When we enter numbers into
these cells, they will automatically take on the format that we want.
Move to B6 and type: 3,250,000 for Cost of Goods Sold. This is the total cost
of the products sold to customers, including inventory shrinkage and write downs
for damaged or outdated products. Notice that, as promised, the number in B6
appears with commas.
Gross profit is the amount that is left over after paying for the goods that were sold.
To calculate gross profit, we subtract cost of goods sold from sales. Again, we
want Excel to make all of the calculations, so in B7 type: =B5-B6. Selling,
General and Administrative (S,G&A) Expense is an input, so enter: 330,300 in B8.
Fixed expenses (rent, salaries, etc.) for the period are an input so enter: 100,000
in B9. Depreciation is also an input in this case, so in B10 enter: 20,000.
Earnings Before Interest and Taxes (EBIT) is gross profit less all remaining
expenses other than interest and taxes. Any of several formulas could be used for
this calculation, for example the obvious formula for EBIT in B11 is: =B7-B8-
B9-B10. However, obvious formulas aren’t always the best. We could simplify
this equation somewhat by making use of the SUM function. The new function
would be: =B7-Sum(B8:10). SUM is a built-in Excel function which returns the
summation of the arguments. SUM is defined as:
SUM(NUMBER1, NUMBER2, ...)
2. There is no need for you to type the commas. We are showing them here for clarity.
However, Excel will accept the numbers with commas if you wish to type them in.
The Basic Financial Statements 45

Another Random Scribd Document
with Unrelated Content

Gosling was very full of importance that day, and during lunch he wore the
air of a man who had secret and valuable information. He was too well
versed in City methods and too loyal to his own house to give any hint of
Barker and Prince’s speculations in Austria and Germany; but when the
subject of the new plague inevitably came into the conversation, he spoke
with an authority that was heightened by the hint of reserve implicit in his
every dictum.
When the latest joke on the subject, fresh from the Stock Exchange, had
been retailed by one of the usual group of lunchers, and had been received
with the guffaws it merited, Gosling suddenly screwed his face to an
unaccustomed seriousness and said, “But it’s serious, you know, extremely
serious.”
And by degrees, from this and many other better informed sources, the
rumour ran through the City that the new plague was serious, extremely
serious. That afternoon there was a slight drop of prices in certain industrial
shares, and a slight rise in wheat and some other imported food stuffs;
fluctuations which could not be attributed to ordinary causes. Mr Barker’s
foresight was justified once again in the eyes of Gosling and Flack. Before
five o’clock another letter was posted to Dundee, enforcing haste.
In the bosom of his family that evening, Gosling was a little pompous, and
talked of economy. But his wife and daughters, although they assumed an
air of interest, were quite convinced that the head of the house in Wisteria
Grove was making the most of a rumour for his own purposes.
As Blanche said to Millie, later, father was always finding some excuse for
keeping them short of dress money. That five pounds had proved inadequate
to supply even their immediate necessities, and they were already
meditating another attack.
“We simply must get another three pounds somehow,” said Millie. And
Blanche quite agreed with her.

V—THE CLOSED DOOR
1
There was a lull for forty-eight hours after that announcement of the case of
the new plague in Berlin, and Maxwell was beginning to regret his
headlines when the news began to come in, this time in volume. The
Russian censorship had broken down, and the news agencies were suddenly
flooded with reports. There were several thousand cases of the plague in
Eastern Russia; the north and south were affected, many men were dying in
such towns as Kharkov and Rostov; there were a dozen cases in St
Petersburg; there was a such a rush of reports that it was quite impossible to
distinguish between those that were probably true and those that were
certainly false.
The morning papers gave as much space as they could spare, and had even
broken up some of the matter dealing with the arrangements for the opening
of Parliament on that day. But the evening papers had news that put all
previous reports in the shade. Eleven more cases were reported in Berlin,
three in Hamburg, five in Prague and one in Vienna. But more important,
more thrilling still, was the news that H.I.H. the Grand Duke Kirylo, the
Tsar’s younger brother, had died of the plague in Moscow, and Professor
Schlesinger in Berlin. Until that startling announcement came, the English
public had incomprehensibly imagined that only peasants, Chinamen and
people of the lower social grades were attacked by this strange new
infection.
In the later editions it was reported on good authority that Professor
Schlesinger had been observing a sample of the blood of the first case of

plague that had been recognized in Berlin.
Nevertheless the majority of readers, after glancing through the obituary
notices of H.I.H. the Grand Duke Kirylo and of the world-famed
bacteriologist, turned to the account—only slightly abbreviated—of the
opening of Parliament. And in many households the subject of the new
plague gave place to the fiercely controversial topic of the English Church
Disestablishment Bill, which had been indicated in the King’s Speech as a
measure that was to be introduced in the forthcoming session. Many
opponents of the Bill coupled the two chief items of news and said that the
plague was a warning against infidelity. It may be assumed that they found
sufficient warrant for the killing of a few thousand Russians, including a
prince of the blood and a great German scientist, in the acknowledged
importance of England among the nations. The death of half a million or so
Chinamen in the first instance had been a delicate hint; now came the more
urgent warning. Who knew but that if this sacrilegious Bill were passed,
England herself might not be smitten. When warnings are disregarded,
judgments follow. The Evangelicals found a weapon ready to their hands....
But what precisely was the nature of the new plague, none of the journals
was as yet able to say. The symptoms had not as yet been “described” by
any medical authority, for it appeared that, contrary to modern precedent,
the doctor himself, despite all precautions, was peculiarly subject to
infection. Out of the eleven new cases in Berlin, no less than four were
medical men.
From the layman’s point of view the symptoms were briefly as follows:
Firstly, violent pains at the base of the skull, followed by a period of
comparative relief which lasted from two to five hours. Then, a numbness
in the extremities, followed by rapid paralysis. Death ensued in from
twenty-four to forty-eight hours after the pains were first experienced. No
case, as yet, was known to have recovered. A well-known physician in
London gave it as his opinion that the disease was a hitherto unknown form
of cerebro-spinal meningitis of unexampled virulence. He protested that the
word “plague” was a false description, but that word had already been

impressed on the public mind, and the disease was spoken of as the “new
plague” until the end.
2
The next morning all London was reading a heavily-leaded article by Jasper
Thrale. It appeared first in the Daily Post, with the announcement that it
was not copyright, and all the evening papers took it up, and some of them
reprinted it in its entirety.
The article began by pointing out that in the recent history of civilization
Europe had been subject to a long succession of pestilences. From the
fourteenth to the seventeenth centuries, wrote Thrale, the Black Death, now
commonly supposed to be a form of the bubonic plague, was practically
endemic in England. In more recent times small-pox had been responsible
for enormous mortality among all classes, and, in our own day, tuberculosis.
In the two former examples, Thrale pointed out, and in many other diseases,
infectious or contagious, or both, these pestilences had gradually lost
virulence. By the elimination of those most susceptible to infection and
incapable to resist the onslaught of the disease, and by the survival of those
whose vitality was strong enough either to resist attack or to achieve
recovery, mankind at last were gradually becoming immune against certain
infections which had prevailed in the past. And in a greater or less degree
this immunity was without doubt being obtained against a whole host of
lesser ills. This comparative immunity, in fact, was one of the means of
man’s evolution towards a more perfect physical body.
“But let us consider for a moment,” wrote Thrale, “the appalling danger
which threatens us when we are attacked by a pestilence which is entirely
new to humanity; new, so far as we know, to the world. In the middle of the
fourteenth century the Black Death is recorded in some places to have
killed two-thirds of the whole population, and, notwithstanding the modern

improvement in sanitation and general hygiene, there is no inherent reason
why another pestilence may not appear, which may be even more deadly.
And we are faced at the present moment with the awful threat that such a
pestilence has appeared, the pestilence commonly known as the ‘new
plague.’ There is no reason why we should consider the appearance as
without precedent in history; there is no reason why we should regard its
coming as outside the laws of common probability; finally, and most
decisively, there is no reason why England should not be smitten.
“According to report among the Chinese, this ‘new plague’ has been
spasmodically epidemic in Tibet for more than a century. We have, as yet,
no certain facts upon which to base any hypothesis, but is it not credible
that during that time some bacterium or bacillus—hitherto harmlessly
parasitic, perhaps, in the blood of lower animals—has changed its life
habit? In the isolated and sparsely inhabited regions of Tibet, it is possible
that for many thousand years the assumed bacterium was never bred in the
blood of man; it is possible that when it first found a new host it was
comparatively harmless to him, but within a hundred years it may have
become so altered by new conditions that it has developed into what is
practically a new species. If these theories are relatively true, it is not
unlikely that this new bacterium is working out its own destruction by the
destruction of its hosts. It may be that it is one of those blind alleys of
evolution which reach a certain stage of development and then disappear.
But meanwhile what of mankind? We know so little of the history of
microscopic life. There is a whole world of evolution in process of which
we have no conception, and at this stage, whether my hypothesis be a
possible one or not, we are at least sure that an unknown organism—animal
or vegetable—has become visible to us in its effects and may alter the
whole history of mankind.
“I lay stress on these aspects, because we are so hide-bound, so restricted,
so conventional in our ideas that we assume, without thought, that the
process of life as we know of it from a few thousand years of history can
never be interrupted. In our few years of individual existence we become
accustomed to certain apparent laws of cause and effect, and will not
believe that there can be any exception to those assumed laws. But, now, in

the face of recent evidence, it is absolutely essential that we should realize
instantly and practically that we are threatened with a new factor in life,
which imperils the whole human race. It is no longer safe to comfort
ourselves with the belief—begotten of our vanity—that the world was
necessarily made for man. It behoves us to take measures for our protection
without delay, to undertake our own cause and trust no longer in any
beneficent Providence that works always for our ultimate benefit.
“These measures of protection are clearly indicated. We must close our
doors against the invasion of the plague. Quarantine will not protect us; we
must have no traffic with Europe until the danger is past. By the happy
accident of our position we can become isolated from the rest of the world.
We must close our doors before it is too late.”
3
If the people had not been seriously scared by the sudden irruption of news
on the day preceding that on which this article was published, they would
have ignored Thrale’s hyperboles—or laughed. But, caught in a moment of
agitation and fear, a certain section of the crowd took up Thrale’s
suggestion, talked about the “closed door,” held meetings, and started
propaganda. The Press, with its genius for appreciating and following
public opinion, also took up the suggestion, and was automatically divided
into two sections, recognizable as Liberal and Conservative.
The Times took command of the situation with a leader, in which Thrale’s
argument was pounded, rather than picked, to pieces; but the Daily Mail
produced more effect with two special articles contributed, one by a
bacteriologist, the other by a professor of economics. The first had little
weight—all argument under that head was as yet founded on the most
uncertain hypotheses. The second was so convincing that the less ardent
supporters of the “closed door” policy were shaken in their convictions.

The writer of the economic article pointed out that an England with closed
doors could not feed herself for a month. He was scrupulously fair in his
argument, and was at great pains to show that even if preparation was
instantly made to lay in large stores of grain from Canada, tinned meats
from America, and food-stuffs generally from the many places which were
as yet free from any taint of plague, it would still be impossible to provide
for more than a three months’ isolation. Then, leaving this aspect of the
question, he went on to show in detail that even if the food could be
supplied, the practical cessation of our enormous foreign trade would mean
the destruction of England’s commerce, and he wound up with an earnest
exhortation to the country at large, warning the people to beware of
scaremongers, pessimists, and opportunists who had their own ends to
serve, and cared nothing for the general welfare. It was an excellent article
in every way; quite one of the best that the Daily Mail had ever published.
And as this, too, was declared free of any copyright restrictions, it was
largely circulated.
The Daily Post replied next morning by pointing out that the celebrated
professor of economics was nullifying all his own previous utterances on
the case for Tariff Reform, but that retort carried little weight. No one cared
if the professor contradicted himself; anyone, except the faddists, could see
that the argument of the article was sound, in fact incontrovertible. What
had to be done was to put pressure on the Local Government Board. It was
true that the Daily Post, the semi-official organ of the Government,
affirmed that the Board in question was alert and active, but that
announcement was regarded as a cliché; what was wanted were particulars
of the preventive measures that were being taken.
The members of the great Gosling family, in offices, warehouses and shops
followed the line of least resistance, while making some assertion of their
rights as citizens.
George Gosling’s arguments with his crony Flack were excellently
representative.
“What yer think of this ‘closed door’ business?” asked Flack.

“Goin’ a bit too far, in my opinion,” returned Gosling judicially.
Flack’s natural incredulity had inclined him in the same direction, but his
colleague’s certainty swung him round at once.
“I ain’t so sure o’ that,” he said. “Looks to me as things is going pretty
bad.”
“Bad enough, I grant you,” returned Gosling. “But there isn’t no need for us
to lose our ’eads over it. Take it all round, you know, it’s pretty certain as
things isn’t as bad as is made out, whereas, on the other ’and, the ‘closed
door’ policy’d mean ruin and starvation for ’undreds of thousands—there’s
no gettin’ round that.”
“Better a few ’undred thousands than the ’ole male population,” said Flack.
“If it come to that, but it won’t; no fear, not by a long chalk, it won’t,”
replied Gosling. “What’s got to be done is to get the Local Government
Board to work. We’ve got to ’ave a regular system o’ quarantine
established, that’s what we’ve got to ’ave.”
It did, indeed, appear the most practical form of prevention at the moment;
it is hard to see what other measures could have been adopted. The
supporters of the “closed door” policy soon began to lose adherents. The
scheme was obviously alarmist, far-fetched and utterly impracticable....
4
Through February and the early part of March the plague spread through
Central Europe, but not with an alarming rapidity.
In the second week of March, Berlin was reporting a weekly roll of over
five hundred deaths attributable to this cause, and Vienna was second with

between four and five hundred. In St Petersburg and Moscow the figures
were no higher, and there were as yet comparatively few cases in France,
and none in Spain or Portugal.
Many authorities were of opinion that the mortality had reached the
maximum, and that the plague would work itself out in the course of a few
more weeks. Moreover it appeared that the early reports of the highly
infectious character of the plague must have been grossly exaggerated, for
as yet there had been not a single case in the British Isles despite the
enormous traffic between England and the Continent. It is true that the
strictest quarantine had been established—it had been ascertained that the
period of gestation of the germ was about fifty hours—but not one single
case had so far been detained in quarantine ships or hospitals. It was argued
from this that the plague was not infectious at all in the ordinary sense, and
only mildly contagious; that it flourished in certain centres and was not
easily transferable from one centre to another.
The only aspect of the thing that was seriously alarming was the horrible
mortality among doctors and the specialists who were endeavouring to
recognize and isolate the characteristic germ of the disease. Nine English
experts who had dared martyrdom in the cause of science had gone to
Berlin to make investigations, and not one of them had returned. As a
consequence of this strange susceptibility of the investigator, whether
medical man or bacteriologist, there was still an extraordinary ignorance of
the general nature and action of the disease.
Nevertheless, despite this one intimidating aspect of the plague, the general
attitude in the middle of March was that the quarantine arrangements were
enormously impeding trade and should be relaxed. The foreign
governments were alive to the seriousness of the scourge, and were doing
all in their power to prevent infection. There had been a scare, but people
were calm again, now, and able to realize the extent of the earlier
exaggerations.
The Government passed the second reading of the English Church
Disestablishment Bill by a majority of nineteen, before the Easter recess,

and the Goslings, who had grown used to the plague, whose chief attitude
towards it was that it was an infernal nuisance which interfered with trade,
turned their attention gladly to the new topic; they all thought that a general
election at that moment would result in an overwhelming Conservative
majority. And as the Liberals had been in power for more than ten years,
that eventuality was regarded with complacency.
But at this critical moment—to the joy of the Evangelicals—the new plague
set to work in earnest.

VI—DISASTER
1
Russia was smitten. Once more communication was cut off from Moscow,
this time by a different agent. The work of the city was paralysed. Men
were falling dead in the street, and there were only women to bury them. A
wholesale emigration had begun. The roads were choked with people on
foot and in carriages, for the trains had ceased to run.
The news filtered in by degrees: it was confirmed, contradicted and
definitely confirmed again every few hours.
Then came final confirmation, with the news that something approaching
war had broken out—a war of defence. Germany had sent troops to the
frontier to stem the tide of emigrants from smitten Russia and Poland; and
Austria-Hungary was following her example.
Parliament re-assembled before the Easter recess had expired. The time for
more drastic measures had come, and the Premier explained to the House
that it was proposed to bring in a Bill immediately to cut off communication
with Europe.
There can be no doubt that England was now badly scared, but centuries of
protection had established a belief in security which was not easily shaken.
The enthusiasts for the “closed door” policy found plenty of recruits, but on
the other side there was a solid body of opinion which maintained that the
danger was grossly exaggerated. And when the Evening Chronicle came out

with a long leader and a backing of expert opinion, to prove that the
“Closed Door” Bill—as it was commonly called—was a dodge of the
Government’s in order to retain office, a well-marked reaction followed
against the last and terrible step of cutting off all communication with
Europe; and the Conservative party was joined by some avowed Liberals
who had personal interests to consider in this connexion.
In committee-rooms, members of the Opposition were inclined to be
jubilant: “If we can throw out the Government on this Bill we shall simply
sweep the country ... all the manufacturers in the North will be with us ...
even Scotland, most likely ... we should come back with a record
majority....”
The prospects were so magnificent that there could be no hesitation in
making a party question of the Bill.
No time was to be lost, for the Bill was to be rushed, it was an emergency
measure, and it was proposed that it should become law within four days.
Preparations were already in hand to carry out the provisions enacted.
An urgent rally of the Opposition was made, and when the Bill came up for
the second reading the Premier addressed a well-filled House. The House
was not crowded because a large number of people, including many
members of Parliament, were on their way to America. All the big liners
were packed on their outward voyage and were returning, contrary to all
precedent, in ballast—this ballast was exclusively food-stuffs.
The Premier introduced the Bill in a speech which was remarkable for its
sincerity and earnestness. He outlined the arrangements that were being
made to feed the community, and showed clearly that while communication
remained open with America, there was no fear of any serious shortage.
Pausing for a moment on this question of intercourse with America, he
made a point of the fact that American ports were already closed to
emigrants from all European countries with the one exception of Great
Britain, and that if a single case of plague were reported in these islands the
difficulties of obtaining food-stuffs from America and the Colonies would

be enormously increased. He wound up by almost imploring the House not
to make a party question of so urgent and necessary a measure at a time
when the safety of England was so terribly threatened. He pleaded that at
this critical moment, unparalleled in the history of humanity, it was the duty
of every man to sink his own personal interests, to be ready to make any
sacrifice, for the sake of the community.
Mr Brampton, the leader of the Opposition, then completely destroyed the
undoubted effect which had been made upon the House. He did not openly
speak in a party spirit, but he hinted very plainly that the Bill under
consideration was a mere subterfuge to win votes. He poured contempt
upon the fear of the plague, which he characterized throughout as the
“Russian epidemic,” and ended with the advice to keep a cool head, to
preserve the British spirit of sturdy resistance instead of shutting our doors
and bringing the country to commercial ruin. “Are we all cravens,” he
concluded, “scurrying like rabbits to our burrows at the first hint of alarm?”
The further debate, although lengthy, had comparatively little influence; the
House divided, and the Government was defeated by a majority of nine.
2
The news was all over the country by ten o’clock that night, and it was
noticeable that a large percentage of the younger generation still regarded
the danger as “rather a lark.” This threat of the plague held a promise of
high adventure; youth can only realize the possibility of death in its relation
to others.
“I say, if this bally old plague did come” ... remarked a young man of
twenty-two, who was sitting with a friend in the little private bar of the
“Dun Taw” Hotel.

His friend drew his feet up on to the rungs of his tall stool and winked at the
barmaid.
“Well, go on. What if it did?” remarked that young woman.
The young man considered for a moment and then said: “Those that got left
would have a rare old time.”
“It’s the women as’d get left, seems to me,” replied the barmaid, and scored
a point.
“I say, surely you don’t come from this part of the world?” was the
compliment evoked by her wit.
“Not me!” was the answer, “I’m a Londoner, I am. Only started yesterday,
and sha’n’t stay long if to-day’s a fair sample. There ’asn’t been a dozen
customers in all day, and they were in such a ’urry to get their tonic and go
that I’m sure they couldn’t ’ave told you whether me ’air was black or
ches’nut.”
Both men immediately looked at the crown of pretty fair hair which had
been so churlishly slighted.
“First thing I noticed about you,” said one.
The other, who had hardly spoken before, took the cigarette out of his
mouth and remarked: “You can never get that colour with peroxide.”
The barmaid looked a little suspicious.
“Oh, he means it all right, kid,” put in the younger man quickly. “Dicky’s
one of the serious sort. Besides, he’s in that line; travels for a firm of
wholesale chemists.”
Dicky nodded gravely. “I could see at once it was natural,” he remarked
with the air of an expert.

“Ah! you’re one of them that keeps their eyes open,” returned the barmaid
approvingly, and Dicky modestly acknowledged the compliment by saying
that his business necessitated close observation.
“Most men are as blind as bats,” continued the barmaid, and the examples
she gave from her own experience led to an absorbing conversation, which
was presently interrupted by the shriek of the swing door.
The new-comer was a small, fair man with a neatly waxed moustache. He
came up to the counter with the air of an habitué, and remarked, “Hallo!
where’s Cis? You’re new here, aren’t you?”
The barmaid, recognizing the marks of a regular customer, quietly admitted
that this was only her second day at the “Dun Taw.”
“I’ve been away for two months,” explained the fair man, and ordered
“Scotch.” He was evidently in the mood for company, for he brought up a
stool and, sitting a little way back from the bar, he began to address his
three hearers at large.
“Only came back from Europe this evening,” he said, “and glad to be home,
I assure you.” He raised his left hand with a gesture intended to convey
horror, and drank half his whisky at a gulp.
Dicky turned to give his serious attention to the narrative which was plainly
to follow, and somewhat ostentatiously observed the details of the new-
comer’s dress. Dicky had a new-found reputation to maintain. His friend
looked bored and a little sulky, and tried to continue his conversation with
the barmaid, but that young woman, appreciating the difference in value
between a casual and a regular customer, passed a broad hint by with a
smile and said: “Europe? Just fancy!”
“It’s a place to get out of, I assure you,” said the fair man. “I’ve been over
there for two months—Germany and Austria chiefly—but for the last
fortnight I’ve been wasting my time. There’s nothing doing.”
“Isn’t there?” commented Dicky with great seriousness.

“Oh, we’re sick to death of this bally plague,” put in the other young man
quickly. “There’s been simply nothing else in the papers for the last I don’t
know how long. I want to forget it.”
The fair man reached forward and put down his empty glass on the bar
counter. “Same again, Miss,” he said, and then: “We’ll all be more sick of
the plague before we’ve finished with it. It’s a terror. If I was to tell you a
few of the things I’ve seen in the past fortnight, I don’t suppose you’d
believe me.”
“That’s all right; I’d believe you quick enough,” returned the young man.
“Point is, what’s the good of getting yourself in a funk about it? Personally I
don’t believe it’s coming to England. If it was it would have been here
before this. What I say is ...”
His pronouncement of opinion ceased abruptly. The fair man’s behaviour
riveted attention. He was gazing past the barmaid at the orderly rows of
shining glasses and various shaped bottles behind her. His mouth was open.
He gazed intensely, horribly.
The barmaid backed nervously and looked over her shoulder. The two
young men hastily rose and pushed back their stools. The same thought was
in all their minds. This neat, fair man was on the verge of delirium tremens.
In a moment the air of intercourse and joviality that had pervaded the little
room was dissipated; in place of it had come shocked surprise and fear.
There was an interval of slow desolating silence, and then the convulsive
grip of the fair man shattered the glass he held, and the fragments fell
tinkling to the floor.
“I say, what’s up?” stammered the barmaid’s admirer, while the barmaid
herself shrank back against the shelves and watched nervously. She had had
experience.
The fair man’s head was being pulled slowly backwards by some invisible
force. His eyes, staring straight before him, appeared to watch with fierce

intensity some point that moved steadily up the wall of shelves behind the
counter; up till it reached the ceiling and began to move over the ceiling
toward him.
Then, quite suddenly, the horrible tension was relaxed; his head fell loosely
forward and he clapped both hands to the nape of his neck. He was
breathing loudly in short quick gasps.
“I say, do you think he’s ill?” asked the young man. At the suggestion
Dicky made a step towards the sufferer; his knowledge of chemistry gave
him a professional air.
“He’s come from Europe.... Suppose it’s the plague,” whispered the
barmaid.
And at that the two young men started back. As the words were spoken
realization swept upon them.
Mumbling something about “get a doctor,” they rushed for the door. One of
them made a wide détour—he had to pass the man who sat doubled forward
in his chair, frantically gripping the base of his skull.
Hardly had the clatter of the swing door subsided before he fell forward on
to the floor. He was groaning now, groaning detestably.
The barmaid whimpered and stared. “Women don’t get it.” she said aloud.
But she kept to her own side of the counter.
Later the owner of the “Dun Taw” identified the fair man—from a distance
—as Mr Stewart, of the firm of Barker and Prince.
3

Thrale’s “higher forces” had shown their hand.
The humble and rotund instrument of their choice had served his purpose,
and he was probably the first man in London to receive the news—a
delicate acknowledgment, perhaps, of his services.
The telegram was addressed to the firm, but as neither of the heads of the
house had arrived, Gosling opened it according to precedent.
“Gosh!” was his sole exclamation, but the tone of it stirred the interest of
Flack, who turned to see his colleague’s rather protuberant blue eyes staring
with a fishy glare at a flimsy sheet of paper which visibly trembled in the
hold of two clusters of fat fingers.
Flack lifted his spectacles and holding them on a level with his eyebrows,
said, “Bad news?”
Gosling sat down, and in the fever of the moment wiped his forehead with
his snuff handkerchief, then discovered his mistake and laid the
handkerchief carelessly on the desk. This infringement of his invariable
practice produced even more effect upon Flack than the staring eyes and
wavering fingers. Gosling might be guilty of mild histrionics, but not of
such a touch as this. The utter neglect of decency exhibited by the display
of that shameful bandanna could only portend calamity.
“Lord’s sakes, man, what’s the matter?” asked Flack, still taking an
observation under his spectacles.
“It’s come, Flack,” said Gosling feebly. “It’s in Scotland. Our Mr Stewart
died of it in Dundee this mornin’.”
Flack rose from his seat and grabbed the telegram, which was brief and
pregnant. “Stewart died suddenly five a.m. Feared plague. Macfie.”
“Tchah!” said Flack, still staring at the telegram. “‘Feared plague.’ Lost
their ’eads, that’s what they’ve done. Pull yourself together, man. I don’t
believe a word of it.”

Gosling swallowed elaborately, discovered his bandanna on the desk and
hastily pocketed it. “Might ’a been ’eart-disease, d’you think?” he said
eagerly.
“We-el,” remarked Flack, “I never ’eard as ’is ’eart was affected, did you?”
Gosling held out his hand for the telegram, and made a further elaborate
study of it, without, however, discovering any hitherto unsuspected
evidence relating to the unsoundness of Stewart’s heart.
“It says ‘feared,’ of course,” he remarked at last. “Macfie wouldn’t have
said feared if ’e’d been sure.”
“They’d ’ardly have mentioned plague in a telegram if they ’adn’t been
pretty certain, though,” argued Flack.
Gosling was so upset that he had to go out and get a nip of brandy, a thing
he had not done since the morning after Blanche was born.
The partners looked grave when they heard the news from Dundee, and
London generally looked very grave indeed, when they read the full details
an hour later in the Evening Chronicle.
Stewart, it appeared, had come straight through from Berlin to London via
Flushing and Port Victoria, and on landing in England he had managed to
escape quarantine. His was not an isolated case. For some weeks it had been
possible for British subjects to get past the officials. There was nothing in
the regulations to allow such an evasion of the order, but it could be
managed occasionally. Stewart had been told to spare no expense.
The Evening Chronicle, although it made the most of its opportunity in
contents bill and headlines, said that there was no cause for alarm, that these
things were managed better in Great Britain than on the Continent; that the
case had been isolated from the first moment the plague was recognized
(about five hours before death), that the body had been burned, and that the
most extensive and elaborate process of disinfection was being carried out

—even the sleeping coach in which Stewart had travelled from London to
Dundee twelve hours before, had been identified and burned also.
London still looked grave, but was nevertheless a little inclined to
congratulate itself on the thoroughness of British methods. “We’ll never get
it in England, you see if we do,” was the remark chiefly in vogue among the
great Gosling family.
But twelve hours or so too late, England was beginning to regret that the
Government had been defeated. It was rumoured that the Premier had
broken down, had immediately resigned his office, and would not seek re-
election as a private member.
This rumour was definitely confirmed in the later editions of the evening
papers. Mr Brampton had been summoned to Buckingham Palace and was
forming a temporary ministry which was to take office. In the
circumstances it was deemed inadvisable to plunge the country into a
general election at that moment.
4
Mr Stewart died in the small hours of Friday morning, and the next day,
Saturday, the 14th of April, was the first day of panic.
The day began with comparative quiet. No further case had been notified in
Great Britain, but telegraphic communication was interrupted between
London and Russia, Prague, Vienna, Budapest, and other continental
centres. In Germany matters were growing desperate. There had been riots
and looting. Military law had been declared in several towns; in some cases
the mob had been fired upon. Business was at a standstill, and the plague
was spreading like a fire. Between two and three hundred cases were
reported from Reims, and upwards of fifty from Paris....

Business houses were being closed in the City of London, and the banks
noted a marked tendency among their depositors to withdraw gold; so
marked, indeed, that many banks of high standing were glad to be able to
close their doors at one o’clock.
It was on this Saturday morning, also, that the bottom suddenly fell out of
the money market. For weeks past, prices had been falling steadily, but now
they dropped to panic figures. Every one was selling, there were no buyers
left. Consols were quoted at 53–1/2.
The air of London was heavy with foreboding, and throughout the morning
the gloom grew deeper. The depressed and worried faces to be met at every
turn contrasted strangely with the brilliance of the weather. For April had
come with clear skies and soft, warm winds.
As the day advanced the atmosphere of depression became continually
more marked, and how extraordinary was the effect upon all classes may be
judged from the fact that less than 5,000 people paid to witness the third
replay between Barnsley and Everton, in the semi-final of the English
cup....
In London, men and women hung aimlessly about the streets waiting for the
news they dreaded to hear. The theatres were deserted. The feeling of gloom
was so real that many women afterwards believed that the sky had been
overcast, whereas Nature was in one of her most brilliant moods.
It was a few minutes past three when the pressure was exploded by the
report of the final catastrophe. “Two more cases of plague in Dundee and
one in Edinburgh,” was the first announcement. That would have been
enough to show that all the vaunted precautions had been useless, and
within an hour came the notification of two further cases. Before six
o’clock, eight more were notified in Dundee, three more in Edinburgh, and
one in Newcastle.
The new plague had reached England. It was then that the panic began.

VII—PANIC
1
Gurney, when he left his office on that Saturday, was influenced by the
general depression. He went to lunch at the “White Vine,” in the
Haymarket, quite determined to keep himself in hand, to argue himself out
of his low spirits.
He made a beginning at once.
“Every one seems to have a fit of the blues. Ernst,” he remarked to the
waiter with a factitious cheerfulness.
Ernst, less polite than usual, shrugged his shoulders. “There is enough cause
already,” he said.
“Have you had bad news from Germany?” asked Gurney, feeling that he
had probably been rather brutal.
“Ach Gott! ’s’ist bald Keiner mehr da,” blubbered Ernst, and he wept
without restraint as he arranged the table, occasionally wiping his eyes with
his napkin.
“I’m most awfully sorry,” murmured the embarrassed Gurney, and retreated
behind the horror of his evening paper. He found small cause for rejoicing
there, however, and discarded it as soon as his lunch had been brought by
the red-eyed Ernst.

“I wonder what Mark Tapley would have done,” Gurney reflected moodily
as he attacked his chop.
There were few other people in the restaurant, and they were all silent and
engrossed. That dreadful cloud hung over England, the spirit of pestilence
threatened to take substance, the air was full of horror that might at any
moment become a visible shape of destruction.
Gurney did not finish his lunch, he lighted a cigarette, left four shillings on
the table, and hurried out into the air.
He did not look up at the sky as he turned eastwards towards Fleet Street;
no one looked up at the sky that afternoon. Heads and shoulders were
burdened by an invisible weight which kept all eyes on the ground.
Fleet Street was full of people who crowded round the windows of
newspaper offices, not with the eagerness of a general election crowd, but
with a subdued surliness which ever and again broke out in spurts of violent
temper.
Gurney, still struggling to maintain his composure, found himself
unreasonably irritated when a motor-bus driver shouted at him to get out of
the way. It seemed to Gurney that to be knocked down and run over was
preferable to being shouted at. The noise of those infernal buses was
unbearable, so, also, was that dreadful patter of feet upon the pavement and
the dull murmur of mournful voices. Why, in the name of God, could not
people keep quiet?
He bumped into some one on the pavement as he scrambled out of the way
of the bus, and the man swore at him viciously. Gurney responded, and then
discovered that the man was known to him.
“Hallo!” he said. “You?”
“Hallo,” responded the other.

For a moment they stood awkwardly, staring; then Gurney said, “Any more
news?”
The man, who was a sub-editor of the Westminster Gazette, shook his head.
“I’m just going back now,” he said. “There was nothing ten minutes ago.”
“Pretty awful, isn’t it?” remarked Gurney.
The sub-editor shrugged his shoulders and hurried away.
Presently Gurney found himself wedged among the crowd, watching the
Daily Chronicle window.
A few minutes after three, a young man with a very white face, fastened a
type-written message to the glass.
There was a rapid constriction of the crowd. Those behind, Gurney among
them, could not read the message, and pressed forward. There were cries of
“What is it?... I can’t see.... Read it out....” Then those in front gave way
slightly, a wave of eagerness agitated the mass of watchers, and the news
ran back from the front. “Two more cases of plague in Dundee; one in
Edinburgh.”
And with that the pressure of dread was suddenly dissipated, giving place to
something kinetic, dynamic. Now it was fear that took the people by the
throat: active, compelling fear. Men looked at each other with terror and
something of hate in their eyes, the crowd broke and melted. Every man
was going to his own home, possessed by an instinct to fly before it was too
late.
Gurney shouldered his way out, and stopped a taxi that was crawling past.
“Jermyn Street,” he said.
The driver leaned over and pointed to the Daily Chronicle window. “What’s
the news?” he asked.

“The plague’s in Dundee and Edinburgh,” said Gurney, and climbed into
the cab and slammed the door.
“Gawd!” muttered the driver, as he drove recklessly westwards.
Sitting in the cab, finding some comfort in the feeling of headlong speed,
Gurney was debating whether he would not charter the man to take him
right out of London. But he must go home first for money.
At the door of the house in Jermyn Street he met Jasper Thrale.
2
“Have you heard?” asked Gurney excitedly.
“No. What?” said Thrale, without interest.
“There are two more cases in Dundee and one in Edinburgh,” said Gurney.
The driver of the cab got down from his seat, and looked from Gurney to
Thrale with doubt and question.
Thrale nodded his head. “I knew it was sure to come,” he remarked.
“Better get out of this,” put in the driver.
“Yes, rather,” agreed Gurney.
“Where to?” asked Thrale.
“Well, America.”
Thrale laughed. “They’ll have it in America before you get there,” he said.
“It’ll go there via Japan and ’Frisco.”

“You seem to know a lot about it,” said the driver of the cab.
“Do you mean to tell me there’s nowhere we can go to?” persisted Gurney.
Thrale smiled. “Nowhere in this world,” he said. “This plague has come to
destroy mankind.” He spoke with a quiet assurance that carried conviction.
The driver of the cab scowled. “May as well ’ave a run for my money first,
then,” he said, and thus gave utterance to the thought that was fermenting in
many other minds.
There was no hope of escape for the mass, only the rich could seek railway
termini and take train for Liverpool, Southampton or any port where there
was the least hope of finding some ship to take them out of Europe.
That night there was panic and riot. The wealthy classes were trying to
escape, the mob was trying to “get a run for its money.” Yet very little real
mischief was done. Two or three companies of infantry were sufficient to
clear the streets, and not more than forty people in all were seriously
injured....
In Downing Street the new Premier sat alone with his head in his hands, and
wondered what could be done to stop the approach of the pestilence. One of
the evening papers had suggested that a great line of fire should be built
across the north of England. The Premier wondered whether that scheme
were feasible. He had never held high office before; he did not know how to
deal with these great issues. All his political life he had learned only the art
of party tactics. He had learned that art very well, he was a master of
debate, and he had shown a wonderful ability to judge the bent of the public
mind and to make use of his judgments for party ends. But now that any
action of his was divorced from its accustomed object, he was as a man
suddenly forced into some new occupation. Whenever he tried to think of
some means to stay the progress of the plague his mind automatically began
to consider what influence the adoption of such means would have upon the
general election which must soon come....

“A line of fire across the north,” he was thinking, “would shut off the whole
of Scotland. They would never forgive us for that. We should lose the entire
Scottish vote—it’s bad enough as it is.” He sat up late into the night
considering what policy he should put before the Cabinet. He tried honestly
to consider the position apart from politics, but his mind refused to work in
that way....
3
In Jermyn Street Thrale was arguing with Gurney, trying to persuade him
into a philosophic attitude.
“Yes, I suppose there’s absolutely nothing to be done but sit down and
wait,” said Gurney.
“Personally,” returned Thrale, “I have no intention of spending my time
flying from country to country like a marked criminal. That way leads to
insanity. I’ve seen men become animals before now under the influence of
fear.”
“Yes, of course, you’re quite right,” agreed Gurney. “One must exercise
self-control. After all, it’s only death, and not such a terrible death at that.”
He got up and began to pace the room restlessly, then went to the window
and looked out. Jermyn Street was almost deserted, but distant sounds of
shouting came from the direction of Piccadilly. He left the window open
and turned back into the room.
“It’s so infernally hard just to sit still and wait,” he said. “If only one could
do something.”
“I doubt, now,” said Thrale, quietly, “whether one could ever have done
anything. The public and the Government took my warnings in the
characteristic way, the only possible way in which you could expect

twentieth-century humanity to take a warning—a thrill of fear, perhaps, in
some cases; frank incredulity in others; but no result either way that
endured for an hour.... Belief in national and personal security, inertia
outside the routine of necessary, stereotyped employment; these things are
essential to the running of the machine.”
“I suppose they are,” agreed Gurney absently He had sat down again and
was sucking automatically at an extinguished pipe.
“In a complex civilization,” went on Thrale “any initiative on the part of the
individual outside his own tiny sphere of energy is just so much grit in the
machine. There are recognized methods, they may not be the best, the most
efficient, but they are accepted and understood. Every clerk who has to
calculate twelve pence to the shilling knows how his work would be
lightened if he had only to calculate ten, but he accepts that difficulty,
because he can do nothing as an individual to introduce the decimal system.
And that spirit of acceptance grows upon him until the individual has the
characteristics of the class. Only when a man is stirred by too great
discomfort does he open his eyes to the possibility of initiative; then come
labour strikes. If labour had a sufficiency of ease and comfort, if its lot were
not so violently contrasted with that of even the middle-classes, labour
would settle down to complacency. But the contrast is too great, and to
attain that complacency of uninitiative we must level down. That was
coming; that would have come if this plague....”
“What was that?” asked Gurney excitedly, jumping to his feet. “Did you
hear firing?” He went to the window again, and leaned out. From Piccadilly
came the sound of an army of trampling feet, of confused cries and
shouting. “By God, there’s a riot,” exclaimed Gurney. He spoke over his
shoulder.
Thrale joined him at the window. “Panic,” he said. “Senseless, hysterical
panic. It won’t last.”
“I think I shall go out of London,” said Gurney. “I’d sooner ... I’d sooner
die in the country, I think.” He withdrew from the window and began to

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