EXERCISE 3. Answer the following questions (all the answers must be translated)

· Are you aware of successful entrepreneurs in your commu­nity? (Check your daily news­paper for stories about local entrepreneurs.)

· Why do you think that most small businesses are in the service and retail fields?

· What are the challenges and rewards of entrepreneurship?

· What are the advantages and disadvantages of sole proprietorships, partnerships and corporations?

· What are the advantages and disadvantages of franchises?

· How are large corporations organized?

EXERCISE 4. Prepare short reports on the following topics. The reports are to be translated in the class.

· A rags-to-riches story about local entrepreneurs.

· The role of small business in the American and Russian economies.

· Challenges and benefits of starting a new busines.

· Views of Th. Veblen and F. Knight.

6. FINANCING A BUSINESS

When Business Borrows

Business loans are generally classified as eithershort-termorlong-term loans. For short-term loans, theprincipal (the amount borrowed) must be repaid within one year. Long-term loans mature (come due) in more than a year. Creditors, people who make loans, expect to receive interest, payments for the use of their money, and the return of the principal (the amount loaned) at the end of a specific period of time. Interest is expressed as a percentage of the principal.

Short-term Financing. Short-term loans are used to finance the everyday costs of doing business, such as payrolls, raw materials and merchandise. Long-term loans are more likely to be used to purchase equipment, buildings and other high-cost items. The most common types of short-term financing are trade credit, loans from financial institutions, and loans from investors.

Tradecredit is like a department store charge account. Customers charge purchases to their accounts for payment at a later date. In the case of trade credit, the customers are busi­nesses whose suppliers allow them to charge purchases for payment at a later date.

Loans from financial institutions, such as banks and finance companies, are another source of short-term credit.

Finally, some of the nation's largest businesses can look to loans from investors to meet their short-term financial needs. If, for example, General Motors needed $10 million to finance a payroll, it could raise the money by sellingcommercial paper — a kind of IOU issued by a corporation, promising to repay a sum of money at a specified rate of interest. Investors wishing to earn interest on their surplus funds can buy these IOU's from brokers specializing in such investments.

Federal law requires that all loans be expressed in terms of the annual percentage rate orAPR. The APR of loans that are discounted is always higher than the rate quoted. This is true because the amount the borrower received is less than the amount actually loaned.

Long-term Financing. Long-term financing is money that will be used for a year or more. Building a factory, purchasing equipment, launching a major research effort are the kinds of projects that require long-term financing.

Why would anyone lend money to a business for a year or more? The reason is that revenues from these kinds of projects (like a new factory) continue to flow for a long period of time. This makes it possible for borrowers to repay their loans as promised.

The most common sources of long-term financing are retained earnings, long-term loans, and the sale of stock.

Corporations can do one of two things with their profits: distribute them to their shareholders in the form of dividends, or "plow them back" into the business. Undis­tributed profits, orretained earnings, are often used to finance major projects.

Long-term loans are repaid over more than one year. The most common form of long-term loan is themortgage, a loan secured by real estate (land or buildings). If the borrower fails to make payments on the mortgage, the lender may take the property. Families who own a home or apartment probably have a mortgage on the property.

Many large corporations raise long-term capital through the sale of theirbonds. Corporate bonds are a kind of IOU sold to the general public, usually in denominations of $1,000. The corporation promises to repay the face value of the certifi­cate at a specified time. In addition, the bondholder receives interest at periodic intervals (usually twice a year). Because the money paid for a bond is really a loan, bondholders are considered creditors of a corporation. This means the corpo­ration is legally obligated to pay the bondholders the interest and principal of the loans as they come due.

The History of Economic Thought

Jean Baptiste Say (1767-1832)

Say's Law of Markets

For hundreds of years, the science of astronomy was frozen by the widely believed theories of the second-century Greek astronomer, Ptolemy. According to Ptolemaic theory, the Earth was the center of the universe. It was not until the 16th century that Europeans, accepting the work of Galileo and Copernicus, were persuaded that the Earth, and all the other planets, rotated around the sun. In much the same way, the doctrine known as Say's Law, stifled advances in the study of economics for well over 100 years.

An admirer of Adam Smith, Jean Baptiste Say's Treatise on Political Economy (1803) helped to introduce The Wealth of Nations to his native France. In the course of explaining Smith's theories and the role of markets in satis­fying human wants, the author developed what came to be known as Say's Law. According to Say's law, "produc­tion creates its own demand." In other words, people produce and sell goods and services in order to buy the things they want. If buyers no longer want certain products, sellers will stop producing them, and shift into something that is in demand.

Now, if only those goods and services actually in demand are produced, and the income received from the sale of those products is ultimately used by managers and workers to buy the things they want and need, it follows that supply created its own demand. In other words: there could be no such thing as overproduction, or long-term unemploy­ment. Temporary overproduction and unemployment, yes. Long term, never.

The onset of the Great Depression of the 1930's, with its widespread unemployment and overproduction that dragged on for years, finally put Say's law to rest. Although some economists continued to agree with Say that "in the long run," the market would bring supply, demand, and employment into balance, most agreed with the British economist J.M. Keynes who pointed out that "in the long run we are all dead." By that he meant pressing problems require immediate attention. We can't wait for long-term solutions.

We will learn more about Keynes and his view of the economy in a later chapter.

Buying And Selling Stocks And Bonds

Stocks as a Source of Funds. Large corporations often raise funds through the sale of their stocks to the general public.

Unlike bondholders who are creditors of the corporation, stock­holders are its owners. This entitles them to a voice in the selection of the board of directors and a share of the potential profits, when and if the directors elect to distribute them.

Common and Preferred Stock. All corporations issue common stock; some, however, also issue preferred stock.

Common stock entitles the holder to a voice in the manage­ment of a corporation and a share of the profits. Unlike common stockholders, preferred stockholders usually do not have voting rights. However,preferred stock receives preferential treatment over common stock in two ways: 1) it receives a specified dividend before any dividends are paid on the common stock, and 2) it receives a share of the assets ahead of the common stockholders if the corporation should be liquidated.

The XYZ Corporation has issued 100,000 shares of common stock, and 50,000 shares of $5 preferred (stock that pays $5 in dividends). Last year the board of directors declared dividends of $500,000. $250,000 of this sum went to the preferred stockholders (because 50,000 x $5 = $250,000). The rest of the money went to the common stockholders who received $2.50 for every share of stock they held (because $250,000-100,000 = $2.50).

This year, the company lost money (it earned no profits). Therefore, the board of directors had to decide whether to:

1. pay the preferred stockholders a dividend out of savings and skip paying a dividend to the common stockholders,

2. pay their regular dividend to the preferred stock­holders and another dividend to the common stock­holders out of savings, or

3. skip paying dividends to both the preferred and common stockholders.

The board chose the third alternative.

Buying and selling corporate securities (stocks and bonds) takes place in the "stock market" or "bond market." The attention given to the stock market by radio, TV and the newspapers is evidence of the widespread interest in stock ownership. So, too, is the fact that over 47 million people now own stock in America's corporations.

Protecting the Investing Public. The Securities and Exchange Commission (SEC), an agency of the federal government, is responsible for protecting investors in the sale of securities. It operates on the principle ofcaveat emptor, a Latin phrase meaning "let the buyer beware." In applying this principle, the SEC requires corporations to provide the public with essential information about their operations and finances. Having done that, they let investors determine the risks for themselves.

Much of the information required by the SEC is contained in aprospectus. Similar to the annual report distributed to stock­holders, a prospectus is prepared for any new issue of securities.

How Stocks and Bonds Are First Offered to the Public.Corporations sell stocks and bonds (securities) as a way of raising capital. Once a corporation decides to sell its securi­ties, it will look for a firm willing to buy the entire issue and sell it to the public. The securities firmunderwrites— advances the agreed-upon price for the stocks or bonds to the corpora­tion — and then sells the securities to the public. It makes a profit if sales go well but must absorb any losses if sales are weak. Often a securities firm will join with other similar firms to spread its risk by forming a syndicate to sell the bonds.

Securities Exchanges and the Over-the-Counter Market.We have seen that the proceeds from the sale of new stocks and bonds go to the companies issuing them. Thereafter, sales are handled either through a securities exchange, or the over-the-counter market. Naturally, the proceeds from those transac­tions go to the sellers, not the individual corporations.

A securities exchange is a market where brokers meet to buy and sell stocks and bonds for their customers. Securities exchanges list the securities of approximately 3,000 of the nation's largest publicly owned corporations.

Largest of the securities exchanges are the New York Stock Exchange and the American Stock Exchange. The New York Stock Exchange handles about 80 percent of all securities transactions, whereas the American Stock Exchange handles 10 percent. The remaining transactions are made at a number of regional exchanges located around the nation.

If you wanted to buy or sell corporate securities, you would probably call upon the services of a local brokerage firm. An account executive (salesperson licensed to sell securities) would take your order and transmit it to the company's representative on the floor of the exchange. The exchange works like an auction. Brokers representing buyers and sellers bid against one another for the best possible price.

Theover-the-counter market consists of brokerage firms around the nation that buy securities of the smaller, "unlisted' firms and sell them to the public. There are more than 40,000 corporations whose securities are traded "over the counter.'

Investing and Speculating. Those who buy stocks to share in the profits and growth of a corporation over a long period of time are described as "investors." Those who buy or sell stocks as a way to earn a fast profit are known as "speculators."

Investing in Corporate Stocks. Investors share in a corpora­tion's profits by receiving periodic dividends. In addition, if the corporation prospers over the years, its stock will increase in value. Investors will be able to sell the stock for more than they paid for it, thereby earning acapital gain or "profit" from the sale.

Speculating in Corporate Stocks. Stock market speculators fall into two groups. One group, commonly known asbulls, hopes to profit by correctly predicting an increase in the value of a stock. The other group,bears, hopes to profit by correctly predicting a decrease in the value of a stock.

Bulls are said to "buy long." That is. they buy stocks intending to hold them until they can be sold at a higher price.

Stanley Green thought that the stock of the ABC Corpo­ration, then selling at $5 a share, would soon increase in value. He instructed his broker to buy 200 shares. Two weeks later, the price of ABC stood at $6. Stanley told his broker to sell his shares. Before subtracting the commis­sions that he had to pay his broker, Stanley made a profit of $200. Had the price gone down to $3.50 a share at the time he sold, Stanley Green would have lost $300.

Bears "sell short." Expecting the price of a stock to fall, bears borrow the stock from their brokers and sell it at today's price. If and when the price does fall, they repurchase the stock at the lower price, return it to their brokers, and pocket the differ­ence. The broker is paid a fee for these services.

Grace Blue feels that the stock of the DEF Corporation is due for a fall. DEF is currently selling for $13 a share. She instructs her broker to sell 300 shares of DEF short. Blue's broker lends her 300 shares of DEF which she then sells for $3,900. Two weeks later DEF is selling for $10 a share. Grace tells her broker to close out her trans­action. The broker buys back the 300 shares of DEF (that had been loaned to Blue) for $3,000. As a result other short sale, Grace Blue has earned a profit of $900, less brokerage fees. If, instead of falling, the price of DEF had risen, Grace would have lost money.

The exact origin of the terms "bull" arid "bear" is not known. However, you can re­member what kind of market they refer to because u bull's horns point up and a bear lumbers along looking down at the ground.

Buying and Selling Corporate Bonds. When a corporation sells its bonds to the public, it makes two important promises: to pay the bondholder a fixed rate of interest for a specific number of years and to repay the face value of the bond when it comes due.

The sale of bonds is handled in the same way as the sale of stocks. Corporations in need of capital sell their bonds to under­writers for a fixed sum. The underwriter then sells the issue to the public. Once the bonds are in the hands of the public, future sales are handled by the stock exchanges and the over-the-counter market. As with stocks, the market value of bonds depends upon supply-and-demand conditions at the time. Individuals thinking of investing in corporate bonds should compare the safety and yield of those securities with those offered by thrift institutions. There is some risk of default (failure to pay interest or principal) on the bonds of even the strongest corporations, whereas most thrift institution accounts are insured by the government.

Mutual Funds

How do you know which stocks to buy? Once you've bought them, don't you have to keep an eye on them? How would you know when to sell your stocks?

In fact, no one really knows the best stocks to buy or exactly when to sell them. For that reason many people invest in mutual funds. Mutual funds are corporations that sell stock and use the proceeds to invest or speculate in the securities markets. Because they work with large sums of money, they can afford to buy many securities, to spread the risk of invest­ment. Risk is spread because a loss by one or two securities would be offset by gains in the others. The mutual funds can also afford to hire professional managers to look after their investments.

!!! ВСТАВКА ИЗ ФАЙЛА MARKET WRAP !!!

(методички\ эконом. перевод\ …)

ВСТАВКА ВЕСЬМА ЖЕЛАТЕЛЬНА В ОДНУ КОЛОНКУ!

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Summary

Business firms can raise money from internal (inside) and external (outside) sources. Most internal funds come out of profits. The principal source of external funds are loans and sales of stock.

Large corporations often raise funds through the sale of stocks and bonds. Bondholders lend money to the corporation and are, therefore, its creditors. Since stocks represent part-ownership of the corporation, stockholders are owners of the firm.

Bondholders receive interest payments during the period of the loan, plus the face value of the bond at maturity. Stockholders receive a share of the profits in the form of dividends when and if the board of directors declares them. When stockholders sell their shares, they will receive whatever the market value is at the time of sale.

Publicly held stocks and bonds are traded in stock exchanges or over-the-counter markets. Those who trade corporate securities do so for reasons of investment or speculation.

The government agency responsible for overseeing the operations of the securities markets is the Securities and Exchange Com­mission (SEC). The SEC subscribes to the principle of caveat emptor ("let the buyer beware").

Investors and others interested in the financial condition of a firm can learn much from its income statement and balance sheet.