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Corporate Finance

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Corporate Finance
© 2008 Ventus Publishing ApS
ISBN 978-87-7681-273-7

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 Corporate Finance Contents

Contents
1. Introduction 8

2. The objective of the firm 9

3. Present value and opportunity cost of capital 10

3.1 Compounded versus simple interest 10
3.2 Present value 10
3.3 Future value 12
3.4 Principle of value additivity 12
3.5 Net present value 13
3.6 Perpetuities and annuities 13
3.7 Nominal and real rates of interest 16
3.8 Valuing bonds using present value formulas 17
3.9 Valuing stocks using present value formulas 21

4. The net present value investment rule 24

5. Risk, return and opportunity cost of capital 27

5.1 Risk and risk premia 27
5.2 The effect of diversification on risk 29
5.3 Measuring market risk 31
5.4 Portfolio risk and return 33
5.4.1 Portfolio variance 34
5.4.2 Portfolio’s market risk 35
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 Corporate Finance Indholdsfortegnelse

5.5 Portfolio theory 36

5.6 Capital assets pricing model (CAPM) 38
5.7 Alternative asset pricing models 40
5.7.1 Arbitrage pricing theory 40
5.7.2 Consumption beta 41
5.7.3 Three-Factor Model 41

6. Capital budgeting 42
6.1 Cost of capital with preferred stocks 43
6.2 Cost of capital for new projects 44
6.3 Alternative methods to adjust for risk 44
6.4 Capital budgeting in practise 44
6.4.1 What to discount? 45
6.4.2 Calculating free cash flows 45
6.4.3 Valuing businesses 45
6.5 Why projects have positive NPV 48

7. Market efficiency 49
7.1 Tests of the efficient market hypothesis 50
7.1.1 Weak form 50
7.1.2 Semi-strong form 51
7.1.3 Strong form 53
7.1.4 Classical stock market anomalies 54
7.2 Behavioural finance 54
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 Corporate Finance Indholdsfortegnelse

8. Corporate financing and valuation 56

8.1 Debt characteristics 56
8.2 Equity characteristics 56
8.3 Debt policy 57
8.3.1 Does the firm’s debt policy affect firm value? 57
8.3.2 Debt policy in a perfect capital market 57
8.4 How capital structure affects the beta measure of risk 61
8.5 How capital structure affects company cost of capital 62
8.6 Capital structure theory when markets are imperfect 62
8.7 Introducing corporate taxes and cost of financial distress 63
8.8 The Trade-off theory of capital structure 64
8.9 The pecking order theory of capital structure 66
8.10 A final word on Weighted Average Cost of Capital 66
8.11 Dividend policy 69
8.11.1 Dividend payments in practise 69
8.11.2 Stock repurchases in practise 69
8.11.3 How companies decide on the dividend policy 70
8.11.4 Do the firm’s dividend policy affect firm value? 71
8.11.5 Why dividend policy may increase firm value 72
8.11.6 Why dividend policy may decrease firm value 73

9. Options 74
9.1 Option value 75
9.2 What determines option value? 77
9.3 Option pricing 79
9.3.1 Binominal method of option pricing 81
9.3.2 Black-Scholes’ Model of option pricing 84

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 Corporate Finance Indholdsfortegnelse

10. Real options 87

10.1 Expansion option 87
10.2 Timing option 87
10.3 Abandonment option 87
10.4 Flexible production option 88
10.5 Practical problems in valuing real options 88

11. Appendix: Overview of formulas 89

Index 95

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Corporate Finance Introduction

1. Introduction
This compendium provides a comprehensive overview of the most important topics covered in a corporate
finance course at the Bachelor, Master or MBA level. The intension is to supplement renowned corporate
finance textbooks such as Brealey, Myers and Allen's "Corporate Finance", Damodaran's "Corporate
Finance - Theory and Practice", and Ross, Westerfield and Jordan's "Corporate Finance Fundamentals".

The compendium is designed such that it follows the structure of a typical corporate finance course.
Throughout the compendium theory is supplemented with examples and illustrations.

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8
Corporate Finance The objective of the firm

2. The objective of the firm

Corporate Finance is about decisions made by corporations. Not all businesses are organized as
corporations. Corporations have three distinct characteristics:

1. Corporations are legal entities, i.e. legally distinct from it owners and pay their own taxes
2. Corporations have limited liability, which means that shareholders can only loose their initial
investment in case of bankruptcy
3. Corporations have separated ownership and control as owners are rarely managing the firm

The objective of the firm is to maximize shareholder value by increasing the value of the company's stock.
Although other potential objectives (survive, maximize market share, maximize profits, etc.) exist these
are consistent with maximizing shareholder value.

Most large corporations are characterized by separation of ownership and control. Separation of
ownership and control occurs when shareholders not actively are involved in the management. The
separation of ownership and control has the advantage that it allows share ownership to change without
influencing with the day-to-day business. The disadvantage of separation of ownership and control is the
agency problem, which incurs agency costs.

Agency costs are incurred when:

1. Managers do not maximize shareholder value

2. Shareholders monitor the management

In firms without separation of ownership and control (i.e. when shareholders are managers) no agency
costs are incurred.

In a corporation the financial manager is responsible for two basic decisions:

1. The investment decision

2. The financing decision

The investment decision is what real assets to invest in, whereas the financing decision deals with how
these investments should be financed. The job of the financial manager is therefore to decide on both such
that shareholder value is maximized.

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9
Corporate Finance Present value and opportunity cost of capital

3. Present value and opportunity cost of capital

Present and future value calculations rely on the principle of time value of money.

Time value of money

One dollar today is worth more than one dollar tomorrow.

The intuition behind the time value of money principle is that one dollar today can start earning interest
immediately and therefore will be worth more than one dollar tomorrow. Time value of money
demonstrates that, all things being equal, it is better to have money now than later.

3.1 Compounded versus simple interest

When money is moved through time the concept of compounded interest is applied. Compounded interest
occurs when interest paid on the investment during the first period is added to the principal. In the
following period interest is paid on the new principal. This contrasts simple interest where the principal is
constant throughout the investment period. To illustrate the difference between simple and compounded
interest consider the return to a bank account with principal balance of €100 and an yearly interest rate of
5%. After 5 years the balance on the bank account would be:

- €125.0 with simple interest: €100 + 5 · 0.05 · €100 = €125.0

- €127.6 with compounded interest: €100 · 1.055 = €127.6

Thus, the difference between simple and compounded interest is the interest earned on interests. This
difference is increasing over time, with the interest rate and in the number of sub-periods with interest
payments.

3.2 Present value

Present value (PV) is the value today of a future cash flow. To find the present value of a future cash flow,
Ct, the cash flow is multiplied by a discount factor:

(1) PV = discount factor ˜ Ct

The discount factor (DF) is the present value of €1 future payment and is determined by the rate of return
on equivalent investment alternatives in the capital market.

1
(2) DF =
(1  r) t

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10
 Corporate Finance Present value and opportunity cost of capital

Where r is the discount rate and t is the number of years. Inserting the discount factor into the present
value formula yields:

Ct
(3) PV =
(1  r) t

Example:

- What is the present value of receiving €250,000 two years from now if equivalent
investments return 5%?

Ct €250,000
PV = € 226,757
(1  r) t 1.05 2

- Thus, the present value of €250,000 received two years from now is €226,757 if
the discount rate is 5 percent.

From time to time it is helpful to ask the inverse question: How much is €1 invested today worth in the
future?. This question can be assessed with a future value calculation.

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11
Corporate Finance Present value and opportunity cost of capital

3.3 Future value

The future value (FV) is the amount to which an investment will grow after earning interest. The future
value of a cash flow, C0, is:

(4) FV C 0 ˜ (1  r ) t

Example:

– What is the future value of €200,000 if interest is compounded annually at a rate

of 5% for three years?

FV €200,000 ˜ (1  .05) 3 €231,525

- Thus, the future value in three years of €200,000 today is €231,525 if the discount
rate is 5 percent.

3.4 Principle of value additivity

The principle of value additivity states that present values (or future values) can be added together to
evaluate multiple cash flows. Thus, the present value of a string of future cash flows can be calculated as
the sum of the present value of each future cash flow:

C1 C2 C3 Ct
(5) PV
(1  r ) 1

(1  r ) 2

(1  r ) 3
 .... ¦ (1  r ) t

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12
Corporate Finance Present value and opportunity cost of capital

Example:

- The principle of value additivity can be applied to calculate the present value of the
income stream of €1,000, €2000 and €3,000 in year 1, 2 and 3 from now,
respectively.
€3,000

€2,000
$1,000

Present value 0 1 2 3
with r = 10%

€1000/1.1 = € 909.1
€2000/1.12 = €1,652.9
€3000/1.13 = €2,253.9
€4,815.9

- The present value of each future cash flow is calculated by discounting the cash
flow with the 1, 2 and 3 year discount factor, respectively. Thus, the present value
of €3,000 received in year 3 is equal to €3,000 / 1.13 = €2,253.9.
- Discounting the cash flows individually and adding them subsequently yields a
present value of €4,815.9.

3.5 Net present value

Most projects require an initial investment. Net present value is the difference between the present value
of future cash flows and the initial investment, C0, required to undertake the project:

n Ci
(6) NPV = C 0  ¦
1 (1  r )
i
i

Note that if C0 is an initial investment, then C0 < 0.

3.6 Perpetuities and annuities

Perpetuities and annuities are securities with special cash flow characteristics that allow for an easy
calculation of the present value through the use of short-cut formulas.

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13
 Corporate Finance Present value and opportunity cost of capital

Perpetuity

Security with a constant cash flow that is (theoretically) received forever. The present
value of a perpetuity can be derived from the annual return, r, which equals the
constant cash flow, C, divided by the present value (PV) of the perpetuity:

C
r
PV

Solving for PV yields:

C
(7) PV of perpetuity
r

Thus, the present value of a perpetuity is given by the constant cash flow, C, divided by
the discount rate, r.

In case the cash flow of the perpetuity is growing at a constant rate rather than being constant, the present
value formula is slightly changed. To understand how, consider the general present value formula:
C1 C2 C3
PV   "
(1  r ) (1  r ) 2
(1  r ) 3

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Corporate Finance Present value and opportunity cost of capital

Since the cash flow is growing at a constant rate g it implies that C2 = (1+g) · C1, C3 = (1+g)2 · C1, etc.
Substituting into the PV formula yields:

C1 (1  g )C1 (1  g ) 2 C1
PV   "
(1  r ) (1  r ) 2 (1  r ) 3

Utilizing that the present value is a geometric series allows for the following simplification for the present
value of growing perpetuity:

C1
(8) PV of growing perpetituity
rg
Annuity

An asset that pays a fixed sum each year for a specified number of years. The present value of an
annuity can be derived by applying the principle of value additivity. By constructing two perpetuities,
one with cash flows beginning in year 1 and one beginning in year t+1, the cash flow of the annuity
beginning in year 1 and ending in year t is equal to the difference between the two perpetuities. By
calculating the present value of the two perpetuities and applying the principle of value additivity, the
present value of the annuity is the difference between the present values of the two perpetuities.

Asset Year of Payment Present Value

0 1 2….…….t t +1…………...

Perpetuity 1 C
(first payment in year 1) r

Perpetuity 2 §C · 1
¨ ¸
© r ¹ (1  r )
t
(first payment in year t + 1)

Annuity from § C · § C ·§ 1 ·
¨ ¸  ¨ ¸¨¨ ¸¸
© r ¹ © r ¹© (1  r )
t
(year 1 to year t) ¹

ª1 1 º
(9) PV of annuity C«  »
¬r r 1 r t ¼
Annuity factor

Note that the term in the square bracket is referred to as the annuity factor.

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Another Random Scribd Document
with Unrelated Content
The Project Gutenberg eBook of The Virtue and Use of
Coffee With Regard to the Plague and Other Infectious
Distempers
This ebook is for the use of anyone anywhere in the United States
and most other parts of the world at no cost and with almost no
restrictions whatsoever. You may copy it, give it away or re-use it
under the terms of the Project Gutenberg License included with this
ebook or online at www.gutenberg.org. If you are not located in the
United States, you will have to check the laws of the country where
you are located before using this eBook.

Title: The Virtue and Use of Coffee With Regard to the Plague and
Other Infectious Distempers

Author: Richard Bradley

Release date: September 8, 2019 [eBook #60264]

Most recently updated: October 17, 2024

Language: English

Credits: Produced by Chuck Greif and the Online Distributed

Proofreading Team at http://www.pgdp.net (This file was
produced from images available at The Internet Archive)

*** START OF THE PROJECT GUTENBERG EBOOK THE VIRTUE AND

USE OF COFFEE WITH REGARD TO THE PLAGUE AND OTHER
INFECTIOUS DISTEMPERS ***
 THE
Virtue and Use
OF
COFFEE,
With Regard to the
PLAGUE,
 And Other
Infectious Distempers:
C O N TA I N I N G
The most Remarkable Observations of the
Greatest Men in Europe concerning it, from
the first Knowledge of it, down to this
Present Time.
To which is Prefix’d, An Exact Figure of the
Tree, Flower, and Fruit, taken from the Life.

By R. Bradley, Fellow of the Royal Society.

LONDON,
Printed by Eman. Matthews, at the Bible in
Pater-noster-Row; and W. Mears, at the
Lamb without Temple-Bar. M.DCC.XXI.
(Price Six-Pence.)

TO

The Right Honourable

THE

Lords Spiritual and Temporal,

And to the Honourable

The Commons of Great Britain in

Parliament Assembled,

THIS
 H I S T O RY
OF

COFFEE
Is most humbly Inscribed,

BY

Your Honours

Most Obedient, and

Most Humble Servant to command,

Richard Bradley.
 P R E F A C E.
T this time, when every Nation in Europe is under the melancholy
Apprehension of an approaching Plague or Pestilence, I think it
the Business of every Man to contribute, to the utmost of his
Capacity, such Observations, as may tend to the Service of the
Publick. Upon this foot, I have some Months since published my
Thoughts of the Plague in general, upon an Hypothesis which many of the
Learned concur with, tho’ some few dissent from it: However, I find, that the
Remedies prescribed by the Physicians of both Opinions, are little different
from each other. It is remark’d by several Learned Men abroad, that Coffee
is of excellent Use in the time of Pestilence, and contributes greatly to
prevent the spreading of Infection: And one of them, in a Letter to me,
observes, that in some Parts of Turkey, where the Plague is almost constant,
it is seldom mortal in those Families, who are rich enough to enjoy the free
Use of Coffee, but that the Poorer Sort, who want that Benefit, seldom
escape. Again, the same Person observes, that Coffee is not subject to be
destroy’d by any Insect, or is subject to rot, as most other Seeds or Grains
will do; and therefore justly concludes, that it is of great Virtue and Use in
all Distempers, which are supposed to be occasioned by Insects, or
unwholesome Air. And it is likely, if the true Virtue and Use of Coffee had
been known in London in the Year 1665, when the Plague raged there, that
Dr. Hodges, and other Learned Men of that time, would have recommended
it. But since it is now become a Liquor known to most people, I have thought
fit to republish its History, with several Additions and Remarks; especially
how far it is useful in Pestilential Cases, with an Account of the best Method
of roasting the Berries, and preserving them after roasting: And for the
Satisfaction of the Curious, have prefix’d a Figure of the Tree, Flower, and
Fruit, which I delineated from a growing Tree in the Amsterdam Gardens.
 AN
Historical Account
OF
C O F F E E.
OFFEE, of late Years, is grown so much in request throughout
England, Holland, and other Parts of Europe, that I need say little
to recommend its History to the World: The general Use of it
rather seems to command this Work, that by our having a more
familiar Knowledge of it, we may relish it the better. And again, what yet
prompts me further to this Undertaking, is the Opportunity I have at this time
to present the World with a perfect Figure of the Tree that produces this
celebrated Fruit; which is not done here by any random Guess, or according
to the uncertain Report of others, but drawn by my own Hand from a
growing Tree.
A N D that I may observe some sort of Method in the Prosecution of my
Discourse, I shall, in the first place, give my Reader the Names and
Descriptions of it, from the several Authors who have mentioned it; and then
I shall offer a more exact Account, from my own Knowledge, of the Plant,
Flower, and Fruit, for the better understanding of the aforesaid Figure: after
which, I shall set down the Time and Manner of its first Appearance in
England, with its Virtues and Uses. To which I shall add some necessary
Observations relating to the Original Place of its Growth, and Manner of
Trading for it; and conclude with some Remarks I have made of its Culture
in the Amsterdam Garden.
 J A C O B C O T O V I C U S , in his Travels to Jerusalem, Anno 1598.
mentions the Coffee to have been at that time a Drink much in use amongst
the Turks; and tells us, that some of the Arabians called it Cahua, and others
Bunnu and Bunchi, but gives us no Description of the Plant. He is the first
Author that I find to have mentioned this Liquor.
P R O S P E R A L P I N U S , a Physician of Venice, in his Book of
Egyptian Plants, makes mention of the Tree, and gives us an imperfect Cut
of it: He tells us, that he first saw it in a Garden belonging to a Captain of the
Janizaries at Grand Cairo, brought from Arabia Felix, and planted there as a
great Rarity: It is, saith he, like the Euonymus or Prickle-Timber, but with
Leaves thicker, harder, and greener. Of the Fruit (called Buna) the Turks and
Arabs make a Decoction or Drink, which they use instead of Wine, and is
called Coava.
PA L U D A M U S , after him, mentions it by the Name of Choava; and
Rauwolfius calls it Chaube; but neither of them do make any Remarks upon
it, that are worthy to be communicated to my Reader; for these Authors writ
near a hundred Years since, when Coffee was little known to the Europeans.
S A N D Y S , in his Travels through the Turkish Empire, met with this
Drink at Constantinople: He says, “It was sold in many publick Places there,
which he calls Coffa-Houses, where the Turks sit chatting most of the Day,
and sip of a Drink called Coffa, in little China Dishes, as hot as they can
suffer it; black as Soot, and tasting not much unlike it.” He believes it to be
that black Broth, which was in use amongst the Lacedemonians.
PA R K I N S O N , in his Theatr. Botanic. pag. 1622. gives us a very
indifferent Figure of it, calling the Tree, Arbor Bon, and tells us, the Fruit is
somewhat larger than a Hazel-Nut, pointed at the Extremities, and of a
greyish Ash-Colour; that each Berry contains two white Seeds, which the
Turks make Drink of, and is in great Esteem amongst them.
J O H N B A U H I N E calls it Bon vel Ban Arbor.
C A S P E R B A U H I N E describes it thus; Euonymo Similis Ægyptica
fructu Baccis Lauri simili.
M r . R AY , in his Histor. Plantar. pag. 1691. calls it Coffee Frutex, ex
cujus Fructu fit Potus. He had not seen the Plant, but discourses largely on
its Virtues, which I shall give an Account of in the proper Place.
M O N S I E U R P O N C E T T , in his Voyage to Æthiopia, makes it a
Native of that Country; it was, as he says, transplanted from thence to
Arabia Felix, and at this time the Æthiopians cultivate it only as a Curiosity:
he describes it to be like the Myrtle in its Leaves, but larger and tufted; the
Fruit like Pistachio Nut, green at first, and of a darker Colour when it is
ripe: and this they call Coffee.
M A N Y others have mentioned the Fruit to be of a Citron Colour, and of
a Greyish White: but it appears plain to me, they have never seen it in its
Prosperity, as I have done; of which my Reader may be satisfied, when he
compares such Accounts with the Description I shall give of it.
D r . C O M E L I N , Botanick Professor at Amsterdam, in his Lectures on
Plants, places this Tree among the Jessamines, and compares the Leaf to that
of our common Chesnut; but as that Gentleman has not yet printed any
Account of it, I shall not therefore attempt to publish the Name at large,
which he has given it. He is undoubtedly in the right to class it with the
Jessamines; but I rather join in Opinion with my learned Friend Mr. Petiver,
that the Leaf is more like to that of the Laurus Vulgaris, or common Bay, but
larger.
T H U S having given a View of what has been mentioned by the several
Authors concerning the Name and Description of this Tree, I shall proceed to
describe it from the Knowledge I have of it.
I N the Physick-Garden of Amsterdam are two Coffee-Trees above
seventeen foot high, which have been for some time in a bearing State, and
have, at most Seasons, Fruit upon them; from one of these Trees I design’d
the Figure prefix’d to this Treatise, which in every Point resembles the
Branch I took it from, except only the Size, which ought to be one third part
bigger to make it equal with the Life.
T H E Tree is of very quick Growth, and naturally inclinable to shoot
upright; ’tis reported, that in its native Country it generally attains to the
height of forty or fifty foot, although the Stem, in the thickest part, does not
exceed five Inches in Diameter. The Leaves are Bi-composite (or set in cross
Pairs at the Joints) and not unlike those of the common Bay, but curl’d at the
Edges, and inclinable to hang down. The Flowers put forth in Clusters at the
Joints, towards the Extremities of the Branches; they make their first
Appearance in July, and are in Figure, Size, and Colour the same with those
of the common Jessamine, with the Addition only of five yellow Apices,
which hang loosely on the Top of the Flower, and a Style which projects near
half an Inch above it: their Smell is faint, and little worth our Notice.
A B O U T October these Trees have done blowing, and then the Green
Fruit appear, which hang on them till the July following before they are ripe;
they resemble at that time the Berries of the Lauro-Cerasus, or Bay-Cherry,
and are much of the same Shape and Colour (i.e. of a dark Red) but instead
of a single Stone, these have two Kernels, which split in the middle like the
Bay-berries of the Shops.
T H E Fruit being come to its Perfection, is gathered and prepared either
for making Drink, or for propagating other Plants. For the first of these Uses
they are spread on Mats, in the open Sun, to dry and harden, which requires
some time to accomplish; they are afterwards rolled to and fro in rough
Baskets to get off the Husks, and then tost in an airy Place to clean them.
Being thus ordered, they are ready for the Roaster, who fits them for our
Use.
M O N S I E U R B E R N I E R tells us, that in the roasting of the Berries
chiefly depends the Goodness of the Liquor; and affirms, that at Grand
Cairo, (where there were above a thousand Coffee-Houses) there was but
two Persons who rightly understood that Art.
I H AV E taken some pains to experience the best Method of roasting it,
and find none so good as by an Iron Vessel made to turn on a Spit, and it
may be roasted before a clear Fire, or over a Charcoal Fire: and here every
Berry has an equal share of Heat; and I like it roasted in a middle way, not
overburnt. I would recommend therefore the roasting of it to every particular
Family in England, they being then most secure from having any damaged
Berries, or any Art used to increase the Weight, which is very injurious to the
Drinkers of Coffee. Most Persons of Distinction in Holland roast their own
Berries.
M O N S I E U R D U F O U R , a Merchant of Lyons, in his Treatise of
this Liquor, recommends to us, that the Decoction be prepared in Earthen or
Stone Vessels, as preferable to those of Tin, Copper, or any other Metal;
which (says he) take from it much of its Flavour and Goodness. And an
ingenious Friend of mine observes, that Boiling of it evaporates too much
the fine Spirits; for which reason he advises us to pour boiling Water upon
the Powder, and let it stand to infuse four or five Minutes before the Fire:
and this Method, in my Judgment, much exceeds the common way of
preparing it.
S O M E of the most curious Coffee-drinkers have informed me, that as
soon as they have reduced the Berries to Powder, ’tis the best way to put the
fresh-ground Coffee into the Coffee-Pot, which should be either of Stone or
Silver; and let it stand over the Fire a Minute or two, before they pour the
Water upon it: Others, who have not the Opportunity of getting their Berries
fresh roasted, recommend the drying and warming them before the Fire,
immediately before they grind them. And indeed both these ways I find
contribute greatly to the good Flavour of the Liquor; but whether we prepare
this Liquor by Decoction or Infusion, it commonly remains thick and
troubled for some Minutes after it is made, unless we pour into it a Spoonful
or two of cold Water, which immediately precipitates the more heavy Parts
to the bottom, and renders it clear enough for drinking. In travelling I have
often found my Account in packing the Powder of fresh-roasted Coffee in
Bottles, which for more than twenty days has preserved its Strength and
Goodness; which I mention for the sake of those who have been so much
used to drink Coffee in the Morning, that they have not their Health without
it, or have been forced to take up with ill-tasted damaged Stuff in some
Country Village. I am the more careful to make this Remark, because I have
sometimes been a Sufferer on this Account, and I would advance, as much as
possible, the Content of Mankind.
T H E first Knowledge and Use of Coffee is not certainly known; but,
according to Banesius, it was discovered by mere Accident: He tells us, “It is
the common Tradition amongst the Eastern People, that a certain Keeper of
Camels or Goats in Arabia Felix, complained to the Religious of a
Monastery in those Parts, that his Herds, twice or thrice a Week, not only
kept awake all Night long, but spent it in frisking and dancing in an unusual
manner. The Prior of the Monastery, led by his Curiosity, and weighing the
Matter, believed that this must happen from the Food of these Creatures.
Marking therefore diligently that very Night, in company with one of his
Monks, the very Place where the Goats or Camels pastured, when they
danced; found there certain Shrubs or Bushes, on the Fruit of Berries, of
which they fed. He resolved to try the Virtues of these Berries himself;
thereupon boiling them in Water, and drinking thereof, he found, by
Experience, it kept him awake in the Night. Hence it happened that he
enjoined those of his Monastery the daily Use of it; for this procuring
Watchfulness, made them more readily and surely attend their Devotions,
which they were obliged to perform in the Night. When by this frequent use
of it, they daily experienced its Wholesomness, and how effectually it
conduced to the preserving them in perfect Health, the Drink grew in request
throughout the whole Kingdom; and, in progress of time, other Nations and
Provinces of the East fell into the use of it.”[A]
T H I S Story may very likely have given rise to that Opinion so generally
receiv’d amongst the Italians, That the Use of Coffee was first discover’d
and brought out of Asia into Europe by some Fryers.
T H E same Author mentions, “That some among the Turks, in a sort of
Thankfulness to these Monks, have sett and peculiar daily Orisons for
Sciadly and Aidrus, which they believe are the Names of the Monks
beforemention’d.”
B U T it is a more receiv’d Opinion throughout the Turkish Empire, that
an Angel taught the Use of this Coffee-Drink to a Mussel-man, or true
Believer: however, of this we are certain, the Use of it was not known in
England, till the Year 1657; at which time Mr. Daniel Edwards, a Turkey-
Merchant, in his Return from Smyrna to London, brought over with him one
Pasqua Rosee, a Ragusean Greek, who was used to prepare this Liquor for
him every Morning: The Novelty of it drew so great Resort to his House,
that he lost all the Fore-part of the Day by it; insomuch that he thought it
expedient to rid himself of this Trouble, by allowing his Greek Servant (in
conjunction with his Son-in-law’s Coachman) to make and sell it publickly.
They set up their Coffee-House in St. Michael’s Alley in Cornhill, which was
the first in London. But some small time after, these Partners fell out and
parted; and the Coachman got leave to pitch a Tent in St. Michael’s Church-
yard, and there to sell his Coffee in opposition to Pasqua, as appears by a
Letter written at that time by a curious Gentleman, who lately communicated
it to me.
 A N D thus was the Use of Coffee first introduced amongst us. The
Cheapness of it, with the Conveniencies in this Way of meeting (being
preferable to those in Taverns and Ale-Houses) soon increas’d its Drinkers;
and other Coffee-Houses were set up in most Parts of the Kingdom: so that,
in a few Years, it did not only gain a general Esteem with us, but also
became one of the most valuable Commodities imported by the East-India
and Turkey Companies.
W E may here observe, That King Charles II. finding the daily Increase
of Coffee-Houses, and that at those Places People were apt to talk too freely
of the State, endeavour’d the suppressing of them: but the Judges being
consulted, they declared it could not be done by Law; and only ended in
laying a Tax on them.
O F its Vertues; It is noted, That the Arabs, and others of the Eastern
People, in the Summer-Season, use only a Decoction made of the outside
Husks of this Fruit; and in the cooler Seasons make use of the Kernels,
esteeming the first to be cooling, and the other to be of a hotter Nature.
Veslingius seems to be of their opinion, in his Notes on Alpinus, where he
tells us, The Husk and Kernel of this Berry have different Qualities; the first
he esteems cold and dry, and the latter to be moderately warm: And this
Assertion is likewise confirm’d to us, by Peter de la Valle.
Dr. Lemery of Paris, speaking of Coffee, as it is in use amongst the
Europeans, tells us, It is of an excellent drying Quality, comforts the Brain,
and dries up Crudities in the Stomach. Mr. Ray mentions it to be of singular
Use and Efficacy to such as are afflicted with Pains in the Head, Vertigo,
Lethargy, and Coughs: it has a good Effect on moist and cold Constitutions;
but on the other hand, he disallows the Use of it to such as are Paralytick,
and likewise such as are troubled with Melancholy Vapours, or have Hot
Brains.
O T H E R Authors assert, it cures Consumptions, Swooning Fits, and the
Rickets; and that it helps Digestion, rarefies the Blood, suppresses Vapours,
gives Life and Gayety to the Spirits, prevents Sleepiness after eating,
provokes Urine and the Catamena. The Arabian Women drink this Liquor
constantly in their Periodical Visits, and find a good Effect from it. It
contracts the Bowels, and confirms the Tone of the Parts, being drank after
Victuals, provided it be fresh made; for if it stands but two or three Hours, it
loseth much of its Virtue. It is prevalent in such as have Running-Humours,
Sores, or King’s-Evil. It is an effectual Remedy against Worms in Children;
so that if the Mother drinks frequently of it when she is With-Child, the
Infant will not be troubled with Worms, during its first Years. ’Tis allowed to
be a strong Antihypnotick, greatly dissipating sleepy Vapours, and Fumes of
Wine. ’Tis likewise useful to such as are afflicted with Rheumatick or Gouty
Humours. The Dutch Physicians commend the Use of it in Intermitting
Fevers, and hold it to be good against Infection; because of the great
Refreshment it gives the nobler Parts of the Body, and its sudden Effect upon
the Spirits, which are wonderfully recreated by it. And it is apparently the
Opinion of all Physicians who have yet wrote concerning the Plague, That
such Bodies whose Spirits are the most overcome by Fear, are the most
subject to receive Infections. And again, That the Spirits must be refresh’d
only by such Liquors, or Preparations, as will not promote Inflammations.
And of this nature, say they, is Coffee, which by a right Use supports the
vital Flame, and defends the Body from Pestilential Infection. And as such it
is generally recommended, as a necessary Drink, at least twice a day; the
first thing in a Morning, and at four in the Afternoon. Now whether the
Hypothesis of venomous Animalcula brought by the Air, or that of Aerial
Atoms, poison’d and rendred unwholesom, be the Cause of the Pestilence,
will be examin’d in another Work; but at present I shall only say, That most
of the Physicians, of both Sects, prescribe the same Methods of Prevention,
and of Cure.
I T has been remark’d by several eminent Men, That in the Countries of
the East, where this Liquor is drank plentifully, the Inhabitants of those Parts
are seldom or never troubled with the Stone, Gout, or Dropsy; which
Distempers they imagine to be subdu’d by the powerful Virtue of this
Decoction: but whether this Drink be proper for such as are afflicted with the
Stone, I shall leave to the Judgment of the Learned, after they have read the
following Relation, which I had from a Gentleman of Leyden, and what I
believe may be depended upon: A Person of that University prepared two
Gallons of Coffee-Drink, after the rate of eight Ounces of Powder to a
Gallon of Water, and drew a Spirit from it, and again distilled from that
Spirit another, which he set by in his Study, till he could find some
Opportunity to try its Effects. About eight Months pass’d before he had any
Occasion to make use of it, when, to his great Surprize, he found at the
bottom of the Bottle a Crustaceous or Petrified Matter, so very hard, and so
strongly cemented together, that, notwithstanding his great Skill in
Chymistry, he was not able to dissolve it. And this Case (I think) may well
admit of farther Enquiry, and more especially if we consider the Volatile
Spirits contain’d in Coffee to be one fourth part of the Weight of it, which
appears by so much Loss in the common Way of roasting the Berries.
I S H A L L now proceed to give an Account of the Country it comes
from, with some Observations relating to the Mercantine Part.
T H AT curious Gentleman, Robert Balle Esq; furnish’d me with the
following Relation, as he had it from a Person that had been upon the Place,
and seen it grow: Coffee, says he, is not known to grow naturally in any Part
of the World, but only in Arabia Felix, some few Days Journey Inland from
Moco, in the Valleys of the Great Mountains, and near the City Saana, about
twenty Degrees North-Latitude: The Prince of which, about eighty Years
since, beat the Turks in a Battel near that Place, freed himself from their
Yoke under which he was before, and made himself Independent as at this
Day, permitting great Freedom of Trade to all Nations.
I S H A L L here take occasion to remark, wherein lies the Difference
between what we call Turkey and India Coffee, and why the latter has not
been esteemed so good as that we receive from Turkey.
T H E first of these is bought by the Turks Merchants, who go up into the
Country where it grows, and there contract for the Fruit of Gardens, or so
many Trees as they have occasion for, (as our Fruit-mongers do for Cherries
in Kent.) When it is gathered and prepared, as I have already mentioned,
they bring it upon Camels down to Juda, a Port at the bottom of the Red-Sea
(which is the Port to Grand Cairo) to be transported to Suez; from thence by
Land, about seventy Miles, to Grand Cairo, and so down the Nile to
Alexandria, where it is ship’d off for Asia or Europe.
T H E R E commonly comes thus every Year to Egypt, from sixty to
seventy thousand Bales of Coffee; which may contain, one with the other,
about three hundred weight each.
T H E Bashaw of Cairo sets a Price upon it, according to its Abundance
or Scarcity, and the People there make use of it as Money in the Market,
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