Retailing
| 6.3.A Analysis | Warehouse clubs Listen to the tape recording of a marketer talking about warehouse clubs in America. Answer the following questions. 1 Supply the following figures: a The percentage discount offered by warehouse clubs compared with prices in other retail outlets. b The number of warehouse clubs in the USA. c Total expected sales this year. d Inventory turnover by successful warehouse clubs. e The cost of becoming a member of a warehouse club. f The club's gross margin. g The percentage of purchases made by business customers. 2 Identify six factors which enable warehouse clubs to offer such huge discounts. 3 What impact have warehouse clubs had on retailing generally, and why? | |||||
| 6.3.B Vocabulary | Adjectives I In each of the following sentences replace the words in italics with a more complex adjective from the list below.
1 Bicorex plc is facing very hard competition. 2 Sales were very slow last year. 3 A very important decision was made. 4 He made a very big mistake. 5 This product only has a very small chance of succeeding. 6 My job is very nice. 7 She is a very good salesperson. 8 He had a very strong desire to buy a sports car. 9 It's very convenient to shop at the local supermarket. 10 Our sales approach is very small. 11 A new price war could be very damaging. 12 I refuse to allow you to embark on this extremely risky venture. 13 Our salespeople have become too casual about their work. 2 What images do the complex adjectives convey to you in the context of the above sentences? Portray one of the sentences pictorially for use with an overhead projector. |
Retailing
| 6.3.C Grammar | Word transformation I Complete the following sentences by transforming the words in italics. Example
1 Our chain of distribute is too long; we ought to cut out the middleman. 2 A short of top marketing executives has made recruitment pretty difficult. 3 Yuppies tend to find this product rather appeal. 4 Government regulate require all ingredients to be clearly displayed on the label. 5 The grow of hypermarkets has led to an increasing concentrate of powerful retailers. 6 We simply can't competition with them on price. 7 Our sell figures are down by 3.5%. 8 We'll have to make some alter if the campaign is to succeed. 9 The Japanese simply production better quality goods. 10 We've made a size increase in our market share. 11 New patterns of consume have evolved over the past few years. 12 The sell are always polite and helpful. 13 We're expecting a slight reduce in orders next month. 14 Consume are increase fed up with being given misleading information. 15 This advertise will be broadcast on all the commerce television networks in the Fall. 16 People's net dispose income has steadily risen since the war. 17 We've made several interesting scientific discover but have been unable to transform them into market products. 18 It would be much more economy to buy them in bulk. 19 Our next step is to conquest the Australian market. 20 We need to diverse our product range. 2 Write a short paragraph using five of the untransformed words in italics. | |
6.3.D Listening  | A shopping mall Listen to the tape recording of a talk about a large shopping mall in Los Angeles and answer these questions. 1 What five changes in post-war American society led to the creation of the first shopping malls? 2 What did Victor Gruen hope that the shopping mall would achieve? 3 What facilities can be found at this LA mall? 4 How does the layout of the mall encourage customers to spend more money than planned? 5 Apart from being convenient and offering a wide range of products and amenities, what other advantages does this mall offer? 6 In what way can this mall be considered a fantasy land? |
Part II Marketing Unit 6 Retailing and merchandising
| 6.3.E Discussion | The future of retailing In small groups, discuss the changes which you foresee in retailing in your country over the next 20 years. Use the following points to guide your discussion: · the decline/disappearance of some retail outlets · the appearance/growth of other retail outlets · changes in location of retail outlets · changes in consumption patterns (frequency of shopping, growth of new products, etc) · government regulations and deregulations demographic trends, economic growth, development of infrastructure and so on. |
Company focus
| COMPANY FOCUS Marketing at United Distillers The following extracts are taken from Guinness plc's annual report for 1991. Read them and then answer the questions which follow. |
UNITED DISTILLERS United Distillers, the spirits company of Guinness PLC, produces and markets premium quality, world-famous brands. It is the international leader in both the Scotch whisky and gin industries, and is the world's largest and most profitable spirits company. The company employs nearly 11,000 people worldwide. It has a portfolio of leading brands of Scotch whisky, gin, bourbon, vodka, rum and other spirits. More than 50 million cases are sold annually. United Distillers' international sales and marketing headquarters is at Landmark House, Hammersmith, London. Distillers House, Ellersly Road, Edinburgh, is the headquarters for UK production. United Distillers has four geographical regions: Europe, North America, Asia/Pacific and International (rest of the world), with an Operations Group responsible for UK production. In overseas markets the company owns sales and marketing companies, has joint ventures, notably with LVMH (Moët Hennessy Louis Vuitton), and has direct control over 80% of its brands distribution. It also produces spirits locally, either directly or through third party arrangements. PERFORMANCE The Top Five Wines & Spirits Companies in the World (Operating Profit - 1991)  |
Part II Marketing Unit 6 Retailing and merchandising
| UNITED DISTILLERS' PRINCIPAL BRANDS - 1991 World Spirits 1991 Ranking Brand Volume in millions of nine liter cases 4………………….Johnnie Walker Red Label……………………………………………………...…….....6.6 5..................................................Gordon's Gin........................................................................................6.4 15..................................................Bell's.....................................................................................................4.0 28................................................Dewar's White Label............................................................................3.0 29.............................................Johnnie Walker Black Label..................................................................2.9 39..............................................Gordon's Vodka....................................................................................2.4 54...............................................Pampero Rum.......................................................................................2.0 58...............................................White Horse Fine Old...........................................................................1.9 81................................................Tanqueray Gin......................................................................................1.4 86................................................Skol (vodka)..........................................................................................1.3 91.............................................Asbach Uralt (German brandy)............................................................1.3 Source: Impact International January 1992 (Volumes measured are shipments not customer sales.) KEY BRANDS United Distillers' comprehensive portfolio includes internationally famous brand names such as: Johnnie Walker Red Label the world's best selling Scotch and the leading duty free spirits brand worldwide. Johnnie Walker Black Label the world's best selling deluxe Scotch whisky, and the world's third largest duty free spirits brand. Bell's Extra Special the best selling Scotch whisky in the UK and South Africa. Dewar's White Label the best selling Scotch whisky in the USA, and the fifth largest Scotch brand in the world. White Horse Fine Old the best selling Scotch whisky in Japan, and the seventh largest Scotch brand in the world. I W Harper the best selling bourbon whiskey in Japan. Old Parr the best selling deluxe Scotch whisky in Japan. Gordon's Gin the world's leading gin, selling 50% more volume than its nearest gin competitor, and United Distillers' largest volume brand. Tanqueray Gin the most successful imported gin in the USA. Pampero Rum the world's leading golden rum, and the number one spirit brand in Venezuela. Asbach Uralt the leading premium brandy in Germany. Bundaberg Rum the biggest spirits brand in Australia. |
Company focus
| United Distillers is the largest company in the Scotch whisky industry and during 1991 continued to strengthen this position with the rejuvenation and range development of key brands. Johnnie Walker, the world's best selling Scotch whisky, is United Distillers' flagship brand. The Company has now established a broad range of Johnnie Walker products, at carefully selected positioning and price points. Red Label is the brand's premium standard Scotch. Black Label its 12-year-old de luxe, while Swing is positioned at the top end of the de luxe sector. Following a successful launch into duty free. Premier was introduced into Asia Pacific domestic markets during 1991 at XO cognac price level, and the top of the range is Johnnie Walker Blue Label, selling at over $100 in prestige outlets only. To reinforce the brand's unique role in golf sponsorship, the inaugural Johnnie Walker World Championship was held in Jamaica. This annual event, which is the play-off between the winners of the season's leading tournaments, generated considerable worldwide interest and is to be held again in Jamaica in December 1992. Old Parr has been the leading de luxe Scotch whisky in Japan for many years, with considerable sales in Latin America too. The brand takes its name from the legendary figure of Thomas Parr who, it was claimed, lived to the age of 152, through the reigns of 10 monarchs from 1483-1635. Old Parr's premium range extension. Old Parr Superior, continues to build sales steadily in both Japan and duty free. Old Parr Tribute, presented in a ceramic bottle, took the brand into the premium duty free gift market. Old Parr Elizabethan, only available in duty free, is the flagship of the range, selling at over $700, enhancing the prestigious | image of the Old Parr brand and of Scotch whisky overall. White Horse is another of the world's top selling Scotch whiskies. It is the premium brand leader in Japan as well as having a strong customer franchise in the UK, South America and continental Europe. During the year, the brand has undergone a major repackaging following extensive research in its key markets. This has led to the introduction of a more distinctive bottle which reflects the quality the consumer expects of this brand. In Japan, a new bottle with an 8-year-old blend has been introduced for that market alone. White Horse also has an extended range in the Japanese market, where White Horse Extra Fine, positioned between the standard and de luxe categories, has shown good growth. Additionally, Glen Elgin, a single malt, was launched under the White Horse brand name. Its launch reflects the increasing interest in malts in Japan. United Distillers continued to develop its other single malt brands. The Classic Malts -six premium-priced malts representing the different whisky-producing regions of Scotland -have extended their distribution from duty free to major European markets and the USA Cardhu's packaging was upgraded to enhance its unique positioning. Locally-bottled Scotch also fulfils an important role in extending United Distiller's coverage of the overall Scotch whisky market. The launch of Usher's Green Stripe was an outstanding success in Venezuela in providing an opportunity to trade up from national whiskies. Scoresby, recently acquired as part of the Glen-more portfolio and locally bottled in the USA, is now the fourth largest Scotch whisky in that market. |
1How has United Distillers segmented its markets both geographically and in terms of quality and image?
2What role does Old Parr Elizabethan play in the Old Parr product range?
3How much importance does United Distillers attach to packaging?
4Why do you think Glen Elgin was launched under the White Horse brand name?
5In which way is United Distillers much more than a producer of spirits?
6What is meant by a 'flagship brand'?
7From what you have read in the above extracts and from your background knowledge, describe the ways in which United Distillers have achieved a coherent and successful Marketing Mix.
| PART III |
Finance
UNIT 7
Raising capital
Section I
The sources of funds
| 7.I.A Warm-up | National projects In small groups discuss the following questions: 1 What large projects are currently being carried out or have recently been carried out in your country? 2 How are these projects being financed? 3 Do you know of any small projects and if so, how are these being financed? |
| 7.I.B Reading | Raising capital Read the following passage and answer the questions which follow it. In order to meet the day-to-day expenses of running a business and to acquire new assets, companies need to raise funds. Financing day-to-day operations such as buying inventory or paying wages are very different from financing a project that may only bear fruit in five years time. Consequently, financial matters are often discussed in terms of different time periods. Short-term finance A company's revenues don't always come in at exactly the same rate as the bills which have to be paid. To avoid having a negative cash flow the company may need to take on some short-term debt which would be repaid within one year. The main sources of short-term financing are as follows: trade credit is obtained by the purchaser directly from the supplier and in most countries is the most widespread source of short-term financing for business. The terms of the trade credit vary according to the amount of credit required and the company’s credit rating. Some suppliers may offer their customers 30 days or 60 days of interest-free credit on a handshake. This is known as open-book credit. Hire purchase is another kind of trade credit. In This case the customer takes possession of the goods immediately in return for a deposit plus regular installments. Other suppliers prefer a written agreement, called a promissory note, whereby the customer (who initiates it) promises to repay a fixed sum of money plus interest on a specified date in return for immediate credit. Another type of trade credit is a trade draft which is similar to the promissory note except that it is drawn up by the supplier and not the customer. Trade drafts are particularly useful when dealing with foreign customers whose credit ratings are difficult to check. Short-term loans may be obtained from a commercial bank or a finance company which charges interest depending on the borrower's creditworthiness. A secured loan is a loan backed by collateral, which is an asset such as property, |
The sources of funds
| inventory or accounts receivable (amounts owed by customers). If the borrower fails to repay the loan, the lender may seize the asset. Businesses may also be able to sell accounts receivable to a financial institution. This is known as factoring and tends to be a relatively expensive way of raising short-term capital. An unsecured loan requires no collateral. However, the lender may require the borrower to maintain a minimum amount of money at the bank while the loan is outstanding. This is known as a compensating balance. Although the borrower pays interest on the full amount of the loan, a portion of it remains on deposit at the bank. Another important type of unsecured loan is an overdraft, or line of credit, whereby the business may borrow an agreed-on maximum amount of money without having to negotiate each time with the bank. Commercial paper is a financing option which is mainly for large corporations with top credit ratings. In order to finance short-term projects a corporation may sell commercial paper to another business which will pay less than its face value. At the end of the stipulated period the corporation will buy back the commercial paper at full face value, the difference between the discounted price and the face value being the equivalent of interest on a loan. Long-term finance In order to finance long-term projects such as major construction, acquisition of other companies, and R&D projects, companies can turn to both internal and external sources of capital. The chief internal source is retained earnings which is the money kept by the firm after meeting its expenses and distributing a portion of the profits to investors. Retained earnings are also known as ploughed-back profits or reserves. Another source of capital is to sell assets such as real estate. External sources of capital may be divided into two broad categories: debt capital (which must be repaid) and equity capital (which represents investors' shares of ownership in the company). There are three kinds of debt capital: Long-term loans are repaid over a period of five years or more and may be either secured or unsecured. Collateral on a secured loan is usually in the form of a mortgage. Leasing is a source of long-term capital whereby a company borrows an item (a machine, a building, a vehicle) in exchange for regular payments. The leasing arrangement often includes an option to buy. Bonds are transferable certificates that pay interest regularly for the term of the loan and may be either secured or unsecured. Unsecured bonds are called debentures. As far as equity capital is concerned, the source of equity for a small company is often a single individual such as a member of the family or a venture capitalist. In partnerships, a new partner may be brought in thus providing a fresh source of equity. In larger businesses equity may be raised though the Stock Exchange where shares are issued to investors on the open market. In each case the investor owns a share in the business and expects a share in the profits. |
1 What is the difference between:
a debt capital and equity capital?
b leasing and hire purchase?
c secured bonds and debentures?
d interest and dividends?
e open-book credit and promissory notes?
Part III Finance Unit 7 Raising capital
| 7.I.C Presenting | Using overheads In making oral presentations it is essential to convey important information visually, using slides or an overhead projector wherever possible. The keys to successful visuals are simplicity and clarity. It also helps if your visuals are eye-catching. Imagine you have been asked to present an outline of the text on page 90 to a group of trainee managers. Draw up a chart which could be used on an overhead projector to convey the main points of the text visually. |
| 7.I.D Vocabulary | Defining key terms I Match the following key terms with their definitions: |
| Terms 1asset 2inventory 3cash flow 4credit rating 5trade credit 6open book credit 7promissory note 8trade draft 9secured loan 10hire purchase 11collateral 12factoring 13unsecured loan 14compensating balance 15line of credit/ overdraft 16accounts receivable 17commercial paper 18retained earnings 19mortgage 20lease 21bond 22debentures 23junk bonds 24dividends 25equity 26Stock Exchange | Definitions a a loan agreement whereby the lender has a legal claim on the borrower's property if repayments are not made as specified b payments to shareholders from a company's earnings c the degree of risk a borrower represents d valuable things owned by a company e payment terms whereby the purchaser takes possession of the goods and pays for them later f payment terms whereby the purchaser takes possession of the goods upon payment of a deposit and regular installments g a company's promise to pay back a stated amount of money on a given date less than one year from the time of issue h an order to pay a stated amount of money within a certain number of days, drawn up by the creditor i an unconditional written promise to repay a certain sum of money on a specified date, drawn up by the customer j money owed by customers k a legal agreement whereby the user of an asset pays the owner in exchange for using the asset l bonds that are not backed by specific assets m a market where stocks and bonds are traded n bonds that pay a high interest rate because of the low credit rating of the borrower o a loan granted on the basis of the borrower's credit rating rather than on the basis of collateral p a tangible asset that a lender can claim if a borrower defaults on a loan q the net increase in assets which can be ploughed back into the business r goods held in stock for the production process or for sale to final customers s a loan backed up with something of value that the lender can claim in case of default t the portion of an unsecured loan that is kept on deposit at the bank u the amount of money entering and leaving a business v an unsecured short-term loan made available up to a certain amount w funds obtained by selling shares of ownership in the company x a certificate of indebtedness sold to raise funds y credit obtained by the purchaser directly from the supplier z the buying of accounts receivable at a discount |
| 2 Divide into two teams. Each member of each team reads aloud a definition and asks one member of the opposing team to give the corresponding term. The person answering must not consult his or her notes and has five seconds to answer in order to earn a point. |
The sources of funds
| 7.I.E Discussion | Sources of funds: pros and cons From what you have read in exercise 7.I.B and from your background knowledge list the possible advantages and disadvantages of raising funds through the following sources: | |||||||||||||
| 1 open-book credit 2 promissory notes 3 trade drafts 4 secured loans 5 unsecured loans | 6 commercial paper 7 long-term loans 8 leasing 9 bonds 10 equity | |||||||||||||
| 7.I.E Role play | Giving and getting information Work in pairs sitting back-to-back. One of you plays Role A and the other Role B. Role A You have just received your monthly bank statement as shown in Figure 18. Unfortunately, it was poorly printed and some important information is missing. Phone your bank and ask them to give you the missing information. | |||||||||||||
Figure 18: Monthly bank statement for Role A
| ||||||||||||||
| You paid in a cheque last week for £450 but this does not appear on the statement. Ask the bank why not. You also want an explanation for the high bank charges and say that generally you are unsatisfied with the bank's service. |
Part III Finance Unit 7 Raising capital
Role B
You are a teller at Eastern Bank. You receive a phone call from a customer. Obtain his references, then call up his account on your screen (Figure 19) and give him the information he requires.
Figure 19:
Monthly bank statement for Role B
| E A S T E R N B A N K Westbourne Mr JAMES PEACH 13 Orchard Ave WESTCLIFFE, DORSET | Tel. 0202 778925 STATEMENT OF ACCOUNT A/C No 906243077 31. JAN 93 Post No 14 | |||
| DETAILS | PAYMENT | RECEIPTS | DATE | BALANCE |
| Balance forward Cash withdrawal Nego. of us chq Card: happy eater Card: wine and dine Salary credit STO: elect STO: mortgage DDR: nothern assurance Cheque 373214 Cheque 373215 Cheque 373218 Cheque 373221 Dr Bank charges DR | 1 300.00 27.5 31.25 102.00 876 .00 300.00 76 .25 1 032.50 415.00 372.50 18.00 | 47.25 1 745.25 | 31.12 2.1 2.1 5.1 6.1 15.1 18.1 18.1 18.1 2.1 5.1 20.1 22.1 -490.50 31.1 31.1 | 1 460.00 160.00 207.25 179.75 148.5 1 893.75 1 791.75 1 75.75 1 405.75 1 329.50 297.00 -118.00 -490.50 -508.50 |
| Abbreviations: | DIV Dividend; STO Standing Order; DDR Direct Debit; DR Overdrawn Balance; CDT Cash Dispenser Transaction; BGC Bank Giro Credit |
After investigation, you find a cheque for £450 was credited to the customer's account this morning. The delay was caused by the regional computer being out of order for 48 hours. The bank charges are for the unauthorized overdraft incurred during the month (£10.00) and the US dollar cheque (£8.00). You offer to make the customer an appointment to see the manager to discuss the service offered by the bank.
The sources of funds
Section 2
The uses of funds
| 7.2.A Discussion | Meeting the company's needs In small groups, discuss what you think would be the likely source or sources of funds in the following cases. Make a copy of the grid and fill it in accordingly. Be ready to justify your decisions. |
| Company | Needs | Source(s) of funds |
| 1 Computer manufacturer (annual earnings 1992: $3 billion) | to buy new plant and equipment | |
| 2 Medium-sized car dealer | to buy 12 vehicles for immediate display in showroom (prime lending rate: 13%) | |
| 3 Small producer of kitchen furniture | to have enough ready cash to cover immediate expenses | |
| 4 Small manufacturer | to purchase 10 industrial drills | |
| 5 Large producer of skiing equipment with top credit-rating | to meet immediate expenses during off-season (prime lending rate: 18%) | |
| 6 Overseas electronics wholesaler with unknown credit rating | to buy a large consignment of VCRs | |
| 7 Clothes store with poor credit rating | to purchase stock for the summer season | |
| 8 Major oil company | to build a 1,000 km pipeline from a newly discovered oil-field to the sea | |
| 9 Loading chemical manufacturer | (forecast: two or three years before business takes off again) |
Part III Finance Unit 7 Raising capital
| 7.2.B Summarising I | Getting the message across In writing reports and memos, and in presenting information orally, we are often called upon to state or restate the main facts and arguments as briefly as possible. Match each of the following long sentences with a short sentence. Long sentences 1 It is probably quite true to say that to a certain extent the borrower's choice of options in financing a project depends in many cases on the probable cost of the project. 2 Raising funds through the sale of certificates of indebtedness is less onerous, financially speaking, than other ways of raising capital. 3 Individuals and institutions owning bonds in a particular company are not allowed to interfere in the way it runs its business. 4 There are many arguments for and against the decision by a company to obtain fresh capital through the sale of shares on the Stock Exchange. 5 Raising capital through borrowing from banks, individuals, companies or any other institution can turn out to be a costly operation at times when rates of interest tend to be high. Short sentences a The Stock Exchange cannot meet the needs of all companies. b When interest rates are high, any form of debt is expensive. c It is relatively easy to issue bonds. d Bondholders do not have any voice in management. e Bonds represent the cheapest type of financing. f Choosing a vehicle for financing a project often depends on the size of the operation. g Issuing stock has its pros and cons. h The choice of project a company undertakes depends on the capital it is able to raise. i Buying shares can be expensive. Why are the short sentences better models to follow than the long sentences? |
| 7.2.C Summarising 2 | Simplifying and reducing A good summary should: · be objective - your comments or opinions should not be included · be in your own words · include only essential material · be concise - it should be no longer than one-third of the original work and may be as short as one sentence. Rewrite each of the following sentences, preserving the essential meaning, in a maximum of one-third of the original number of words. 1 It is undeniably the case that the growing number of consumers who purchase goods and services using any one of a number of credit cards has led to a situation where banks are reaping huge profits. (36 words) 2 It is most regrettable that there is clear evidence which indicates that certain consumers in our society are purchasing more than they can afford due to credit cards. (28 words) |
The sources of funds
| 3 It would appear reasonable to assert that more stringent measures need to be set up and put into practice by the banks themselves if we are not to witness the tragedy of growing numbers of families being forced into a situation of living in a state of permanent indebtedness. (49 words) 4 It really was totally and utterly irresponsible of loan managers from banks throughout the United States as well as Western Europe and Japan to have acted in such a way as to extend large-scale credit facilities to undeveloped and developing countries whose economies simply have not been able to support the enormous burden of interest repayments. (57 words) | |||
| 7.2.D Vocabulary | Verbs and nouns in context I Match the phrases on the left with those on the right to make complete sentences. | ||
| 1 We should be able to meet... 2 We'll need to raise... 3 If we don't use our reserves, we'll simply have to take on... 4 If you buy on hire purchase, you have to put down ... 5 It may be more expensive to pay by... 6 We'll ask our supplier to draw up ... 7 It will work out very expensive to factor... 8 Let's lease... 9 I hope they don't default... 10 Instead of giving a dividend this year, why don't we plough back... | a on the loan. b our accounts receivable. c all the profits. d our expenses this year. e a deposit. f funds for the expansion programme. g a trade draft. h instalments. i all the vehicles. j more debt. | ||
| 2 Find the nouns which correspond to the following verbs. Example | |||
| To indicate → indication | |||
| 1 to repay 2 to extend 3 to purchase 4 to reap 5 to acquire 6 to discuss 7 to avoid 8 to vary 9 to agree 10 to promise 11 to back 12 to fail | 13 to seize 14 to require 15 to negotiate 16 to sell 17 to distribute 18 to divide 19 to lease 20 to own 21 to expect 22 to specify 23 to earn 24 to rate | ||
Part III Finance Unit 7 Raising capital
| 3 Fill in the blanks in the following paragraph, using nouns from the previous exercise, so that it respects the meaning of the paragraph which follows. 'The 1 of the government to provide sufficient 2 for the project has led to a 3 among the members of the Board of Directors. Some want to reopen 4* with the government in the hope of obtaining more cash, while others feel we should ask the banks for a(n) 5 of the 6 of the loan. My main worry is that if neither plan works, we'll have to consider the 7 of our American operations which will lead to a major loss of 8 . Hopefully, though, we'll come to some kind of a(n) 9 before long. *two possibilities 'The government has not funded the project sufficiently and the Board is now split over whether to try again or ask the banks to restructure the debt. I'm concerned that if we don't come up with a solution, we may have to discontinue our business in the States, with the resulting drop in income. Let's hope we can sort something out soon!' | |
| 7.2.E Discussion | Sayings Each language has 'sayings' about money. Discuss the ideas behind the English sayings shown below. Translate similar sayings about money from other languages you know and compare the advice they offer.  |
UNIT 8
Investing
Section I
Investment options
| 8.I.A Reading | Investment options Read the following article from 'Investment Quarterly' then work on exercises 8.I.B and 8.I.C. Purchasing plant, machinery, management contracts, patents, and other real assets is necessary if companies are to grow and remain competitive. Investment decisions such as these are based on the need to find assets which are worth more than they cost and which are worth more than other investments. Calculating how much a real asset is worth is often a difficult task. Unlike securities investments which are traded in highly active markets, the market for most corporate investments is relatively thin; for example, it is not often that one comes across advertisements in The Financial Times to sell an oil refinery, buy a second-hand blast furnace, or exchange a patent. Financial managers are therefore called upon to analyse mountains of raw data supplied by armies of specialists in product design, production, marketing and so on, in order to make forecasts upon which their investment decisions will be based. But even where a flourishing market does exist, the choice of investment is not easy as the number of investment products on the market has increased dramatically over the past few years. Before investing your money you need to analyse your resources and objectives. Determining what you are looking for in terms of income, growth, safety, liquidity and tax benefits will help you develop an efficient investment strategy. If you are looking for a steady income from your investment the best strategy would be to choose low-risk vehicles - bank deposits, Government securities, high-grade corporate bonds and stock - which pay interest or dividends on a regular basis. If, however, you are more interested in growth you may be better off choosing an investment which maximises the potential for capital gains. Stocks, real estate, precious metals or works of art may be the answer, although this depends very much on the prevailing economic conditions. In general, the higher the potential for income or growth, the greater the risk of the investment. For example, the rate of return on junk bonds tends to be high, but so are the risks. If liquidity is important to you - in other words, if you may need to convert the investment into cash soon - you should invest in something the price of which does not fluctuate too much. If not, you may have to sell when the market is down. Stocks Stocks can earn money in two ways: by paying dividends and through capital gains. Blue chip stocks are issued by large, well-capitalised companies that have consis-tently paid good dividends. On the other hand, stocks which offer high capital gains are more difficult to identify. The likelihood of a particular stock increasing in market value depends on a variety of factors, not least of which is the condition of the market as a whole. Stock prices tend to rise and fall as the economy expands and contracts. A 'bear' market is characterised by falling share values and generally. |
Part III Finance Unit 8 Investing
| occurs during recessions. A 'bull' market, on the other hand, is associated with economic booms and is characterised by rising share prices. Corporate bonds Corporate bonds offer income in the form of interest plus the possibility of making capital gains. Although corporate bonds are relatively safe investments, their face value can fluctuate, and may go down as well as up, thereby leading to a capital loss. However, this may not matter much to investors whose objective is to receive regular interest; the capital loss only occurs when the bond is sold and such investors may have no intention of selling. Government securities Federal and state governments also issue bonds which, generally speaking, carry a lower rate of interest than corporate bonds but provide advantages in terms of safety and tax advantages. In the US, the main government securities are as follows: · Treasury bills (T-bills) are sold by the US government at a discount and redeemed at full face value at maturity, which ranges from 91 to 364 days from the date of issue. A minimum investment of $10,000 is required. · Treasury notes and bonds have longer maturity dates than T-bills and pay a fixed rate of tax-free interest twice a year, which is generally about one percentage point less than the interest on corporate bonds. A minimum investment of $1,000 is required. · Savings bonds are available in denominations ranging from $50 to $10,000. Although savings bonds can be sold at any time, the interest rate is higher if the holder keeps them for at least five years. · Municipal bonds are tax-free investments issued by a town or city to help finance new public services. Many investors have become dissatisfied with municipal bonds, especially since a number of issuers defaulted on the repayments. Mutual funds A mutual fund is an investment company where small investors pool their money. This money is then used to acquire stocks or bonds or other financial investments. Small investors who have neither the time nor the know-how to invest rationally can benefit from the broad selection of investments which the fund is able to acquire. Mutual funds generally offer liquidity. They also offer variety and, in many cases, are tailored to specific objectives, for example, tax-exempt funds, high-growth funds, utility funds, money market funds and so on. Commodities Commodities are raw materials and farm produce used to produce finished goods. Producers and manufacturers need to hedge their risks and therefore follow very closely the fluctuations in the prices of the raw materials they produce or use. Contracts calling for the delivery at a given time of a set amount of these commodities are traded at Commodity Exchanges. The trade represents a shift in risk from the hedger to the speculator. Nowadays, many commodity traders are neither producers nor consumers but merely investors who will never take possession of the commodity. The commodity market is divided into 'spot trading' (for commodities that will be delivered immediately) and 'futures trading' (for commodities that will be delivered at a future date). Financial futures Investors in financial futures trade contracts for the delivery or acceptance of some financial instrument on a set date at a set price. Examples of financial instruments are Government securities, foreign currencies, loans, stock index futures and stock index options. Most financial futures are traded on 'the margin', a particular kind of leverage which means that the investor borrows from the broker, paying interest on the borrowed money and leaving the security with the broker as collateral. |
Investment options
| 8.I.B Vocabulary | Defining key terms Match the following terms with their definitions. Terms 1 institutional investors 2 capital gains 3 speculators 4 rate of return 5 blue chip stocks 6 bull markets 7 bear markets 8 S mutual fund 9 commodities 10 spot trading 11 futures trading 12 financial futures 13 hedgers 14 leverage 15 to default Definitions a Promises to buy or sell financial instruments at a future date. b Companies that invest money entrusted to them by others. c Trading in commodities that will be delivered at a future date. d Raw materials used in producing other goods. e Difference between the price at which a financial asset is sold and its original cost (assuming the price has gone up). f Percentage increase in the value of an investment. g Falling stock markets. h Investors who seek large capital gains through relatively risky investment. i Company that sells shares to the public and uses the pooled money to buy stocks, bonds, or other financial investments. j Equity instruments issued by large, well-established companies and paying relatively stable dividends. k Rising stock markets. l Trading in commodities that will be delivered immediately. m People who protect themselves from major fluctuations in prices which may lead to loss. n The use of borrowed funds to finance a portion of an investment. o Failure to pay back a debt. |
| 8.I.C Discussion | Where to invest 1 From your background knowledge, find examples of: · institutional investors · commodities · blue-chip stocks · real estate. 2 We are sorry to inform you that your Uncle Tom has passed away at the age of 103. You will, however, be pleased to know that he has left you $20,000 in his will. You have no immediate needs so you have decided to invest the money. Explain to the class how you will invest the money. Justify your choice(s). |
Part III Finance Unit 8 Investing
3 You are an investment consultant. Advise the following people on the best investment option(s).
| Name | Age | Marital status | Profession | Size of investment | Other information |
| John McGregor | Single | Student | $12,000 | Hopes to get married in two years' time | |
| Anne Davies | Widow, no children | Secretary | $25,000 | Receives a small widow's pension | |
| James Black | Married, two children | Engineer | $100,000 | Owns some real estate and wants to diversify | |
| Marilyn Dangerfield | Married, children grown up | None | $150,000 | Hopes to retire to Miami when she can afford to | |
| Martha Leclerc | Married, four children | Owner and managing director of a company producing saucepans | $500,000 | Worried about the effects that a rise in copper prices will have on her business |
| 8.I.D Role play | Consulting Work in pairs. One student will play the role of investment consultant, while the other is the client. Prepare and present a short role play in which the consultant obtains information about the client's background, resources and needs and then advises him or her on the most appropriate investment. The following expressions may be useful: · What can I do for you? · What size investment were you thinking of? · How much risk are you prepared to take on? · I'm looking for a high-yield investment. · I want access to my capital at short notice. · I want to put some money by for my daughter's university education. |
Investment options
| 8.I.E Project | Analysing the stock market In small groups, carry out the following analysis activities. 1 Choose an industry such as banking, electronics, food, manufacturing and so on. Select five companies within that industry the stock prices of which are listed in the The New York Times or The Financial Times. 2 Read the financial section of a good newspaper over one week and keep any articles regarding your chosen industry and companies. 3 Track the daily performance of your chosen companies over one week, using the guidelines below. |
1 The volume of trading may give you a clue to developing trends. For example, if the stock market is down on heavy volume, it may mean that investors are selling before prices fall even further - a strong 'bearish' sign.
2 Stocks in the same industry tend to have p/e ratios that are roughly the same. A high p/e ratio is not necessary good or bad, it is only significant in relation to other companies' p/e ratios. If the p/e ratio is significantly below the industry norm, it could either mean that the company is having problems or that it is an undiscovered gem.
4 Compare the performance of your companies with others in the industry. Compare also with an appropriate index (Dow Jones, FT, S and P 500, etc)
5 Present your findings to the class in a short talk (maximum five minutes) and conclude by making investment recommendations.
Part III Finance Unit 8 Investing
Section 2
The securities market place
| 8.2.A Listening | The Commodities Exchange Center, New York I Listen to the tape recording of a guide talking to a group of Korean business people at the Commodities Exchange Center (CEC) in downtown Manhattan. Answer the following questions. 1 List the four independent exchanges that trade at the CEC. 2 Where does the trading actually take place at the CEC? 3 One of the CEC's major functions is to fix prices. What is the other? 4 Who are the hedgers? 5 Does a speculator need a large amount of capital in order to invest in futures contracts? 6 Does the speculator generally want to take possession of commodities? 7 How is the price of each contract determined? 8 Which financial futures are mentioned? 9 What is meant by options trading? 10 How do the brokers communicate with each other on the trading floor? 11 How is the latest price information communicated? 2 Fill in the grid below to show the various steps in a commodity transaction. |
| Person | Action |
| Customer | |
| Transmits the order to the trading floor | |
| Writes the order on an order ticket | |
| Runner | |
| Notes the details of the trade | |
| Runner | Returns order ticket to phone clerk |
| Phone clerk | |
| Phone clerk | Reports execution of trade back to broker |
The securities market place
| 8.2.B Functions | Explaining and giving instructions Explain one of the following activities to your partner. · how to buy stocks · how to withdraw cash from an electronic cash point · how to programme a VCR · how to copy information from one computer disk to another · how to make an international call from a public phone · how to enrol at a university · how to prepare for an overseas assignment. You may find the following expressions useful: |
| · First of all... · Be careful not to ... · Don't forget to ... · Make sure you ... · The ______ works as follows ... · If you don't _______ you'll... | · You('ll) have to ... · You ought to ... · You should ... · You must... |
| 8.2.C Reading | The London Stock Exchange I Read the following text about the London Stock Exchange and take notes on the following points: · its origins · its functions · the Big Bang. The London Stock Exchange is a marketplace - indeed, it is one of the most important markets for stocks and bonds in the world. Like many other famous British institutions, the Stock Exchange was not created overnight; no edict or constitution brought it into being. It developed stage by stage, adapting as it did so to changing economic conditions and needs. In the seventeenth century, trading firms and governments needed to raise money for their expanding activities - more money than they could obtain from their usual sources. They did this by issuing stocks and shares and inviting the public to buy them. This provided the necessary capital. If the company made a profit, the shareholders received a share of it. If the shareholders wanted to get back the money they had invested, it was not possible to go to the company and ask for it. Instead they had to find somebody interested in buying the shares from them. A regular market therefore began to form. At first, the brokers used to meet at the Royal Exchange. Then, in the eighteenth century they began to meet in London coffee houses where business was carried out over a cup of coffee or a glass of madeira wine. In 1773, the market moved to a building of its own and the volume of trade increased steadily so that the London Stock Exchange became the largest in the world and remained so until the First World War. During the Industrial Revolution, other share markets had developed in other parts of the country, but by 1973 they had amalgamated to form the Stock Exchange of Great Britain and Ireland, and celebrated the event by moving into |
Part III Finance Unit 8 Investing
| a brand new tower block in the heart of the City of London. The next milestone in the history of the Exchange was on 27 October 1986 in an event which came to be known as the Big Bang. Basically, the Big Bang was a deregulation of the Stock Exchange. Until then, the Stock Exchange had been operating a system of restrictive practices under which, for example, it was virtually impossible for foreigners to become members of the Stock Exchange. It was a little like a very exclusive club whereby members could choose who would and who wouldn't be allowed membership rights. Obviously this absence of real competition led, amongst other things, to the members charging their customers higher commissions than would otherwise have been the case. So, the first major change which the Big Bang brought about was the opening up of the Stock Exchange to outsiders. This was done by ending the distinction between brokers (who execute transactions on behalf of their customers) and jobbers (who buy and sell on their own account to make a market in one or more stocks). Secondly, the Stock Exchange ended the practice of fixed minimum commissions on transactions. This means that investors are now free to negotiate commissions with traders. The consequences of these changes are far-reaching. Firstly, the difference between trading on the floor and off the floor has been eliminated. In fact much of the trading has now been moved off the trading floor. This has been helped, of course, by the greatly increased use of electronic trading. In the long-term this trend may lead to the London Stock Exchange becoming less important as investors will be able to make their own markets by dealing with each other directly either by phone or by computer. Secondly, the admission of outsiders has led to a flood of foreign institutions moving into the City. Japanese and American banks, in particular, have been attracted because in both the US and Japan there are laws which ban commercial banks from dealing in stocks. Faced with overwhelming competition from such institutional investment giants as America's Salomon or Japan's Nomura, some much smaller British firms are in danger of being crushed on their own territory. Others are managing to survive by concentrating their resources on the specialities they can excel in. In spite of these changes, the City has benefited and will continue to benefit from the Big Bang. The high concentration of foreign institutions could transform the City into the hub of a new worldwide computer-linked network of dealers trading US, Western European and Japanese and American stocks independently of any exchange floor. London is, of course, the natural centre for such a network because of its geographical location within a time zone that suits both Japanese and American traders. Also, British tax officers are not too curious about foreigners' financial affairs. There is also a tremendous pool of talent in London, with a lot of people who know how to trade in world markets. And, last but not least, London is the natural choice because of the fact that English is commonly used throughout the world. 2 Design a one-page overhead transparency which could be used to accompany an oral presentation of this information. |
The securities market place
| 8.2.D Presenting | Presenting an organization In small groups, prepare and present a short talk (five minutes maximum) on an organisation of your choice (a company, school, university, trade union, etc). In the very limited time you have available, try and cover the following points: · its origins · its activities · a recent important event. | |||||
| 8.2.E Listening | Yesterday's trading at the London Stock Exchange Listen to the account of yesterday's trading and say what happened or is happening to the following: · Wall Street · US employment data · UK equities yesterday · UK equities in the short-term · fund managers · sterling · UK base rates · Footsie · yesterday's trading. | |||||
| 8.2.F Grammar | Linking sentences Fill in each of the gaps below by using one of the following conjunctions:
1 We put our money in property,the property market crashed we lost practically everything. 2 we came into an inheritance, we decided to buy some shares to have a nest egg for our old age. 3 our house was paid for I wanted to speculate my husband had warned me against it. |
Part III Finance Unit 8 Investing