VIII Reading and Comprehension
Exercise 16. Read the text E and identify the differences between:
a). financial capital and other types of capital;
b). stock capital and debenture capital;
c). preference shares, ordinary shares, and deferred shares.
Text E Financial Capital
Financial capital is the “liquid capital” of a company, such as cash, bonds, shares, etc. there may be other types of capital, including especially the company’s physical assets (land, buildings, machinery, and equipment).
Financial capital is usually subdivided into stock capital (that received from the company’s stocks) and debenture capital. Debenture capital is the money the company has gained from loans –i.e., borrowed by the company.
Stock capital can be classified according to the type of shares- preference shares, ordinary shares, or deferred shares.
Preference stocks have a fixed rate of dividends, meaning that people who hold these always receive an amount of money equal to their dividends. The advantage is that they receive this money before dividends are paid to the holders of ordinary or deferred shares, and even in bad years. The disadvantages are that holders of preference shares do not have the right to vote at shareholders’ meetings and cannot influence decisions.
Holders of ordinary shares have voting rights and the right to elect the company’s senior management. They also have the right to increased dividends when the company enjoys greater profits. The disadvantage is that their dividends go down when profits are smaller, and in bad years they may receive no dividends at all.
Deferred shares are shares with deferred (later) payment of dividends. For instance, they may be paid after a company has reached a certain level of development, or at the time of determining its annual profits.
Exercise 17. Read the text F.
Text F Financial Activities and Their Management
Any person or company starting or doing some business has three questions to answer, all connected to finance.
The first question is, "What long-term investments are necessary?" This means identifying the business to be done, and the buildings, machinery, and equipment needed to do it.
The second question is, "Where and how can the firm get long-term financing to pay for those investments?" Will the firm's own money be sufficient? If not, will it try to interest others to invest in the business and share ownership, or will it borrow money?
The third question is, "How will the firm manage everyday financial activities?" These activities include collecting money from customers, paying suppliers, paying salaries and wages, administrative costs, etc.
The financial structure of a company is called corporate finance. The Financial Department in a company is responsible for its corporate finance. Financial management is the responsibility of the Vice-President for Finance, who supervises the work of the Financial Department. In Fundamentals of Corporate Finance (Chicago: Irwin, 1995), the authors: Stephen A. Ross, Randolph W. Westerfield, and Bradford D. Jordan suggest the following organizational chart of financial activity in a large firm (p.3), supervised by the Vice-President for Finance.
All the financial activities are aimed at answering the three questions listed above. The answer to the first question is called capital budgeting. It is the process of planning and managing the firm's long-term investments. To do that, the Financial Manager has to try to find opportunities for investments which are worth more to the firm than they cost to be acquired. That means that the amount of cash to be received as a result of an investment should be greater than its cost, i.e., greater than the amount of money spent to gain it.
The answer to the second question is found in capital structure. This structure is a mixture of long-term debt and the equity that a firm uses to finance its operations. Debt is a result of the firm borrowing money to finance its operations. Equity is the value of its property (also used as security for the financing) after deducting all the charges to which that property may be liable. The Financial Manager should decide on the suitable balance of debt and equity - what mixture of debt and equity is best for the firm. He or she should also find the least expensive sources of funding for the firm.
The working capital managementis the answer to the third question. Working capital is the firm's short-term assets - for instance, inventory. It also includes short-term liabilities, such as paying suppliers. Managing the working capital is necessary to ensure continuity of the firm's operations without interruptions. It requires a number of decisions, such as how much cash and inventory should be readily accessible at a moment's notice, how to obtain short-term financing, etc.
Decisions made regarding any of these three basic questions of finance involve risks. That is why no firm can avoid some financial losses. But efficient financial management can bring those losses to a minimum, thus maximizing the profits.
Exercise 18. Find in the text and put down English equivalents to the following word combinations:
Довгострокова інвестиція; розподіляти власність; керувати фінансовими діяльностями; корпоративне фінансування; наглядати за роботою; кошторис капіталовкладень; знаходити можливості; довгострокові запозичення; найменш дорогі джерела фінансування; управління оборотним капіталом; короткострокові зобов’язання; уникати фінансових витрат.
Exercise 19. Answer the questions:
What are the most important questions of finance?
What is a corporate finance?
3. Which managers does the Vice-President for Finance supervise?
4. What is capital budgeting?
5. What is capital structure?
6. What is working capital?