The funds the capital of a business consists of;
2. the classification of capital;
3. the types of financing.
The capital of a business consists of the funds used to start and run the business. The funds may be either the owner’s (equity capital) or creditor’s (debt capital). Equity capital consists of those funds provided to the business by the owner(s). These funds come from the personal savings of the owner. Debt capital consists of borrowed funds that the business owner owes to the lender. With debt capital the entrepreneur doesn’t have to share ownership, but has a legal obligation to repay the borrowed money (principal) plus interest at a future data even if the business does not make profit.
Capital is also classified, depending on it use, as fixed or working. Fixed capital refers to items bought once and used for a long period of time. These items include real estate, fixtures, equipment. With a grocery, for example, the real estate consists of the store itself and the land on which it is built. The fixtures include such objective as counters, refrigerators, shelves. Equipment covers such articles as cutting machines, knives, scales. Working capital refers to the funds used to keep a business working or operating. It pays for merchandise, inventory and operating expenses such as rent, utilities (light and heat), taxes, wages. Cash on hand and accounts receivable are also considered working capital. Therefore, working capital is cash, or anything that can easily and quickly be turned into cash.
Equity financing (obtaining owner funds) can be exemplified by the sale of corporate stock. In this type of transaction, the corporation sells units of ownership known as shares of stock. Each share entitles purchaser to a certain amount of ownership. For example, if someone buys 100 shares of stock from Ford Motor Company, that person has purchased 100 shares worth of Ford resources, material, plants, production and profits. The person who purchases shares of stock is known as a stockholder or shareholder.
All corporations, regardless of their size, receive their starting capital from issuing and selling shares of stock. The initial sales involve some risk on the part of the buyers because corporation has no record of performance. If the corporation is successful, the stockholder may profit through increased valuation of the shares of stock, as well as by receiving dividends. Dividends are proportional amounts of profit usually paid quarterly to stockholders. However, if the corporation is not successful, the stockholder may take losses on the initial stock investment.
Often equity financing does not provide the corporation with enough capital and it must turn to debt financing, or borrowing funds. One example of debts financing is the sale of corporate bonds. In this type of agreement, the corporation borrows money from investor in return for bond. The bond has maturity date, a deadline when the corporation must repay all of the money it has borrowed. The corporation must also make periodic interest payment to the bondholder during the time the money is borrowed. If these obligations are not met, the corporation can be forced to sell its assets in order to make payments to the bondholders.
All businesses need financial support. Equity financing (as in the sale of stock) and debt financing (as in the sale of bonds) provide important means by which a corporation may obtain its capital.
T E X T 4
Read the text. Define the main idea of each paragraph. Underline the sentences expressing these ideas.
FINANCIAL MARKETS
Financial markets provide a forum in which suppliers of funds and demanders of loans and investments can transact business directly. Whereas the loans and investments of institutions are made without the direct knowledge of the suppliers of funds (savers), suppliers in the financial markets know where their funds are being lent or invested. The two key financial markets are the money market and the capital market. Transactions in short-term debt instruments, or marketable securities, take place in the money market. Long-term securities (bonds and stocks) are traded in the capital market.
The money market is created by a financial relationship between suppliers and demanders of short-term funds, which have maturities of one year or less. The money market exists because certain individuals, businesses, governments and financial institutions have temporarily idle funds that they wish to put in some type of liquid assets or short-term, interest-earning instruments. At the same time, other individuals, businesses, governments and financial institutions find themselves in need of seasonal or temporary financing. The money market thus brings together these suppliers and demanders of short-term liquid funds.
The capital market is a financial relationship created by a number of institutions and arrangements that allows the suppliers and demanders of long-term funds -- funds with maturities of more than one year – to make transactions. The backbone of the capital market is formed by the various securities exchanges that provide a forum for debt and equity transactions. Major securities traded in the capital market include bonds and both common and preferred stock.
All securities, whether in the money or capital markets, are initially issued in the primary market. This is the only market in which the corporate or government issuer is directly involved in the transaction and receives direct benefit from the issue – that is, the company actually receives the proceeds from the sale of securities. Once the security begins to trade among individuals, businesses, government or financial institutions, savers and investors, they become part of the secondary market. The primary market is the one in which «new» securities are sold; the secondary market can be viewed as an «issued» or «preowned» securities market.
During the last two decades the Euromarket – which provides for borrowing and lending currencies outside their country of origin – has grown quite rapidly. The Euromarket provides multinational companies with an «external» opportunity to borrow or lend funds with the additional feature of less government regulation.
1. What is a financial market?
2. What are the two key financial markets?
3. In what do they differ?
4. Differentiate between primary and secondary markets.
T E X T 5
WHAT ARE DERIVATIVE INSTRUMENTS?
It may sound like a house of cards, but many financial instruments in the global economy are based on nothing more than the value of other financial instruments. Today it would be impossible to responsibly manage any significant international investment without an understanding of financial derivatives like options, financial futures, and interest rate swaps. A stock option, which allows an investor to purchase or sell a given stock at a fixed price sometime in the future, is called a derivative because its value is determined by the value of an underlying stock.
A financial future is an agreement to buy a financial instrument— such as a stock or bond—sometime in the future at a fixed price. A stock index future, for example, allows investors to benefit from the rise in a stock index by buying, in a sense, all the shares in the index. Just as a gold future goes up in value when gold's price rises, a future on the Standard & Poor's 500 will increase in value when the stock index rises.
The basic idea of a swap is to trade something you have for something you want. A swap is a trade agreement between two or more counterparties, usually banks, to exchange different assets or liabilities such as interest payments. Essentially, it allows both parties to obtain the right assets and cash flows for their own particular needs. In the case of banks, this most often means trading two loans with different interest rates or different foreign currencies. For example, a bank lending money to consumers at a fixed interest rate may be borrowing money at floating or periodically changing interest rates. In order to eliminate the risk of having borrowed and lent money at two different interest rates, the bank enters into an interest rate swap agreement with another institution to exchange one flow of interest rates for another.
1. What is ‘a financial instrument’?
2. What does a stock option allow?
3. What is ‘a financial future’?
4. What is the basic idea of a swap?
T E X T 6
INFLATION
inflationA persistent rise in the general level of prices.
disinflationA falling inflation rate.
zero inflationNo change in the general level of prices.
hyperinflationA rapidly rising inflation rate, often reaching hundreds of percentage points within a few months.
deflationThe opposite of inflation, in which the general level of prices declines.
stagflationA simultaneous increase in both the inflation rate and the unemployment rate.
purchasing power of moneyThe amount of goods and services a unit of money can command in the market.
price index A numerical device used to measure changes in prices.
consumer price indexA measure of inflation based on a theoretical market basket of consumer goods.
Everyone is familiar with the way prices of goods and services behave in the marketplace. They usually go up. The phenomenon of rising prices is calledinflation.Since the economy includes multitudes of prices, and all do not rise or fall at the same time, it is convenient to use the concept of an average price and describe inflation as a continuing rise in the level of the average price, or the general price level.
The inflation rate is the rate of change (or the percentage change) in the general price level over a specified time period, usually a year. An increase in the inflation rate means that prices are rising at a faster rate. A decrease in the inflation rate means that prices in general are not rising as quickly as before; it does not mean that prices are falling. The termdisinflation is often used to describe a declining inflation rate. If prices in general do not change, a situation ofzero inflationexists.
Rapidly rising prices may lead to a situation called hyperinflation. Many countries have experienced hyperinflation, some very recently, with inflation rates reaching hundreds of percentage points in a matter of months.
The phenomenon of falling prices is known as deflation. It is the opposite of inflation.
Economies have also experienced a situation known asstagflation. This occurs when a high rate of inflation is accompanied by a high level of unemployment This presents a dilemma for policy makers, as attempts to cure one problem invariably make the other one worse. The cherished goal of every country has been to keep both problems under control to avoid the heavy costs they inflict on people.
Inflation and thepurchasing power of money are inversely related. Inflation causes the purchasing power of money to fall. The purchasing power of money (also known as the value of money) is the amount of goods and services that one unit of money can buy. When prices rise, the same goods cost more in terms of dollars, and the dollar's value in terms of those goods falls.
Inflation is commonly measured with the aid of aprice index. A price index is a statistical device to measure price changes between a base period and a subsequent period. Economists use many different price indices. Theconsumer price index (CPI) is the most popular index for tracking inflation in the United States. The CPI measures the average change in the prices paid by urban consumers for a fixed basket of goods and services. The statistics for this index are compiled by the Bureau of Labor Statistics of the U.S. Department of Labor, which publishes them monthly.
1. Sum up the text in 7-10 sentences and present your summary in class. Use the key-words given before the text.
T E X T 7
EXCHANGE RATE
When residents of one country trade with residents of another country, they must generally convert funds between the currencies of the two countries to facilitate payments. Currency conversion requires a rate to define the value of one currency in terms of another currency. This rate is theexchange rate.
Since multinational companies trade in many different foreign markets, that’s why portions of their revenues and costs are based on foreign currencies. Among the currencies regarded as being major (or ‘Hard’) are the British pound, the Swiss franc, the Deutsche mark, the French franc, the Japanese yen, the Canadian dollar and the US dollar. The value of two currencies with respect to each other is foreign exchange rate.
For the major currencies, the existence of a floating relationship means that the value of any two currencies with respect to each other is allowed to fluctuate on a daily basis. On the other hand, many of the nonmajor currencies of the world try to maintain a fixed (or semi-fixed) relationship with the respect to one of the major currencies, or some type of an international foreign exchange standard.
On any given day, the relationship between two of the major currencies will contain two sets of the figures, one reflecting the spot exchange rate (the rate on the date), and the other indicating the forward exchange rate (the rate at some specified future date).
Two widely used systems of quoting exchange rates are known asEuropean terms andAmerican terms of quotation. In European terms, the value of the U.S dollar is expressed in terms of all other currencies. In American terms, the values of all foreign currencies are expressed in terms of U.S. dollars. American terms of quotation are commonly used in many retail currency transactions. In their dealings among themselves, banks use European terms of quotation except for quotes on the British pound, the Irish punt, the Australian dollar, and the New Zealand dollar. These currencies have been traditionally quoted in American terms. The Wall Street Journal reports daily exchange rates in both European terms and American terms.
Exchange rates between pairs of currencies that do not involve the U.S. dollar such as the rate between the German mark and the Swiss franc, are known ascross rates. The common practice of quoting exchange rates in either European or American terms requires an additional calculation to obtain cross rates from these quotations.
Consider the following quotes (in European terms) of Deutschemarks and Swiss francs against the U.S. dollar:
DM1.6240/$ and SF1.4625/$
The cross rate of the DM against the SF is obtained by dividing the DM/$ rate by the SF/$ rate, as shown below:
DM/SF = (DM/$)/(SF/$) = 1.6240/1.4625 = DM1.1104/SF
This cross rate indicates that one Swiss franc is worth 1.1104 Deutschemarks.
1. What is exchange rate?
2. What are ‘hard’ currencies?
3. What does a floating relationship mean?
4. What are cross rates?
T E X T 8
TAXATION
In poetry, spring is a time when a young person’s fancy turns to thoughts of love. But in economics, spring is much less romantic period. It is the season when millions of people in many countries begin to sort their previous year’s income and expense records—the first step in determining their personal income tax.
In calculating this tax, you are allowed to take specific types of deductions and exemptions. Some deductions that may be made (within limits) from your income are donations to your alma mater and to various non-profit organizations
The amount of income tax you must pay at a given income level depends on several things. These include whether you are single or married and what the particular tax rates happen to be at the time. The rates are usually revised by the government every few years.
Tax is money compulsory levied by the state or local authorities on individuals, property, or businesses.In modern economies taxes are the most important source of government revenues. Taxes can be levied and classified in many ways. In mane countries there are three principal types of taxes:
Taxes on income (personal income taxes and corporate income taxes);
Taxes on wealth (property taxes; death and gift taxes);
Taxes on activities (sales and excise taxes; social security taxes).
Because the power to tax is so weighty a matter, economists have developed several broad standards for judging the merits of a tax:
1.Equity. Tax burdens should be distributed justly.
2. Efficiency, Stability, and Growth. A tax should contribute toward improving resource allocation, economic stabilization, and growth in the total output of goods and services.
3. Enforceability. A tax should be adequate for its purpose and acceptable to the public, or else it will be impossible to enforce.
Taxes are considered to have three functions:
(a) fiscal or budgetary, to cover government expenditure, to provide the public authorities with the revenue required for meeting the cost of defence, social services, interest payment on the national debt, municipal services, etc.;
(b) economic, to give effect to economic policy, to promote stable economic growth, to influence the rate of economic growth of the nation;
(c) social, to increase the economic welfare of the community, to lessen inequalities in the distribution of income and wealth.
Businesses and individuals are subject to many forms of taxes. The various forms of business are not taxed equally. The tax situation is simplest for proprietorships and partnerships; corporations or companies are treated differently.
1.What are taxes?
2.What are the main functions of taxation?
3.What are the principal types of taxes?
T E X T 9
CAREERS IN FINANCE
Careers in finance vary as widely as the scope of finance itself. Some of these career paths require extensive, highly specialized knowledge and advanced degrees. Others begin with entry level positions open to enthusiastic, hard-working individuals regardless of their undergraduate majors.
The scope of finance has increased so much over the past decade that the field is generally subdivided into three parts. Financial markets and institutions, financial management, and investments are commonly considered to be separate disciplines. The study of financial markets and institutions focuses on those public and private institutions engaged in granting loans, accepting deposits, facilitating securities transfers, raising corporate funds, and regulating both the economy (domestic and global) and its financial institutions.
Financial management is concerned with how firms acquire and allocate funds. It examines how firms obtain short-term and long-term funds and how these funds are spent to acquire selected assets. Decisions regarding dividend policies, merger and acquisition activities, and leasing, all fall within the realm of the capital budget. Financial management also emphasizes the cash budget and management of its components.
Investment analysis focuses on how individuals or portfolio managers select appropriate financial and real assets. It examines the markets within which fund raising and security trading take place. It explores the methodologies used by investors, providing insights into criteria for analyzing companies and industries, as well as generating norms of behavior. The study of the markets for stocks and bonds, stock and index options, warrants, and commodities and financial futures are all part of the investments area.
Careers in Institutions and Markets
Entry level positions in financial institutions and markets can include everything from bank teller to credit trainee. A person with a strong finance background would probably begin as an administrative assistant to a loan officer, or as a junior financial analyst in either the credit department or the research department of a depository institution. Positions such as customer service representative or mortgage servicing specialist in an insurance company or a mortgage banking company, respectively, are generally staffed by people with limited finance backgrounds. More experienced individuals would be eligible for loan officer, branch manager, or senior analyst positions.
Careers in Financial Management
Entry level positions for those with associate degrees and limited experience in finance include data processing clerks, investor relations specialists, and accounts payable staff positions. Finance majors find entry level positions as junior accountants in cost or financial accounting departments, budget analysts, or financial planners. Promotion opportunities generally lead to managerial positions such as cash manager, credit manager, or financial accounting manager. Senior financial management positions include CFO, corporate comptroller, and treasurer.
Careers in Investments
Generally it is the investment area that attracts people to finance. They see an appealing opportunity to control multimillion dollar investment portfolios, or to be part of an investment banking institution engaged in mergers and acquisitions. Most brokerage houses, however, provide entry level positions as registered representatives (for those who qualify by passing specific NASD (National Association of Securities Dealers) examinations), or as investment or industry analysts. Clerical and assistant positions are always available with the major brokerage houses for those with limited experience, but excellent self-motivational skills. Senior employment opportunities include portfolio manager, senior investment analyst, and investment counselor.
1. The scope of finance is generally subdivided into three parts. What are they?
2. What does the study of financial markets and institutions focus on?
3. What is financial management concerned with?
4. What does investment analysis examine?
5. What are the parts of the investment area?
6 What can entry level positions in financial institutions include?
7. Where would a person with a strong finance background begin?
8. What can you say about entry level positions and promotion opportunities in Financial Management?
9. What are the appealing opportunities in the investment area?
Ex.11. Study the following words and word-combinations. What are their Russian equivalents?
To be out of action, to break down, (a) dead end, dud, to go dead, to go wrong, to be (or to fall) short of, to take the consequences, vicious circle, in the red, to make a loss, to pay the penalty (or price) for, to reach a stalemate, to bear fruit, the end product, in the black, to pay dividends, to pay (one’s) way, to pull off, to take effect.
Translate the following sentences into Russian.
1. If discussion between the two companies bears fruit, as seems likely, the resulting merger will bring about far-reaching changes in our industry.
2. Whether we buy coal from Australia or Germany, either way the end product is the same: we’re importing coal.
3. Shareholders will be pleased to hear that, once again, the company’s year-end results show us strongly in the black.
4. The company’s investment in staff training schemes should pay future dividends in the shape of more efficient, more effective personnel.
5. Your department is not paying its way. Unless you make cuts and improve performance, you’ll have to go. I’m afraid that’s the price you pay for the privilege of being head of department.
6. I see from the financial press that our main competitor has won a major overseas contract. I wonder how they managed to pull it off.
7. Your breach of contract is so serious that it rules out any possibility of doing further business with you. Needless to say, the contract may be regarded as terminated, such termination to take immediate effect.
8. The computer is out of action at the moment, due to an electrical fault.
9. The photocopier has broken down again. It may be due to overheating, or it could be mechanical failure.
10. This balance sheet does not give enough information. We need a complete breakdown of the figures.
11. After five years without promotion, she felt she was in a dead-end job.
12. We had high expectations of your assistant, but it seems he’s turned out to be a dud on the job, in spite of all his qualifications.
13. We negotiated with them for months. They seemed interested at first and then they went dead on us – no replies to phone calls and faxes, no letters, nothing.
14. When carrying out this experiment, it is important to remember above all to be exact and go step by step and not cut corners. If you go wrong, the results can be expensive, and dangerous. So, better safe than sorry.
15. The company’s final results put it seriously in the red and a sharp fall in its share price has taken place.
16. The company would be a more attractive for investment without its loss-making overseas activities.
17. The young executive paid the penalty for spending too much time on business; his wife left him for another man.
18. At first sight, the new manager seemed able to cope with his responsibilities. Under the acid test of stress, however, his performance fell seriously short.
19. Taking risks also involves the consequences if things go wrong.
20. Companies continuing to produce goods in a dying market are creating vicious circle.
Ex.12. Explain the meaning of the following words and phrases. Translate them into Russian. Make up your own sentences.
Saver, borrower, allocation of financial resources, financial intermediaries, ongoing expenses, inventories, credit extension, insurance, bank loan, credit card, secure funds, interest-earning instruments, liquid assets, primary market, secondary market, security trading, stock, warrant, option, financial futures.
Ex. 13. Insert the missing words given below.
Finance, profit, stockholder, financial, mutual, bondholders, legislative, comply, interrelated, managers, constraints, legal, counterparts, activities, investors, trends, predominate, recession, keystone.
All participants in the world of … have goals. While these goals may be grounded in the economic concepts of maximization of … and maximization of satisfaction, they need to be much more specific to be useful in … decisions. The financial manager of a corporation, for example, generally considers maximization of … wealth to be the firm’s primary goal. Other competing goals, combined with … restrictions, tend to favour a goal of maximization of stakeholder wealth. Consequently, it is not unreasonable to say that …,employees, community residents, and even environmentalists need to interact with the corporation in the pursuit of … interest.
Institutional financial managers, like their corporate counterparts, are torn between personal goals and constituent goals. These managers also find limits on their flexibility from … constraints imposed by regulatory agencies. Similarly, government financial … are legally constrained in their actions and must work to maximize the efficiency of financial operations relative to these … .
Individual …, serving as their own financial managers, would love to be completely free to maximize their wealth. However, they quickly find that certain …, such as insider trading, are frowned upon by the US judicial system. It should be obvious that the goal of the individual investor and that of other financial managers are closely… .
The principal … in finance today are corporate restructuring and the internationalization of finance. Restructuring was forced upon an unwilling corporate world by a … and an anemic economy recovery. Consequently, such words as downsizing or rightsizing entered the corporate vocabulary, and conservatism in financial matters has come to … . The internationalization process has developed gradually over time, but the increasing complexity of trade and the continuing growth of multinational corporations has made it a … of finance in the 1990s. Hence, all future financial decisions must now … with this new dimension.
Read the above text once again. Explain the meaning of the following words and phrases: financial decision, stockholder, legislative restrictions, regulatory agencies, individual investor, anemic economy recovery, downsizing, rightsizing.
Ex. 14. Think of the words (verbs and adjectives) that are most commonly used with:
Money, fund, activity, resources, profit, level, success, company, loan.
Ex.15.What is common and what is the difference in the meaning of the following words? Give your own sentences to show that you understand it.
Gain, earnings, profit, income, salary, wages, pay, revenue, return, receipts
Ex.16. Open the brackets.
Insurance Companies
Most of us (to will) (to pay) money (to avoid) some of the financial consequences of taking risks, so insurance companies can (to sell) us a guarantee against risk for a fee that (to be) large enough (to cover) their claims and operating costs and still (to permit) a profit. No one can (to predict) whose house (to burn down) next, yours or your neighbour’s. Thus, all insurance policy buyers (to make) small contributions toward a fund that can (to be used) (to compensate) the person whose house (to go up) in flames. Insurance companies can (to provide) this service and (to expect) (to make) profits as long as the premium (to be) greater than the amount they might have (to pay), multiplied by the probability of payment. Vast amounts of money (to pay) to insurance companies as premiums for life, auto, and health insurance, or as contributions to pension funds, many of which (to administer) by insurance companies. These funds (to make) available for loans to business firms or (to invest) directly by the insurance companies.
Ex. 17. Give the English equivalents to the following:
a) добывать деньги; перевод денег; в пределах финансовой системы; механизм ведения записей; доходы и расходы; осуществлять широкий спектр деятельности; размещение финансовых ресурсов; страховые компании; текущие расходы; краткосрочное финансирование; банковский займ; заемщик; кредитор; уставной капитал; личные сбережения; привлеченный капитал; долговые обязательства; процентная ставка; недвижимость; арендная плата; акции; пакет акций; акционер; облигации; дата выплаты (долга); выполнять обязательства; долгосрочные ценные бумаги; привилегированные акции; выпускать ценные бумаги; предоставлять заем; подвергать риску.
б) каждая акция дает право акционеру на …; получить стартовый капитал путем выпуска и продажи акций; определенный риск со стороны покупателя; не имеет отчета о деятельности; получить прибыль за счет увеличения стоимости акций; выплачиваемая акционерам ежеквартально; берет деньги взаймы в обмен на облигации; корпорация могут заставить продать активы; фонды, срок выплаты по которым меньше года; эмиссионер напрямую задействован в сделке; выручка от продажи ценных бумаг.
Ex. 18.Translate into English.
Common stock – акция корпорации, которая дает право голоса ее владельцу на выбор управляющих и право на получение части прибыли, которую корпорация выплачивает в виде дивидендов.
Capital gain – прибыль, получаемая в результате продажи акций или других активов по более высокой цене, чем та, по которой они были куплены.
Preferred stock – акция корпорации, которая не дает право голоса, но дает право на первоочередное распределение прибыли корпорации, а в некоторых случаях – первоочередное распределение имущества в случае банкротства. Как правило, доход на такую акцию не зависит от размера прибыли и является фиксированным. Таким образом, привилегированная акция близка облигации.
Stockholder – владелец одной или нескольких обычных акций корпорации.
Limited liability – юридическое положение, в соответствии с которым каждый собственник, вкладывающий капитал в дело, несет ответственность за пассивы предприятия только в размере вложенного капитала.
Financial accounting – отрасль бухгалтерского дела, которая связана с предоставлением финансовой информации за пределы организации.
Mortgage – долгосрочная ссуда на землю или строения.
Prime rate – процентная ставка, устанавливаемая банками по краткосрочным ссудам для своих наиболее платежеспособным клиентам.
Stockbroker – лицо, обслуживающее торговлю ценными бумагами между их продавцами и покупателями без принятия права на владение ценными бумагами.
Underwriting – процесс, в результате которого инвестиционный банкир или синдикат покупает целиком весь выпуск новых ценных бумаг организации и продает затем публике.
Ex. 19. Translate the definition into English and match it with the appropriate word given below.