Vocabulary

Do you know the meaning of the following words? Try to match up each of them to its Ukrainian equivalent. Use your dictionary if necessary.

subsequently ploughed back profits legal proceeding bankruptcy involuntary liquidation interest on debt retained profits to tie up to convert stock exchange council stringent to be aware of Unlisted Securities Market

safeguards to dispose of prevailing rights issue to underprice tender preference share rate of return to declare a dividend cumulative preference shares arrears redeemable preference shares articles of association

а) конвертувати, перебудовувати

б) усвідомлювати

в) міри безпеки, захист

г) укладати гроші у що-небудь

д) кумулятивні привілейовані акції

е) згодом, потім, пізніше

є) борг, заборгованість, несплачена по рахунку сума, недоїмка

ж) статут акціонерної компанії

з) нерозподілений прибуток

и) банкрутство

і) привілейовані акції, котрі можуть бути погашені за рахунок резервів компанії

ї) тендер, заявка на торгах, заявка про підписку на цінні папери

й) недобровільна ліквідація

к) рада фондової біржі

л) ринок цінних паперів, котрі не котируються

м) випуск акцій для розподілу серед акціонерів, що надає їм право придбання нових акцій відповідно до кількості акцій, котрі вони вже мають

н) капіталізований прибуток

о) норма прибутку; норма рентабельності

п) процент по заборгованості

р) проголошувати про виплату дивідендів

с) встановлювати надто низьку ціну

т) привілейована акція

у) переважний, поширений

ф) суворий, скрутний (про гроші), напружений

х) розпоряджатися, продавати, збувати

ц) судовий процес

Pre-reading task

Work in small groups.

Can you answer the following questions?

• Do you know anything about sources of finance for any business?

• Owners’ capital has some advantages and disadvantages. Do you have any idea about what they are?

• Can you identify the difference between ordinary and preference shares?

Preface each answer with one the following according to what is true for you:

I can say that … I’d like to point out … It should be noted …

The important thing is … I am not sure … I have no idea

Reading

1. Read text 21. How much of the information did your group already know?

Text 21

Sources of finance

There are three main sources of finance for any business:

• owners’ capital;

• borrowing from other people or organizations;

• obtaining goods on credit.

Owners' capital

In a small business or partnership this is limited to the personal wealth the owners put into the business at the beginning and any profits subsequently re-invested.

Methods of increasing owners' capital are listed below:

• sole traders and partners may use some of their private wealth to give an injection of capital to a business.

• sole traders may take a partner; partnerships can increase the number of partners.

• sole traders or partners could decide to float their business as a company.

• existing companies may be able to issue more shares.

• profits can be left in the business and used to finance further investment. These profits are sometimes referred to as ploughed back profits.

Advantages of owners' capital

1. Interest has to be paid on borrowed funds. When the interest is not paid the debtors can start legal proceedings that can result in bankruptcy or involuntary liquidation. Shareholders have no right to demand a dividend. Sole traders and partners are not

required to make a profit from their business. A high proportion of owner capital can give stability to a business during its initial development and in periods of economic recession when demand might be falling.

2 The interest on debt is a fixed cost during the life of the debt. This reduces the amount of money available for the owners as profit.

3 Shareholders who do not receive the level of dividend they had hoped for can challenge the directors at the annual general meeting of the company. Theoretically shareholders can vote the directors out of office. This seldom happens in practice. A high proportion of share capital, therefore, can give the directors greater power in deciding to finance growth from retained profits.

Disadvantages of owners’ capital

1 The capital is tied up in the business throughout its life. A sole trader can overcome this problem by taking a partner; partnerships may expand in size by taking additional partners. Both sole traders and partnerships can decide to convert to companies. The owners of shares in a company can convert their holding in the company into cash only by selling their shares to somebody prepared to buy them. This is relatively easy if the company is listed on the Stock Exchange. The body that runs the Stock Exchange (the Stock Exchange Council) will accept a company for listing - and therefore for its shares to be bought and sold by members - only if it meets stringent financial requirements. People holding shares in unlisted companies find it more difficult to sell them. Aware of this problem, the Stock Exchange opened another market for shares. This is known as the Unlisted Securities Market (USM). The financial requirements needed to enter this market are less stringent than those required for listed securities but they still provide safeguards for people buying and selling shares on the Stock Exchange.

2 A high proportion of owners' capital increases the owners' risk. They may be shareholders in a listed company but if they wish to dispose of their shares at any time they may have to sell for a lower price than they paid, particularly if the dividends of the company have been low compared with the prevailing rate of interest or the dividends paid by other companies.

3 Raising money by issuing more shares is expensive in administrative costs. A rights issue, where shares are offered to existing shareholders, is the cheapest method. It is also difficult for a company to estimate the market price of its shares and, if underpriced, there is an additional cost to the company. Issuing shares by tender attempts to overcome this problem by stating the minimum price the company will accept for its shares and inviting the public to state how much they are prepared to pay for them.

Apart from the administrative costs of floating a share issue, owner capital appears the cheapest method of acquiring funds. The opportunity cost of using owner capital, that is the earning potential of alternative investment, should not be forgotten.

Preference shares

Between owners' capital and loans there is a less well-defined area of preference shares. The holder of a preference share:

• is not an owner of the company.

• receives a fixed rate of return but has no legal right to it.

• has priority over ordinary shareholders when a dividend is declared.

• has priority over ordinary shareholders when the company goes into liquidation.

Apart from these four points the rights of preference shareholders will vary from company to company. Companies design their preference shares to attract investors who do not want to take the risk of holding ordinary shares and who either do not have sufficient capital to lend to the company or wish to spread the risks of lending money. Cumulative preference shares have the right to claim arrears of dividends if the company does not pay a dividend in one year. Redeemable preference shares can be bought back by the company after a stated number of years. Some preference shares carry voting rights, others do not. The rights of the preference shareholders are laid down in the company's articles of association.

2. Comprehension check.

Read the text again more carefully. Here are some answers about the main sources of finance for any business. Write the questions.

1. __________________________________________________________________

Owners’ capital, borrowing from other people or organizations and obtaining goods on credit.

2. __________________________________________________________________

Using some of the private wealth, increasing the number of partners, floating a business as a company, issuing more shares by existing companies, etc.

3. __________________________________________________________________

Interest has to be paid on borrowed funds.

4. __________________________________________________________________

Shareholders can vote the directors out of office.

5. __________________________________________________________________

The capital is tied up in a business throughout its life, a high proportion of owners’ capital increases the owners’ risk, raising money by issuing more shares is expensive in administrative costs.

6. __________________________________________________________________

Companies design their preference shares to attract investors who do not want to take the risk of holding ordinary shares and do not have sufficient capital to lend to the company.

7. __________________________________________________________________

The rights of the preference shareholders are laid down in the company’s articles of association.

Discussion

Discuss in pairs. What type of shares would you prefer to have? Why?

Pre-reading task

Work in small groups.

Now you are going to read about borrowings. Do you have any idea about different kinds of borrowings?

Reading

1. Read text 22 quickly. Were your ideas about borrowings correct?

Text 22