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 The following are partial financial statements for an industrial firm that you
are required to analyze and value. All amounts are in millions of dollars.

Income Statement for Fiscal Year 2004

Sales 2,000
Cost of goods sold 1,500
Gross margin 500
Selling and general expenses 300
Operating income 200
Interest income 5
205
Interest expense 21
Restructuring charge 14
Income before tax 170
Income taxes 60
Net income J
 Balance Sheet, Year 2004
Assets Liabilities and Equity

2004 2003 2004 2003

Operating assets A 910 Operating liabilities 113 C

Debt securities 110 B Financing debt 360 340
Perferred stock 100 100
Common equity E 500
1,146 1,000 D 1,000

Statement of Common Shareholders Equity, Year 2004

Balance, end of 2003 F

Net income G
Common dividends (30)
Preferred dividends H
Unrealized loss on debt securities held (5)
Foreign currency translation gain 4

Balance, end of 2004 I

The firm’s statutory tax rate is 35.3%.

(a.) Supply the missing numbers, A to J.

A= 1,036

B= 90

C= 60

D= 1,146

E= 573

F= 500

G= 110

H= (6)

I= 573

J= 110

(If you are unable to calculate one of these numbers, make a reasonable guess before
proceeding to part (b) of the question.)
To answer the remainder of the questions, prepare the reformulated income
statement and balance sheet:
 Income Statement, 2004

Core operating income 200.00

Tax reported 60.00
Tax on unusual item 4.94
Tax on NFE 5.65 70.59
Core OI after tax 129.41 (ii)
Unusual item (restructuring) 14.00
Tax on UI (@ 0.353) 4.94
9.06
Foreign currency gain 4.00 5.06
Operating income 124.35

Net financial expense:

Interest expense 21.00
Interest income 5.00
16.00
Tax (@ 0.353) 5.65
10.35
Unrealized loss on debt 5.00
Preferred dividends 6.00 21.35 (iii)
Comprehensive income 103.00 (i)

Balance Sheet
2004 2003

NOA 923 850

NFO 350 350
CSE 573 500

OA 1,036 910
-OL 113 60
NOA 923 850

FL 460 440
FA 110 90
NFO 350 350
(b) Calculate the following for 2004. Use beginning of year balance sheet
numbers in denominators.

(i) Comprehensive income

Comprehensive income = 110 – 5 + 4 – 6 = 103

NI OCI Pref.
Div.

(ii) Core operating income, after tax

129.41

(iii) Net financial expense, after tax

21.35

(iv) Return on net operating assets (RNOA)

RNOA = 124.35/850 = 14.63%

(v) Core return on net operating assets (Core RNOA)

Core RNOA = 129.41/850 = 15.22%

(vi) Net borrowing cost (NBC)

NBC = 21.35/350 = 6.1%

(vii) Free cash flow

C– I = OI – NOA
= 124.35 – (923 – 850)
= 51.35

(viii) Net payments to debt holders and debt issuers

F = C–I–d
= 51.35 – 30
= 21.35

Also,
NFE – NFO = 21.35 – 0 = 21.35
(c) Show that the following relation holds for this firm:

ROCE = RNOA + (Financial Leverage x Operating Spread)

ROCE = 103/500 = 20.6%

FLEV = 350/500 = 0.7 (beginning of 2004)
20.6% = 14.63% + [0.7 × (14.63% - 6.1%)]

(d) Show that the following relation holds for this firm. Use 3% for the short-term
borrowing rate. ROOA is return on operating assets.

RNOA = ROOA + [Operating Liability Leverage x (ROOA – Short-term

Borrowing Rate)]
124.35 +(0.03 60)
ROOA = = 13.86%
910

OLLEV = 60/850 = 0.071 (beginning of 2004)

14.63% = 13.86% + [0.071 × (13.86% - 3.0%)]

(e) Forecast ROCE for 2005 for the case where RNOA is expected to be the same
as core RNOA in 2004 and the net borrowing cost is expected to be the
same as in 2004.

FLEV, beginning of 2005 = 350/573 = 0.611

ROCE = 15.22% + [0.611 × (15.22 – 6.1)]

= 20.79%

OR,

OI = 923 × 0.1522 = 140.48

NFE = 350 × 0.061 = 21.35
CI 119.03

ROCE = 119.31/573 = 20.79%

(f) Value the equity under a forecast that

(i) Return on net operating assets in the future will be the same as core
RNOA in 2004.
(ii) Sales are expected to grow at 4% per year.
(iii) Asset turnovers will be the same as in 2004.

The required return for operations is 9%.

E
V2004 = 573 +
(0.1522 − 0.09) 923
1.09 −1.04

= 1,721
(g) Calculate the intrinsic levered price-to-book ratio and enterprise price-to-book
and show that the two are related in the following way:

Levered P/B = Enterprise P/B + [Financial Leverage × (Enterprise P/B – 1)]

V2004
NOA
= 1,721 + 350 = 2,071

Levered P/B = 1,721/573 = 3.00

Enterprise P/B = 2,071/923 = 2.24

3.00 = 2.24 + [0.611 x (2.24 – 1.0)]

(h) Calculate the intrinsic trailing levered P/E and the trailing enterprise P/E. Show
that the two are related in the following way:

Levered P/E = Enterprise P/E + [Earnings Leverage ×

(Enterprise P/E – 1/NBC – 1)]

Levered P/E = 1, 721+ 30 = 17.00

103

Enterprise P/E = 2, 071+51.35 = 17.07

124.35

ELEV = 21.35 = 0.207

103

1
17.00 = 17.07 + [0.207 × (17.07 – – 1)]
0.061
Question 2 (8 points)

At the end of the fiscal year ending June 30, 2003, Microsoft reported
common equity of $64.9 billion on its balance sheet, with $49.0 billion invested in
financial assets (in the form of cash equivalents and short term investments) and no
financing debt. For fiscal year 2004, the firm reported $7.4 billion in
comprehensive income, of which $1.1 billion was after-tax earnings on the
financial assets.

This month Microsoft is distributing $34 billion of financial assets to

shareholders in the form of a special dividend.

a. Calculate Microsoft’s return on common equity (ROCE) for 2004.

ROCE = 7.4/64.9 = 11.40%

b. Holding all else constant what would Microsoft’s ROCE be after the
payout of $34 billion?

Income statement after payout

OI 6.30 (As before: 7.4 – 1.1 = 6.3)

NFI (15 × 0.0224) 0.34 (NFA = 49 – 34 = 15)
Comp. income 6.64 (Rate of return = 1.1/49 = 0.0224)
CSE = 64.9 – 34.0 = 30.9
ROCE = 6.64/30.9 = 21.49%

Also, with new FLEV of – 0.485,

ROCE = 39.62 (– 0.485 × (39.62 – 2.24))
= 21.49%
 c. Would you expect the payout to increase or decrease earnings growth
in the future? Why?

Increasing leverage always increases expected earnings growth. The payout

increases leverage (in this case, it makes the leverage less negative).

a. What effect would you expect the payout to have on the value of a Microsoft
share?

The per-share value of the shares will drop by the amount of the dividend
per share.

[Note: if the payout were via a share repurchase, there would be no effect on
per-share value]
Another Random Scribd Document
with Unrelated Content
“At least in my father’s bank they will be secure——” 80
began Rob, when he broke off short, and turned swiftly.
His keen ear had detected a slight rustling in a clump of
bushes behind him. As he communicated his suspicion
that some one might have been concealed there, they
all sprang forward, surrounding the clump, but there
was no sign of a concealed listener, and, satisfied that
everything was well, they followed the young officer
toward the house. Their conductor narrated, as they
went, such details of the experimental work as he
thought might interest the lads.

Hardly had they vanished within the gloomy, deserted

mansion, however, before two faces appeared above the
surface of the ground, peering up from the mouth of
one of the concealed passages which Mr. Blake had
mentioned as existing on the old place.

Could the boys have seen those two countenances, they 81

would have been greatly interested, for one of them
was Freeman Hunt’s and the other was Jack Curtiss’s.
To explain how they came to be there, it is necessary to
revert for a moment to an occurrence which took place
some weeks before on a fishing expedition. Driven by
bad weather to shelter in the little cove not far from the
De Regny place, the party, consisting of Freeman Hunt,
Dale Harding and Lem Lonsdale, had hastily sought a
shelter from the pelting rain, as their boat was an open
one. In a low, rocky cliff, a half-obscured opening
showed.

“Looks like there might be a cave in behind there,” Hunt

said, and, on his suggestion, they set to work moving
away several big rocks that encumbered the opening.
The place proved to be a cave, and an ample one,
running back to a great depth, seemingly.
An exploration party had been formed at once, and,
after traversing a narrow passage, running back
underground for some distance, the lads emerged, to
their astonishment, in the clump of bushes in which Rob
had just heard the rustling sound.

On this particular day, Hunt and Jack Curtiss had visited

the cave alone to explore it more thoroughly. The
branch passages they expected to find were not there,
however, but, threading the original one, they had
emerged into the clump which thickly screened its
opening, in time to overhear most of the conversation of
the Boy Scouts and the army officer.

As the door of the old house slammed, its echoes 82

reverberating through the tangled, overgrown grounds,
Jack Curtiss turned to his companion with a grin of
satisfaction.

“Here’s the chance we’ve been looking for,” he

exclaimed, wiping the sweat and dirt from his forehead,
—for burrowing in long disused passages is dirty work.

“You mean a chance to get even?” asked Hunt in a

puzzled tone.

“Yes. We can fix that Rob Blake up so that he’ll be in

disgrace from this afternoon on.”

“I don’t understand,” rejoined Freeman, who, while he

had chosen Jack Curtiss for a companion, had not a
tenth part of the other’s evil ingenuity.

“Well, I do,” was the confident rejoinder. “It’s up to us to

find this Jap and this Dugan, or whatever his name is. If
we can do so, we’ve got Rob Blake where we want him.”
“I see now!” exclaimed Hunt, a light of comprehension
showing in his eyes, “but do you dare——”

“Dare!” repeated Jack Curtiss scornfully, “I’d dare do 83

anything to get even with Rob Blake, and,” he added
prudently, “the best of it is, that there’s not a chance of
it ever being traced to us. If we are only lucky enough
to find those fellows they mentioned, they can do the
dirty work, and we have the satisfaction of being even
with those cubs.”

“But how are you going to find them?” asked Hunt, still
hesitating.

“There’s only one road from that hut to this place. We’ll
sneak through the grounds while they are all in the
house, and nail this chap Dugan in time to put our plan
into execution.”

An instant later, two grimy, dust-covered forms emerged

from the bowels of the earth, as it seemed, and shoving
their way through the dense clump of bushes, glanced
cautiously about them.

“Coast’s clear,” announced Jack presently.

Together, Rob’s old enemy and Freeman Hunt, now his

equally bitter foe, sped across the De Regny grounds
and toward the road.

84
 CHAPTER VIII.
AN UNEXPECTED ENCOUNTER.

“You younkers are certain you are telling me the truth?”

Dugan, the treacherous private, paused, and, from his

immense height, looked down into the faces of Jack
Curtiss and Freeman Hunt.

“As sure as we stand here,” Jack assured him, “I’ve told

you how we came to overhear what was said. If you
want those plans, now is your chance to get them.”

“And don’t forget to beat Rob Blake up good and

proper,” chimed in Hunt, who had lost all prudence in his
eagerness to have his grudge avenged.

“You bet I won’t,” Dugan grunted. “I guess if he’s the

sort of boy you describe him to be, he won’t give them
up without a struggle.”

“You could break him in two with one hand tied behind 85
your back,” struck in Jack, gazing at the immense frame
and loosely hung, ape-like arms of Dugan.

“Leave that to me, kid,” Dugan assured him, with an

ominous grin, “and—hullo, here comes Hashashi now.
That’s lucky. I may need him if there are three of them.”
Turning in the direction in which the soldier had spied
the newcomer, the lads saw a small, slightly-built figure
approaching them. It was the Japanese with whom
Dugan had been seen conversing in the hut when the
unsuspected listeners had overheard.

“Guess we’ll be going,” said Jack Curtiss uneasily.

“Hold on!” exclaimed Dugan, clutching him with a grip

of iron, as he spoke. “You’ve got to promise me that you
don’t tell nothing of this.”

“Of course,” Jack assured him; “we’ve promised you

once.”

“And I guess you’ll keep your word,” said the man, 86

grimly compressing his lips till they formed a narrow
line. “If I ever suspect you of telling a thing about it,
I’ve got you two ways. In the first place, I’ll reveal your
part in the plot, and, in the second, I’m a bad man to
have for an enemy.”

Dugan drew his low forehead into a dozen horizontal

puckers, as he spoke. With his lowering brow and ape-
like face, he looked indeed, as he had said, “a bad man
to have for an enemy.”

“D’ye understand?” he grated harshly, glaring at Jack

grimly.

Curtiss, who was as big a coward as he was a bully and

reprobate, felt his knees knock together under that
ferocious gaze.

“Y-y-yes, sir,” he said.

“You, too!” hissed Dugan, switching suddenly on
Freeman Hunt, who was looking nervous and ill at ease.
He began to think that perhaps they had let themselves
in for something more serious than they had bargained
for.

“I won’t breathe a word of it,” Hunt hastened to assure

him.

“You’d better not,” snarled Dugan, more savagely than

ever, “now, git!”

Without further loss of time, Jack Curtiss and Freeman 87

Hunt “got.” To their surprise, as they turned to hasten
off, no sign of the Jap was to be seen, yet an instant
before he had been in the road, not more than ten
yards from them. There were no hedges at this point,
and salt meadows stretched out to the sea on one side,
and stubble-fields, flat and level, on the other.

“Where on earth did that Jap go to?” asked Jack in a

mystified tone, as they hurried away.

“Don’t know,” rejoined Freeman, with a trembly feeling.

“There was something uncanny about it.

“I—I begin to wish we hadn’t met those fellows or had

anything to do with them,” he burst out, in a
complaining tone.

“There you go, sniveling like a baby,” sneered Jack

Curtiss. “Why, a short time ago, you were only too
pleased to have found such an easy way of getting even
on Rob Blake and those other young whelps.”

“I know,” rejoined Hunt timidly, “but—but I don’t like the 88

look of that fellow Dugan. He scared me. If he ever
suspects us of betraying him, he’ll take a terrible
revenge. I wish we hadn’t meddled in the thing at all, I
wish——”

“Say, you make me tired,” broke in his companion

angrily, “we’re not going to tell about it, are we? We
won’t be foolish enough to let on that we had anything
to do with the beating Rob Blake is bound to get.”

“No, but——” quavered Hunt.

“Oh, tell it to your grandmother,” scoffed Jack. “Come

on. Hurry up; we want to get away from here before the
fun begins.”

Hastening on, they soon were out of sight and earshot

of the spot in which their momentous colloquy had
taken place.

In the meantime, from behind a large rock, not far from

where Dugan was standing, the lithe form of the Jap
suddenly upreared itself.

“Wow! You gave me a scare that time!” exclaimed

Dugan, as his ally came into view. “How did you vanish
like that, a few minutes ago?”

“Simple, my dear friend. I simply took advantage of a 89

large rock by the roadside, and dodged behind it. There
was nothing of Oriental mystery in it, I assure you.”

“Huh!” rejoined Dugan, as if only half convinced. “You’re

a queer fellow, Hashashi. What did you come after me
for, anyhow? Not but what I’m mighty glad to see you
right now.”
“I hastened after you to give you some final instructions
I had forgotten,” was the reply. “But what were you
talking to those boys about?”

“Something mighty interesting to us both. Listen.”

Dugan rapidly related all that Jack had told him.

“Of course,” he concluded, “there is a chance that they

may not come down this road, but, in any event, we
know now where the plans are, and if the worst comes
to the worst——”

“The vaults of country banks are not proof against

Shimose,” grinned the Jap.

“Hark!” exclaimed Dugan suddenly. “I hear voices— 90

boys, too,” he went on, after a minute’s listening; “get
behind that rock yonder. I’ll stop them and ask the time
of day or something, and you make your appearance
when you think you are needed.”

“All right, my honorable comrade,” chuckled the Jap,

sliding like a gray-suited shadow toward the rock, and
vanishing from view behind it.

On came the three unsuspecting boys, chatting and

laughing, and little dreaming of what lay in store for
them round the turn of the road. Dugan, an evil
expression on his countenance, drew back a little, and
then, as they drew closer, started forward.

“Got the time, young fellow?” he asked in a natural,

easy tone, as the three lads came up to him.

“It’s the man we saw in the hut!” exclaimed Tubby, in a

rather affrighted tone, but so low that Dugan did not
hear him.

“Well, he can’t possibly know what we have been

doing,” rejoined Rob, in an equally cautious voice.
Thinking it best not to give the man even a slight
excuse for suspicion, he drew out his watch.

“It’s just three-thirty,” he said. 91

“Thanks,” said Dugan, who all this time had been

carefully sizing up the three lads. Rob he recognized by
description as being the one who was likely to carry the
plans of the equalizer.

“Phew!” he remarked to himself. “They’re three husky

youngsters for fair. Glad I’ve got a revolver, or I might
get the worst of it.”

The boys were starting on again when Dugan stepped

back a pace or two and spread his immense bulk across
their path.

“Hold on a minute, boys,” he said. “I’ve got something

to say to you. You’ve been calling on Lieutenant Duvall.”

“We’ve been for a walk,” rejoined Rob boldly. “I don’t

know who this Lieutenant Duvall is you’re talking about.”

“You don’t, eh, you young mucker?” Dugan had decided

that his best chance lay in scaring the three lads. “Well,
I do. Don’t try to lie to me.”

He contorted his face in hideous fashion. This was a 92

trick he had found very successful in intimidating other
persons he wished to bully or oppress. But in the three
boys before him, as we know, Dugan was up against
boys out of the ordinary run. Instead of being
impressed, Rob simply took a step forward, turning to
his chums and saying in a natural, unshaken voice.

“Come on, fellows.”

“Yes, come on, fellows,” sneered the other. “Not so fast,

my young buckos. I want a word with you. You’ve got
some plans in your pockets. Are you going to give them
up peaceably, or do you want a taste of Bill Dugan’s
fists?”

Rob could not repress a start, not of fear, but of

astonishment, as the fellow spoke.

How could he know anything about the plans he was

carrying to the safe deposit vaults?

Dugan misinterpreted his hesitation.

“Come on now,” he grated, coming closer, with an ugly

leer on his face; “fork over!”

As he spoke his hand crept back toward his hip. He

might have to use his revolver. These boys were proving
more obstinate than he had imagined. To his
amazement, no trace of fear or alarm appeared on their
faces for all his blustering.

“See here,” exclaimed Rob boldly, “I don’t know who 93

you are and I don’t think I want to better the
acquaintance. I do know this, however, that you wear
the uniform of a United States soldier. Let us pass at
once, and stop this nonsense, or——”

With a bellow of rage, Bill Dugan leaped forward. At the

same instant he aimed a powerful blow at Rob’s head.
The lad could hear the ponderous fist whistle as it cut
through the air. But somehow, when the blow landed—
or reached the point where it should have landed—Rob
wasn’t there. The boy had nimbly sidestepped.

With a bellow of rage Bill Dugan leaped forward.

“That won’t do you no good,” bellowed Dugan,
assuming furious rage, both to impress the boys and to
conceal his astonishment. “I’ve got you where I want
you. Are you going to give up them plans?”

“I am not!”

The reply came swift as a bullet. Rob realized that in 94

some way the rascal before him knew that the precious
designs were in his possession. He determined that they
would not leave his person without a struggle.
Somehow he felt that the three of them, all clean-lived,
healthy, muscular boys, should prove a match for the
hulking, bloated, blustering brute before him. He was
totally unprepared for the fellow’s next move, however.
With a gliding motion of one hand, so swift as to be
almost imperceptible, Dugan suddenly produced a gun.
At the same instant he gave a shrill whistle, and from
behind his rock the serpentine form of the Jap
appeared. His almond shaped eyes glittered balefully as
he took in the scene before him.

Dugan took quick advantage of the temporary

distraction of the lad’s attention.

With an agility which would hardly have been expected

from his huge proportions, he suddenly sprang forward.
Rob, totally unprepared as he was for such a move,
could not defend himself. Down he toppled into the
dust, before the savage onslaught of the giant Dugan’s
great form falling on top of him and pinning the lad
securely to the ground.

95
 CHAPTER IX.
WHEREIN CAPTAIN HUDGINS’ BEES SWARM.

As Rob and the soldier sprawled in the road “hugger-

mugger,” Merritt darted forward. He succeeded in
seizing Dugan’s gnarled fist just as it was about to come
crashing down in the boy’s face, but as his fingers
closed upon Dugan’s arm a convulsive pain shot through
the corporal of the Eagles. Switching round he saw,
bending over him, the grinning face of the Jap. The
Oriental had merely pressed upon some nervous center
of Merritt’s being, and had for a second paralyzed all
effort. It was the lad’s first introduction to jiu-jitsu.

“Ouch!” yelled Merritt, in spite of himself.

The next instant his exclamation was echoed by the Jap.

Tubby’s rotund form had come hurtling upon the
Oriental like a thunderbolt, bearing him to the ground.
Temporarily his jiu-jitsu tricks were at a discount.

But all this did not materially aid Rob, who felt his 96
strength fast ebbing under ineffectual attempts to throw
off the mighty grip of the massive Dugan. The giant
encircled the lad’s windpipe with his rough fingers and
squeezed till Rob grew purple in the face. In the
meantime, the other lads had their hands full with the
Jap, who had again exercised his cunning, and by a
simple pressure upon a spot near Tubby’s heart had
rendered that youth inactive for some moments.

Dugan’s great paws were sliding under Rob’s jacket to

search his inside pockets, when a voice, suddenly
hailing them, caused both attacked and attackers to
look up. So engrossed had they been in defense and
aggression that not one of them had noticed the
approach of a stout, thick-set man, in clothes that
somehow suggested a sailor. The newcomer’s hair was
iron gray and a tuft of the same colored growth adorned
his square chin. Under his arm he carried a large box of
some kind, carefully covered with newspapers.

For a second he stood petrified with astonishment at the 97

scene upon which he had so unexpectedly come. The
next instant his blue eyes snapped steelily, and with a
roar he dashed toward the combatants.

“Avast there!” he bawled. “Lay aft, you lubbers! Boy

Scouts, ahoy!”

“Captain Hudgins!” shouted Merritt.

“Aye, it’s the captain!” bawled the valiant ex-tar, leaping

forward and dealing Dugan a terrific blow with his free
arm. With the other he kept tight hold of his big box.

“You interfering old lummox!” bawled Dugan, springing

erect, with a roar of fury. “Keep out of this!”

“Not much I won’t,” bellowed the captain, just as loudly.

“Lay aft, you military pirate, or the navy’s goin’ to wipe
up the ground with the army.”
As the captain spoke, brandishing aloft his free arm,
Dugan sprang for him, aiming one of his terrific swings.
The captain, who was nimble for his years, sidestepped
swiftly, but not quick enough to altogether avoid the
blow. Dugan’s fist fell upon the box he was carrying with
a crunching, crackling sound.

“Now you’ve done it!” bawled the captain, dancing 98

about as if executing a hornpipe. “’Vast afore they board
yer!”

“Don’t try to bluff us,” roared Dugan; “we——”

But before he could complete the sentence there was an

angry buzzing sound in the air, like the drone of a
sawmill cutting through a tough, knotty log.
Simultaneously, from the broken box, there poured a
dark stream of flying things.

“Bees!” shouted Merritt.

“Honey makers!” exclaimed the experienced Tubby, as

the dark swarm surged down upon Dugan.

“Ho! ho! ho! Here’s where you get stung!” shouted the 99
captain. “Come close to me, boys, and they won’t hurt
yer. Hey there, after ’em, sting the scoundrels. Get your
hooks inter that yaller-faced lime juicer. Hooroh! That’s
the time he got you! I guess them bees is thar with ther
business ends!”

In these, and a dozen similar exclamations of

satisfaction, did the captain indulge, as the bees angrily
settled in swarms upon Dugan and his Oriental
companion. Rob, who had scrambled to his feet, stood
with the others close to Captain Hudgins, and not a bee
bothered them. The intelligent insects knew their owner
too well to attack him. With Dugan and the Jap,
however, the case was different.

In vain did the two rascals wave their arms about and
beat the air in a desperate effort to free themselves of
their tormentors. It was of not the slightest avail. The
bees settled upon them in angry masses in every
exposed part. Some even dropped down the Jap’s back,
and commenced an attack there.

Yelling like Comanches and whirling their arms 100

frenziedly about their heads, the two ruffians fairly
leaped the fence at one bound in their pain and
astonishment, and dashed off across the fields toward
the sea. About them, as they ran, hovered a dark,
angrily buzzing cloud.

“Hey, come back thar! You’ve took my prize Eye-talian

queen!” the captain bawled at the top of his voice, but,
somewhat naturally, the fugitives paid no attention to
his words. Straight for the sea they dashed, and,
plunging into the surf, rolled over and over in frantic
attempts to rid themselves of the clinging, stinging
pests.

“Ho! ho! ho!” roared the captain. “That’s as good as a

fair breeze arter a c’am. But avast thar, lads, how come
you ter be in such a pickle?”

Rob, whose throat still showed the red marks where

Dugan’s fingers had clutched, hastily explained, being
frequently interrupted by the captain with exclamations
of:

“Belay thar! The deck-swabbing, land-lubbers! Heave

ahead!” and “Douse my glimmering sidelights!”
“Wall,” opined the captain, when Rob had concluded, “I 101
reckon them fellers is off on a long cruise. They shore
did heave their anchors sudden. The worst of it is my
bees has gone with ’em, and I’m generally mighty
partic-lar who my bees associates with.”

But it was now the captain’s turn to explain how he

came to be on the road between Hampton and the
isolated De Regny place at such an opportune moment.
It appeared that the lone recluse of Topsail Island had
been to the distant farm of a friend of his to aid him in
wintering some bees. He had taken a hive of his own
honey makers with him to obviate the chance of being
stung by the strangers.

“Bees won’t attack any one they knows, or who they

has an introduction to,” he explained. “Now you see
them bees wouldn’t touch any of you boys. Now then,
that’s——”

“Ouch!” exclaimed Tubby suddenly, clapping one hand

to the back of his neck.

“Belay thar, lad, what’s in yer rigging?” demanded the

captain anxiously, rising from the broken box which he
had set down in the road and had been using as a seat.

“I—I think it’s a bee,” rejoined the stout youth. “I—I’m 102
sure it is, in fact. Wow! there’s another!”

The lad began dancing about as if he were on springs.

“Thought you said they wouldn’t sting any one they

were introduced to,” said Rob, with a half smile.

“Wall, I guess in the hurry I must hev overlooked them

two,” responded the captain, without the quiver of an
eyelid. Stepping up to the capering Tubby, he deftly
removed two bees from the back of his neck.

“Consarn ye!” he said angrily, as if he were addressing

human beings. “What’s the matter with you, you
mutinous dogs.”

The boys burst into a roar of laughter at such talk

addressed to bees, but the captain solemnly assured
them that the little winged creatures understood every
word.

“Will those that flew away come back to you?” inquired

Rob, with interest.

“No, lad. They’ve deserted ther ship,” was the rejoinder. 103
“But they done it in a good cause, so I ain’t got a word
to say. But now let’s trim our sails, up anchor, and lay a
course for home. My boat’s at the Inlet, and I’ve got ter
make ther island by dark.”

“How is Skipper?” asked Rob, as they accordingly strode

forward at a brisk pace.

“Just as good a shipmate as ever,” was the response.

“That thar dog gits more sensible every day. I thought
that time when he found them uniforms thet Jack
Curtiss and that rascal Bender stole that he was just
about the limit in dog sense, but he does smarter things
than that right along. Speakin’ uv that, what’s come of
Jack Curtiss and his piratical shipmates?”

The boys soon told him what they knew of those two
worthies. The captain shook his head as he heard.

“Bad craft them two,” he observed, shaking his head

with renewed energy. “But, to my thinkin’, they ain’t
much worse than that yaller-skinned feller and his mate
wot attacked you on the road.”

“No,” Rob agreed; “if it hadn’t been for you, we should 104
have been in bad straits.”

“If it hadn’t a bin fer them bees, lad, you mean,”

amended the captain earnestly.

Soon after, they reached the Inlet and the captain set
out for the wharf, having exacted a promise from the
boys to visit him at an early date.

“Ther island’s seemed kind er lonesome since the Boy

Scout camp weighed anchor,” he said.

“We’ll be back again this summer,” Rob assured him.

When Rob reached home he found a telephone

message awaiting him. It was from Lieutenant Duvall.
The boy soon obtained connection with his friend, one
of the improvements at the mansion having been the
installation of a ’phone. The lieutenant actually gasped
as he listened. He had trusted Dugan implicitly up to
that afternoon, and the revelation of his brutal attack
following the lad’s disclosures of what they had
overheard in the hut had shaken his faith in human
nature tremendously.

“I don’t know who to trust,” he exclaimed over the wire. 105

“No,” in answer to Rob’s question, “Dugan has not come
back. When he does I shall see that he is sent to
Washington under guard.”

But Dugan did not return to his duty with the aero
squad that night, nor on any succeeding night. He and
the Jap disappeared as completely as though the earth
had swallowed them. A visit to the hut revealed a cot-
bed and the rough furniture the lads had noticed, but
there were no other traces of human occupancy.

“Good-by, Dugan,” chorused the lads, as it became

certain that the ruffianly wearer of the army uniform
had vanished from their midst, but could they have
looked into the future they would, perhaps, have
changed their form of farewell to “Au revoir.”

106
 CHAPTER X.
MR. STONINGTON HUNT—SCHEMER.

One afternoon, not long after the events related in the

last chapter, Paul Perkins had a visitor. The caller was
Freeman Hunt’s father, a man of past middle age, but
flashily dressed notwithstanding the plentiful sprinkling
of gray in his hair and carefully trimmed mustache. A
diamond ring sparkled on Mr. Hunt’s left hand and a
similar stone blazed in his tie. He regarded the wearing
of the jewels as advertisements of prosperity, and wore
them with the same satisfaction with which he looked
upon his new, gaudily furnished house on the hill above
the village, and his automobile—also very new—and his
numerous other possessions, all of which, like himself,
seemed somehow to savor of veneer and to nowhere
have the true ring of solid wood.

There was, perhaps, a reason for this. Stonington Hunt 107

had not always enjoyed “ease and a competency.” His
earlier years, in fact, had been a hard struggle. He had
been a messenger boy for a firm of Wall Street brokers,
but, by natural sharpness and shrewdness, had worked
himself up till he obtained an interest in the business.
Then he branched out. His fortune grew by leaps and
bounds, till Stonington Hunt was recognized as a
wealthy man. The newspapers had shown up several of