Вы находитесь на странице: 1из 152

Кафедра английского языка № 4

Н.И.Хватова
Серия ESP

Английский язык
для изучающих финансы

ESP In-Depth:
English for Financial Studies

Уровень С 1

Издательство
«МГИМО-Университет»
2016
Предисловие

Учебное пособие ”ESP in-Depth. English for Financial Studies С1” предназначено для
студентов магистратуры 2-го года обучения факультета МБДА (11-ый семестр) МГИМО
(Университет) МИД РФ и является составной частью УМК “English for Management
Masters. Competence Approach”, созданного под руководством к.ф.н. профессора
Зинкевич Н. А. Данное пособие входит в комплекс учебных материалов, используемых на
занятиях по аспекту «Экономический перевод» (ESP in-Depth . English for Management
Studies С1” часть 1, авторы Виноградова Н. Н. и Иванова Е. Э. и “ESP in-Depth .English for
Management Studies” С1 часть 2, автор Виноградова Н. Н. предназначены для студентов
магистратуры 1-го года обучения).
Пособие соответствует программе подготовки магистра по дисциплине «Иностранный
язык (английский)», в частности, следующим её разделам:
Модуль «Язык профессии и специальный перевод» - 3
Цели и задачи:
1.Развитие и совершенствование переводческих, речевых и языковых компетенций.
2.Обогащение языка профессии за счет новой тематики, устойчивых сочетаний и
идиоматики в «деловом английском».
3.Умение учитывать реалии и кросс-культурные различия при переводе с английского
языка на русский и с русского на английский.
4.Реферирование английских текстов делового содержания с использованием “mind
maps”.
5.Составление обзоров о деятельности компаний на английском языке.
6.Умение выполнять письменные переводы и перевод с листа текстов экономической
тематики и материалов по направлению подготовки с английского языка на русский и с
русского на английский.
7.Совершенствование навыков аудирования на новом предметно-лексическом материале.
8.Развитие переводческой догадки.
9.Развитие качеств и умений студентов, необходимых для успешной работы
переводчиком в рамках своей компетенции.
10.Способность использовать знания профилирующих дисциплин при переводе
(использование межпредметных связей).
Предметно-лексические темы:
1. Финансовый рынок: рынок акций, облигаций, валютный рынок, рынок производных
финансовых инструментов. Первичный и вторичный рынки; рынок краткосрочного
капитала, рынок долгосрочного ссудного капитала.
2. Фондовый рынок: факторы, определяющие конъюнктуру фондового рынка; рынок
«быков» и рынок «медведей»; фиксация прибыли; премия за риск; прирост капитала.
3. Стратегии фондового рынка: «скальпинг», технические сделки, скоростная торговля,
торговля на колебаниях; понятие дивидендной доходности, «собаки» Доу; гипотеза
эффективного рынка.
4. Классы и виды акций: акции класса А и акции класса В; акции в зависимости от права
голоса, выплаты дивидендов и права на активы; новый вид акций – отслеживающие
акции.
5. Корпоративные финансы: фундаментальный анализ, количественные и качественные
аналитические показатели, концепция внутренней стоимости. Документы финансовой
отчётности –отчёт о прибылях и убытках компании, баланс. Структура капитала
компании; агентские издержки; коэффициенты рентабельности, ликвидности
эффективности, коэффициент финансирования.
6. Проблемы бухгалтерского учёта: кассовый метод и учёт методом начисления; учёт по
первоначальной стоимости и по справедливой рыночной стоимости; Совет по

2
международным стандартам бухгалтерского учёта, международные стандарты
финансовой отчётности.
7. Публичные и частные компании: типы компаний в зависимости от структуры и форм
собственности; частный акционерный капитал, фонды прямого инвестирования.
8. Ролевая игра на основе фильма «Чужие деньги».
Учебные материалы:
1. Хватова Н.И. “ESP In Depth. Financial Studies” - “Английский для изучающих финансы.”
(Электронная версия).
2.Статьи экономического содержания из качественной англоязычной периодики и
российской прессы (“The Economist”, “Newsweek” и др.)
3. Тематические материалы интернет- сайтов.
4. Видеозаписи по предметно-лексической тематике.
5.Case study из книги: Drew Rogers “Business Communications. International Case Studies in
English”, Cambridge University Press, 2000.

В соответствии с Законом Российской Федерации от 9 июля 1993 года № 5351 – 1 автор


данного пособия использовал в своей работе с обязательным указанием имени автора,
произведение которого используется, и источника заимствования правомерно
обнародованные произведения и отрывки из них в качестве иллюстраций (в широком
смысле) в объёме, оправданном поставленной целью или методикой.

3
Методическая записка

В основу учебного пособия положен компетентностный подход, который определяет


структуру всех уроков (модулей). Каждый урок предваряется перечислением целого ряда
общих, языковых и речевых компетенций, формирование и закрепление которых поможет
выпускникам в их будущей профессиональной деятельности. Одновременно авторы УМК
руководствовались и междисциплинарным подходом, позволяющим увязать материал
пособия со знаниями, полученными студентами по профилирующим дисциплинам и в
некоторой степени расширить их.
В целом структура данного учебного пособия аналогична структуре учебника для
магистратуры 1го года обучения “ESP in-Depth. English for Management Studies”
(авторы Н. Н. Виноградова и Е. Э. Иванова). Каждый урок включает аналитические виды
работ:
• вопросы для выявления наличия у студентов фоновых знаний по определённой
тематике;
• вопросы, обсуждение и выполнение заданий к вводным текстам по
профессиональной тематике;
• письменный и устный перевод основного текста; реферирование русскоязычного
текста на английском языке;
• различные виды лексических упражнений к текстам;
• творческие задания – доклады, презентации в PowerPoint с привлечением
дополнительных материалов, включая и материалы из Интернета.
Завершается каждый урок рубрикой Reflection Spot, дающей студентам возможность
оценить пройденный материал и свои собственные достижения в овладении им и теми
компетенциями, которые были заявлены в начале каждого урока. В конце урока даётся
тематический словарь.
Пособие заканчивается разработкой для проведения деловой игры на основе фильма
“Чужие деньги”. Данный фильм содержит значительный пласт профессиональной
лексики и по тематике близок к специальным дисциплинам, преподаваемым в
магистратуре факультета МБДА. В ходе подготовки к игре студенты должны провести
значительную работу;
1. дать оценку состояния дел в компании, ставшей объектом враждебного
поглощения:
• провести всесторонний анализ деятельности компании, включая и анализ
документов её финансовой отчётности и расчёт ряда коэффициентов
(ликвидности, прибыльности, эффективности, финансовой зависимости);
• оценить степень компетентности руководства компании и
• охарактеризовать положение компании на фондовом рынке.
2. Дать характеристику основных работников компании и её потенциального
покупателя.
3. Предложить варианты решения проблемы.
Как вид учебной деятельности ролевая игра развивает и проверяет целый ряд языковых
компетенций и компетенций, необходимых в профессиональной сфере в ситуации
общения на английском языке – ведение дебатов, публичные выступления и т. д. С нашей
точки зрения, ролевая игра является логическим завершением курса обучения
английскому языку для профессиональных целей.
Пособие состоит из 7 уроков и разработки ролевой игры, рассчитанных на 34 часа
аудиторных занятий и внеаудиторной работы студентов.
Автор

4
Table of Contents

Unit 1: Financial Markets 6


Unit 2: Stock Markets 21
Unit 3: Stock Market Strategies 45
Unit 4: Tracking Stock – Friend or Foe 62
Unit 5: Corporate Finance. Fundamental Analysis 72
Unit 6: Accounting Issues 89
Unit 7: Private vs. Public 107
Role-play: Other People’s Money 118

5
UNIT 1. FINANCIAL MARKET

Competencies:

• Grasping the gist of an extended text

• Extracting detailed information

• Developing team-work skills

• Developing translation skills

• Synthesizing the contents of an extended text

• Developing subject-specific skills

Reading and Speaking

1. Answer the questions:

• What is meant by financial markets?

• How do different types of financial markets


differ from one another?

2. Contrast the different types of financial markets in the way shown; give their
definition:

Primary verses secondary market


debt versus ……
Money versus … …
Domestic versus … …
Futures versus …

3. Skim the text “The Viagra of Volatility” for main ideas; be ready to give brief
comments on the situation on the equity, bond, commodity and foreign exchange
markets.

4. Infer the meaning of the italicized words from the context; paraphrase them.

a). In Japan, continental Europe and Britain share prices bobbed about, but are down by
almost 10% since the start of the sell-off – nearly enough to qualify as a correction.
6
b). …its (dollar’s) status as a safe haven shone when it strengthened on fears about bird flu in
Indonesia; then it faded a few hours later , after weak numbers on American-made durable
goods, only to recover that afternoon on stronger sales of new homes.
c). Mr. van Steenis estimates that hedge funds with both long and short positions on shares
have made 4-5% so far in 2006, having lost more than half this year’s gains in the past
month. Those who bet on mining and energy companies have wilted most.

5. Scan text A for the details which will help you to do the tasks which follow.

Text A The Viagra of Volatility


Financial markets, not for the faint-hearted, are febrile again

“Sell in May and go away” sounds just like the sort of old saw that lazy
stockbrokers cling to when they need an excuse for a holiday and have nothing better to say to
their clients. But as an explanation of why investors the world over have been selling shares
since May11th, it makes more sense than many others doing the rounds. As investors struggle to
make sense of the blustery state of financial markets, conflicting stories abound. What is beyond
dispute, however, is that volatility has staged a comeback.
This week stock markets such as those in Turkey, Russia, Brazil and India fell
sharply, as investors skimmed off some of the huge profits they had made in emerging markets
in recent years. In Japan, continental Europe and Britain share prices bobbed about, but are down
by almost 10% since the start of the sell-off – nearly enough to qualify as a correction.
Commodities were especially jumpy. After a period of heavy selling, the price of copper rose by
11% on May 23rd, only to fall by 7% the next day.
The dollar was erratic, too. One day this week, its status as a safe haven shone,
when it strengthened on fears about bird flu in Indonesia; then it faded a few hours later, after
weak numbers on American-made durable goods, only to recover that afternoon on stronger
sales of new homes. So far this year, the greenback has lost almost 8% against the euro and 5%
against the yen. Yet foreign investors have still bought America’s Treasury bonds. American
shares have also been steadier than most in recent weeks, although shares in Vonage, an internet
telecoms company, fell by 13% on their stock market debut on May 24th, the worst first-day
performance by an American technology share for almost two years.
In London, two share offering were pulled that same day. But around the world
you can find signs of enduring optimism. Bank of China’s initial public offering in Hong Kong,
also in May 24th, raised $9,7 billion despite a 7% fall in the Hang Seng index in the preceding
two weeks. This was the biggest share sale anywhere since 2000. The bids from America and
7
Germany for Euronext, a European financial-exchange group, shows that some dealmakers are
working around the clock.
Nevertheless, some hedge funds are suffering. Huw van Steenis, an analyst at
Morgan Stanley in London, noticed long faces among the blooms at the Chelsea Flower Show’s
annual corporate bash on May 22nd. Prime brokers, who provide hedge funds with credit and
loans of shares, told him that day had been the worst in three years for funds investing in shares.
Mr. van Steenis estimates that hedge funds with both long and short positions on shares have
made 4-5% so far in 2006, having lost more than half this year’s gains in the past month. Those
who bet on mining and energy companies have wilted most.
So far, any talk of hedge funds shutting up shop has been vague. But below the
surface, hedge funds may be making things worse for other investors. That, Mr. van Steenis says,
is because in the past fortnight they have been cutting their net exposure to falling stocks
vigorously, by buying protection in the derivatives market. That results in further selling in cash
markets, as counterparties who write the protection sell shares to hedge their own risk.
Talk of a generalized sell-off, as well as a “flight to quality” – i.e. to highly liquid
assets such as Treasury bonds – has inevitably inspired some commentators to leaps of faith
about the months ahead. On the one hand, those who believe the world has been in the grip of the
bear market since 2000, punctuated by a three year rally since 2003, say that share prices will
probably continue to slide. They point to higher interest rates and a possible slump in global
housing markets and the dollar as dangers lurking just out of sight.
On the other hand, those who celebrate a long period of rising profits and
moderate share valuations argue that markets are suffering from nothing worse than a bout of
profit-taking while the world economy runs at full throttle. Ian Scott, a strategist at Lehman
Brothers, notes that global share prices are trading on a forward price/earnings multiple of 13.8,
compared with an average since 1988 of 17.5. Even if he supposes that profits grow only at their
long-run average pace, he says, values are still lower than usual. That is a bullish sign.
Whatever the outcome, the turmoil could have erupted for many complex reasons,
rather than a single simple one. Some have put it down to inflation scare in America, heightened
by an unexpectedly large rise in core consumer prices in April. But that explains neither why
American assets have done better than most nor why the rally in Treasury bonds, which should
flee inflation like leprosy.
Others ascribe the change in mood to a sudden dislike of risky assets, as if
investors had woken up on May 11th with a pressing need to dump Brazilian shares or copper
futures and buy something safer. This may sound far-fetched, but it makes some sense. Higher
volatility means it is easier to lose money on risky assets, and there has been a flight to quality.

8
Yet a consistent pattern is hard to find: emerging-markets bonds, for example, have done much
better than emerging-market shares.
In developing markets the share prices of medium-sized companies have fallen by
more than large ones, but the prices of risky companies’ bonds have barely fallen. Most of the
assets that have fared worst in the past two weeks had enjoyed a good run; their falls may simply
reflect profit-taking. According to Gray Newman, of Morgan Stanley, in Latin America
enormous profits were waiting to be raked off. Between January 2003 and May 1st this year,
Brazilian stocks had climbed by 490% in dollar terms, Mexico’s by 219% and Colombia’s by
716%. Such rises make the recent selling look much less troubling. “This is a bit of profit-
taking,” he says. “There’s only real reason for concern if you believe we’re going into a global
recession”.
That fear, that rising global interest rates might ultimately upset the delicate
harmony of the world’s Goldilocks economy, is probably the most credible – though, admittedly,
the broadest - explanation for the markets’ spasms, especially now that America’s overheated
housing market seems to be cooling. It comes just as Ben Bernanke has made a slightly
uncertain start to his tenure as chairman of the Federal Reserve System. Markets are not yet sure
how hard on inflation the new man will be. The European Central bank looks sure to keep
increasing interest rates, although there is room for doubt about how far and how fast. And the
Bank of Japan is expected to raise rates too, although no one is quite sure when.
So, a guessing game has begun after two years in which monetary policy was
boringly predictable, and speculators borrowed cheaply to make big “momentum” bets on rising
markets. By April, stock market volatility had sunk so low that hedge-fund managers were
complaining there were no trends left to follow.
Once again, financial markets have discovered the Viagra of volatility. Their
concentration on economic data pumped out of sealed rooms by American officials has
intensified. Policymakers, including Mr.Bernanke, are reassessing the importance of off-the-cuff
remarks. Traders are being forced to dig out their maths books to sharpen their grasp of
derivatives. No longer is anything predictable about capital markets. Those who sell in May and
go away may save themselves some money – but they will miss a lot of fun.
The Economist
Notes:
1. Correction: a reverse movement, usually negative, of at least 10% in a stock, bond,
commodity or index. Corrections are generally price declines, interrupting an uptrend in the
market or asset.

9
2. Hedge Fund: an aggressively managed portfolio of investments that uses advanced
investment strategies such as leverage, long, short and derivative positions in both domestic and
international markets with the goal of generating high returns (either in an absolute sense or over
a specified market benchmark)
Legally, hedge funds are most often set up as private investment partnerships that are open to a
limited number of investors and require a very large initial minimum investment. Investments in
hedge funds are illiquid as they often require investors keep their money in the fund for a
minimum period of at least one year. It is important to note that hedging is actually the practice
of attempting to reduce risk, but the goal of most hedge funds is to maximize return on
investment.
3. Cash Market: the market for a cash commodity or actual, as opposed to the market for its
future contract
4. Profit Taking: the action of selling stock to cash in on a sharp rise. This action pushes price
down temporarily. When traders are profit taking, the implication is that there is an upward
trend in the security.
5. Forward Price To Earnings – Forward P/E: A measure of the price-to earnings ratio (P/E)
using forecasted earnings for the P/E calculation. While the earnings used are just an
estimate and are not as reliable as current earnings data, there is still benefit in estimated P/E
analysis. Also referred to as “estimated price to earnings”.
6. Long (or Long Position): 1. The buying of a security such as a stock, commodity or
currency, with the expectation that the asset will rise in
value.
2. In the context of options, the buying of an options contract.
7. Short (or Short Position): 1. The sale of a borrowed security, commodity or currency
with the expectation that the asset will fall in value.
2. In the context of options, it is the sale (also known as
“writing”) of an options contract.
8. Goldilocks Economy: A term used to describe the U.S. economy of the mid- and late-
1990s as “not too hot, not too cold, but just right.” Some economists consider this
optimal, and in such situations the government usually decides not to undertake any
policy measures to improve macroeconomic performance.
9. Momentum Investing: an investment strategy that aims to capitalize on the continuance
of existing trends in the market. The momentum investor believes that large increases in
the price of a security will be followed by additional gains and vice versa for declining
values.

10
(Momentum is the rate of acceleration of a security’s price or volume)

6. Suggest the Russian for the following:

a) to do the rounds (explanations doing the rounds)


b) faint-hearted
c) to skim off (huge profits)
d) long faces
e) to run at full throttle
f) to ascribe a change of mood to something
g) the shares … fared worst
h) off-the-cuff remarks
i) to sharpen the grasp of derivatives

7. Find the English for the following:

a) пытаться найти причину чрезвычайно высокой активности на финансовых рынках


struggle to make sense of the blustery state of financial markets
b) существует огромное количество противоречивых объяснений erratic explanations
c) особая нестабильность наблюдается на рынках сырьевых товаров Commodities were
especially jumpy
d) курсы акций американских компаний были более стабильны - American shares have
also been steadier
e) отменить IPO - pull IPO
f) разговоры о прекращении хеджевыми фондами своего существования - talk of

hedge funds shutting up shop


g) на мировых рынках господствовала понижательная тенденция
h) сбрасывать акции – dumb shares
i) пребывание в должности председателя ФРС - tenure as chairman of the Federal
Reserve System
j) проявлять жёсткую позицию в отношении инфляции - hard on inflation

8. Explain the following in English:

a) The dollar was erratic, too.


b) … the status of the dollar as a safe haven shone …
c) … as counterparties who write the protection …

11
d) Talk of a generalized sell-off, as well as a “flight to quality” … has inevitably inspired
some commentators to leaps of faith about the months ahead.

9. Make questions to match the answers.

a). That, Mr. van Steenis says, is because in the past fortnight they have been cutting their net
exposure to falling stocks vigorously, by buying protection in the derivatives market.
b). They point to higher interest rates and a possible slump in global housing markets and the
dollar as dangers lurking just out of sight.

c). Between January 2003 and May 1st this year, Brazilian stocks have climbed by 490%

in dollar terms, Mexico’s by 219% and Colombia’s by 716%.


10. Read text B and answer the following questions (you may have to search the Internet to
help you with the answers):
a) What is to be understood by “systemic failures”?
b) Are they repeatable or predictable?
c) How can they arise?
d) Can they be prevented?
Text B Systemic Failure
by Patrick J. Buchanan
As the U.S. financial crisis broadens and deepens, wiping out the wealth and savings of tens of
millions, destroying hopes and dreams, it is hard not to see in all of this history's verdict upon
this generation.
We have been weighed in the balance and found wanting.
For how did this befall us, save through decisions that brushed aside lessons that history and
experience had taught our fathers?
It all began with the corruption called sub-prime mortgages.
The motivation was not wicked. Democrats wanted to raise home ownership among African-
Americans from 50 percent to the 75 percent of white folks. Republicans wanted to do the same
for Hispanics.
Banks were morally pressured by politicians into making home loans to folks who could not
remotely qualify under standards set by decades of experience with mortgage defaults.
Made by the millions, these loans were sold in vast quantities to Fannie Mae and Freddie Mac.
There they were packaged, converted into mortgage-backed securities and sold to the big banks.
The banks put scores of billions of dollars worth on their books and sold the rest to foreign banks
anxious to acquire Triple-A securities, backed by real estate in America's ever-booming housing
market.
12
Computer whizzes devised exotic instruments -- derivatives, which could soar in value, making
instant multimillionaires, but also plummet, based on rises and dips in the underlying value of
the paper.
Came now young geniuses at AIG to insure the banks against catastrophic losses, should the
U.S. housing market crash. As the risk was minuscule, premiums were tiny. Payouts, however,
should it come to that, were beyond AIG's capacity.
In AIG's Financial Products division, based in Connecticut and London, brainiacs were creating
other exotic instruments, such as credit default swaps to guarantee against losses and insure
profits. To keep these wunderkinds at AIG, they were promised million-dollar retention bonuses.
Who kept the game going?
The Federal Reserve, by keeping interest rates low and money gushing into the economy, created
the bubble that saw housing prices rise annually at 10, 15 and 20 percent.
As the economy grew, however, the Fed began to tighten, to raise interest rates. Mortgage terms
became tougher. Housing prices stabilized. Homeowners with sub-prime mortgages now found
they had to start paying down principal. People losing jobs began to walk away from their
houses.
Belatedly, folks awoke to the reality that housing prices could go south as well as north, and all
that paper spread all over the world was overvalued, and a good bit of it might be worthless.
And, so, the crash came and the panic ensued. Who is to blame for the disaster that has befallen
us? Their name is legion.
There are the politicians who bullied banks into making loans the banks knew were bad to begin
with and would never have made without threats or the promise of political favors.
There is that den of thieves at Fannie and Freddie who massaged the politicians with campaign
contributions and walked away from the wreckage with tens of millions in salaries and bonuses.
There are the idiot bankers who bought up securities backed by sub-prime mortgages and were
too indolent to inspect the rotten paper on their books. There are the ratings agencies, like
Moody's and Standard & Poor's, who gazed at the paper and declared it to be Grade A prime.
In short, this generation of political and financial elites has proven itself unfit to govern a great
nation. What we have is a system failure that is rooted in a societal failure. Behind our disaster
lie the greed, stupidity and incompetence of the leadership of a generation.
Does Dr. Obama have the cure for the sickness that ails the republic? He is going to borrow and
spend trillions more to bring back the good old days, though it was the good old days that
brought us to the edge of the abyss into which we have fallen. Then he is going to spend new
trillions to give us benefits we do not now have, though the national debt is surging to 100
percent of the Gross National Product, and may reach there by 2011. Is Obama willing to speak

13
hard truths? Is he willing to say that home ownership is for those with sound credit and solid
jobs? Is he willing to say that credit, whether for auto loans, or student loans, or consumer
purchases, should be restricted to those who have shown the maturity to manage debt -- and no
others need apply? "Avarice, ambition," warned John Adams, "would break the strongest cords
of our Constitution as a whale goes through a net. Our Constitution is made only for a moral and
religious people. It is wholly inadequate to the government of any other." In this deepening
crisis, what is being tested is not simply the resilience of capitalism, but the character of a
people.
Human Events.com

Translation

11) a) Translate the text “The Viagra Of Volatility” in writing. Your


translation will make Portfolio Entry.

b)Translate the text “Systemic Failure” in writing.

Language Focus (1)

12. Fill in the blanks with the following words or word combinations:
volatility, volatile, sell-off, safe haven, short position, exposure
(подверженность риск), momentum.

a) It necessitates active asset/liability management due to a bank’s [ momentum ]


to currency fluctuations and [ ] interest rates.
b) Prices had not climbed as fast in the first place and were less dependent on [
volatile ] international buying.
c) It is likely that these various arrangements help to reduce the [ Volatility ] of
exchange rates and thus reduce uncertainty.
d) Elaborate pricing mechanisms were set up by the government before the [sell off
]; they were aimed at helping the industry, which had long been a victim of under-
investment, to pay for a capital spending program of at least $ 18 billion over the next
decade.

14
e) Some market participants, worried by the market’s [ volatility ],
questioned whether the rebound could be sustained.
f) Credito Italiano and Banco Commerciale Italiano, two big state banks, have been
earmarked for privatization, but progress towards a [ ] has been
painfully slow.
g) Market makers also have special stock borrowing privileges which permit taking a [
] in shares.
h) This effect called “leverage” or “gearing” increases the investor’s [ ]
to price fluctuations.
i) Rebutting charges that they were insensitive to the plight of the unemployed, Bush and
Republican congressional leaders urged support for Senator Robert Dole’s more modest
benefit extension bill whose costs would be funded by the [ sell off ] of
radio airwaves.
j) One factor which investors look for in a [ safe heaven ] is liquidity.
k) On Monday, the shares jumped 30p, squeezing out a few [ ] takers and
pushing the price on another 24p to 370p.
l) Gold seems to have lost its old role as a [ ].
m) Our policy on managing foreign exchange has been to minimize our [ ]
to currency fluctuations.
n) Nervous investors are looking for a [ ].
o) The campaign for change is now gathering [ mometum ].
p) For developing countries, [ volatility ] increased the direct impact on their
domestic policies and plans.
q) The research aims to assess the extent and ways in which such companies have
restructured their activities in response to the [ ] international buying.
r) A company’s [ ] to the foreign exchange markets means that it runs
a risk of making financial losses.
s) The new acquisitions will play an important role in future growth and the [
] of the first half of 2002 will be maintained to give a satisfactory outcome for the
full year.
t) International [ exposure ] is as much a requirement for cultural development
as it is for sport.

13. Match the following words with their definitions.

a. Treasury bonds 1. the sale of a borrowed security, commodity or

15
currency with the expectation that the asset will
fall in value
b. initial public offering(IPO) 2. the state of being in a situation where there is no
protection from something harmful
c. bid 3. a marked rise in the price of a security,
commodity future, or market after a period of
decline
d. Euronext 4. corporation’s first offering of stock to the public

e. dealmaker 5. financial instrument whose value is based on


another security
f. short position 6. price of a stock divided by its earnings per share
g. long position 7. an offer by a person or a business company to pay
a particular sum of money for something
h. exposure 8. long-term debt instruments of ten years or longer
issued in minimum denominations of $1,000
i. derivatives 9. the buying of a security, commodity or currency
with the expectation that the asset will rise in value
j. price/earnings multiple 10. a pan-European stock exchange with subsidiaries
in Belgium. France, the Netherlands, Portugal
and the UK
k. core consumer price index 11. one that makes deals, as in business, finance,
or
politics
l. rally 12. one which measures prices paid by consumers
for goods and services other than food and
energy

14. Make up a list of verbs which collocate with the following nouns; compare your
list with that of your peer; give your own examples to illustrate how these collocations
can be used.

Verb Noun Verb

To issue, … share Skyrockets,…


profit
dollar

16
bid
slump
inflation
assets
(interest) rates
trend
policy

Hungry Minds

15. Scan the text “Day of the MiFID” paying attention to the meaning
of the italicized words and expressions; answer the following questions:
a) How does the European Union plan to facilitate the move towards a
single market in financial services?
b) What will this directive enable different companies in the EU to do?
c) Why do many experts qualify the MiFID as a long moan?
d) What is on the plus side of the new directive?
e) How do technology consultants react to the MiFID?
f) Why is the document so vaguely worded?
g) What is the reaction of financial firms and what do they have to
admit?

Day of the MiFID


Europe’s move towards more open financial markets makes sense, but details are troubling
Twenty years ago the City of London was run by a clubby old boys’ network. The
business was opaque, less than efficient and closed to outsiders. Predictably, the old boys raised
a din when the British government deregulated the financial markets in1986. Yet measured by
the past two decades’ prosperity, it is clear that the more open and efficient markets created by
that year’s “Big Bang” have greatly helped the City in its quest to reign as a global hub.
Now come predictions that changes even bigger than Big Bang are looming for
А) Europe’s financial markets. The Markets in Financial Instruments Directive – a mouthful
known as MiFID is a cornerstone of the European Union’s plan to move toward a single market
in financial services, in which firms can in theory do business seamlessly across national
borders. It is a seductive vision and one that promises to benefit plenty of people. But MiFID

17
will work only if regulators pull together and financial firms prepare. At the moment there is too
little sign of either.
Next to the ´eclat of Big Bang, MiFID is more of a Long Moan. Due to take effect from
C) November 2007, the directive will affect investment banks, brokers, exchanges and all sorts
of other financial firms across Europe. In the attempt to do for financial services what the single
D) market did for goods, ((MiFID will harmonize securities trading, protect investors, remove
stock markets’ monopolies and help firms operate across the EU.)) Although MiFID’s effects
may be far more reaching than Big Bang was, they will be more gradual, In fact, the earliest,
such as the pressure on financial exchanges to become more efficient or consolidate, are apparent
even now. B) On balance, MiFID should promote competition, transparency and, ultimately,
lower the cost of trading securities. That is the prize worth having.
Cross-breed
But not at any price. The complaints from practitioners are more than just the cavilling
C) of vested interests. With directives from Brussels washing over Europe’s financial centers,
there is growing regulatory fatigue. MiFID is the most far-reaching directive yet and technology
E) consultants are licking their chops at the prospects of helping clients comply with rules
requiring ever more financial computer systems to talk with each other across borders, markets,
asset classes and so on.
Exacerbating the costs of compliance are the enduring uncertainties about the details.
Striving for rules that are politically acceptable across Europe, the EU has crafted a vaguely
worded document that leaves private firms groping for direction only 14 months before MiFID
F) is due to take effect. The fine intentions are all very well, but MiFID needs to be clear about
the nitty-gritty. How are clients to be classified? What does “best execution” mean for products
that are traded off-exchange? People trading in bonds and specialized derivatives products argue
that it is wrong to lump them in with the trading of equities. That is only sometimes true but,
whatever the case, regulators need to make up their mind and frame the rules accordingly.
One choice would be to delay the directive and let people thrash out all this in their
own time. But MiFID’s seemingly interminable implementation has already been delayed once.
Another postponement may threaten its very existence – along with the gains it promises. Far
better to fix it quickly. National regulators, which are expected to transpose the EU directive into
their own laws by January 2007, need to settle the ambiguities by agreeing on definitions. Until
they do so, uncertainty and compliance costs will mount. Officials in Brussels are wary of
dictating more detail on MiFID before the European Parliament approves it (as is likely in the
next few weeks). But they need to knock national regulators’ heads together and ensure that
differing local implementation does not stymie the single market.

18
G) That leaves financial firms themselves. Even allowing for ambiguities, too many are
sitting on their hands – pretending, hoping, praying even that MiFID will go away. Yet pretty
much any financial firm in Europe should recognize that its world is about to change. Managers
need to think about what markets they want to compete in and how they will do so in an
increasingly open world. Their future could depend on it.
The Economist

День Европейской директивы «О рынках финансовых инструментов»


Движение Европы к более открытым финансовым рынкам имеет смысл, но детали
вызывают беспокойство.

Двадцать лет назад Лондонским сити управляла узкая сеть старых мальчиков. Бизнес был
непрозрачным, менее эффективным и закрытым для посторонних. Как и следовало
ожидать, старики подняли шум, когда британское правительство дерегулировало
финансовые рынки в 1986 году. Тем не менее, если судить по процветанию последних
двух десятилетий, очевидно, что более открытые и эффективные рынки, созданные в
результате “реорганизации” того года, в значительной степени помогли городу в его
стремлении стать глобальным центром.

Теперь появляются прогнозы о том, что на финансовых рынках Европы надвигаются


перемены еще более масштабные, чем реорганизация. Директива о рынках финансовых
инструментов, известная как MiFID, является краеугольным камнем плана Европейского
союза по переходу к единому рынку финансовых услуг, на котором фирмы теоретически
могут беспрепятственно вести бизнес через национальные границы. Это соблазнительное
видение, которое обещает принести пользу множеству людей. Но MiFID будет работать
только в том случае, если регуляторы объединятся и финансовые фирмы подготовятся. На
данный момент слишком мало признаков ни того, ни другого.

Рядом с успехом реорганизации, MiFID больше похож на продолжительную жалобу.


Директива вступит в силу с ноября 2007 года и затронет инвестиционные банки, брокеров,
биржи и всевозможные другие финансовые фирмы по всей Европе. В попытке сделать для
финансовых услуг то, что единый рынок сделал для товаров, MiFID гармонизирует
торговлю ценными бумагами, защитит инвесторов, устранит монополии фондовых
рынков и поможет фирмам работать по всему ЕС. Хотя последствия MiFID могут быть
гораздо более масштабными, чем реорганизация, они будут более постепенными, на

19
самом деле, самые ранние, такие как давление на финансовые биржи с целью повышения
эффективности или консолидации, очевидны уже сейчас. В целом, MiFID должен
способствовать конкуренции, прозрачности и, в конечном счете, снижению стоимости
торговых ценных бумаг. Это достойный приз.

Помесь
Но не любой ценой. Жалобы практикующих компаний - это нечто большее, чем просто
придирки корыстных интересов. В связи с директивами Брюсселя, распространяющимися
на финансовые центры Европы, растет усталость от регулирования. MiFID - это самая
далеко идущая директива, и технологические консультанты облизывают свои челюсти
перед перспективами помочь клиентам соблюдать правила, требующие, чтобы все больше
финансовых компьютерных систем общались друг с другом через границы, рынки, классы
активов и так далее.

Усугубляющими издержки соблюдения требований являются сохраняющиеся


неопределенности в отношении деталей. Стремясь к правилам, которые являются
политически приемлемыми по всей Европе, ЕС разработал нечетко сформулированный
документ, который оставляет частные фирмы нащупывать направление всего за 14
месяцев до того, как MiFID должен вступить в силу. Прекрасные намерения - это все
очень хорошо, но МиФИД должен четко представлять себе все детали. Как следует
классифицировать клиентов? Что означает “наилучшее исполнение” для продуктов,
которые продаются вне биржи? Люди, торгующие облигациями и специализированными
производными финансовыми инструментами, утверждают, что неправильно смешивать их
с торговлей акциями. Это только иногда верно, но, в любом случае, регулирующим
органам необходимо принять решение и соответствующим образом сформулировать
правила.
Одним из вариантов было бы отложить директиву и позволить людям разобраться со всем
этим в свое время. Но кажущаяся бесконечной реализация MiFID уже однажды была
отложена. Еще одна отсрочка может поставить под угрозу само его существование –
вместе с теми выгодами, которые оно обещает. Гораздо лучше исправить это быстро.
Национальным регулирующим органам, которые, как ожидается, включат директиву ЕС в
свои собственные законы к январю 2007 года, необходимо устранить неясности путем
согласования определений. Пока они этого не сделают, неопределенность и издержки
соблюдения будут расти. Официальные лица в Брюсселе опасаются диктовать более
подробную информацию о MiFID до того, как Европейский парламент одобрит ее (что,

20
вероятно, произойдет в ближайшие несколько недель). Но им необходимо объединить
усилия национальных регулирующих органов и обеспечить, чтобы различия в местной
реализации не препятствовали единому рынку.

Это оставляет сами финансовые фирмы. Даже допуская двусмысленности, слишком


многие сидят сложа руки – притворяются, надеются, молятся даже о том, чтобы МиФИД
ушел. Тем не менее, практически любая финансовая фирма в Европе должна признать, что
ее мир вот-вот изменится. Менеджерам необходимо подумать о том, на каких рынках они
хотят конкурировать и как они будут это делать во все более открытом мире. От этого
может зависеть их будущее.

Language Focus (2)


16. Paraphrase the italicized words and expressions in the
above text. Clubby – close, din – buzz/ confusion, Big Bang –
rearrangement/reorganization , quest - pursuit , hub – core
focus , looming – appearing/ approaching , mouthful – made up
word, seductive – attractive, eclat – success/flourish, Cross-
breed – mixture, cavilling of vested interests – criticizing
personal interests, are licking their chops – wait for sth good,
groping for – moving clumsily or hesitantly , nitty-gritty –
details/ fundamentals/basics of a matter , thrash out – consult/
negotiate, transpose – translate directive in national law, to
knock national regulators’ heads together - combine the efforts
of national regulatory authorities with decisive measures ,
stymie – impede, sitting on their hands – sit back and do
nothing

17. Expand your vocabulary: the following words are synonyms


to the adjectives in the boxes below. Put them in correct
box.

non-transparent in one piece perfect


attractive whole entire foggy
pleasurable unclarified tempting uncut
misty undivided smoky lovely cloudy

21
Opaque скрытый Seamless Seductive
неясный беспрепятственный привлекательный
беспроблемный притягательный
foggy in one piece Attractive
non-transparent perfect Pleasurable
unclarified whole Tempting
misty entire lovely
smoky uncut неограниченный
cloudy undivided целый

Writing
18. Summarize the contents of the text about MiFID in 95 –100 words
Your summary will make Portfolio Entry.

Business Skills

19. Analyze the reasons for the possible turmoil in financial markets; write
them down. Be ready to discuss them in class.

Reflection Spot

20. Did you find the Unit useful? Substantiate your view point.

ACTIVE VOCABULARY OF UNIT 1

1. volatility n
2. volatile adj. to be/ become/ remain ~
3. sell-off n
4. correction n to make/ need/ require ~
5. safe haven n to create/ offer sb/ provide sb with ~
6. technology shares n
7. dealmaker

22
8. prime broker n to be/ act as ~
9. long (short) position n to open. close/ take ~
10. exposure n to smth; to suffer/ increase/ limit/ minimize, reduce/ avoid ~
11. derivatives market
12. cash market
13. risk n to reduce/ increase/ hedge/ pose a risk to sb
14. asset(s) n great/ important/ valuable/ fixed/ tangible/ intangible/ liquid ~
to have, own, possess/ accumulate/ acquire/ dispose of, sell ~
15. rally n ~ takes place/ breaks up/ ends
~ against smth/ for smth/ in support of smth
16. profit taking
17. forward price/earnings multiple
18. core consumer index
19. Goldilocks economy
20. tenure n as chairman; to have/ get/ grant sb ~
21. momentum n to gather/ lose/ maintain/ gain/ sustain ~
22. policymakers

UNIT 2. STOCK MARKETS

Competencies:

23
• Making deductive and inductive inferences
• Developing translation skills
• Synthesizing the contents of an extended text
• Enriching interdisciplinary knowledge
• Enhancing subject-specific skills

Reading and Speaking (1)

1. Answer the questions:

• .What do you know about the current situation on the global stock
markets?

• What moves the stock market?

• .What institutions represent the Russian stock market?


2. Judging by the title “Calling for the Band to Strike Up” decide what the text can be
about.
3. Scan the text and mind-map it identifying the main problem, its causes, different aspects
characterizing the problem and the forecasts concerning its solutions.
4 In a punter’s jargon there are such expressions as “Bottom Fisher” and “Falling
Knife”. Infer their meaning from the second paragraph of the text “Calling for the Band to
Strike Up”.

Text A Calling for the Band to Strike Up


Equity markets are falling, and the explanations are plentiful

Now should be the time, with America’s economy emerging from what seemed a
relatively mild recession, for stock markets to roar ahead again. When equity prices fell in the
weeks after September 11th , no one could have been shocked. Nine months on, however, amid
upbeat economic data, punters still hope the band will strike up again. Instead, share prices
continue to slip. In rich countries they are back near their post-attack lows. America’s Treasury
secretary, Paul O’Neill, who among his many duties presumes to know the appropriate level of
share prices, says he finds the falls “inexplicable”. Yet explanations abound.
But first, consider the expectations of investors in America, who over the past 20
years have become accustomed to high, sometimes double-digit, returns from shares. Many,
indeed, have come to expect a summer rally like the one that launched America’s long bull run
back in August, 1982. Today, with share prices broadly where they were in late 1999, the bull
24
market wisdom of always buying “on the dips” might seem to apply. Yet this summer – and
possibly for some seasons to come – that wisdom may not be borne out.
Sluggish profits are one reason to think so. In good times, equity markets do not
need profits, as the dotcom bubble showed. Now, thanks to doubts about the quality of corporate
accounts, profits are at the front of investors’ minds. While bulls point to rising figures for
economic growth, production and consumer confidence, firms are finding that corporate profits
are rising rather more slowly, if at all. America’s Bureau of Economic Analysis says that after-
tax profits grew by only 1% in the first quarter, and remain 27% below their peak in 2000. But
companies’ own figures are losing credibility.
The integrity of published profits is being called into question everywhere. One
measure of valuing shares, the price/earnings (p/e) ratio – the share price divided by earnings per
share – is certainly stretched, no matter how you look at it. The range of p/e estimates is also
wide, thanks to uncertainty over the “e” side of the ratio. Take your pick from various
accounting measures of earnings: pro-forma, operating, excluding extraordinary items, or with or
without employee share options as an expense. Depending on the type of earnings used, p/e
ratios are now somewhere between the high teens and (rather more likely) the low 40s. In any
case, they are far above America’s long-term average of 16.
Now, bring out the equity-risk premium – the excess return, over and above
riskless government debt, that investors expect for holding risky shares. Not long ago, authors
wrote touting targets for the Dow Jones Industrial Average of 36,000 and even 100,000 (it is
under 10,000 today). They reasoned that shares as a whole were no riskier than government debt.
Investors, recognizing this, would demand no more return than that from government bonds.
They would bid share prices greatly upwards, and the risk premium down to zero. Talk of the
risk premium’s demise was premature. Some analysts, such as Chris Johns of ABN Amro, a
Dutch bank, expected the risk premium to rise after September 11th. Instead it fell, partly in
response to quick action by the world’s central banks in cutting interest rates. Today, though,
with interest rates already almost as low as they can go, a new bunch of risks may be occupying
investors: geopolitical instability (in the Middle East and Kashmir) as well as accounting
uncertainties. Investors may demand higher returns for jumping back into shares, implying a fall
in share prices to levels that more accurately reflect the risks.
By Mr. Johns’s measure, American share prices imply a risk premium of around
3%. Traditionally, the risk premium that investors demand has been closer to 6-8%. One rather
conservative measure of the risk premium that investors might now reasonably require is 4%,
based on the longest period of historical data. If investors today adjust their expectations to this
4% level, they will have to bid share prices down by a quarter.

25
To the extent that European companies have fewer accounting uncertainties than
American ones, and their shares are less highly valued, stock markets in Europe might have been
expected to outperform. Instead, they have fallen in sympathy with American exchanges.
Generally, though, European valuations are not as stretched, with p/e’s closer to their historical
average.
One of the best guides to the future may be the one that looks farthest into the
past. A study by professors Elroy Dimson, Paul Marsh and Michael Staunton of the London
Business School (“Triumph of the Optimists”, published by Princeton University Press),
analyses a century’s worth of equity returns, for 16 countries. One of their conclusions ought to
give shareowners consolation: shares do indeed outperform bonds over the long run, in every
country studied. Yet their data shows that this happy result does not quite conform to the iron
schedule of 20 years, as the current wisdom of American investors has it. In some countries, in
some periods, shares have taken as many as 40 years to outperform. That may be longer than
today’s investors have bargained for.
The Economist

5. Explain the following:

• …buying on the dips


• …the wisdom of the bull market may not be borne out
• …companies’ own figures are losing credibility
• …authors wrote touting targets for the Dow Jones Industrial Average
• Talk of the risk premium demise was premature

6. Comment on the following quotations:


• A market is the combined behaviour of thousands of people responding to information,
misinformation and whim.
Kenneth Chang
• Every once in a while, the market does something so stupid it takes your breath away.
Jim Cramer
• If a business does well, the stock eventually follows.
Warren Buffet
• Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but
reality is distorted by a misconception. George Soros
• The only reason to invest in the market is because you think you know something others
don’t.

26
Translation

7. Translate text A in writing.

Language focus

8. Make up a list of collocations with the following adjectives (or nouns);


Illustrate by your own examples how these collocations can be used.

Adjectives (or nouns) Nouns


mild Recession, …
economic
appropriate
double-digit
sluggish
dot.com
corporate
after-tax (pre-tax)
accounting
pro-forma
operating
government
risk

9. Match the following words with their definitions. Translate them into
Russian.

a. risk-premium 1. a period of time when prices are rising on

a financial market
b. bull run 2. an unjustified rise in prices
c. bubble 3. dividends
d. pro-forma earnings 4. irregularities in accounting
e. government bond 5. the excessive return over and above

27
riskless investment
f. accounting uncertainties 6. not complete or final results
g. equity returns 7. an amount of money borrowed by a
government
h. bargain for 8. discuss the conditions of an agreement in
order to get the greatest advantage for
yourself

10. Solve the crossword puzzle.

Stock Exchange
1 2 3

8 9

10 11

12 13

14

15 16

17 18

19

EclipseCrossword.com

Across Down
1.. a situation in which a person or group 2. the period of time when sb holds.
gains control of a company by buying an important job
all or most of its shares 3. an instrument whose value changes
5. something you buy that costs much if the price of the underlying asset
less than normal changes
7. someone whose job is to organize 4. the possibility that something
business deals for other people, unpleasant or dangerous might
especially on an exchange happen
6. having no money
9. an amount of money paid in addition 8. an offer to buy the shares in a
to the usual amount company and take control of it
10. distribution of earnings to shareholders 9. a person gambling on a stock
12. a gradual change or development exchange
28
that produces a particular result 11. something that can change and
14. a purchase by a company of its own affect the result of a situation
shares 13. a formal agreement, especially in
15. an increase in the value of smth business or politics
after a period when its value has 16. a return on an investor’s capital
been low investment
17. something such as money or property
that a person or company owns
18. a profit on money that you have invested
19 qualities that someone has that
make people believe or trust them

11. Give the English for the following:


Подверженность риску; фиксация прибыли; вступить в фазу рецессии; выходить из
рецессии; доход на инвестиции; достоверность данных; право на активы; прогнозная
прибыль; стоимостное инвестирование; управление портфелем ценных бумаг;
впечатляющий послужной список; рынок реальных финансовых инструментов; набирать
силу, наращивать скорость; динамичная торговля.

12. Read the article below to better understand the concept of the ERP.
Equity markets
Text B Shares and Shibboleths
How much should people get paid for investing in the stock market?
IF THERE is a sacred belief among investors, it is that equities are the best asset for the long run.
Buy a diversified portfolio, be patient and rewards will come. Holding cash or government bonds
may offer safety in the short term but leaves the investor at risk from inflation over longer
periods.
Such beliefs sit oddly with the performance of the Tokyo stock market, which peaked at the end
of 1989 and is still 75% below its high. Over the 30 years ending in 2010, a “long run” by any
standards, American equities beat government bonds by less than a percentage point a year.
In the developed world, the period since the turn of the millennium has been a particular
disappointment. Since the end of 1999 the return on American equities has been 7.6 percentage
points a year lower than that on government bonds. That has left many corporate and public
pension funds in deficit and many people with private pensions facing a delayed, or poorer,
retirement. Understanding why equities have let investors down over the past decade will help
them work out what to expect in the future.
The long-term faith in equities is based on the theory that investors should be rewarded for the
riskiness of shares with a higher return, known as the “equity risk premium” (ERP). That risk
comes in two forms. The first is that shareholders get paid only when other claimants on a

29
company’s cashflow, such as workers, the taxman and creditors, have received their due. Profits
and dividends are thus highly variable and can disappear altogether when times get tough. The
second risk is that share prices are volatile, more so than bond prices. Since 1926 there have been
seven calendar years when American equity investors have suffered a loss of more than 20%;
investors in Treasuries have suffered no such calamitous years.
The big question, however, is how large that extra return should be. Here it is important to
distinguish between the extra return investors actually achieved for holding equities (what could
be called the ex post number) and the return they expected to achieve when they bought them
(the ex ante figure). Academics started to focus on this problem in the mid-1980s when a paper
by Rajnish Mehra and Edward Prescott indicated that the ex post return of American equity
investors had been remarkably high, at around seven percentage points a year. It seems unlikely
that investors expected to do so well.
Premium puzzle
There are a number of possible explanations for these very high ex post returns. One is
survivorship bias in the numbers. America, which is the benchmark for ERP measurements,
turned out to be the most successful economy of the 20th century, but it might not have been.
Before the first world war investors doubtless had high hopes for Argentina, China or Russia—
only to be disappointed.
Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School (LBS) have
analysed the data for 19 countries from 1900 to 2011 and found that the ERP relative to Treasury
bills (short-term government debt) ranged from just over two-and-a-half percentage points a year
in Denmark to six-and-a-half points in Australia. They found a premium for America of five
percentage points.
Another explanation for the high returns is a paradoxical one: that equities have become less
risky. In the early part of the 20th century corporate accounts were more opaque and less reliable
(though shareholders in Enron, a bust energy company, may disagree). Most stocks were owned
by private investors with only a handful of individual shares. This left them more exposed to the
risk of a single firm failing, which meant they put a lower value on shares—or, to put it another
way, they demanded a higher premium for owning them.
Today most equities are owned by institutional investors who can assemble a diversified
portfolio. Even small investors can own an index fund at low cost. The impact of one
company failing is thus far smaller. This reduced risk has prompted investors to pay higher
prices for shares; in other words, to accept a lower dividend yield. That may well have
increased the ex post risk premium
The Economist

30
Business Skills

13. Make mini-presentations on the following:

• “In good times equity markets do not need profits, as the dot.com bubble showed.
• The relationship between the equity risk premium and share prices. (As the starting point
you may use the author’s statement: ”Investors may demand higher returns for jumping
back into shares, implying a fall in share prices to levels that more accurately reflect the
risks.” You are also recommended to make use of the material from Text B and video
clips).
• Why the ERP matters.

Reading and Speaking (2)


14. The piece of information below may enlarge your knowledge of
how stock market traders work. Search the web and try to find
some additional data about different types of traders.

Different Types of Traders


Let's review the major styles of equity trading:
• Scalping - The scalper is an individual who makes dozens or hundreds of trades per
day, trying to "scalp" a small profit from each trade by exploiting the bid-ask spread.
• Momentum Trading – Momentum traders look to find stocks that are moving
significantly in one direction on high volume and try to jump on board to ride the
momentum train to a desired profit.
• Technical Trading - Technical traders are obsessed with charts and graphs, watching
lines on stock or index graphs for signs of convergence or divergence that might indicate
buy or sell signals.
• Fundamental Trading - Fundamentalists trade companies based on fundamental analysis,
which examines things like corporate events such as actual or anticipated earnings
reports, stock splits, reorganizations or acquisitions.
• Swing Trading - Swing traders are really fundamental traders who hold their positions
longer than a single day. Most fundamentalists are actually swing traders since changes in
corporate fundamentals generally require several days or even weeks to produce a price
movement sufficient enough for the trader to claim a reasonable profit.

31
Novice traders might experiment with each of these techniques, but they should
ultimately settle on a single niche, matching their investing knowledge and experience
with a style to which they feel they can devote further research, education and practice.

15.…Scan the following article from the Economist and pick out information
which will help you to answer the question in the subtitle.

The Big Mo
Why do share prices move relentlessly in one direction?

THESE days almost all stock markets seem to be falling inexorably. But in more normal times
individual stocks are affected by momentum, which is the tendency for popular stocks to keep
rising (and for unpopular ones to keep falling). When it comes to shares, what goes up does not
always come down—at least in the short term.
The phenomenon has been noted in a wide range of studies and has often been exploited by fund
managers, but it has puzzled academics for decades. It is hard to square with the idea that
investors are rational. If it were easy to identify which shares were due to go up and which to go
down by looking at their previous price movements, why would a rational investor be willing to
sell the former group or buy the latter?
Explanations for momentum have thus tended to focus on the idea that investors are irrational.
For example, they may be slow to recognise that the fundamentals of a business have changed
for the better (or worse). A company may need to beat profits forecasts for two or three quarters
before the market is willing to give the stock a premium valuation.
But a new working paper* by researchers at the London School of Economics (LSE) suggests
that the momentum effect is still consistent with the idea that investors are rational. The paper’s
main insight is that most investors do not buy stocks directly, but give their money to fund
managers. This creates an agency problem: how do the clients know that the managers are
earning their fees?
In the short term, it is difficult to distinguish management skill from luck. Because the index
represents the average return of all investors before costs, some managers will beat the index
while others will underperform. There is a natural tendency to assume the outperformers are
skilful. So the underperformers will lose clients and the outperformers will gain.
The dotcom bubble was a case in point. “Value” investors (who look for stocks that appear cheap
by usual measures) ignored the technology industry. They were dumped by clients who gave
money to “growth” investors (who look for companies with a promising future) instead. By

32
itself, that pushed up the value of dotcom stocks and made the relative performance of value
investors even worse.
In the academics’ view, nobody was being irrational. The clients thought they were picking the
best fund managers; the value investors were avoiding overpriced stocks; the growth managers
were doing what they were paid to do. After the dotcom bubble popped in March 2000, the same
thing happened. Value managers started to outperform, so clients switched their money away
from growth stocks. This continued for several years.
By extension, the theory also explains why momentum effects can occur at the industry level. If
there is one industry (oil is a case in point) with a low correlation to the market, fund managers
will watch their exposure to it very carefully, to avoid the risk of underperforming the index. So
if oil shares are doing well, managers will be forced to buy them, pushing up their prices even
further.
What is trickier to explain is why the momentum effect ever stops. Academics have found a
tendency for a reversion to the mean (outperformers start to falter, underperformers to recover)
over longer periods such as three to five years. The LSE authors suggest that momentum effects
eventually take prices to such extreme levels that the gains from betting the other way are
irresistible. The tricky question is who has the cash to take advantage.
Take the bursting of the dotcom bubble. Value investors were losing clients and so were selling
not buying. Growth investors had a mandate from their clients to buy tech stocks and thus had no
incentive to switch. And the index-trackers just bought the stocks in the index.
Reversion thus requires a deus ex machina in the form of some superrational investor (Warren
Buffett, maybe?) or, the authors suggest, fund managers using their own money, who can take
advantage of the opportunity provided.
The theory does provide some insights into how momentum might work. But relying on the
notion of rational investors seems to complicate matters. If investors are rational, and cannot be
sure whether active managers have skill, why do they not just put their money in index-trackers?
The idea that investors can occasionally become irrational seems both simpler and intuitively
more appealing, especially in the light of recent events.
RENDERING
16. Suggest the English for the following:

Бурное экономическое развитее; организация труда; развернуть масштабную


оптовую торговлю; заключать сделки; объект купли-продажи; смещать «центр
тяжести»; прототип товарной биржи; поступать в оборот; долговая расписка;
меняла; уличить в обмане; изгонять; стихийное явление; закладывать (ценности);
закладная; дать толчок; торговая площадка

33
17. a)Render text A from Russian into English making use of your active
vocabulary and the English equivalents from Assignment 1. b)Render text B
into English.
Your rendering will make Portfolio Entry.
Text A Как рождались биржи
Впереди Европы всей
Зачатки биржевой торговли появились в средневековой Италии. Этому
способствовало бурное экономическое развитие городов Апеннинского полуострова. Оно
началось вслед за появлением там мануфактурного производства. Новая организация
труда позволяла производить быстрее и больше.
Купцы Генуи, Венеции, Флоренции развернули в XIV – XV веках масштабную
оптовую торговлю. Они перестали скучать на рынках. Местом их регулярных встреч
стали городские площади, таверны и гостиницы, где шёл обмен информацией о товарах и
ценах. Здесь же стали заключать сделки. Конечно, это делалось и на ярмарках, но в
отличие от ярмарок, собиравшихся раз в год, посиделки в тавернах могли длиться
круглосуточно. Поэтому «центр тяжести» постепенно смещался в их сторону.
Так возникли прототипы товарных бирж. Вслед за ними начал образовываться и
финансовый рынок. Торговые соглашения сами превратились в объекты купли-продажи.
Появились и люди, которые решили на этом зарабатывать.
Кроме того, в оборот стали поступать векселя. Начиная с XII века, итальянские
менялы выдают клиентам долговые расписки, предъявив которые в другом городе можно
было легко получить свои деньги у любого менялы. Эти расписки защищали монеты от
грабителей и вообще были очень удобны.
Кстати, итальянцам мы обязаны и возникновением понятия банкротства. Меняла,
уличённый в том, что он обманул своего клиента, изгонялся из города, а скамья, на
которой совершалась сделка, ломалась. Отсюда и термин – banca rotta – сломанная скамья.
Первое акционерное общество тоже было создано в Италии – им стал учреждённый в 1345
году Генуэзский банк.
Страна тюльпанов и бирж
Однако появление понятия «биржа» - уже не заслуга жителей Италии. Здесь
первенство принадлежит нидерландскому городу Брюгге, в котором около дома
известного менялы и маклера Ван дер Берзе собирались купцы, торговавшие
иностранными векселями. По одной из версий, именно от его фамилии и произошло
слово «биржа». В переводе с латинского оно означает «кошелёк».Надо отметить, что в те
времена Голландия была заражена «тюльпановой лихорадкой»: выведение удачного сорта

34
цветка сулило его владельцу немалый доход. Фламандцы готовы были последние деньги
отдать за участие в этой лотерее. Одну луковицу меняли на «новую карету, двух лошадей
и их упряжь». Естественно, что появилось огромное количество долговых расписок
значительная их часть обращалась на бирже Ван дер Берзе. Есть мнение, что организована
она была именно для этих целей.
Однако первые биржи чаще всего были стихийным явлением – люди собирались
где могли и когда могли. Специально организованный институт такого рода впервые
появился в Антверпене (1531 год).
В Нидерландах в 1608 году была создана старейшая из ныне существующих бирж
– Амстердамская. По её образцу Петр I устраивал в 1703 году первую российскую биржу.
Сначала Амстердамская биржа являлась исключительно торговой, но потом на
ней начали продаваться векселя, закладные, долговые обязательства, государственные
обязательства и т.п. Почти все известные сегодня операции с ценными бумагами были
опробованы местными дельцами.
Титаны фондового рынка
В Англии первая биржа появилась ещё в 1566 году. Но даже в !625 году
драгоценности британской короны были заложены с целью получения кредита в
Амстердаме, а не в Лондоне. Лишь к концу XVII века из товарной Лондонской биржи
выделилась финансовая, или. Как её стали называть, фондовая биржа. Кстати, ей мы
обязаны терминами «бык» и «медведь» применительно к торговцам ценными бумагами.
Нью-Йоркская фондовая биржа родилась только в XVIII веке – благодаря
соглашению 24 дилеров с Уолл-стрит, договорившихся друг с другом о торговле ценными
бумагами под платановым деревом. Изначально на ней котировались облигации
правительства и акции Банка США, выпускавшиеся для оплаты военных расходов ,
связанных с борьбой штатов за независимость. Позже здесь появились акции частных
компаний и промышленных предприятий. В 1840 году в её работе стал использоваться
телеграф, что дало толчок возникновению сначала общенационального рынка ценных
бумаг, а затем, после установки связи с Лондоном, - интернационального. Постепенно
Лондон и Нью-Йорк стали главными мировыми финансовыми центрами.
С развитием IT-технологий появились электронные биржи, для работы на
которых необходим только Интернет и компьютер. Главная из них – NASDAQ – успешно
конкурирует по объёмам торгов с другими крупнейшими площадками. Такие системы
позволяют выйти на рынок компаниям, для которых слишком дорога процедура листинга
на традиционных биржах.
ГОРОДСКАЯ БАНКОВСКАЯ ГАЗЕТА Новости финансового мира

35
Text B Рынки падают. Все деньги прячем в шорты
Евгений Беляков
Как использовать панику на биржах своим инвестициям на пользу.
На прошлой неделе случилось знаковое событие. Одно из ведущих мировых рейтинговых
агентств, Standard & Poor’s, дало негативный прогноз по развитию экономики США.
Посыл был прост – мол, у американцев слишком большие долги, с которыми они могут не
справиться в будущем. Фондовые рынки во всём мире тут же восприняли эту новость как
негативную и тут же повалились вниз. Не удержались и российские биржи За один день
котировки акций на ММВБ упали более чем на 5%. Откровенно запахло второй волной
кризиса..
Биржи вниз – прибыль вверх
О том, что наш рынок ждёт коррекция ( смена тенденции после долгого роста или
падения), говорили ещё с начала апреля. И с этого времени я стал нервничать. Российские
биржи непрерывно росли больше 9 месяцев подряд. И нужен был только серьёзный повод,
чтобы началось падение.
- А ты не паникуй, а пошорти! – предложил мне знакомый трейдер.- Зарабатывать
па бирже ты можешь даже при падении котировок.
Как известно многим, на фондовом рынке есть две касты игроков: «быки» и «медведи»
Первые играют на повышение котировок, а вторые – на снижение. Последние как раз
пользуются шортАми (короткими продажами). Этот уникальный биржевой инструмент
позволяет легально получать прибыль даже тогда, когда котировки акций летят в
тартарары. Как им пользоваться? И какие риски могут поджидать начинающего инвестора
временно переквалифицировавшегося из «быка» в «медведя»? Минус игры на бирже
заключается в том, что котировки акций постоянно колеблются то вверх, то вниз. Причём
угадать, когда «выстрелит» та или иная ценная бумага, практически невозможно..
Особенно человеку, далёкому от биржевой кухни.
До последнего времени моя стратегия была довольно проста. Я покупал ту или иную
акцию в надежде на рост, а потом спустя некоторое время продавал её: когда с прибылью,
когда с убытком. Но что делать, когда падает весь рынок?
- весь фокус заключается в том, что покупку с продажей следует поменять местами, -
поясняет Ирина Елисеева, автор книги «Как выжить на фондовом рынке» – то есть
сначала инвестор продаёт акцию дорого, а после того как она подешевеет, покупает её
снова, затрачивая на это меньше денежных средств. Разницу он оставляет себе.
Как продать то, чего нет

36
Проницательный читатель, тут же заметит подвох: «Чтобы продать что-нибудь ненужное,
надо сначала купить что-нибудь ненужное...» И будет отчасти прав. Поэтому брокеры
(они получают комиссию за каждую нашу сделку) уже давно придумали автоматически
действующий механизм. Чтобы трейдерам не приходилось бегать и «занимать до получки
у коллег их акции.
- Мы просто нажимаем в нашей торговой системе кнопку «Продать» и автоматически
встаем в шорт, - поясняет эксперт по фондовому рынку Пробизнесбанка. - Номинально
это происходит так: вы берете акцию в долг у брокера и сразу же ее продаете по рыночной
цене. Эти два действия происходят одновременно. Когда вы хотите закрыть шорт, то
покупаете акцию на бирже и отдаете ее брокеру. Если в этот момент ценная бумага
подешевела, то вы получаете прибыль. Если подорожала - фиксируете убыток
Технический анализ в помощь
С тем, как использовать шорт, в работе на бирже мы разобрались. Но остался самый
главный вопрос: как определить, когда именно его открывать? Подумывать о том, чтобы
ненадолго стать «медведем», я начал еще за неделю до обвала, вызванного негативным
прогнозом по экономике США.- На взгляд экспертов, для этого лучше всего использовать
технический анализ (с его помощью спекулянты, используя графики котировок, пытаются
определить, как будет меняться цена в будущем. - Ред.).
В техническом анализе есть несколько десятков, а то и сотен различных фигур («голова и
плечи», «две вершины», «бычий флаг» и т. д.). Они должны сигнализировать инвестору о
том, что стоит делать: покупать или продавать бумагу.- О, да это же «голова и плечи», -
радостно потер я руки, глядя на графики изменения стоимости акций Газпрома, и...
немедленно зашортил. Как назло, мои ожидания оказались неверными. Только я открыл
шорты, как медленно падавшие акции стремительно взмыли вверх. Тогда из Америки
пришли позитивные новости, и «быки» вновь передавили «медведей»- Убыток составил
около 500 рублей. Как оказалось позже, все сделал правильно. Акции после этого еще
росли несколько дней.
Следующий «медвежий» опыт оказался более удачным. Шорты по акциям Сбербанка и
«Роснефти» принесли мне около 3 тысяч рублей. Но закрыл я их слишком рано. В тот
день, когда агентство Standard & Poor's понизило прогноз по развитию американской
экономики, я уже сидел в деньгах. С одной стороны, повезло - я не понес никаких убытков
во время обвала. С другой - не смог заработать на падении. Оно было слишком
стремительным- Поймать максимумы на рынке практически невозможно, - успокоил меня
эксперт. - Лучше входить и выходить тогда, когда мы точно уверены в том, какая сейчас
тенденция на рынке: повышательная или понижательная.

37
www.kp.ru

Have Your Say

19) Read the following article and express your own


opinion on the issues raised in it. Use the italicized
words expanding on their meaning.

The Five Biggest Stock Market Myths

When fiascos like Enron bankruptcy, auditing scandals and analysts’ conflict of interest
occur, investor confidence can be at an all-time low. Many investors wonder whether or not
investing in stocks is worth all the hassle. At the same time, however, it’s important to keep a
realistic view of the stock market. Regardless of the real problems, common myths about the
stock market often arise. Here we go over these myths in order to bust them.
1). Investing in stocks is just like gambling.
This reasoning causes many people to shy away from the stock market. To understand
why investing in stock is inherently different from gambling, we need to review what it means to
buy stocks. A share of common stock is ownership in a company. It entitles the holder to a
claim on assets as well as a fraction of the profits that the company generates. Too often ,
investors think of shares as simply a trading vehicle, and they forget that stock represents the
ownership of a company.
In the stock market, investors are constantly trying to assess the profit that will be left
over for shareholders. This is why stock prices fluctuate. The outlook for business conditions is
always changing, and so are the future earnings of a company.
Assessing the value of a company isn’t an easy practice. There are so many variables
involved that the short-term price movements appear to be random (academics call this the
Random Walk Theory); however, over the long term, a company is only worth the present value
of the profits it will make. In the short term a company can survive without profits because of the
expectations of future earnings, but no company can fool investors for ever – eventually a
company’s stock price can be expected to show the true value of the firm.
Gambling, on the contrary, is a zero-sum game. It merely takes money from a loser and
gives it to a winner. No value is ever created. By investing, we increase the overall wealth of an
economy. As companies compete, they increase productivity and develop products that can make
our lives better. Don’t confuse investing and creating wealth with gambling’s zero-sum game.
2) The stock market is an exclusive club in which only brokers and rich people
make money.

38
Many market advisors claim to be able to call the markets’ every turn. The fact is that
almost every study done on this topic has proven that these claims are false. Most market
prognosticators are notoriously inaccurate; further more, the advent of the internet has made the
market much more open to the public than ever before. All the data and research tools previously
available only to brokerages are now there for individuals to use.
Actually, individuals have an advantage over institutional investors because individuals
can afford to be long-term oriented. The big money managers are under extreme pressure to get
high returns every quarter. Their performance is often so scrutinized that they can’t invest in
opportunities that take some time to develop. Individuals have the ability to look beyond
temporary downturns in favour of a long-term outlook.
3). Fallen angels will all go back up, eventually
Whatever the reason for this myth’s appeal, nothing is more destructive to amateur
investors than thinking that a stock trading near a 52-week low is a good buy. Think of this in
terms of the old Wall Street adage, “Those who try to catch a falling knife get hurt.”
Suppose you are looking at two stocks:
• XYZ made an all time high last year around $50 but has since fallen to $10 per
share.
• ABC is a smaller company but has recently gone from $5 to $10 per share.
Which stock would you buy? Believe it or not, all things being equal, a majority of investors
choose the stock that has fallen from $50 because they believe that it will eventually make it
back up to those levels again. Thinking this way is a cardinal sin in investing! Price is only one
part in the investing equation (which is different from trading, which uses technical analysis).
The goal is to buy good companies at a reasonable price. Buying companies solely because their
market price has fallen will get you nowhere. Make sure you don’t confuse this practice with
value investing, which is buying high-quality companies that are undervalued by the market.
4). Stocks that go up must come down.
The laws of physics do not apply in the stock market. There is no gravitational force
that pulls stocks back to even. Over ten years ago, Berkshire Hathaway’s stock price went from
$6,000 to $10,000 per share in a little more than a year. Had you thought that this stock was
going to return to its lower initial position, you would have missed out on the subsequent rise to
$70,000 per share over the following six years. If you find a great firm run by excellent
managers, there is no reason the stock won’t keep on going up.
5). Having just a little knowledge, because it is better than none, is enough to invest
in the stock market.

39
Knowing something is generally better than nothing, but it is crucial in the stock market
that individual investors have a clear understanding of what they are doing with their money. It’s
those investors who really do their homework that succeed.
Don’t fret. If you don’t have the time to fully understand what to do with your money,
then having an advisor is not a bad thing. The cost of investing in something that you do not
fully understand far outweighs the cost of using an investment advisor.
Conclusion
Forgive us for ending with more investing clichés, but there is another old adage that is
very much worth repeating: “What’s obvious is obviously wrong.” This means that knowing a
little bit will only have you following the crowd like a lemming. Like anything worth anything,
successful investing takes hard work and effort. A partially informed investor is about as
effective as a partially informed surgeon; he or she will only hurt themselves and those around
them.

Investopedia, A Forbes Media Company

Group Work

19. Working in groups( student A and student B, student C) read the


articles about Warren Buffett); make up a joint list of Warren Buffett’s
characteristics as an investor. Article C gives a remarkable insight into
the underlying reasons for Buffett’s success. While reading it pay
attention to the following points: a). beta coefficient and its impact on
investors’ decisions; b) how reality refutes “high beta” model; c)what
makes “low beta’ stocks underpriced; d )factors enabling Buffett to get
spectacular investment returns .

Text A. Warren Buffett (The Sage of Omaha)

Price is what you pay and value is what


you get – and if you are a smart investor,
the first will always be less than the second
Warren Buffett
Warren Buffett’s determination and creativity have made him who he is now: the
chairman of a long-term investment company which has more than $2 billion in holdings. As a

40
child, Buffet was already ambitious. He was an enthusiastic and industrious paper boy for the
Washington Post, and tried to cover more than one route at the same time. He also made money
by collecting and selling lost golf balls. Buffett’s interest in finance was clear extremely early on
in his life. He started playing the stock market with one of his sisters when he was eleven. At
twelve, he was betting on horses, and by high school he had started a business (pinball machines)
with a friend, which earned him fifty dollars a week.
Not only did he own a business by graduation, but he also had bought himself forty
acres of Nebraskan farm land with his profit. Graduate school was a formative time for Buffett.
It was there that he met Benjamin Graham, an economic scholar whose work Buffett had begun
studying in college. Buffett believed strongly in Graham’s theory that it was wise to look at
stocks of companies which are undervalued, which will most probably prosper with a little time.
Thus began Buffett’s untraditional approach to portfolio management.
After working for his father’s investment banking company for the three years
after business school, Buffett returned to Graham and worked as a security analyst at Graham’s
company for two years until 1956. In that year, at the age of twenty five, Buffett started his own
investment company, The Buffett Partnership, using $5,000 of his own funds and collecting
$100,000 from interested friends and family.
One of the smartest moves made by Buffett‘s company at that time was to invest
in American Express. In 1963, a scandal surrounded AmEX, and Wall Street believed the
company was near the end. But Buffett, always with his wits about him and his thinking cap on,
noticed when in restaurants and shops that customers were still using the card to buy. He went
ahead and bought 5 percent of the stock, which by 1961 had risen from 35 to 189 market points.
Buffett is now chairman of Berkshire Hathaway Inc., which makes long-term
investments.
http//www.surferess.com/CEO/html

Text B. How Buffett Bounces Back


The ability of the “Oracle of Omaha” to recognize and learn from his missteps
is one of his greatest strengths as an investor
By Ben Steverman
Thousands have studied the success of Warren Buffett, the chairman and CEO of
Berkshire Hathaway (BRKA). And for good reason: The value of Berkshire stock increased
361,156% from 1964 to 2006.

41
But the country’s most famous investor has made some infamous mistakes, too.
Buffett’s blunders offer their own lessons to investors trying to emulate the “Sage of Omaha”.
“He might be the best in the business, but his batting average is far below 1,000,” said
Timothy Vick of Sanibel Captiva Trust, author of How to pick stocks like Warren Buffett.
A key lesson, Vick said: “You have to learn from every mistake and keep them isolated
and keep them small.” Buffett is open about his investing missteps, often detailing them in his
annual letter to Berkshire shareholders. He usually takes all the blame himself, shielding his
underlings and his business partner, Charlie Munger.
Dwelling on failure
This willingness to dwell on failure may be the biggest lesson from Buffett’s
mistakes. Everyone is told to learn from failure, but how many people really do that? Buffett has
learned how, and has the multi-decade track record to prove it.
A key to investing well is a willingness to look stupid, Buffett says. “Most managers have
very little incentive to make the intelligent-but-with-some-chance-of-looking-like-an-idiot
decision,” Buffett wrote in 1984. Most would prefer “failing conventionally”.
At times, Buffett has looked like an idiot to others. In 1999, when tech stocks were
taking off, Berkshire’s stock and earnings were stagnant. Buffet avoids technology companies,
whose products he says he doesn’t understand. That later paid off when the tech bubble burst.
“People like Warren don’t fuss over the status issues,” Mark Thompson, a co-author
of Success Built to Last, said. They change their minds for good reasons, not because public
opinion changes.
Waiting for the right opportunity
The biggest mistakes for any investor can be mistakes of omission, investments not
made that could have performed spectacularly. But Vick says investing like Buffett requires
patience. “You don’t have to chase everything. It’s better to wait for the right opportunity than to
jump on every fad.”
When you realize you’ve made a mistake. What next? Buffett’s record suggests it
sometimes makes sense to cut your losses. He shut down a failing textile business in the mid-
1980s, for example. But often Buffett sticks with his mistakes, even after he admits they were
bad ideas to begin with. An investment in USAir ( LCC) was nearly wiped out in the ‘90s, but
Buffett held on until it recovered again. “Time erases a lot of mistakes, especially when you’re
investing in a decent business that can grow,” Vick says.
The occasional investing failure is inevitable. Even the best money managers screw
up, and even the worst get lucky. Keep this in mind when choosing someone to manage your

42
money, Vick advises. “You want someone who acknowledges mistakes and is humble about
success,” he said. Kind of like the Sage himself.
http://www.businessweek.com
Text C
The Secrets of Buffett’s Success
Beating the market with beta
IF INVESTORS had access to a time machine and could take themselves back to 1976, which
stock should they buy? For Americans, the answer is clear: the best risk-adjusted return came not
from a technology stock, but from Berkshire Hathaway, the conglomerate run by Warren Buffett.
Berkshire also has a better record than all the mutual funds that have survived over that long
period.
Some academics have discounted Mr Buffett as a statistical outlier. Others have simply stood in
awe of his stock-picking skills, which they view as unrepeatable. But a new paper* from
researchers at New York University and AQR Capital Management, an investment manager,
seems to have identified the main factors that have driven the extraordinary record of the sage of
Omaha.
Understanding the success of Mr Buffett requires a brief detour into investment theory.
Academics view stocks in terms of their sensitivity to market movements, or “beta”. Stocks that
move more violently than the market (rising 10%, for instance, when the index increases by 5%)
are described as having “high beta”, whereas stocks that move less violently are considered “low
beta”. The model suggests that investors demand a higher return for owning more volatile—and
thus higher-risk—stocks.
The problem with the model is that, over the long run, reality has turned out to be different. Low-
beta stocks have performed better, on a risk-adjusted basis, than their high-beta counterparts. As
a related paper† illustrates, it should in theory be possible to exploit this anomaly by buying low-
beta stocks and enhancing their return by borrowing money (leveraging the portfolio, in the
jargon).
But this anomaly may exist only because most investors cannot, or will not, use such a strategy.
Pension schemes and mutual funds are constrained from borrowing money. So they take the
alternative approach to juicing up their portfolios: buying high-beta stocks. As a result, the
average mutual-fund portfolio is more volatile than the market. And the effect of ignoring low-
beta stocks is that they become underpriced.
Mr Buffett has been able to exploit this anomaly. He is well-known for buying shares in high-
quality companies when they are temporarily down on their luck (Coca-Cola in the 1980s after
the New Coke debacle and General Electric during the financial crisis in 2008). “It’s far better to

43
buy a wonderful company at a fair price than a fair company at a wonderful price,” he once said.
He has also steered largely clear of more volatile sectors, such as technology, where he cannot be
sure that a company has a sustainable advantage.
Without leverage, however, Mr Buffett’s returns would have been unspectacular. The
researchers estimate that Berkshire, on average, leveraged its capital by 60%, significantly
boosting the company’s return. Better still, the firm has been able to borrow at a low cost; its
debt was AAA-rated from 1989 to 2009.
Yet the underappreciated element of Berkshire’s leverage are its insurance and reinsurance
operations, which provide more than a third of its funding. An insurance company takes in
premiums upfront and pays out claims later on; it is, in effect, borrowing from its policyholders.
This would be an expensive strategy if the company undercharged for the risks it was taking. But
thanks to the profitability of its insurance operations, Berkshire’s borrowing costs from this
source have averaged 2.2%, more than three percentage points below the average short-term
financing cost of the American government over the same period.
A further advantage has been the stability of Berkshire’s funding. As many property developers
have discovered in the past, relying on borrowed money to enhance returns can be fatal when
lenders lose confidence. But the long-term nature of the insurance funding has protected Mr
Buffett during periods (such as the late 1990s) when Berkshire shares have underperformed the
market.
These two factors—the low-beta nature of the portfolio and leverage—pretty much explain all of
Mr Buffett’s superior returns, the authors find. Of course, that is quite a different thing from
saying that such a long-term performance could be easily replicated. As the authors admit, Mr
Buffett recognised these principles, and started applying them, half a century before they wrote
their paper.
The Economist September 29 2012

Hungry minds
20. Read the text below, explain the meaning of the words and word
combinations in bold type; answer the questions:

a) How does the author prove that modern-day investors fall prey to superstitions?
b) Why may natural phenomena, such as lunar and solar eclipses, be viewed as an
opportunity for arbitrage?
c) What does the showing of the Shanghai market testify to?

44
A Total Eclipse of the Brain
Superstitions make for less-than-super stock market returns
The Dow is falling! The Dow is falling!
MODERN stockmarkets, with their lightning trades and endless reams of data, sometimes seem
to be run by automatons, not people. But lift the curtain and the wizards pushing the buttons turn
out to be as susceptible to fear and irrationality as any of their abacus-wielding ancestors. That,
at least, is the conclusion of Gabriele Lepori of the Copenhagen Business School, whose work on
solar and lunar eclipses suggests that modern-day man, even of the steely-eyed, stockbroking
variety, is still prey to ancient superstition.
By choosing to study eclipses, Mr Lepori has neatly avoided the two largest obstacles to proving
the effects of superstitious behaviour on stockmarkets. The first is that one culture’s lucky sign is
often another’s omen of disaster. The second is that not everyone may experience an “unlucky”
event at once. Eclipses, however, have been feared all over the world for millennia. Even better,
they are widely publicised and highly visible, and happen to the entire planet over a short period.
That means that their effects on stock trading—if there are any—should be seen easily.
To test for any link, Mr Lepori collected the dates and times of all 362 lunar and solar eclipses
that had been visible anywhere in the world between 1928 and 2008. He then matched these
events against four American stock indices: the Dow Jones Industrial Average; the S&P 500; the
New York Stock Exchange Composite; and the Dow Jones Composite Average. Finally, he
computed average daily returns for each index and compared returns on days when eclipses
occurred with those on days when they did not.
The results showed a small but persistent effect. In the three days around the date of an eclipse,
three of the four stock indices exhibited lower-than-average returns. The depressive effect of the
eclipse was slight—around a seventeenth of 1%—but it was there. Moreover, if an eclipse took
place on a weekday, when the stockmarkets were open, its effect was larger than if it occurred on
a Saturday or Sunday. And the greater the magnitude of the eclipse—that is, the bigger the
percentage of the sun covered by the moon, or of the moon covered by the Earth’s shadow—the
more likely it was to have a demonstrable effect on stock returns.
Intriguingly, Mr Lepori found that stocks recovered quickly in the days following an eclipse,
showing that the markets swiftly recognise that the eclipse-related dip has been irrational.
Although Mr Lepori dryly labels this phenomenon the “reversal effect”, others might view it as
an opportunity for arbitrage. Indeed, on Mr Lepori’s own calculations (and assuming zero
transaction costs), an investor who had bought and held the Dow Jones Industrial Average at the
end of 1928 would have multiplied his money 37 times. One who sold before each eclipse and
bought back straight after would have multiplied the principal 55 times.

45
How much longer that will last, though, is moot. On July 22nd a total solar eclipse was visible
from India and China. If markets are anywhere near as efficient as they are superstitious, the
dissemination of Mr Lepori’s research should mean this eclipse is one of the last when stock
returns drop in response to primitive astrological fears. Given that the Shanghai market had its
best showing for seven weeks that day, perhaps this has already happened.

From The Economist print edition

Reflection Spot

21. Has the newly acquired information enlarged your knowledge? Is it


relevant to your future business career?

ACTIVE VOCABULARY OF UNIT 2

1. recession n damaging/ painful/ deep, severe/ mild/ prolonged/ short-lived ~

to cause / go into, plunge into/ beat/ come out of, emerge from/ suffer from/
survive ~
2. upbeat economic data
3. returns from shares (equity returns), return on investment

46
4. dotcom bubble n ~ bursts
5. credibility n to have/ lack/ gain/ restore/ establish/ enhance/ damage/ undermine ~
credibility gap
6. integrity n to have/ lack/ restore/ ensure/ maintain/ threaten ~
integrity of published profits
7. pro-forma (operating) profits
8. extraordinary items
9. riskless government debt
10. to bid prices upwards (to bid prices down)
11. risk premium
12. claim on assets to have/ assert/ lay/ establish/ prove/ withdraw ~
13. variable
14. variable costs
15. present value (net present value)
16. Random Walk Theory
17. Zero-sum game
18. value investing
19. portfolio management
20. track record n good/ impressive/ poor ~; to have/ posses ~

UNIT 3. STOCK MARKET STRATEGIES

47
Competencies:

• Enhancing translation (rendering) skills

• Searching the Web for specific information

• Enhancing team-work skills

• Making presentations

Reading and Speaking


1. Answer the questions:

• What stock market indexes do you know?


• How are they computed and in what way can they be useful for
investors?

2. Scan the text “Is There a Magic Money Machine?” and be ready to do the tasks
which follow.

Is There a Magic Money Machine?

No. But investors are always looking for a way to beat the system. We found
a couple of strategies that worked – this year at least
By David Rynecki
Since the advent of public markets – and almost certainly before – investors have
been looking for an edge. The eternal search for a magic elixir, some secret source to spike
returns, has driven inventive thinkers to devising systems geared around everything from
harnessing market momentum to mapping the movements of the stars.
In 2002 we could have used a sign. As the year wound down, the major stock
indexes were a lock to extend their streak of consecutive annual losses to three – a depressing
feat unmatched since the Great Depression. That left even the most gifted and successful money
managers grasping at straws. Whatever the professionals tried – value, growth, small caps, large
caps, foreign stocks and even convertible bonds – all lost ground.
Through it all, investors have continued to be creative. This year some strategies -
including fringe or specialty approaches that all but the most devout followers pooh-pooh –
actually made money.

48
With that in mind, we decided to analyze a few of these offbeat winners to figure out
what’s been working.
Dogs of the Dow
This old battleship of alternative strategies is based on a fairly simple formula: Look
at the Dow Jones industrial average’s 30 components and, at the beginning of each year, choose
the ten stocks with the highest dividend yields. Then readjust the next year. The gimmick,
backers say, produces a portfolio that outperforms the Dow over time. Though it’s an old
approach, it has recently been bolstered by new research demonstrating that companies with the
highest yields actually grow faster than those paying no dividends.
Elliot Wave
One thing no one can control is market sentiment. Yet sentiment is perhaps the key
ingredient defining whether stocks will rise, sink, or stagnate. Some investors believe that it’s
possible to capitalize on such sentiment – and that technical signposts in the market can show
you how. The basic notion of the Elliot Wave, based on a theory developed in the 1920s and ‘30s
by a government accountant named Ralph Nelson Elliot, is that the market moves in predictable
waves of rallies and selloffs.
The best known disciple of this approach is newsletter writer Robert Prechter. Robert
was something of a hero during the 1980s, when he correctly predicted the start of the bull
market in 1982. He became a perma-bear, however, after the 1987 crash and missed most of the
1990s rally. Now Prechter is sure – really sure – that another bear market has begun.
Corporate Buybacks
This comparatively new and low profile market strategy is, like the Elliot Wave,
dependent on market timing – a potentially risky proposition. The philosophy is to invest in
companies that have bought back enough of their own shares to decrease the amount of shares
outstanding minus options or acquisitions. Doing so automatically increases earnings per share.
While buybacks alone don’t alter the fundamentals of a company, they often come at an
inflection point for the company – that is, when good things are about to happen.
Condensed from the Fortune

Notes:
1. Dogs of the Dow: an investment strategy that consists of buying the 10 DJIA stocks with the
highest dividend yield at the beginning of the year. The portfolio should be adjusted at the
beginning of each year to include the 10 highest yielding stocks.

49
2. Dividend Yield: a financial ratio that shows how much a company pays out in dividends
each year relative to its share price. In the absence of any capital gains, the dividend yield is the
return on investment for a stock. Dividend yield is calculated as follows:

= Annual Dividends Per share


Price Per Share

3. Match the meaning of the following expressions with their definitions; translate
them into Russian.

a. look for an edge 1. try all possible means to find a solution in


a difficult situation
b. spike returns 2. try to get advantage
c. harness market momentum 3. help rise quickly and reach a high value
d. be a lock to do smth 4.control and take advantage of the favorable
situation
e. grasp at straws 5. a sure thing that smth will be done

4. Explain the meaning of the expressions given below.

beat the system (market)

fringe approaches
offbeat winners
market sentiment
capitalize on smth
perma-bear
low profile
market timing
fundamentals of a company
inflection point

5. Describe the different types of stock market strategies.

50
Translation

6. Translate the text “Barking Up the Dogs of the Dow Tree” in writing

Your translation will make Portfolio Entry.

Barking Up the Dogs of the Dow Tree

By Daniel Myers
Dividends are the hidden jewel of the investment world. These often-overlooked treats
have been the backbone of great stock market returns for the better part of the century. One well-
known and successful strategy for cashing in on this dividend phenomenon has garnered both
praise and ridicule.
That famously simple investment strategy is known as the Dogs of the Dow, or the
“Dow dividend strategy”, and has earned its reputation by being a simple and effective way to
beat the market over time. It involves owning the 10 highest yielding stocks of the Dow Jones
Industrial Average (DJIA), rebalanced every New Year’s Eve. Saves time, saves effort – less
filling, tastes great. Well, may be, but we’ll get to that.
In the tutorial, Stocks-Picking Strategies: Dogs of the Dow, we mentioned that “from
1957 to 2003, the Dogs outperformed the Dow by about 3%, averaging a return rate of 14.3%
annually, whereas the Dow averaged 11 %. “While this record is impressive enough, the
reasoning behind its success is why you should consider employing this strategy.
The Strategy
Views differ on the Dow dividend strategy. They all seem to agree that this
strategy has beaten the market, but they don’t agree on why. Is it logical reasons or just plain
luck that generated those returns?
However, many people argue that the Dogs of the Dow strategy does have merit
because it is fundamentally based. The Dow dividend strategy is simply a way to pick one- third
of the Dow stocks, which, using their relative yields as value indicators are more likely to be
discounted than their Dow brethren.
Discounted stocks can be viewed in a few different ways, including
1. There is no difference in relative value among these and other Dow stocks.
This idea is that the market has valued all stocks correctly, including the high-yield
stocks. However, the difference in return is only the higher average dividend yield
between the Dogs and the others. If this difference is 3% on average, then that might
be explained by the higher yield on the Dogs. Many assume that the market corrects

51
stock prices for dividend payouts. In the daily movements, may be it does. But in the
months and years, many would argue that this may not be the case. Instead, the
market often values companies based on current and expected earnings, with little
attention to whether or not those earnings are paid out in the form of dividends.
2. The Dogs have been, well dogs – they have been pushed down in price by the
market, which sends their yields up. Assuming that, as a group, the Dogs aren’t
much better or worse companies than those in the rest of the Dow, this idea may have
some merit. Benjamin Graham , in his classic book “The Intelligent Investor” wrote,
that large companies almost never go broke, they have some period of success, and
other times they struggle. The Dow dividend strategy is by no means an in-depth
fundamental analysis, but it can be a useful indicator to help find those large,
struggling (read: CHEAP) companies of which Graham spoke, and to buy them when
they are struggling, just before they embark on their periods of success.
This leads us to the main problem with the Dogs strategy. Yield as a valuation metric is
much too simple to be useful in telling us what a company is actually worth. The Dow dividend
strategy is led by the indicator of yield, which is not a true valuation metric unto itself such as
P/E, price-to-book or free cash flow numbers.
After all, dividends are easily changed, unlike earnings or book values, and most
companies in the Dow could change their dividends (and yields) within a 10 minute meeting of
the boards of directors. In other words, successful companies could start paying out huge
dividends to become Dogs, or poor performers could cut their dividends and avoid being
relegated to the dog house. However, this rarely happens and the dividend policy of Dow stocks
is usually held to the tradition of moderate dividend growth as the earnings grow. In general,
companies never cut their dividends unless they are really suffering. That said, the yield, as
compared to other Dow stocks, can show which companies’ shares have fallen behind and are
due for a rebound.
Conclusion
The Dogs may not be the most advanced strategy in the world, but if you can add it to
the rest of what you do, it could give you a few extra dollars. Remember though, that the market
historically has gone down about a third of the time, and up about two thirds. Don’t expect the
Dogs of the Dow to be any different. If you are going to be in the market, you have to get used to
this fact of a Dog’s life.
Investopedia, A Forbes Media Company
Notes:

52
Rate of Return: the gain or loss of any investment over a specified period expressed as a
percentage increase over the initial investment cost. Gains on investments are considered to be
any income received from the security, plus realized capital gains.

Language Focus

7. Suggest the Russian for the following:

• to garner praise and ridicule


• the reasoning behind the success
• to beat the market
• to generate the return
• the strategy fundamentally based
• discounted stocks
• to embark on the period of success
• to relegate to the dog house

8. Find the English equivalents to the following:

• завоевать репутацию
• применять стратегию
• существуют различные точки зрения
• всего лишь удача
• глубокий анализ
• критерий оценки
• новейшая, передовая стратегия
• обладать достоинствами

9. Examine the headline of the text and reconstruct the original idiom; say what it
means.

10. Explain the following English idioms, think of their Russian equivalents and give
your own examples to illustrate their usage:

a. Barking dogs seldom bite


b. Сast to the dogs
c. Dog in the manger
d. The dogs bark, but the caravan goes on

53
e. Every dog has his day
f. Every dog is a lion at home
g. A good dog deserves a good bone
h. Keep a dog and bark oneself
i. Let sleeping dogs lie
j. Teach the dog to bark
k. An old dog will learn no new tricks
l. dog eat dog

RENDERING

11. Suggest the English for the following:

скупка собственных акций; распространённая практика; эмитент; чистый объём продаж;


расплачиваться с кем-либо; расплачиваться наличными; избыток денежной наличности;
проект с низкой отдачей; акции, находящиеся в обращении; поставить рекорд; «просеять»
держателей акций; кредит доверия; налогооблагаемая прибыль; налог на
прибыль(юридического лица); чистая прибыль; акционерный капитал; обесценение;
проводить опрос; освобождать компанию от ответственности перед; находиться в
распоряжении; ценные бумаги, обладающие правом голоса.

12. Render the following text from Russian into English making use of the English
equivalents from assignment 11.

Сам себе акционер


Наталья Варнавская
На западе покупка компанией собственных акций – достаточно
распространённая практика. Всё чаще используют этот приём и российские эмитенты.
Что же они на этом выигрывают?
В покупке компаниями собственных акций, как правило, нет ничего
криминального. Например, в истории фондового рынка США чистый объём продаж акций
корпорациями нередко бывал отрицательным – они покупали своих бумаг больше, чем
продавали.
А вот в России подобная скупка пока воспринимается как операция,
негативно характеризующая эмитента, и замеченным в этом компаниям приходится
оправдываться. В принципе, сам факт покупки собственных акций ещё ни о чём не
говорит. Гораздо важнее, с какой целью приобретаются бумаги.

54
Плата за лояльность
Иногда акции покупают, чтобы расплатиться с акционерами. Чаще всего это
делают путём выплаты наличных или раздачи дополнительных акций..
Однако чаще используются выплаты наличными – в виде обычных
дивидендов. На западных рынках последняя операция стала особенно популярна в 1980-е
годы. Покупая собственные акции, компания может решить сразу несколько проблем.
Прежде всего это позволяет эффективно использовать избыток денежной
наличности. Если отсутствуют инвестиционные проекты, способные принести
значительный доход, компании предпочитают передавать средства акционерам. Это
лучше, чем вложить деньги в проекты с низкой отдачей, - на такие инвестиции рынок
неизбежно отреагирует понижением курсов акций.
Например, в 1994 году транснациональная компания по продаже игрушек
“Toys Я Us”, столкнувшись с избытком наличности, израсходовала на приобретение
собственных акций $1 млрд. – было куплено12% находившихся в обращении акций.
Наиболее масштабную скупку собственных акций традиционно проводят нефтяные
фирмы. Так, компания Exxon в 1989 году поставила своего рода рекорд, выкупив
собственных бумаг более чем на $15млрд.
Помимо решения проблемы наличности скупка собственных акций
позволяет «просеять» держателей акций. По сути, она является официальным
предложением сомневающимся акционерам выйти из игры с хорошей прибылью. В итоге
совладельцами компании остаются лишь те, кто уверен в её доходности, и кредит доверия
со стороны акционеров заметно увеличивается.
Минимизация налогов
Принять решение о скупке акций компания может и для минимизации
налоговых платежей.
Если не вдаваться в частности, то инвестиции, по сути, можно привлечь
двумя способами: взять деньги взаймы у акционеров (выпустив акции) или у банков
(получив кредит). В обоих случаях за пользование денежными средствами придётся
платить: акционерам – дивиденды, а банкам – проценты за пользование заёмными
средствами. Однако налогооблагаемая прибыль может быть уменьшена на сумму
процентов по кредиту. При российской ставке налога на прибыль в 24% это означает, что
почти четверть затрат на привлечение банковских денег компенсирует государство.
Дивиденды же, напротив, платятся из чистой прибыли, после уплаты налогов. Получается,
что для компании может оказаться выгодным уменьшить акционерный капитал (и,

55
соответственно, расходы по его использованию – сумму, выплачиваемую в виде
дивидендов) за счёт привлечения банковских кредитов.
Поддержка курса
На западе достаточно распространено приобретение компаниями своих
акций, цель которого – избежать их обесценивания. Иногда это помогает преодолевать
серьёзные кризисы на фондовом рынке. По мнению опрошенных «Секретом фирмы»
экспертов, покупку собственных акций практикуют и российские компании, причём чаще
всего эмитенты делают это именно для поддержания или повышения курсов своих бумаг.
Достоверных сведений о действиях российских компаний по скупке
собственных акций немного. Так, из десятка опрошенных СФ наиболее крупных
российских эмитентов в поддержании своих акций не признался никто. Однако почти все
собеседники СФ были уверены, что есть компании, которые действительно проводят
такие операции.
Область применимости
Таким образом, у компании могут быть разные резоны скупать собственные
акции. Однако существует ряд ограничений на подобную деятельность, в том числе и в
России. Прежде всего, обладание акциями не освобождает компанию от ответственности
перед акционерами. Кроме того, ценные бумаги, находящиеся в распоряжении эмитента,
не имеют права голоса. Это означает, что менеджмент компании не получает
дополнительных рычагов, позволяющих влиять на решения, принимаемые собраниями
акционеров. К тому же законодательно ограничены как максимальная доля акций,
которые могут одновременно находиться на балансе компании-эмитента, так и
предельные сроки обладания этими бумагами.

СЕКРЕТ ФИРМЫ

Group Work

13. Working in groups of three (student A, student B and student


C) analyze the following articles. Compare the authors’
views on the problem of stock buybacks. Decide what they
have in common and how their views differ.

Text A . It’s a Bullish Sign When a Company Buys Back It’s Own Shares!
By Ricky Schmidt
Shareholders and investors of two blue-chip companies were treated to good news
on Monday July 9,2007, that carries potentially bullish long –term consequences.

56
First Johnson & Johnson announced the repurchase of up to $10 billion of its common
stock. Then ConocoPhillips announced the repurchase of a $15 billion share buyback program,
representing an increase of $13 billion above the $2 billion that remained in a previous buyback
program.
But why is a buyback program a positive sign for investors? Why would a repurchase
carry such bullish potential? One explanation is in terms of simple supply and demand:
Repurchases reduce the supply of a company’s outstanding stock, which should increase the
price of those shares that remain.
Another explanation is that companies that repurchase their shares are so confident
about their future prospects that they are willing to commit corporate resources to buying them.
This is worth paying attention to, since a company’s executives and Board of Directors have
access to insider information that the rest of us do not.
Like such, repurchase programs are analogous to corporate insiders repurchasing their
companies’ shares for their own accounts. Both signal confidence in the company’s future
prospects which again is a bullish signal.
In a nutshell:
When a company reduces the amount of shares outstanding by declaring a stock buy
back program, each of the shares becomes more valuable and represents a greater percentage of
equity in the company.
So when putting together your portfolio, you could seek out strong and solid companies
that engage in these sorts of pro-shareholder practices and hold on to them as long as the
fundamentals remain sound.
One of the best examples is the Washington Post, which at one time was only $5 to $10
a share. It has traded as high as $650 already. That what I call long-term value!
But be aware! Even though buybacks can be huge sources of long-term profit for
investors, they are actually harmful if a company pays more for its stock than it is worth. In an
overpriced market, it would be foolish for management to repurchase equity at all, even in itself.
Instead , the company should put the money into assets that can be easily converted
back into cash. This way, when the market swung the other way and is trading below its true
value, shares of the company can be bought back up at a discount, ensuring current shareholders
receive maximum benefit. Remember, even the best investment in the world isn’t a good
investment if you pay too much for it.

http://EzineArticles.com/

57
Text B. The Hidden Meaning of Stock Buybacks
By Justin Fox
Every good idea on Wall Street eventually is imitated so widely and unthinkingly that it
becomes, if not a bad idea, at least an indifferent one. That’s what efficient markets are about:
After a while, inefficiencies (i.e., opportunities to beat the market) disappear.
So you might think that the stock buyback, for almost 15 years one of the cleverest
corporate finance and investment strategies around, should be getting to be a little less clever by
now. And you might be right.
All this buyback activity is generally taken as a bullish sign. For good reason: At least
some of the credit for the stock market’s amazing rise of the past 15 years belongs to buybacks;
for some companies that have been stock market stars, buyback should get most of the credit.
But times change. In a buyback, a company buys back shares, usually on the open
market, and retires them. For an individual company, the main impact is that with fewer shares
outstanding, earnings per share gets a boost. The question is whether that boost is worth the cost,
and with price/earnings ratios reaching levels seen only once before in history (the1960s), it’s
getting to be a pretty good question. For the market as a whole, the impact of buybacks is chiefly
a matter of supply and demand. And it’s pretty clear that the impact has ceased to be positive.
From 1984 to 1990, buybacks, leveraged buybacks (effectively buybacks on steroids),
and mergers helped reduce the nation’s equity supply by about 20% just when demand for stock
from mutual funds, 401(k)s, and the like was starting to boom. It was a recipe for rising prices
right out of Econ 101. For the past three years, the equity pool appears to have been shrinking
again – and bullish Wall Street forecasters have been quick to cite that as a justification for the
market’s continuing rise.
But in this case appearances are wrong, because the burgeoning use of stock options to
pay executives and other workers has fatally skewed federal equity supply statistics. When a
company buys a share of its stock on the open market for $80 dollars to sell to an employee who
has an option to buy at $20, the statisticians count that as a net equity issuance of negative $60 –
even though the actual supply of stock on the market is unchanged. The money‘s is going in on
one end and going out on the other end for options.”
This statistical quirk is of no consequence to investors looking at individual companies;
it’s easy enough to tell that massive stock buybacks at options granters like Microsoft and Intel
aren’t reducing the number of shares outstanding. Practitioners of the buyback religion that
began gaining adherents in the early 1980s are looking for a different sort of corporation, one
that is continually reducing its number of shares outstanding.
Before 1984 or so , a stock buyback was widely seen as an admission by a company that
it didn’t have anything useful to do with its money – and that its growth prospects thus couldn’t
58
be very good. But eventually, after being shown the way by pioneers like Teledyne’s Henry
Singleton, corporate America began to understand the virtues of giving back excess cash to
shareholders by buying its stock. This both spared shareholders the high income-tax rates
imposed on dividends and boosted earnings per share. It was also seen by savvy investors –
notably Warren Buffet – as a signal that a company’s management thought its stock was a
bargain.

Condensed from the Fortune


Text C
Not so smart
How executives spend their company’s cash
IT IS easy to accept that small investors might be irrational—piling into dotcom stocks in late
1999, for example, or buying half-built Miami condominiums in 2006. But corporate executives
are supposed to be “in the know”. That, after all, is why there are such stringent laws against
insider dealing.
Take share buy-backs. Investors often see a decision by a company to buy back its own shares as
a positive indicator. If the executives think the shares are a bargain, everyone else should.
But are executives any good at market timing? Not according to the calculations of Andrew
Lapthorne, a quantitative strategist at Société Générale. In January 2008, just as the stockmarket
was starting one of its worst years in history, companies in the S&P 500 were using almost 40%
of their cashflow to buy back their own shares. By March 2009 equities were finding a bottom,
but the proportion of cashflow used to buy back shares had dropped to 19.6%.
An even lower proportion, 5.9%, was being used to purchase shares as 2010 dawned. That turned
out to be a pretty good year, with the S&P 500 gaining 12.8%. Executives had recovered their
nerve by the start of last year, spending 19% of their cashflow on buy-backs. But 2011 proved to
be a flat year for equities.
It seems likely that executives are being influenced by the market rather than the other way
round. A rising share price makes managers more optimistic, and encourages them to think the
trend will continue. Since a buy-back tends to boost earnings per share (EPS), a virtuous circle
can be created. Investors notice the increase in EPS and push the shares up accordingly. The
danger is that this is the investment equivalent of a sugar rush and that the EPS improvement
cannot be sustained. At the first sign of disappointment, the share price will plunge.
This pattern of behaviour may relate to an old problem: that cash tends to burn a hole in
managers’ pockets. A 2003 paper* by Robert Arnott and Clifford Asness found that companies
which paid a low proportion of their profits in the form of dividends displayed slower subsequent

59
profits growth than those with a higher payout ratio. The temptation was for executives to use
spare cash to go on an acquisition spree. This empire-building was usually a bad idea for
shareholders but could be used to justify higher salaries for managers. In similar fashion, modern
managers are motivated by share options and buy-back programmes are designed to prop up the
share price.
What might be a more rational use of a company’s cashflow? One possibility would be the
injection of cash into their pension funds. According to Mercer, a consultancy, American
pension funds had a deficit of $484 billion at the end of last year (up from $315 billion at end-
2010), a funding ratio of just 75%.
But executives seem to be counting on an equity-market rally to dig them out of the hole. Mr
Lapthorne finds that companies are expecting a return of 10%, after costs, from the equities in
their pension-fund portfolios.
That is quite an extraordinary expectation, given current market conditions. Over the long run
equity returns comprise the current dividend yield plus dividend growth. Since the dividend yield
on the S&P 500 is just 2.5%, that requires dividends to grow at 7.5% a year, faster than any
plausible forecast for economic growth. A rapid increase in profits might be possible if the
starting point was sufficiently low, but American profit margins are at their highest level since
the mid-1960s.
The evidence suggests that companies themselves don’t really believe such rosy forecasts. A
Duke University poll of chief financial officers shows they have an average forecast for equity
returns over the next ten years of 6.3%. So why do their companies allow such predictions for
pension returns to stand? The answer is that if they used more realistic numbers, they would have
to contribute more money to make up for the shortfall. And that would dent their profits and thus
their share prices. So this apparent piece of myopia might be quite rational after all.
The Economist

Hungry minds
14. Read the article below and be ready to speak on the following:
a). Figuring out the right price of any stock;
b). The distinction between value and growth investors in terms of
their stock preference and attitude towards dividends;
c). Changes in investment strategies as illustrated by investors’ attitude
to value stocks;
d). Factors affecting the value stock category

60
Fashions are changing in the stockmarket
IS IT time for a change in investment style? The general rise in stockmarkets this year may be
disguising a fundamental shift within the market. “Value” stocks, in Europe at least, are starting
to outperform those in the “growth” category after five years in which the trend has been the
other way round.
The distinction between the two classifications is not cut and dried. “Market commentators and
investment managers who glibly refer to growth and value styles as contrasting approaches to
investment are displaying their ignorance, not their sophistication,” is the warning of Warren
Buffett. The noted American investor looks for a hybrid: companies that can grow their future
earnings but are priced cheaply relative to what he dubs their “intrinsic value”.
The right price of any stock is the present value of future cashflows, discounted at the relevant
rate. Predicting the volume of those cashflows and picking the right discount rate are the tricky
bits. Both value and growth investors have to perform the task.
Notwithstanding Mr Buffett’s cautionary words, the two groups tend to search in different
places. Value investors look at stocks that are in unglamorous industries or at companies that
have suffered a bout of bad news in the recent past. Growth investors examine companies where
the underlying conditions look more promising but where the market may still be
underestimating the potential for long-term profits growth.
A value investor would usually expect a decent dividend yield; a growth investor would be
happy if the company was reinvesting all its free cash. A value investor might be looking at a
company with shares trading at a discount to its asset value; a growth investor might not worry if
the company had much in the way of tangible assets at all. To caricature the divide, the growth
investor might pick Google and the value investor would opt for Altria, the tobacco firm once
known as Philip Morris.
The moment when this divide seemed starkest was in the late 1990s when investors flocked to
buy stocks in “new economy” companies with no profits or dividends and scorned “old
economy” companies with established brand names and solid cashflows. The vast gap between
the two caused consternation among traditional value managers like the late Tony Dye at Phillips
& Drew, a British fund manager; clients deserted by the score.
Once the dotcom bubble burst, the value style outperformed for several years, before the
financial crisis of 2007 and 2008 heralded yet another change in fashion. Value stocks are
usually cheap for a reason. There is deep uncertainty about the outlook for their business or
industry. Investors became more risk-averse as the crisis took hold and they tended to shun the
value category as a result.

61
So what is driving the recent uptick in value stocks? One reason is greater optimism about the
outlook for the global economy as fears of a euro-zone break-up and a Chinese hard landing
have receded. Furthermore, after years of underperformance, value stocks look like a bargain.
Matthew Garman, a strategist at Morgan Stanley, reckons that European value stocks now trade
at a 47% discount to their growth counterparts, a wide gap in historical terms.
Even so the stockmarket is not typically a place where investors can find lots of $100 bills lying
around. Four sectors are prominent in the value category: energy, financial services, telecoms
and utilities. All are potentially the object of government interference in the form of regulation,
higher taxes, limits on their ability to raise prices, higher capital requirements (for the banks) or
outright nationalisation (mining and oil companies in developing countries). With government
finances under pressure, the risk of adverse developments for these industries must be greater
than normal.
The other risk is that global growth may not be as strong as investors hope. European economies
look stagnant; American growth, which turned negative in the last quarter of 2012, may be held
back by the tax rises agreed upon in January and the potential for spending cuts in the spring.
American consumer confidence fell to a 14-month low in January. Slower-than-expected growth
might lead to lower commodity prices and to more trouble for the banking industry.
Still, once stockmarket trends start to develop, history suggests they can last a long time. In
America value stocks have underperformed growth stocks by 23% since the start of 1997. That
leaves a lot of ground to catch up.

The Economist

IT MATTERS

15. Search the Web for a) Efficient Market Hypothesis. Make a


presentation on the subject covering the following points:

• Who and when formulated the EMH


• The concept of the EMH
• The interrelationship between the information reflected by the market and the
predictability of prices
• The implication of “random walk of prices”
• Behavioral Finance - Arguments against the EMH:
(The January effect and “The Blue Monday on Wall Street”

62
• Relevance of the EMH
b) Harami candlesticks pattern. Make a presentation on the subject.

Reflection Spot

16. Express your critical, though well-founded, opinion of the Unit.

63
ACTIVE VOCABULARY OF UNIT 3

1. market momentum
2. small caps (large caps)
3. (convertible) bonds n long-term/ government/ treasury/ junk; to buy/ invest in/ issue/
redeem/ sell ~
4. (market) sentiment n to express/ agree with/ echo ~
5. to capitalize on
6. buyback (repurchase) n to make ~
7. inflection point
8. Dogs of the Dow
9. to cash in on
10. (dividend) payout n to make/ get/ suspend/ withhold ~
11. current (expected) earnings n to have/ calculate/ declare ~
12. to go broke
13. price-to-book numbers
14. cash flow numbers
15. book value
16. equity (finance)
17. (pro-shareholder) practice n to introduce/ adopt/ follow/ promote/ modify/ prevent ~
18. fundamentals n basic ~, to teach/ grasp/ master/ go back to ~

64
UNIT 4.TRACKING STOCK – FRIEND OR FOE
Competencies:
• Analyzing a subject-specific text
• Making inferences
• Enhancing translation skills
• Enriching interdisciplinary knowledge
• Study skills

Reading and Speaking

1. Answer the following questions:

a) What classes of shares do you know?


b) How do they differ from one another as to their voting power, dividend
payout, and claim on assets?
c) Why do companies create share structures with different voting rights?
2. Scan the article “DuPont’s Tracking Stock”; consider the importance of
tracking stocks; define their advantages and drawbacks; explain the meaning
of the italicized words.
DuPont’s Tracking Stock
Last week, Dow Jones Industrial Average member DuPont announced plans to
issue a tracking stock for its life sciences business. Fools who haven’t spent a lot of time around
the stock market (and many of those who have) may wonder what exactly a tracking stock is.
This type of security is a new class of common stock issued by a company to represent the
financial performance of a specific division. Most often, tracking stocks are issued by companies
that have sexy divisions expected to achieve high valuations in the market.
To gain some insight, let’s look at what DuPont plans to do. Assuming its plan comes to
fruition, some time next year the company will issue a dividend of tracking stock to its current
shareholders. DuPont owners will continue to hold their original DuPont shares, but they will
also own newly issued “tracking “ shares of DuPont Life Sciences (DLS). This stock will
represent the earnings of the DLS businesses, such as the company’s pharmaceutical, crop
protection, and nutrition and health divisions.

65
Despite having separately traded stock, DLS is not a separate company from DuPont.
From a legal standpoint, DuPont will still be one company with one board of directors. It will,
however, report three income statements and balance sheets in its government filings. The first
set of financial statements will reflect all of DuPont, including DLS and all of DuPont’s other
businesses. The second and third sets of financial statements will reflect DuPont’s operations
excluding DLS and those of just DLS, respectively.
Several advantages were cited by DuPont for its decision to issue a tracking stock, most
of which could be also accomplished by spinning off the life sciences business entirely. The
company expects that the tracking stock for its fast-growing life-sciences group will trade at a
higher multiple than its slower-growing chemicals business. Assuming that occurs (which is
likely), the company can use the higher-valued tracking stock as currency in acquisitions and
strategic alliances. The importance of having this currency as the company expands was
demonstrated by the potential dilution from DuPont’s proposed merger with Pioneer Hi-bred.
Using DuPont stock and cash, DuPont faces earnings dilution of up to $0.25 per share next year.
If DuPont had a more highly valued stock, this dilution could have been reduced substantially.
Other advantages noted by DuPont are the ability to allow shareholders to invest
separately in its divisions and better alignment of the company’s incentive stock options for
employees. Many life sciences investors may shy away from investing in the company because
right now they have to buy all of DuPont’s other businesses along with life sciences. When the
tracking stock is issued, those investors are much more likely to evaluate DLS as an investment
option.
Employees of DLS will be able to participate more directly in the success (and failures)
of that business. You may not think that is terribly important, but in reality it is. For example, if
you were a scientist working at DuPont and were being wooed by a competitor like Monsanto
(NYSE: MTC) or Amgen (Nasdaq: AMGN), those competitors could throw out stock options
that reflect the high growth of their businesses. With DuPont, however, the value of your stock
options would be hampered by the slower growing and cyclical chemical business. Having a
tracking stock will give DuPont the ability to better compete for top-notch employees.
Of course, all of the advantages just listed could be achieved if DuPont were to spin off
its life sciences business into a separately traded company. So what is the advantage of having a
tracking stock over a spin-off? In a word, cash. The life sciences segment of DuPont is investing
lots of cash to grow its business. At the same time, the other businesses of DuPont generate
significant cash flow. By maintaining one corporate structure for both businesses, life sciences
has a ready provider of debt and equity capital when needed. The added financial flexibility of a
strong capital partner could become a crucial competitive advantage for DLS.

66
The biggest drawbacks of a tracking stock are the lack of a separate board of directors
to oversee life sciences and the limited voice that tracking stock shareholders have over the
business. DuPont will continue to have only one board of directors responsible for both the core
business and DLS. Based on the history of other tracking stocks, DLS shareholders will not have
a significant voice in their selection (since the old DuPont will be much larger, its shareholders
will have a larger voice in the election). Any situation where directors are not held directly
responsible for their actions via shareholder votes is a reason for concern. Nonetheless, since
DuPont has indicated that life sciences will be its primary focus for growth, my guess is that
directors will be cognizant of the needs of DLS.
http://www.fool.com/eveningnews.foth

3. Distinguish between the spin-offs and tracking stocks.

4. What is the message of the picture on page59?

5. Scan the text “Tracking Stocks are Accidents Waiting to Happen” and judging by
its title infer the author’s attitude towards the innovation, i.e. tracking stock.

6. Paraphrase and suggest the Russian for the following:

• the logic is straightforward


• with growth rates tapering off
• to create a conflict
• chronic management headaches
• their interests are bound to collide
• “lettered stocks”
• to keep the tracked business in-house
• to unlock the market value of a business
• inherent conflicts of interest
• mature business
• to rule against smth

7. Find the English for the following:

• опережать повышательную тенденцию


• рост курсов акций
• потенциал роста
• представители компании дали понять

67
• сохранить контроль (над компанией)
• защищать интересы акционеров
• вернуть долг
• компания, испытывающая острый недостаток в наличных средствах

8. Explain the following in English:

a). “It’s a duty-of-loyalty bear trap”


b). Sounds like fodder for shareholder lawsuit?
c). …since shareholders have voted for the transactions in question, the plaintiffs didn’t have a
case
d). That is changing and without a doubt, train wrecks lie ahead.

Translation

9. Translate texts A and B.

Text A Tracking Stocks Are Accidents Waiting to Happen

Conflict: How can the board protect the interests of two sets of
shareholders when those interests are bound to collide?
By Peter Coy

Microsoft Corp., whose fast-rising shares have consistently outpaced the bull market, is
considering a tracking stock? That should give us a pause. The logic is straightforward enough:
With growth rates in its core software businesses tapering off, the ascent of Microsoft shares
could also slow. Why not, then, issue a stock that reflects the growth potential of its newer
Internet businesses? After all, everybody’s doing that.
Microsoft shares soared on reports of a tracking stock, despite the fact the
company has indicated nothing will happen any time soon. Never might be a better idea. A
tracking stock would be a mistake. In fact, that’s true for any company embracing the fad for
tracking stocks. They are accidents waiting to happen.
Here’s the problem: A company that issues a tracking stock creates a conflict for
its board of directors and chronic management headaches. Why? Because the interests of two
sets of shareholders are bound to collide. In Microsoft’s case it’s easy to imagine conflicts over
whether to fund an operating system (the old shares) or an Internet portal (the new shares). “It’s
a duty-of-loyalty bear trap,” says New York Law School professor Jeffrey Haas. “You have one
servant, the board, serving two or more masters.”

68
Friend or foe? A tracking stock is a class of shares of the parent company that are
linked to the performance of a particular business – usually the fastest-growing one. General
Motors issued the first such shares in 1984 and 1985 – “lettered” stocks for its Electronic Data
Systems and Hughes Electronics subsidiaries. But it’s only in the past year or so that tracking
stocks have gotten hot. Among the recent issuers: AT&T; Donaldson, Lufkin & Jenrette; and
Ziff-Davis. DuPont Co. is readying a tracking stock for its life-sciences division. Others
considering them are General Electric Co. and Walt Disney Co.
Tracking stocks unlock the market value of a new business, much as a spin-off
would, while letting managers retain control. But by keeping the tracked business in-house
instead of spinning it off, the parent preserves the tax advantages and credit quality that come
from having diversified businesses with ups and downs that aren’t synchronized. Meanwhile,
managers of the tracked business can be rewarded with tracking-stock options – a big issue for
Disney, which has lost top executives to Internet startups. The tracking stock can also be used to
make acquisitions.
But all those advantages pale beside the disadvantage posed by the board’s
conflicts of interest. Take this warning from DLJ’s prospectus for DLJdirect: “The board of
directors may make decisions that favor DLJ at the expense of DLJdirect. Due to the extensive
relationships between DLJ and DLJdirect, there will be inherent conflicts of interest.” For
instance, the prospectus goes on to say, “there can be no assurance that DLJ will not expand its
operations to compete with DLJdirect.” Think about that: The directors supposedly looking out
for DLJdirect’s interests are reserving the right to compete with it.
Everybody loses. There are more immediate conflicts as well: How much
investment should go into the high-flying, cash-hungry business, vs. the cash-rich, old-line
company? If you say each should stand on its own, then the fast-growing but perhaps money-
losing business will starve. But if you provide nourishment from the coffers of the mature
business, shareholders of the larger company could justifiably cry foul.
And what happens if one part of the company can’t pay back its loans? The other
part is on the hook. “They are like financial Siamese twins, attached at the hip through their
ownership by the same parent,” says New York Law School’s Haas.
Sound like fodder for shareholder lawsuits? It is.
Delaware Chancery Court1 recently ruled against holders of GM E and H shares
who said that GM had treated them unfairly. The court said that since shareholders had voted for

1
Delaware Chancery Court – «канцлерский суд», «суд справедливости» штата Делавэр (имеется лишь в
некоторых штатах США)
Американа англо-русский лингвострановедческий словарь

69
the transactions in question, the plaintiffs didn't have a case. Lawyers for holders of the former E
shares are appealing, arguing that GM directors duped the shareholders.
The main reason there haven’t been more lawsuits over tracking stocks is that
until recently, few tracking stocks existed. That is changing, and without a doubt, train wrecks lie
ahead. BusinessWeek

Text B
Making Tracks
Life is hard these days for the executives of the «old economy» company. As young
technology businesses bask in attention , glory and vigorous share prices, firms founded earlier
than, say, 1994, seem decidedly long in the tooth. Maturity just does not seem to get its due. But
some middle-aged companies, looking to put juvenile vim into their share prices, believe they
have found a way to tap the fabled fountain of youth.
The staid and stodgy who want to turn themselves into the young and sexy are drawn to
the current fad for a type of share known as a «tracking stock», sometimes called a «designer» or
«letter» stock. Tracking stock’s prices are meant to reflect the fortunes of a subsidiary of a
company. Unlike run-of-the-mill shares, however, they do not lay claim to the assets of the
subsidiary.
The first tracking stock was created by General Motors in 1984 and was tied to the
profits of a computer subsidiary. In 1991, USX Corporation replaced its own common stock with
two tracking stocks: one for its US Steel division and one for its Marathon Oil unit. Much of the
logic in these involved «unlocking value» trapped in profitable subsidiaries, allowing them to be
valued as if they were hived off as separate companies. This is the same logic that has driven
many actual corporate spin-offs in the past decade, among them ITT’s division into three parts in
1995, and AT&T’s divestiture of Lucent Technologies the following year.

Tracking stocks are seductive because they seem to offer companies the benefits of such
«demergers» without making them endure the pain of slicing their firms into pieces. So they
have allowed managers to reap some juicy stock market gains without shedding any of their
bulk.
The various excuses for keeping a company together - and hence of issuing tracking
stocks, rather than selling a subsidiary - usually hinge on claims of «synergies» as well on tax
advantages. Divestiture may sometimes have tax consequences. But the continuing
administrative costs of maintaining tracking stocks can be substantial. And rarely does a
promising subsidiary need its parent to provide it with capital and expertise. Capital markets ,

70
especially in America, can see to that. Most of the time, managers’ reluctance to spin off
promising but unrelated subsidiaries is simply explained: they are loath to give up control.
For many managers it might be better to stop envying the high life and even higher
share prices of their youthful competition, and just learn to let go. Investors too might temper
their enthusiasm for tracking stocks, by giving some thought to how they might perform in a
sharply falling market. In most fairy tales, after all, the fountain of youth turns out a bitter
disappointment.
The Economist

Language Focus

10. Match the meaning of the following words with their definitions:

1. currency a. a company which has passed both the emerging


and the growth phases of its development
2. alliance b. short-term and long-term obligations on a
company’s balance sheet (bonds, loans,
commercial papers)
3. alignment c. the fact that smth is used or accepted by a lot of
people
4. debt d. a written report that quantitavely describes the
financial health of a company
5. equity e. on a company’s balance sheet the amount of
money contributed by the owners (shareholders)
plus the retained earnings (losses)
6. prospectus f. a new business venture
7. startup g. a formal written offer to sell securities that sets
forth the plan for a proposed business enterprise
8. high-flying business h. the organization of activities or systems so that
they match or fit well together
9. mature business i. of established prestige and adhering to
traditional practices
10 old-line company j. a company with high-priced and highly
speculative stock that moves up and down
sharply over a short period

71
11. financial statement k. an agreement between countries, political
parties, etc. to work together in order to
achieve smth they all want

11. Make up a list of adjectives and nouns which collocate with the following words, then
look through the Russian word combinations below to see whether you have their English
equivalents on your list; illustrate by your own examples how these collocations can be
used (e. g. annual growth; growth potential)

Adjectives (or nouns) Nouns Nouns

Annual growth potential

core

market

Inheritance tax

business

credit

value

debt

Рост, стимулируемый экспортом; потенциал роста; органичный, собственный внутренний


рост; основное ядро (группы, партии); сердцевина; основополагающие ценности;
основные предметы (учебные); ведущие отрасли промышленности; деловые контакты;
бизнес-сообщество; командировка; источники кредита; беспроцентный кредит;
ограничение кредита; номинальная стоимость; балансовая стоимость; налог на
непредвиденную прибыль; налог на прирост капитала; налоговая декларация;
освобождение от налогов; налоговая лазейка; “настроение” рынка; проникновение на
рынок.

12. Each of the following words frequently occurs with ONE word. What is it?

72
(You can refer to Unit 2 - Language Focus Assignment 1 and to Unit 4 - Language
Focus Assignment 1)
a).
global, worldwide, prolonged, mild, deep, painful severe, sharp, short-lived
b).
Economic, export-led, dramatic, modest, sluggish, long-term, fast, slow, steady
c).
Zero, galloping, runaway, soaring, spiraling, double-digit, consumer-price, wage
d).
Operating, gross, taxable, net, annual, disposable, real, personal, pre-tax, below-average
e).
Accounting, accepted, widespread, common, unfair, management, business
f).
Pro-forma, original, final, tax
g).
Grave, high, significant, inherent, low, extra, credit, financial, health
h).
Interest-free, consumer, export, bank, long-term, foreign
i).
Competitive, domestic, overseas, bull, bear, capital, stock, foreign exchange, labour
j).
Core, side-line, profitable, private, retail, big, wholesale

Have your say

13. Comment upon the quotation: “The newly tracked business segment
gets a longer leash, but can still run back to the parent corporation if
times get tough”.

Reflection Spot

14. Say whether the information contained in the Unit was really new to
you and whether you found it worthy of your attention.

73
ACTIVE VOCABULARY OF UNIT 4

1. (tracking) stock n to issue/ acquire, buy, invest in/ dispose of, sell/ deal in, trade/ have,
hold, own ~
2. (strategic) alliance n to build up, create enter in, form, make/ break off/ seek ~
3. dilution (of capital, earnings per share ) to cause, result in ~
4. alignment (of interests) to bring smth into alignment
5. top-notch employee
6. debt capital
7. equity capital
8. outpace v ~ the market, competitors
9. collide v interests ~
10. collision n to be involved in, have/ avoid/ cause ~
11. to unlock the market value
12. to retain control (over a company)
13. to keep a business in house
14. startup n
15. prospectus n to produce/ look through ~
16. high-flying business
17. cash-hungry business
18. old-line company
19. money-losing company
20. mature business

74
UNIT 5. CORPORATE FINANCE. FUNDAMENTAL ANALYSIS

Competencies:
• analyzing an extended subject-specific text
• enriching interdisciplinary knowledge
• Making inferences
• Enhancing translation skills
• Making presentations

Reading and Speaking

1. Do you think that mastering the language of finance is key to successful


management? Why?

2. Scan texts A, B, C; answer the questions and develop your awareness of the main
items of an organization’s key financial statements; explain the meaning of the
italicized words.

• What is meant by fundamental analysis?


• What questions does it help to answer?
• Distinguish between quantitative and qualitative fundamentals.
• Define the concept of intrinsic value.
• In what way do technical analysis and EMH differ from fundamental analysis?
• What is an Income Statement, how is it structured and what items does it include?
• How can you define a Balance Sheet, how is it structured and what figures work to
provide you with a picture of the total net assets of a company?
• Distinguish between current and fixed assets, tangible and intangible assets.
• Explain the difference between current and long-term liabilities.
• What does quick ratio show?
• What are the two important equity items ?

75
A Fundamental Analysis: What Is It?

The very basics


Fundamental analysis serves to answer questions, such as:

• Is the company’s revenue growing?

• Is it actually making a profit?

• Is it in a strong-enough position to beat out its competitors in the future?

• Is it able to repay its debts?

• Is management trying to “cook the books”?

Of course, these are very involved questions, and there are literally hundreds of others
you might have about a company. It all really boils down to one question: Is the
company’s stock a good investment? Think of fundamental analysis as a toolbox to help
you answer this question.

Fundamentals: Quantitative and Qualitative


The big problem with defining fundamentals is that it can include anything related to
the economic well-being of a company. Obvious items include things like revenue and profit,
but fundamentals also include everything from a company’s market share to the quality of its
management.
The various fundamental factors can be grouped into two factors: quantitative and
qualitative:

• Quantitative – capable of being measured or expressed in numerical terms.

• Qualitative – related to or based on the quality or character of something, often


as opposed to its size or quantity.

In our context, quantitative fundamentals are numeric, measurable characteristics about


a business. It’s easy to see how the biggest source of quantitative data is the financial statements.
You can measure revenue, profit, assets and more with great precision.

Turning to qualitative fundamentals, these are the less tangible factors surrounding a
business – things such as the quality of a company’s board members and key executives, its
brand-name recognition, patents and proprietary technology.

Quantitative Meets Qualitative


Neither qualitative nor quantitative analysis is inherently better than the other, instead,
many analysts consider qualitative factors in conjunction with the hard, quantitative factors.

76
Take the Coca-Cola Company, for example. When examining its stock, an analyst might look at
the stock’s annual dividend payout, earnings per share, P/E ratio and many other quantitative
factors. However, no analysis of Coca-Cola would be complete without taking into account its
brand recognition. Anybody can start a company that sells sugar and water, but few companies
on earth are recognized by billions of people. It’s tough to put your finger on exactly what the
Coke brand is worth, but you can be sure that it’s an essential ingredient contributing to the
company’s ongoing success.
The Concept of Intrinsic Value
Before we get any further, we have to address the subject of intrinsic value. One of the
primary assumptions of fundamental analysis is that the price on the stock market does not fully
reflect a stock’s “real” value. After all, why would you be doing price analysis if the stock
market were always correct? In financial jargon, this true value is known as the intrinsic value.
For example, let’s say that a company’s stock was trading at $20. After doing extensive
homework on the company, you determine that it really is worth $25. In other words, you
determine the intrinsic value of the firm to be $25. This is clearly relevant because an investor
wants to buy stocks that are trading at prices significantly below their estimated intrinsic value.
This leads us to one of the second major assumptions of fundamental analysis: in the
long run, the stock market will reflect the fundamentals. There is no point in buying a stock
based on intrinsic value if the price never reflected that value. Nobody knows how long “the long
run” really is. It could be days or years.
This is what fundamental analysis is all about. By focusing on particular business an
investor can estimate the intrinsic value of a firm and thus find opportunities where he or she
can buy at a discount. If all goes well, the investment will pay off over time as the market
catches up to the fundamentals.
The big unknowns are:
1) You don’t know if your estimate of intrinsic value is correct, and
2) You don’t know how long it will take for intrinsic value to be reflected in the market
place.
Criticisms of Fundamental Analysis
The biggest criticisms of fundamental analysis come from two groups: proponents of
technical analysis and believers of the “efficient market hypothesis”.
Technical analysis is the other major form of security analysis. Put simply, technical
analysts base their investments on the price and volume movements of securities. Using charts
and a number of other tools, they trade on momentum, not caring about the fundamentals. While
it is possible to use both techniques in combination, one of the basic tenets of technical analysis

77
is that the market discounts everything. Accordingly, all news about a company already is priced
into a stock, and therefore a stock’s price movements give more insight than the underlying
fundamental factors of the business itself.
Followers of the efficient market hypothesis, however, are usually in disagreement with
both the fundamental and technical analysts. The efficient market hypothesis contends that it is
essentially impossible to produce market-beating returns in the long run, through either
fundamental or technical analysis. The rationale for this argument is that, since the market
efficiently prices all stocks on an ongoing basis, any opportunities for excess returns derived
from fundamental (or technical) analysis would be almost immediately whittled away by the
market’s many participants, making it impossible for anyone to meaningfully outperform the
market over the long term.
B The Income Statement
The income statement is basically the first financial statement you will come across in
an annual report or quarterly Securities and Exchange Commission (SEC) filing.
It also contains the numbers most often discussed when a company announces its results
– the numbers such as revenue, earnings, and earnings per share. Basically, the income
statement shows how much money the company generated (revenue), how much it spent
(expenses) and the difference between the two (profit) over a certain time period.
When it comes to analyzing fundamentals, the income statement lets investors know
how well the company’s business is performing – or, basically, whether or not the company is
making money. Generally speaking, companies ought to be able to bring in more money than
they spend or they don’t stay in business for long. Those companies with low expenses relative
to revenue – or high profits relative to revenue – signal strong fundamentals to investors.
Revenue as an Investor Signal
Revenue, also commonly known as sales, is generally the most straightforward part of
the income statement. Often there is just a single number that represents all the money a
company brought in during a specific time period, although big companies sometimes break
down revenue by business segment or geography.
The best way for a company to improve profitability is by increasing sales revenue. For
example, Starbucks Coffee has aggressive long-term sales growth goals that include a
distribution system of 20,000 stores worldwide. Consistent sales growth has been a strong driver
of Starbucks’ profitability.
The best revenue are those that continue year in and year out. Temporary increases,
such as those that might result from a short-term promotion are less valuable and should garner a
lower price-to-earnings multiple for a company.

78
What are the Expenses?
There are many kinds of expenses, but the most common are the cost of goods sold
(COGS) and selling, general and administrative expenses (SG&A). Cost of goods sold is the
expense most directly involved in creating revenue. It represents the cost of producing or
purchasing the goods or services sold by the company. For example, if Wal-Mart pays a supplier
$4 for a box of soap, which it sells to customers for $5. When it is sold, Wal-Mart’s cost of
goods sold for the box of soap would be $4. Next, costs involved in operating the business are
SG&A. This category includes marketing, salaries,, utility bills, technology expenses and other
general costs associated with running a business. SG&A also includes depreciation and
amortization. Companies must include the cost of replacing worn out assets. Remember, some
corporate expenses, such as research and development (R&D) at technology companies, are
crucial to future growth and should not be cut, even though doing so may make for a better-
looking earnings report. Finally, there are financial costs, notably taxes and interest payments,
which need to be considered.
Profits = Revenue – Expenses
Profit, most simply put, is equal to total revenue minus total expenses. However, there
are several commonly used profit subcategories that tell investors how the company is
performing. Gross profit is calculated as revenue minus cost of sales. Returning to Wal-Mart
again, the gross profit from the sale of the soap would have been $1 ($5 sales price less $4 cost
of goods sold = $1 gross profit).
Companies with high gross margins will have a lot of money left over to spend on other
business operations, such as R&D or marketing. So be on the lookout for downward trends in the
gross margin rate over time. This is a telltale sign of future problems facing the bottom line.
When cost of goods sold rises rapidly, they are likely to lower gross profit margins – unless, of
course, the company can pass these costs onto customers in the form of higher prices.
Operating profit is equal to revenues minus the cost of sales and SG&A. This number
represents the profit a company made from its actual operations, and excludes certain expenses
and revenues that may not be related to its central operations. High operating margins can mean
the company has effective control of costs, or that sales are increasing faster than operating costs.
Operating profit also gives investors an opportunity to do profit-margin comparisons between
companies that do not issue a separate disclosure of their cost of goods sold figures (which are
needed to do gross margin analysis). Operating profit measures how much cash the business
throws off, and some consider it a more reliable measure of profitability since it’s harder to
manipulate with accounting tricks than net earnings.

79
Net income generally represents the company’s profit after all expenses, including
financial expenses, have been paid. This number is often called the “bottom line” and is
generally the figure people refer to when they use the word “profit” or “earnings”.
When a company has a high profit margin, it usually means that it also has one or more
advantages over its competition. Companies with high net profit margins have a bigger cushion
to protect themselves during the hard times. Companies with low profit margins can get wiped
out in a downturn. And companies with profit margins reflecting a competitive advantage are
able to improve their market share during the hard times – leaving them even better positioned
when things improve again.

Notes
Profit Margin: A ratio of profitability calculated as net income divided by revenues, or net
profits divided by sales. It measures how much out of every dollar of sales a company actually
keeps in earnings.
Gross Profit Margin: A financial metric used to assess a firm’s financial health by revealing the
proportion of money left over from revenues after accounting for the cost of goods sold. Gross
profit margin serves as the source for paying additional expenses and future savings. Also known
as “gross margin”. Calculated as
Revenue-COGS
Gross Profit Margin = Revenue
C The Balance Sheet
Investors often overlook the balance sheet. Assets and liabilities aren’t nearly as sexy as
revenue and earnings. While earnings are important , they don’t tell the whole story.
The Snapshot of Health
The balance sheet tells you how much a company owns (its assets), and how much it
owes (its liabilities). The difference between what it owns and what it owes is its equity, also
commonly called “net assets” or “shareholders’ equity”.
The balance sheet tells investors a lot about a company’s fundamentals: how much debt
a company has, how much it needs to collect from customers (and how fast it does so), how
much cash and equivalents it possesses and what kinds of funds the company has generated over
time.
The Balance Sheet’s Main Three
Assets, liability and equity are the three main components of the balance sheet.
Carefully analyzed, they can tell investors a lot about a company’s fundamentals.
Assets

80
There are two main types of assets: current assets and non-current (fixed) assets.
Current assets are likely to be used up or converted into cash within one business cycle – usually
treated as twelve months. Three very important current asset items found on the balance sheet
are cash, inventories and accounts receivable.
Investors normally are attracted to companies with plenty of cash on their balance
sheets. After all, cash offers protection against tough times and it also gives companies more
options for future growth. Growing cash reserves often signal strong company performance.
Indeed, it shows that cash is accumulating so quickly that management doesn’t have time to
figure out how to make use of it. A dwindling cash pile could be a sign of trouble. That said, if
loads of cash are more or less a permanent feature of the company’s balance sheet, investors
need to ask why the money is not being put to use. Cash could be there because management has
run out of investment opportunities or is too short-sighted to know what to do with the money.
Inventories are raw materials, work-in-process goods and finished products that haven’t
yet been sold. As an investor, you want to know if a company has too much money tied up in its
inventory. Companies have limited funds available to invest in inventory. To generate the cash to
pay bills and return a profit, they must sell the merchandise they have purchased from suppliers.
Inventory turnover (cost of goods sold divided by average inventory) measures how quickly the
company is moving merchandise through the warehouse to customers. If inventory grows faster
than sales, it is almost always a sign of deteriorating fundamentals.
Receivables are outstanding (uncollected) bills. Analyzing the speed at which a
company collects what it’s owed can tell you a lot about its financial efficiency. If a company’s
collection period is growing longer, it could mean problems ahead. The company may be letting
customers stretch their credit in order to recognize greater top-line sales and that can spell
trouble later on, especially if customers face a cash crunch. Getting money right away is
preferable to waiting for it – since some of what is owed may never get paid. The quicker a
company gets its customers to make payments, the sooner it has cash to pay for salaries,
merchandise, equipment, loans, and, best of all, dividends and growth opportunities.
Fixed assets include items such as property, plant and equipment (PP&E). Unless the
company is in financial distress and is liquidating assets, investors need not pay too much
attention to fixed assets. Since companies are often unable to sell their fixed assets within any
reasonable amount of time they are carried on the balance sheet at cost regardless of their actual
value. As a result, it’s possible for companies to grossly inflate this number, leaving investors
with questionable and hard-to-compare asset figures.
Corporate intellectual property (such as patents, trademarks, copyrights and business
methodologies), goodwill and brand recognition are hard-to-measure intangible assets.

81
Liabilities
There are current liabilities and non-current (long-term) liabilities Current liabilities
are obligations the firm must pay within a year, such as payments owing to suppliers. Non-
current liabilities, meanwhile, represent what the company owes in a year or more time.
Typically, non-current liabilities represent bank and bondholder debt.
You usually want to see a manageable amount of debt. When debt levels are falling,
that’s a good sign. Generally speaking, if a company has more assets than liabilities, then it’s in
decent condition. By contrast, a company with a large amount of liabilities relative to assets
ought to be examined with more diligence. Having too much debt relative to cash flows required
to pay for interest and debt repayments is one way a company can go bankrupt.
Look at the quick ratio. Subtract inventory from current assets and then divide by
current liabilities. If the ratio is 1 or higher, it says that the company has enough cash and liquid
assets to cover its short-term debt obligations.
Current assets - Inventories
Quick ratio = Current liabilities
Equity
Equity represents what shareholders own, so it is often called shareholders’ equity.
Equity is equal to total assets minus total liabilities. The two important equity items are paid-in
capital and retained earnings. Paid-in capital is the amount of money shareholders paid for their
shares when the stock was first offered to the public. It basically represents how much money the
firm received when it sold its shares. Retained earnings are a tally of the money the company has
chosen to reinvest in the business rather than to pay to shareholders. Investors should look
closely at how a company puts retained capital to use and how a company generates a return on
it.
Condensed from Investopedia, a Forbes Media Company
and Understanding Accounts by Stephen Brookson

3. Study the samples of an Income Statement and a Balance Sheet to have a better
understanding of an organization’s main accounts.

Consolidated Income Statement

Years ended December 31, 2006 and 2005 (dollars in thousands) 2006 2005

Net sales $765,000 $725,000


Cost of sales 535,000 517,000

82
Gross margin 230,000 208,000

Operating expenses
Depreciation and amortization 28,000 25,000
Selling, general and administrative expenses 96,804 109,500

Operating income $105, 196 $ 73,500


Other income (expense)
Dividends and interest income 5,250 9,500
Interest expense (16,250) (16,250)

Income before income taxes and extraordinary loss $ 94,196 $ 66,750


Income taxes 41,446 26,250

Income before extraordinary loss $ 52,750 $ 40,500


Extraordinary item: Loss on early extinguishment
of debt (net of income tax benefit of $750) (5,000) _

Net income $ 47,750 $ 40,500

Common shares outstanding 14,999,000 14,499,000

Earnings per common share before


extraordinary loss $3,49 $2,77
Earnings per share-extraordinary loss (.33) _

Net income (per common share) $3.16 $2.77

Consolidated Balance Sheet

December 31, 2006 and 2005 (dollars in thousands)

Assets 2006 2005

Current assets
Cash $ 20.000 $ 15.000
Marketable securities at cost which
approximates market value 40,000 32,000
Accounts receivable – less 156,000 145,000
allowance for doubtful accounts:
83
2006: $2,375, 2005: $3,000
Inventories 180,000 185,000
Prepaid expenses and other current assets 4,000 3,000

Total current assets $400,000 $380,000

Property, plant and equipment


Land $ 30,000 $ 30,000
Buildings 125,000 118,500
Machinery 200,000 171,100
Leasehold improvements 15,000 15,000
Furniture, fixtures, etc. 15,000 12,000

Total property, plant and equipment $385,000 $346,600


Less accumulated depreciation 125,000 97,000

Net property, plant and equipment $260,000 $249,600

Intangibles (goodwill, patents) – less amortization 2,000 2,000

Total assets $662,000 $631,600

Liabilities 2006 2005

Current liabilities
Accounts payable $ 60,000 $ 57,000
Notes payable 51,000 61,000
Accrued expenses 30,000 36,000
Income tax payable 17,000 15,000
Other liabilities 12,000 12,000

Total current liabilities $316,000 $326,000

Shareholders’ Equity

Preferred stock $5.83 cumulative,


$100 par value authorized, issued
and outstanding 60,000 shares $ 6,000 $ 6,000
Common stock $5.00 par value,
Authorized 20,000,000 shares
issued 2006 15,000,000 shares,

84
2005 14,500,000 shares 75,000 72,500
Additional paid-in capital 20,000 13,500
Retained earnings 249,000 219,600
Foreign currency translation adjustments 1,000 (1,000)
Less: Treasury stock at cost
(2006 – 1000; 2005 – 1000 shares) 5,000 5,000

Total shareholders’ equity $346,000 $305,600

Total liabilities and shareholders’ equity $662,000 $631,600

Adapted from “HOW TO READ A FINANCIAL REPORT”


Fourth Edition, Merrill Lynch, Pierce, Fenner & Smith Inc.

4. Fill in the blanks and identify the users of financial statements.

Users of Financial Statements What They Look For


… has a vested interest in an organization’s • How well the business is doing
future and success; tends to be financially compared with previous years and with
cautious competitors.
• Reassurance that the source of income
is safe and secure
… invests money or has shares in an • Information on an organization to allow
organization; their analysis is often detailed comparisons with other businesses,
and ruthless. with a view to choosing between them
• Indications that returns will be
maximized
… advances loans; needs to know that the • Evidence that an organization will be
interest is affordable and that the debt can be able to pay the interest on any debts.
repaid. • The worth of an organization should the
debt be unpaid and the business wound
up.
… has an interest in the relative performance • Growth in sales, market share, net
and business statistics of rivals profits and overall business efficiency.
• Information about the cost structure and
operations of competitors.

85
… works for and is paid by the organization on • Reassurance that the organization will
a full-time or regular basis. continue to operate competitively
• End-of-year figures that reflect his/her
competence favourably
… needs to know whether he/she is dealing • Continuity of supply and business
with financially sound and reputable without disruption to the flow of goods
organizations. or services.
• Ability of an organization to pay for
goods and deliver on time.

… review financial statements for accuracy • Properly prepared and computed


and reasonableness, then check the amount of accounts and profit and loss statements.
tax payable. • Validity of accounts when compared
with similar businesses.

Language Focus

5. Infer the term from its definition:

a). Fraudulent activity performed by corporations in order to falsify their financial statements.
b). The “top line” figure from which costs are subtracted to determine income
c). The likelihood that consumers recognize the existence and availability of a company’s
product.
d). The actual value of a company or an asset based on an underlying perception of its true
value including all aspects of the business.
e). The amount of profit that a company produces during a specific period, which is usually
defined as a quarter or a year and which typically refers to after-tax net income
f). The amount of profit earned from a firm’s normal core business operations. Also known as
EBIT.
g). An expense recorded to allocate a tangible asset’s cost over its useful life.
h). Accounting procedure that gradually reduces the cost value of an intangible asset.
i). Money owed by customers to a firm in exchange for goods or services that have been
delivered or used, but not yet paid for.
j). An account that can be found in the assets portion of a company’s balance sheet and which
often arises when one company is purchased by another company. In an acquisition, the

86
amount paid for the company over book value.

6. Scan the text “Why Companies’ Financial Structure Matters After All” and explain
the following:

• gearing
• agency costs
• corporate insider
• providers of the funds
• entrenchment strategies
• self-dealing
• to consume perks
• general equilibrium
• informational asymmetry
• exercise price
• foundation stone

7. Paraphrase the word combinations:

a) the split between equity and debt


b) overview of corporate finance
c) means to a different end
d) to gain a better grasp of smth

8. Translate the following idiomatic expressions paying attention to the different


meanings of the word ”end”.

a. Means to an end.
b. The end justifies the means.
c. To attain one’s end.
d. To have smth at one’s finger-ends.
e. To make both ends meet
9. In the collocations below one word is odd. Spot the “odd one out” then go through
the Russian word combinations below and match them with the English equivalents
Example:
Apply for, create, catch, get, hold, lose A JOB
a) tackle, resolve, cause, create, play down, decide, address A PROBLEM
b) develop, advance, formulate, propose, request, embrace, refute, prove A THEORY

87
c) add, create, have, catch, affect, acquire, take on, assess VALUE
d) borrow, build up, raise, allocate, lend, receive, make, generate FUNDS
e) incur, meet, pay, settle, write off, reschedule, come across, run up DEBTS
f) make, redouble, refuse, renew, concentrate, focus, abandon EFFORTS
g) introduce, design, develop, come up with, work, disapprove of, plan, resist INNOVATION
h) have, establish, gain, put up, win, get, maintain, retain, lose, relinquish CONTROL
i) exercise, use, have, act with, intensify, employ, lack, practice DISCRETION
j) achieve, improve, increase, reduce, calculate, hit, find, work out RATIO

Заняться решением проблемы; преуменьшать важность проблемы; взять на вооружение


теорию; опровергать теорию; сформулировать теорию; выдвигать теорию; создавать
стоимость; выделять средства; изыскивать средства; списывать задолженность; влезть в
долги; пересматривать сроки погашения задолженности; погашать долг; отказаться
предпринимать усилия; удвоить усилия; не одобрить нововведение; предложить новую
идею; получить контроль; сохранить контроль; отказаться от контроля; проявлять
осмотрительность; быть недостаточно осмотрительным; подсчитать коэффициент;
улучшить соотношение.

Translation

10. Translate the text in writing.

Why Companies’ Financial Structure Matters After All


“Irrelevance theory” contains one of the most startling conclusions in economic
thought. In two papers, published in1958 and 1963, Franco Modigliani and Merton Miller argued
that a firm’s financial structure – its split between equity and different sorts of debt, its dividend
policy and so on – made no difference to its total value. Financial structure merely affected how
the corporate pie was shared out; it had no effect on the size of the pie itself. Managers and
owners should therefore waste no time agonizing about gearing, dividends and such like, and
instead devote themselves to maximizing the value of their firms.
This insight helped win Modigliani and Miller Nobel prizes in economics (although two
such giants would surely have earned them without it). Unfortunately, it also set back for a
generation the study by economists of corporate finance. The problem is not that irrelevance
theory is wrong but that it is true only in circumstances so rare that they are the exception rather
than the rule: that the choice of financial structure does indeed affect the value of a firm.

88
That choices about debt, equity and so forth do matter is the underlying theme of a
magnificent new book, “The Theory of Corporate Finance”, by Jean Tirole, of the University of
Toulouse. This is far more than the mere textbook it purports to be; it has a plausible claim to be
the first truly comprehensive overview of corporate finance by an economist. Perhaps this only
goes to show how slow economists have been.
Means to a different end
Mr. Tirole starts not with Modigliani and Miller but with Adolph Berle and Gardiner
Means, who in 1932 published a classic book documenting the separation of the ownership and
control of firms in America. This separation, they found, allowed managers considerable
discretion, which could be abused at the expense of owners – ie, shareholders. It is only in the
past 30 years that economists have started to explore seriously the implications of these “agency
costs” – the financial loss to the “principal” (the shareholder) due to the abuse of discretion by
the “agent” (the manager) hired to run the firm.
In the world of Modigliani and Miller, no account was taken of agency costs. The size
of the pie was taken as given, without considering whether managers were making it as big as
they could. For Mr. Tirole, “the premise behind modern corporate finance is that corporate
insiders need not act in the best interests of the providers of the funds”. Much of the innovation
in corporate finance in recent decades has been based on this premise. A lot of work has gone
into designing ways of enabling investors to entrust money to managers with a reasonable
expectation of getting something back.
Nowadays, an understanding of agency costs is a standard tool in any economist’s kit.
Since they have been looking seriously, economists have identified numerous areas of potential
conflict between managers and owners. Mr. Tirole groups these into four categories: insufficient
effort; extravagant investments; entrenchment strategies (actions, such as anti-takeover “poison
pills”, that are costly to shareholders and make it harder to remove managers); and self-dealing
(from legally consuming perks to promoting friends or even outright theft). Ominously, Mr
Tirole notes that in recent corporate scandals self-dealing may have been prominent only because
it is “somewhat easier to discover and especially demonstrate than insufficient effort, extravagant
investments or entrenchment strategies”. Misbehaviour you can see is, he says, merely the “tip
of the iceberg”.
At its simplest, issuing debt tackles agency problems (but does not resolve them fully)
because a bond legally obliges managers to pay interest and repay the sum borrowed on specified
dates. Equity is much less effective, because it carries no formal obligation to pay shareholders
back. Yet in recent years much progress has been made in understanding how to reduce equity
agency costs, argues Mr. Tirole. Besides increasing the ratio of debt to equity in a firm’s balance

89
sheet, an idea that gained popularity in the 1980s, there are two main methods: incentives (such
as share options) that align managers’ and owners’ interests; and better monitoring of managers.
True, neither of these is perfect. Economists, inevitably, have found that every
innovation in corporate governance has costs as well as benefits. For instance, share options can
encourage managers to take far bigger risks than shareholders would wish when they are under
water (that is, when the exercise price of the share option is above the market price of the share).
Even so, as Mr. Tirole explains in great detail, economists have gained a much better grasp of
which mix of incentive and monitoring is likely to work best in which circumstances.
One puzzle is why economists took so long to get there. Maybe, speculates Mr. Tirole,
this is because from the 1930s to 1970s they were mostly obsessed with macroeconomics and, in
particular, theories of general equilibrium. These assumed that markets were perfectly
competitive, free of informational asymmetries such as those identified by Berle and Means.
Although Modigliani and Miller slowed the development of economic theories of
corporate finance, their work became a foundation stone of financial economics. Financial
economists’ starting point is the investor rather than the firm: how, they ask, can people best
spread their money over a range of assets (including corporate bonds and shares)? While
corporate-finance economists increasingly emphasize agency problems, many financial
economists still play them down, says Mr. Tirole. Would debt and equity markets work better if
capital’s suppliers and corporate consumers found the same theories relevant?
The Economist

Business Skills
11. Make presentations on a) different ratios used by companies to measure
their profitability, efficiency, financing and liquidity; b) Modigliani – Miller
theorem.

Reflection Spot

12. Do you think you will be able to make use of the information from the Unit in your
future business career? If so, in what way?

90
ACTIVE VOCABULARY OF UNIT 5

1. quantitative (qualitative) fundamentals

2. value n to put, place set a ~ on smth/ increase, raise, double/ lower, reduce/ calculate,
work out ~
3. intrinsic value
4. Income Statement
5. Balance Sheet
6. assets n current/ fixed/tangible/ intangible/ depreciable/ foreign, overseas/ personal/
national, state ~
7. current assets – cash, inventories, accounts receivable
8. fixed assets – property, plant & equipment
9. intangible assets – patents, trade marks, goodwill, brand recognition
10. depreciation (amortization)
11. liabilities n current. long-term ~; to have/ take on/ meet ~
12. quick ratio
13. to “cook the books” (accounting tricks)
14. proprietary technology
15. to trade on momentum
16. to file a report with the SEC
17. SG&A (Selling, General & Administrative expenditures)
18. COGS (costs of Goods Sold)
19. R&D (Research & Development)
20. gross margin
21. operating profit (operating costs)
22. inventory turnover
23. collection period
24. shareholders’ equity: paid-in capital, retained earnings
25. additional paid-in capital (syn. capital surplus)
26. cumulative preferred stock
27. allowance for doubtful accounts
28. Treasury stock
29. self-dealing
30. entrenchment strategy
31. agency costs
32. due diligence n to show ~

91
UNIT 6. ACCOUNTING ISSUES
Competencies:
• analyzing an extended subject-specific text
• enriching interdisciplinary knowledge
• synthesizing the contents of an extended text
• enhancing translation (rendering) skills
• analyzing financial statements of a company

Reading and speaking

1. Answer the questions:

• What is the difference between the cash-basis and accrual basis


accounting?
• What is meant by historical cost and fair value accounting?

2. Comment on the following quotations:

• There is no business like show business, but there are several businesses like account
ting.

David Letterman

• We have the most crude accounting tools. It’s tragic because our accounts and our
national arithmetic doesn’t tell us the things that we need to know.

Susan George

• Balanced budget requirements seem more likely to produce accounting ingenuity


than genuinely balanced budgets.

Thomas Sowell

• I have made the tough decisions, always with an eye toward the bottom line. Perhaps
it’s time America was run like a business.

Donald Trump

3. Scan the text “The ones that get away” paying attention to the following points:
a) The role of accounting numbers in making investment decisions.

92
b) Why have forward-looking estimates come to play such an important role under accrual
basis accounting?
c) The requirements accounting numbers should meet and the determination of standard-
setters on both sides of the Atlantic to shift to fair-value accounting.
d) The concept of fair-value as opposed to historical value.
e) The flaws of fair-value accounting from the point of view of its opponents.
f) Greater responsibilities placed on auditors in connection with the shift.
g) The importance of increased transparency of the accounts of the companies practicing
fair-value.

The Ones That Get Away

Accounts are increasingly more art than science


It is corporate earnings season once again, and investors are poring over the numbers.
This week, Sprint, an American telecom firm, announced net profits more than twice as high as a
year ago. Amazon, an internet retailer, revealed net income that had fallen by 32%, due, the firm
said, to tax issues. The shares of both companies rose. Should they have done?
Profits figures are meant to shed light on how a company – and its stock price – might
fare in the future. But many experts worry that increasingly they don’t. The scandals at Enron
and WorldCom – as well as more recent accounting snafus at General Electric and a big scam at
AIG – show that accounting numbers are malleable. And they are getting squishier as the use of
estimates in company accounts increases.
Whether this malleability is a problem is the subject of heated debate and carries with it
important consequences. Reliable numbers mean that investors can make sound decisions. Bad
ones lead not just to the inefficient allocation of capital but also to a loss of confidence in the
markets and, when fraud is involved to huge shareholder losses. A study by Glass Lewis, a
research outfit, found that investors lost well over $900 billion in 30 big scams between 1997
and 2004.
Ever since accounting shifted from the simple tallying of cash in and cash out to “accrual
accounting”, where profits and expenses are booked when incurred, forward-looking estimates
have played a critical role in measuring company profits. This role has grown as “knowledge-
based” economies have begun to replace the old widget-making versions, and businesses have
become more complex.
The biggest boost to estimation, however, has come from the gradual shift to “fair-value”
accounting. Before, assets and liabilities were mostly carried at their historic, original cost;
“fair-value” is an attempt to show their current worth. Fair-value numbers are up-to-date and

93
arguably more relevant than their static but verifiable precursors. But they also result in more
volatile profits and a heavier reliance on estimates for the many items (bank loans, buildings)
that may not have a ready market.
Standard-setters on both sides of the Atlantic have been urging this shift. In June
America’s Securities and Exchange Commission, in a long-awaited report commissioned by
Congress after the Enron scandal, also endorsed fair-value accounting, which it thinks will
simplify accounts and reduce firms’ interest in structuring transactions to meet accounting goals.
Others are less sanguine. Even with the best will in the world, estimates can be wildly off
the mark. And they are easy to manipulate. In a recent study, Daniel Bergstresser and Mihir
Desai of Harvard Business School and Joshua Rauh of the University of Chicago’s Graduate
School of Business found ample evidence of tinkering. At delicate moments – before
acquisitions and equity offerings and exercising stock options, for example – some bosses
inflated the assumed rate of return on pension-fund assets, thus flattering profits.
Baruch Lev of New York University’s Stern school of Business, and Siyi Li and
Theodore Sougiannis, from the University of Illinois, harbor a deeper worry: that estimates,
which are supposed to improve the relevance of financial information by giving managers a
means to impart their forward-looking views (on how many customers might return their new
cars, for instance), are not very useful at all. That is, they do not really help investors to predict a
company’s future earnings and cash flows.
The three analyzed 3,500 – 4,500 companies a year from 1988 to 2002. They then tried to
“predict” future performance (earnings or cash flow) with five models in which historic cash
flows and estimates were used to different degrees. The trio found that cash flows predicted
future performance robustly, but adding estimates to them was little help in predicting future
performance, or in generating returns from portfolios based on these predictions. It was a
“sobering result”, they concluded.
Mr. Lev blames this on the difficulty of making good estimates in a fast-changing,
complex world as well as on a degree of earnings manipulation. “This is not to say we should
toss the accounting system, which is overwhelmingly based on estimates, into the waste bin,” he
says, “but it does point to the urgent need to enhance the reliability of accounting estimates –
especially given the move to fair value.”
The objective is objectivity
“Estimates are part of accounting. So the focus shouldn’t be on the number of estimates,”
argues Neri Bukspan, chief accountant at Standard and Poor’s, a ratings agency, ”but rather the
objectivity and independence of those making the estimates and those tasked with verifying
them.” This puts a greater onus on auditors to weed out good estimates from hyped ones –

94
making their independence even more critical than it seemed after Enron. The Public Accounting
Oversight Board, recognizing this, also plans to expand its audit guidance on fair value.
Investors need to scrutinize the numbers harder, too. Better disclosure would help them.
Mr. Lev suggests that firms should say how much of key reported figures is based on facts (eg,
revenues as they are in the bag) and how much on estimates – a proposal that companies claim
would tip their hand to competitors. But both FASB and its international counterpart are drafting
standards requiring increased disclosure of how fair values are derived and their impact on
profits and balance sheets. Mr.Lev has a more ambitious proposal. This entails forcing
management to periodically “true up” – that is, disclose how their previous estimates have
panned out. He argues that this would inject discipline into the system, allowing investors to
penalize companies that consistently make bad estimates. Lynn Turner, a former chief
accountant at the SEC, agrees. “Markets can’t discipline without transparency.” Defenders of fair
value say that this is confusing and unnecessary. A change in estimated value could be due to
changing market conditions, not to a bad estimate. And fair value accounting itself, some argue,
is a constant “true up”. But then, there’s “true’ and true.
The Economist

4. Explain the following in English:

• accounting numbers are malleable


• accounting snafus
• a big scam at AIG
• a research outfit
• knowledge-based economy versus widget-making economy
• to have a ready market
• to structure transaction to meet accounting goals
• to be wildly off the mark
• to tinker with smth
• to tip one’s hand to competitors
• how their previous estimates have panned out

5. Analyze texts A, B, C and say what different groups – accounting standard setters,
critics, and investors - think of historical cost and fair value accounting; summarize the
authors’ point of view.

95
Text A

Currently accountants in the US record assets on the balance sheet using historical cost, or
the amount that the company or individual paid for the asset at the time of purchase.

Historical cost ignores the amount the asset could be sold for in the open market, called the fair
value, until the asset is actually sold. The company carries the asset on the balance sheet at the
purchase cost less any depreciation taken. At the time of sale, the company records a gain or a
loss against the purchase cost of the asset less any depreciation if applicable.

Historical Cost Accounting Example


For example, if Sunny purchased an asset for $5,000 and estimated depreciation expense of $500
per year for 10 years, the cost of the asset after the first year less depreciation is $4,500. If the
market value of the asset were $4,800 after year one in the open market, Sunny would not write
up the asset after the first year. Rather, the asset would remain at original cost less any
depreciation until the asset is sold.
If Sunny sold the asset for $4,800 after year one, Sunny recognizes a realized gain of $300.

Sale of Equipment at Historical Cost

Account and Explanation Debits Credits

Cash $4,800
Accumulated Depreciation $500
Equipment - $5,000
Gain on Sale of Equip. - $300
To record sale of asset at original cost less depreciation.
Therefore, assets on the balance sheet are recorded at historical costs until sold. Since everyone
in the U.S. is currently required to follow the historical cost principle, users of financial
statements understand where the asset values are coming from: the price originally paid for the
asset (less any depreciation where applicable).

Historical Cost and Fair Value Accounting: Relevance and Reliability


Revisited
The historical cost principle follows the accounting quality of reliability since everyone can
agree on the original purchase price of an asset. However, the historical price is not necessarily
relevant information. Land that was purchased 20 years ago could be worth much more than the
balance sheet shows. Likewise a building purchased many years ago and recorded on the balance
sheet at the original cost does not reflect the current market price.

96
For this reason, many accountants and users of financial statements argue that the market price,
or fair value should be used when reporting financial information. The fair value is more
relevant, but is not necessarily reliable. Selling the same item at different auctions will lead to a
wide range of winning bids for the same item, and even professional appraisers will value an
asset at a range of prices instead of a set value.
Differences can involve the future use of the asset, assumptions about its useful life and output,
and opinions and professional judgments that result in a range of values for an asset. Like other
professions, professional appraisers balance opinions and judgments with verifiable data. So
although the market price, or fair value of an asset may be more relevant, it is less reliable.
The reliability vs. relevance debate centers on one of the key issues in financial reporting and
one of the major transitions currently underway in GAAP: the transition from historical cost to
fair value accounting.
Currently accountants in the U.S. are not allowed to write up the value of an asset to the market
or fair value, but accountants are required to write down an asset when an asset is materially
impaired in any way. This follows the GAAP accounting principles of conservatism and
reliability, since assets could be written up and overstate a company’s financial position.
Other countries, however, commonly write up assets to the market value. In order to make
financial statements more uniform internationally, FASB is currently working with The
International Accounting Standards Board (IASB) to follow consistent standards worldwide.
As part of this project, FASB is recommending a transition from historical cost to fair value for
some assets, which would create sweeping and somewhat controversial changes to how some
assets are reported on the balance sheet as the reliability vs. relevance debate continues.

Financial Reporting: Historical Cost to Fair Value Accounting


FASB has started a gradual convergence of financial reporting standards with the International
Accounting Standards Board (IASB) to transition from the longstanding historical cost basis to
fair value accounting.

Business accounting-guides.com

Text B

Is Fair Value Accounting Really Fair?


By EmilyChasen
(Reuters) – Some investors are starting to question an accounting method used to put a market
value on hard-to-price assets as the credit crunch has caused their markets to evaporate.

97
Over the past few years, an ever-larger number of US accounting standards has required
companies to use mark-to-market, or fair value accounting. The push was touted as a way to
boost transparency for investors.
But as companies like Citigroup Inc(C.N) and Merrill Lynch & Co Inc MER.N post multibillion-
dollar write-downs on subprime-related asset-backed securities and other hard-to-price assets,
some investors say fair value is not worth the earnings volatility it causes.
“It’s ridiculous to apply fair value accounting to assets that have no market,” said Christopher
Whalen, managing director of risk research firm Institutional Risk Analytics. “All this volatility
we now have in reporting and disclosure, it’s absolute madness.”
Most financial reporting had been based on historical cost, which is the original price paid for an
asset. But US accounting rule makers have come to view fair value, or the price the asset could
fetch in the current market, as more transparent.
Critics say fair value does provide a realistic view when price quotes are really available, but
when there is no market, or a market disappears as it did in the credit crunch, companies must
use complex mathematical models to come up with values that can be just as confusing to
investors.
“All these write-offs aren’t real losses; they are just mark-to market,” said Stephen Ross, chief
executive of Related Cos, one of the largest US real estate developers.
“(The banks) are being forced to take those losses because accountants have to give them a clean
opinion,” Ross told the Reuters Housing Summit last week.
Accounting rule FAS 157, which for most companies takes effect this year (2012), requires a
specific fair value framework to value most financial assets, but some believe fair value, and the
early adoption of that rule by most financial firms, has exaggerated write downs tied to the credit
crunch.
“It breeds overpessimism.” Whalen said. “Most of the losses reported by the banks were
noncash. The only people who benefit from this are the hedge funds, who make money off
volatility.”
‘Life Is Volatile’
For years, critics of fair value have argued that the resultant volatility reduces stock prices, but
its proponents say it reveals economic realities that were hidden by previous accounting
methods.
“Would you rather they come up with a model and say we think it’s worth $60, but yet no one
would buy it unless it was at $40?’ Financial Accounting Standards Board Chairman Robert
Herz told Reuter earlier this month.

98
Investor groups, in fact, are among those that have aggressively lobbied for more use of fair
value in financials. In a 2007 report, the СFA Center for Financial Market Integrity, which
represents analysts and portfolio managers, said it believed fair value provided the most relevant
information for financial decision-making.
Others say the extent of the banks’ write-downs may just have taken the investors by surprise.
“Investors as a group have to get a better understanding of what the volatility means,” said Ed
Nusbaum, chief executive of accounting firm Grant Thornton. “They want to live in a perfect
world. They’d like complete transparency and no surprises. But I think it’s unlikely that the big
write-downs that we’ve seen will reverse.
“Some would argue that creating this kind of volatility in financial information is too much,”
said Michael Young, a securities lawyer at Willkie Farr & Gallagher in New York. “The other
argument is that life is volatile. Part of transparency is letting people see what’s really
happening.”
Text C
Is There a Viable Alternative to Fair-Value Accounting?
Business Agenda - By Tay Kay Luan
MANY culprits have been singled out to take the blame for the financial and economic
crisis. Fair-value reporting too has been blamed for the depth of the crisis, where troubled
companies claim that mark-to-market valuations are forcing them to declare declines in asset
values that aren’t real, thereby worsening sentiment in jittery world markets.
Indeed, opponents of fair-value reporting argue that the information provided by fair-
value financial statements can be unreliable and hence, financial decisions can be put at risk. But
is there a viable alternative to fair value in this highly complex business world?
Although fair-value accounting may have gotten bad press as a result of the crisis, key
producers and users of financial reports - such as chief financial officers and accountants -
recognise the benefits of fair value.
In a recent survey done by CFO Research Services and ACCA, 128 CFOs stated that
adopting global financial standards reporting - including mark-to-market valuations - will be
good for their companies.
There are several reasons for their mindset. In this dynamic global environment where
valuations can change in the blink of an eye, historical-cost financial statements may no longer
be relevant because they are not able to give accurate information on current values.
Traditional accounting rules have not kept pace with sweeping reforms in regulations,
customer sophistication, knowledge-based products and the evolving valuation methods of
enterprises.

99
Value creation has also changed, and this has made reforms very necessary to the way we
report, interpret and compare with a common set of acceptable standards to meet customers’
demands and protect public interest.
This is where fair value accounting - with its emphasis on mark-to-market valuations - is
highly relevant. Historical-cost accounting methods may not work quite so well in measuring
current values and in projecting future values.
It needs to be kept in mind that common double-entry accounting worked in systems
based on transactions and are most relevant to economies based on buying and selling
transactions.
Most sophisticated economies today have evolved beyond that to embrace dynamic value
creation and there needs to be a means to reflect and measure this value.
For instance, intangibles including brand, patents, trademarks, intellectual property, and
thought leadership towards corporate performance, has become a tremendous asset for the
majority of companies, and a key element in valuations.
Most of the information metrics and reporting systems now appearing on the investment
radar screen are designed to measure and report financial health, which are a challenge to their
immediate users. Again, this is where the fair-value accounting framework comes in handy.
Many companies today also operate globally across many regimes and jurisdictions,
thereby increasing the need for better quality disclosures and consistency in understanding and
interpretation of complex financial and risk matters in order to better serve their investors and
shareholders.
Delivering such quality and consistency is a key tenet of the international financial
reporting standards, or IFRS, in which fair-value accounting is fundamental.

One of the biggest benefits of fair value accounting may also be that investors will have
the opportunity to better manage the risk of investing in highly leveraged companies.
In other words, it enables investors to use their judgement to describe how to recognise
real value.
Therefore, it can be argued that fair-value accounting best fits the bill in the demand for a
robust new measurement and reporting framework that can serve the needs of business.
However, since fair-value accounting is a fairly new creature, there will be issues of
interpretation and usage as it evolves.
Although the new financial reporting framework is here to stay, it will probably be
tweaked to make it more relevant, user-friendly and palatable to all stakeholders in the financial

100
value chain, as well as to critics like French President Nicholas Sarkozy who called for an
overhaul of fair-value reporting as part of the solution to the current financial mess.
The International Accounting Standard Board - architect of the shift to fair-value
accounting via the international financial reporting standards - has acknowledged that the global
financial crisis underlined the importance and urgency of making financial reporting more
transparent, comparable and clearer.
At the recent G20 summit, delegates agreed that immediate actions towards a more robust
reporting and value measurement will be necessary as part of the global solutions towards
addressing current financial woes.
Regardless, reforms must come with greater clarity, comparability and responsibility if
the bitter lessons learnt from the current financial and economic crisis are to shape the world into
a better place for everybody.

Tay Kay Luan is ACCA director, Asean and Australasia. ACCA believes that accountancy
should be dynamic, evolving to serve the needs of business and not the other way around.

Language Focus

6.…Scan the text “Speaking in tongues” and interpret its title.


7. Paraphrase the following expressions and suggest the Russian for
them:

a) tongue-twisting accounting-speak
b) to date … 100 countries … adopted the rules
c) (the number of countries )is to swell to150
d) … America, no ardent internationalist
e) pending further study
f) to tailor standards to one’s own liking
g) …we have to nip this in the bud

8. Give the English for the following:

a) распространяться по всему миру


b) делать большие успехи
c) компании, зарегистрированные на фондовой бирже
d) сократить разрыв
e) затянувшийся, но неразрешённый спор

101
f) создать прецедент
g) миротворец
h) требовать более высокую премию за риск
i) быть склонным к чему-либо
j) ликвидировать различия

9. Explain the meaning of the expressions given below:

a) lingua franca
b) full-blown IFRS
c) hard-and-fast codes
d) an exercise that … is driving foreign listings away from the United States
e) to float an idea
f) the EU’s embrace of IFRS has been less than effusive

10. Interpret the last sentence of the text.

11. Translate the following word combinations and idiomatic expressions into Russian:

a) tongue-twister
b) a ready tongue
c) a rough tongue
d) a sharp tongue
e) a long tongue
f) one’s tongue runs before one’s wit
g) a still tongue makes a wise head
h) the tongue is not steel, yet it cuts
i) to keep one’s tongue between one’s teeth
j) to lose one’s tongue
k) to have smth at the tip of one’s tongue

12. Solve the crossword puzzle:

Accounting Issues

102
Across Down
2. to develop new products or activities 1. a reduction in earnings per share that
in addition to the ones that are already occurs through the issuance of additional
provided or done shares
6. a name, symbol or design that a 3. this accounting method is called …
company uses for its product when it measures the performance
10. the act of making laws or rules similar of a company by recognizing economic
to those of a different country, organization etc. events regardless of when cash
transaction occurs
12. an amount of sth that is used for a particular
purpose 4. a method that measures the consumption
13. a reduction in the value of a tangible asset of the value of intangible assets, such as
15. on a company’s balance sheet the amount a patent, copyright, goodwill
of money contributed by the owners 5. an accounting method where receipts are
plus the retained earnings recorded during the period they are
16. a formal written offer to sell securities received, and the expenses in the period
that sets forth the plan for a proposed in which they are actually paid
business enterprise 7. the top-line figure, or “gross income”
17. money owed by customers to a firm figure from which costs are subtracted
18. a company or industry which has passed to determine net income
both the emerging and the growth phases 8. a valuation method in accounting
in its development is considered to be… which requires goods or assets used
in production to be valued by
expenditures actually incurred to
acquire them
9. the raw materials, work in process goods
and completely finished goods which are
considered to be the portion of a

103
company’s assets
11. an official right to be the only person
to make, use, or sell a product or an
invention
14. an action by a stockholder taking
. advantage of a privilege offered by
a company, such as buying its shares
at a lower than market price
15. a separate unit that is complete and
has its own character
13. Suggest the Russian for:
Pro-shareholder practice; fundamentals; small caps; momentum trading; Dogs of the Dow;
unlock the market value; keep the business in-house; cook the books; cash-hungry company;
proprietary technology; amortization; equity.
14. Give the English for:
Соотношение рыночной цены к балансовой стоимости; “настроение” рынка; извлекать
выгоду; разводнение капитала; избегать столкновения интересов; вновь созданная
компания; убыточная компания; заёмный капитал; согласование интересов; норма
ликвидности; внутренняя стоимость; оборачиваемость товарных запасов.

Translation

15. Translate the text “Speaking in tongues” in writing.

Speaking in Tongues
Dragging America down the rocky road to a set of global accounting rules
Forget Esperanto. Too straightforward. The lingua franca that is increasingly spanning
the globe is a tongue-twisting accounting-speak that is forcing even Americans to rethink some
precious notions of financial sovereignty.
International Financial Reporting Standards (IFRS), which aim to harmonize financial
reporting in a world of cross-border trade and investment, have made great strides since they
were adopted by 7,000 or so listed companies in the European Union in 2005. To date, over 100
countries adopted the rules, or said that they plan to adopt them. The London-based
International Accounting Standard Board (IASB) expects that to swell to 150 in the next four
years.
Even America, no ardent internationalist, is working with the IASB to narrow the gap
between its own accounting standards and IFRS, which foreign companies listed in America
could choose by 2009, or possibly sooner. Today such companies must “reconcile” their

104
accounts with American rules – a costly exercise that some believe is driving foreign listings
away from the United States.
In late April America’s Securities and Exchange Commission (SEC) unexpectedly
floated the idea of giving American, and not just foreign, companies the choice of using IFRS.
Critics of the idea claim that this will give companies the option of shopping around for
whichever regime best suits their business. Inevitably, however, by opening the door (if only a
crack), America’s own accounting regime would be in jeopardy.
But even the EU’s embrace of IFRS has been less than effusive. It chose the version of
the rules endorsed by the European Parliament, rather than one issued by the IASB. There is only
one difference, but it’s a big one – the rule on how to account for financial instruments
(derivatives and the like). European banks believed that the rule, which would require companies
to value financial instruments at their market value (which fluctuates) rather than at their historic
cost (which is often zero), would have caused too much volatility in financial accounts.
Politicians and some central bankers agreed. After a protracted and unresolved tussle with the
IASB, the European Parliament unilaterally carved several paragraphs out.
One carve out is bad enough for the IASB – but it seems to have set a worrisome
precedent. A fight has recently erupted over “IFRS 8”, which lets company’s bosses choose how
to divide up their business segments for reporting purposes, much as American standards allow.
Investors, especially in Britain, are furious, claiming the rule gives managers too much discretion
and that it represents the wholesale adoption of “alien” (read American) ways. In April the
European Parliament forced the European Commission, which had been set to ratify the
standard, to delay its vote pending further study. The British Accounting Standard Board has
stepped in as peacemaker, proposing adoption of the rule with a review in a year and a half.
The worry is that if enough countries seek to tailor standards to their liking, “there could
be hundreds of different versions of IFRS instead of one set of international rules, which is the
whole point,” says Sir David Tweedie, the head of the IASB. “We have to nip this in the bud”.
So far, nipping means working with international standard setters to compel companies to
disclose exactly what set of rules they are using. The hope is that investors would press
companies not to use country-specific, bespoke versions of IFRS, or charge them higher risk
premiums if they do. Today, an investor in Europe could not tell from reading a company’s
financial report whether it is using full-blown IFRS or the EU version.
Whether pure IFRS or not, all countries are prone to interpret the rules in ways that
reflect their old accounting standards, according to KPMG, an accountancy firm. Regulators are
working to whittle down these differences.

105
The task is further complicated by the fact that international accounting rules tend to be
“principles-based” which means there are no hard-and-fast codes to follow. This is different
from America, where accounting principles are accompanied by thousands of pages of
prescriptive regulatory guidance and interpretations from auditors and accounting groups. IFRS
have no such baggage, leaving more room for judgment.
This in turn means that it is perfectly feasible that two companies can view a similar
transaction very differently – as long as each can support its judgment. Consider the international
accounting rule that governs consolidation, which defines when a company should include its
investments in the accounts. Donald Gannon, a partner at Deloitte, an accountancy firm, calls it
“one of the best examples of a truly principles-based standard”. Unlike America’s complicated
and highly prescriptive rule – which Enron, an energy giant, and others managed to skip around
to keep debt-laden entities off their books – the international standard requires firms to use their
judgment in deciding whether they control an entity.
Two companies might weigh these same factors and come up with different answers. But
this, claims David Schmidt of PricewaterhouseCoopers, another accountancy firm, is not a
problem: “Transparency is the greater goal in accounting, not comparability.” In his view, as
long as accounting standards flush out information that faithfully reflects the reality of the
underlying business, an investor can do his own sums and either accept or reject management’s
judgments. The other option – piling on rules that aim to cover all contingencies – might make
comparisons easier. But imposing such rules around the world would be so hard that it would
consign IFRS to join Esperanto on the dust-heap of dashed dreams.
The Economist

RENDERING

16. Render the following definitions into English:

1. Accrual basis of accounting – стандартная практика признания доходов и расходов


в период, к которому они относятся, а не в период оплаты или получения наличных

2. Capitalization – суммарная рыночная цена на фондовой бирже всех


зарегистрированных акций компанию. Это, по существу, стоимость компании, которая
может значительно превышать нетто-активы по балансу. Это связано с тем, что в баланс
включаются не все активы, имеющие ценность, например, приверженность покупателей
или квалифицированный штат, и поэтому учётная оценка активов базируется не на
рыночных ценах.

106
3. Cash basis of accounting – признание расходом или доходом выплату или
поступление денег.
4. Creative accounting – творческий бухгалтерский учёт. Хорошо известна история о
большой компании, которая опрашивала нескольких претендентов на должность главного
бухгалтера. Претендентам дали массу учётных данных и попросили вычислить прибыль
Претендент, который получил работу, единственный спросил: «Какую прибыль вы имеете
в виду?». В измерении величины прибыли так много субъективных элементов, что
возможны ответы в широких границах, причём в соответствии с общепринятыми
бухгалтерскими принципами. Таким образом, здесь есть возможность для творчества.
Несколько более старомодным выглядит выражение «приукрашивание баланса»ю Именно
благодаря этой проблеме были созданы органы, разрабатывающие бухгалтерские
стандарты.
5. Current assets - актив баланса считается текущим, если ожидается, что он сменит
свою форму в течение года от даты баланса. Такими активами являются ТМЗ, дебиторская
задолженность и касса.
6. Current liabilities – статьи баланса, которые, как ожидается, должны быть
оплачены предприятием в пределах года. Таким образом, в них включается коммерческая
кредиторская задолженность, определённые налоговые обязательств, а также
предполагаемые дивиденды.
7. Dividends – доход акционеров, владельцев компании. В отличие от процента,
который является доходом кредиторов, дивиденды не обязательно выплачиваются. Они
могут не выплачиваться в течение ряда лет, если компания считает это необходимым для
улучшения ликвидности, расширения деятельности, экономии на налогах или по другим
причинам. Кроме того, дивиденды не имеют установленной ставки, за исключением
дивидендов на привилегированные акции. Если компания га хорошем счету, то акционеры
рано или поздно извлекут выгоду при более высоком дивиденде. Когда дивиденды
получают индивидуальные лица, , они платят подоходный налог.
8. Fixed assets – скорее британское, чем американское выражение, означающее
активы длительного пользования: землю, здания, оборудование Эквивалентное
американское выражение –Property, plant and equipment – имущество, сооружения и
оборудование. Основной капитал изнашивается в связи с использованием или с течением
времени, то есть имеет ограниченный срок полезной службы. Это признаётся путём
отнесения на прибыль и уменьшения остаточной стоимости активов, называемого
амортизацией.

107
9. Goodwill – денежная оценка нематериальных активов. Сумма, уплаченная за
предприятие сверх истинной цены его активов на дату приобретения. Она существует
потому, что функционирующее предприятие стоит больше, чем сумма стоимости его
нетто-активов по отдельности. Это можно рассматривать, как способность приносить в
будущем прибыль, которая выше прибылей аналогичной вновь созданной компании; или
это можно рассматривать как репутацию у покупателей, наличие сбытовой сети,
лояльного штата и квалифицированных управляющих.
10. Historical cost accounting – система учёта, при которой приобретение таких
активов, как земля, здания, машины и материально-производственные запасы
регистрируются по цене покупки на дату приобретения. Как правило, эта величина
впоследствии не изменяется, только списывается часть стоимости ниже себестоимости
для признания убытков или износа.
К. Ноубс Словарь-справочник бухгалтера

Business Skills

17. Analyze the Balance Sheet and Income Statement of New England Wire
and Cable from the film “Other People’s Money” .Calculate liquidity
ratio, acid-test ratio, net profit margin, return on assets, return on equity,
p/e. and other ratios which will help you to determine how the company is
functioning compared with other companies in that industry.

Reflection Spot

18. Do you think the information of the Unit is relevant to your future business
activities?

108
ACTIVE VOCABULARY OF UNIT 6

1. allocation n to make ~

2. allocate v ~ capital, funds,(for smth, to sb)


3. accrual-basis accounting
4. book v ~ profit, expenses
5. confidence (in the market) to enjoy/ express/ feel/ have/ lack ~
6. a crisis of confidence
7. a vote of (no) confidence
8. (current) ratio n to achieve, have/ improve, increase/ reduce/ calculate, work out ~
9. to enhance the reliability of accounts
10. to exercise stock options
11. fair-value accounting
12. Financial Accounting Standard Board, the
13. forward-looking estimates
14. historical cost (value) accounting
15. incur v ~ expenses, losses
16. inflate v ~ earnings/ rate of return/ figures
17. liquidity ratio
18. leverage ratio
19. net worth
20. quick ratio
21. ratings agency
22. standard setter

109
UNIT 7. PUBLIC VS. PRIVATE
Competencies:
• Making inferences
• Synthesizing the contents of an extended text
• Enhancing translation skills
• Study skills
• Making presentations

IT MATTERS

1. Search the web for “Barbarians at the Gate.”


Be ready to speak on the origin of the phrase and its meaning,

Reading and Speaking

2. Answer the questions:

• What is meant by private equity?

• What is a shareholder activist?

• What types of business entities in terms of their structure and


ownership do you know?

3. Skim the text “The Advantages of Private Equity …”; think of the key sentence which will
give the quintessence of the text

4. Infer the meaning of the italicized words from the context; paraphrase them

a) This will give them the wherewithal to attempt deals of record scale and scope.
b) Over the years, however, the barbarians have morphed.
c) But one shudders to imagine the clashes of egos that will occur when club deals turn
sour.
d) If they get results by … externalizing environment costs … society needs to know.

5. Scan the text for the details which will help to do the tasks which follow.

The Advantages of Private Equity Eroded by Its Own Success

Barbarians deserve their rewards if they improve corporate performance by taking a long view

110
Barbarians are at the gate in numbers unprecedented. Several of the largest private
equity firms this year aim to raise funds of $10bn or more. This will give them the wherewithal
to attempt deals of record scale and scope. The $25bn spent in 1988 by Kohlberg Kravis Roberts,
the original barbarian, buying out food-to-tobacco group RJR Nabisco no longer seems startling.
Over the years, however, the barbarians have morphed. Once canny financiers above all,
today they count among their number many talented operational managers. Private equity firms
have grown bigger, too, relying no longer on just a handful of principal investors, and have
started to co-operate more with one another. These quintessentially “private” entities are also
attracting increased attention from politicians, regulators, labour unions and journalists.
Thus success is bringing with it the trappings of civilization: the dead hand of
bureaucracy, the compromises of diplomacy and the chilling effect of transparency. Not all of
today’s big firms will successfully adapt.
Finance theory holds that private equity firms have three main advantages over public
equity markets that (sometimes) allow them to generate superior returns. First, they are the
source of patient capital, willing to take a longer-term view than quarterly earnings-obsessed
public shareholders.
Recently, I was in the company of a Fortune 500 business that, while generating plentiful
cash, is struggling to grow. Rather than increasing investment in marketing and sales, however,
the company has decided to buy back additional shares. Why? Because buying back stock will
boost earnings almost immediately, a move calculated to please Wall Street, whereas spending
more on sales and marketing would reduce earnings in the short term. Never mind that the latter
course would build the business in the medium to long term.
As long as these attitudes prevail, private equity firms will be at an advantage. Once
feared outsiders, barbarians can now credibly present themselves as demanding but benevolent
proprietors to executives tired of games with Wall Street.
Their second advantage has to do with advice By drawing on networks of experienced
executives, private equity firms can help companies with both industry insight and generic
management advice.. Boards of directors should play this role for public companies. The reality,
however, is that most corporate boards are of mixed quality. Again, the barbarians have an edge.
It is the third advantage – corporate governance – that seems most at risk as the private
equity industry matures.
It is no secret that institutional shareholders have difficulty imposing discipline on
managers of public companies. With hundreds of institutions holding only a small percentage of
the stock, no shareholder has a great incentive to hold executives to account. Even if they do

111
band together to demand changes, incumbent managers enjoy substantial legal protection. Often
there is little to be done except write letters and sell the shares in a huff.
Until now, barbarians have been able to laugh in the face of such “agency conflicts”. As
sole proprietor, a private equity firm can dictate management, strategy and the right time for
changes in either. Usually organized around a small handful of gifted principals, firms also had
no problem reaching swift decisions.
But the times are changing. Many firms are no longer the close-knit teams of old. To be
sure, powerful personalities are still found at the center. But multibillion-dollar funds and the
pursuit of global deals have spawned networks of international offices staffed by squads of
principals, analysts and associates: bureaucracy in the making.
Max Weber, the founding father of sociology (and prominent student of bureaucracy),
coined the phrase “routinazation of charisma” to describe the process by which personality-based
leadership is replaced by authority based on rules and regulations. Weber was writing of
societies, circa 1920, but the description applies equally to many of the leading private equity
firms circa 2006. Besides, co-operation between firms in the form of “club deals” means that the
sole proprietor model no longer applies in many in the largest buy-outs. Better to have five or six
barbarian shareholders than several hundred public institutions? Perhaps. But one shudders to
imagine the clashes of egos that will occur when club deals turn sour. Do not expect decision-
making to be either swift or rational.
Then there is the question of transparency. Private equity firms might think that they have
had their fair share of scrutiny. But firms taking ownership of increasingly large companies,
getting increasingly involved with operational restructuring and earning increasingly eye-
popping fees for managing increasingly humongous funds should expect increased attention
from regulators. It is by no means implausible that private equity funds will follow hedge funds
into the net cast by US securities regulators. Even if they remain unregulated, pressure groups
ranging from organized labor to environmental lobbyists will doubtless try to hold them to
account.
Quite right, too. Barbarians deserve their rewards if they improve corporate performance
by taking a long-term view, offering valuable advice and reducing those troublesome agency
costs.. If they get results by redistributing wealth from employees to shareholders, externalizing
environment costs or by bilking public-market shareholders, society needs to know.
Financial Times
Notes:
Club deal: A private equity buyout or the assumption of a controlling interest in a company
that involves several different private equity firms. This group of firms pools its

112
assets together and makes the acquisition collectively. The practice has
historically allowed private equity to purchase much more expensive companies
together than they could alone. Also, with each company taking a smaller
position, risk can be reduced.

Language Focus
6. Suggest the Russian for the following:
a) deals of record scale and scope
b) These quintessentially “private” entities are also attracting increased attention of
politicians.
c) success is bringing with it the trappings of civilization … .
d) generic management advice
e) demanding but benevolent proprietors
f) By drawing on network of experienced executives…
g) bureaucracy in the making
h) It is by no means implausible…

7. Find the English for the following:

a) акционеры публичных компаний, одержимые мыслью о доходах


b) требовать соблюдения дисциплины от менеджеров публичных компаний
c) призывать руководителей к ответу, требовать от них отчёта
d) открыто смеяться над ч-т
e) единоличный владелец, хозяин
f) сплочённая команда
g) фирмы, приобретающие всё более крупные компании
h) перераспределение богатства от работников в пользу акционеров

8. Paraphrase the following:

a) the dead hand of bureaucracy


b) … they (private equity firms) are a source of patient capital
c) the barbarians have an edge
d) … barbarians have been able to laugh in the face of such “agency conflicts”
e) “routinization of charisma”
f) Private equity firms … that have had their fair share of scrutiny

113
9. In the collocations below one word is odd. Spot the “odd one out”; go through
the Russian collocations below, find their English equivalents and demonstrate
the usage of these collocations by your own examples.

a) generate, achieve, get, meet, make, receive, boost, enhance, provide RETURNS
b) raise, generate, be short of, be strapped for, propose, run out of CASH
c) accumulate, attract, borrow, catch, tie up, raise, invest, provide CAPITAL
d) form, set up, boost, establish, create ENTITY
e) enforce, exercise, impose, receive, keep, maintain, submit to, tighten, relax DISCIPLINE
f) need, give, offer, acquire, increase, undermine, act as, be INCENTIVE
g) bring sb into, cause, come into, prove, provoke, avert, resolve, lead to CONFLICT
h) be subject to, come under, submit to, take on, undergo, be open to SCRUTINY
i) pay, collect, charge, allocate, incur, refund, negotiate, cover, reimburse FEE
j) earn, enjoy, gain, obtain, write off, receive, deserve, require REWARD

Увеличить прибыль; испытывать недостаток в наличных средствах; изыскивать


наличные средства; использовать капитал; учредить юридическое лицо; ужесточить
дисциплину; обеспечить соблюдение дисциплины; соблюдать дисциплину;
испытывать необходимость в стимулах; предотвратить конфликт; вступить в
конфликт; спровоцировать конфликт; подвергать тщательной проверке; проходить
тщательную проверку; взимать комиссионные; заслужить вознаграждение.

10. Summarize the contents of the article below in no more than 70 words.

Light and wrong


Incorporation with limited liability is a privilege. It should not include anonymity
LIMITED liability—a commercial venture that protects its shareholders from personal
bankruptcy—is one of the greatest wealth-creating inventions of all time. The law allows
companies to borrow money, to take risks and to make contracts as if they were people, but
without the human beings who own it going bust if things go wrong, as they would in an
unlimited partnership. Limited liability allowed Elizabethan adventurers to finance voyages to
spice islands; it allows Silicon Valley technologists now to make similarly risky bets.
But limited liability is a concession—something granted by society because it has a clear
purpose. It is unclear why in parts of the world anonymity became part of the deal. Efforts to
withdraw that unjustified perk deserve to succeed.

114
In dozens of jurisdictions, from the British Virgin Islands to Delaware, it is possible to register a
company while hiding or disguising the ultimate beneficial owner. This is of great use to
wrongdoers, and a huge headache for those who pursue them (see article). Anonymously owned
companies can buy property, make deals (and renege on them), launch intimidating lawsuits,
manipulate tenders—and disappear when the going gets tough. Those who seek redress run into
baffling bureaucracy and a legal morass. Seeking real names and addresses means dealing with
lawyers and accountants who see it as their job to shield their clients from nosy outsiders.
Attempts to change this have bogged down. The campaigners for reform are hardly anti-
corporate zealots: they include the World Bank, the OECD (a rich-country think-tank), and an
American senator, Carl Levin, who with the support of the administration has introduced a bill to
rein in the antics of states like Delaware (and a bunch of others including Wyoming and
Nevada). But progress is slow, with reformers stuck in an argument about who should pay the
costs of clarity.
If you strip out the obvious self-interests of the jurisdictions that make money from hiding
people’s identity, the main excuse offered is privacy. Hiding your identity can have honest
commercial reasons: if everyone knows that Exxon Mobil, BP or another oil major is bidding for
a patch of Texas, the price will go up. In some countries and industries revealing ownership is
dangerous. Besides, many libertarians would add, private shareholders have the right to be just
that.
Owning up
Except that the rest of us are giving a limited company’s owners a perk. It does not seem
unreasonable to ask who are the main recipients of this benefit (with, say, stakes above 5%).
Legitimate concerns for owners’ safety, such as biotech firms hunted by animal-rights activists,
are rare. In many more cases, such as Caribbean holding companies controlled by well-
connected Russians, greater transparency is on the side of democracy and freedom. If the owners
of an enterprise really want to preserve their anonymity, they can still opt for an unlimited
option—but that will be their risk.
Reform ought to be simple. Anyone registering a limited company should have to declare the
names of the real people who ultimately own it, wherever they are, and report any changes.
Lying about this should be a crime. Some dodgy places will try to hold out. But anti-money-
laundering rules show international co-operation can work. You can no longer open an account
at a respectable bank merely with a suitcase of cash. Let the same apply to starting a limited
company.

The Economist

115
11. Scan the text “The Public Company Is Battered But Not Broken” and infer the
terms used in it from their definitions:

a) A company that is owned by all the people who have shares in it.
b) Equity capital that is not quoted on a public exchange. It consists of investors and funds
that make investments directly into private companies or conduct buyouts of public
companies that result in a delisting of public equity.
c) A complete set of events in the credit sphere being repeated many times, always in the
same order.
d) A right given to employees to buy shares in their company at a fixed price.
e) A system that shows the level of prices on a stock exchange that can be compared with
those of a previous date.
f) A chairman of a company who can give advice at a high level but does not have the
power to make decisions about the company.
g) the theory that all human behavior is learnt by adapting to outside conditions and that
learning is not influenced by thoughts and feelings.
h) To separate a company from a larger company, especially when they had previously been
joined together.
i) The movement of money into and out of a business as goods are bought and sold.

12. Explain the following expressions:

a) to take a hammering
b) private equity marauders
c) secular trend
d) value-based management
e) Executives … marched to a different drum
f) … they still called the shots
g) to leverage the balance
h) to point the finger of blame at sb
i) a stretched balance sheet

Translation

13.Translate the text “The Public Company Is Battered …” in writing.

116
The Public Company Is Battered but Not Broken
By Tony jackson

Lots of barbarians, lots of gates

The public company is taking quite a hammering these days. Everyone seems to think
they can do a better job, from shareholder activists to private equity marauders. As often as not,
rank-and-file investors seem to agree with them.
So let us pose a fundamental question: is the model broken? After 150 glorious years,
is the limited liability joint stock company no longer fit for its purpose?
The question has a double relevance at present. The recent explosive growth of
private equity is at least partly cyclical. The flood of cheap money cannot last for ever. So to that
extent, when the credit cycle turns down, so will private equity.
But we must distinguish between the cycle and the trend. Think of the oil price, where
the huge cyclical swings of the past 30 years presumably mask a rising secular trend as the oil
runs out. If there is to be a similar trend for private equity, it must rest on some basic
shortcoming in how public companies work.
Agents and principals
The most obvious weakness is the so-called agency problem, whereby managers have
a different set of incentives from the owners. One response to that was the rise of value-based
management in the 1990s. Executive rewards should depend on results as measured by the
shareholders. Of course, it did not work. Rewards went up a lot faster than the stock indices. And
when stock options lost their value in the bear market, they were often repriced. Executives still
marched to a different drum and they still called the shots.
Other basic drawbacks have more to do with behavior than rewards. For instance,
boards can work badly because of clashes of personality or ambition. The non-executive
chairman – if there is one – may not be able to handle this.
The obvious people to sort it out are the owners. That is fine if this is a small group of
insiders, as in private equity. But in public companies they are a leaderless army.
Behavioral theory also suggests that executives cannot always analyze the mass of
data in front of them. They respond by going for a safe solution.
This may partly account for the way most public companies today are reluctant to
leverage their balance sheets as much as shareholders want. It may also explain their reluctance
to go for radical strategies unless pushed by an aggressive shareholder.

117
Take Cadbury Schweppes of the UK, which last week abruptly agreed to demerge,
having publicly dismissed the notion less than a month before. This was a virtually instant
response to the appearance of the US activist Nelson Peltz on the share register.
At this point, companies will point the finger of blame at shareholders. The market,
they say, is obsessed with quarterly earnings.
If an otherwise sensible long-term strategy would hit those earnings, forget it. But
shareholders also press for big moves such as mergers and demergers. Where is the consistency?
Even if true, that is not strictly relevant. What matters is not who is to blame but
whether the system works as a whole.
If it induces irrational behavior in both owners and managers, so much the worse.
Old snags, new fixes
On the other hand, none of this is precisely new. Tension among owners and
managers has been inherent in the public company since the beginning. Private equity and
shareholder activism are merely its latest manifestation.
The same goes for the pressure being put on companies to take on more leverage. The
more stretched the balance sheet, shareholders reason, the more disciplined the management on
their behalf. That may be true but that is not the whole story. Equity is there to provide a cushion
in rough times. But recent years have seen abnormal stability in corporate earnings and cash
flows.
When that reverses – as it surely will – the virtue of equity will be rediscovered. So
there is another cycle at work here, this time macro-economic.Which brings us back to the
opening question. Is the public company in secular decline?
Not really. It has serious flaws but then it always has had. Over the years, the market
has devised various ways of addressing them or of exploiting them.
Private equity is an excellent example. Investing institutions have come up with the
strategy of selling companies to private equity, then investing in their funds so that they can get
the benefit when the flaws have been addressed.
For a while that has worked well. But the ploy makes sense only at this point in the
cycle, when money is cheap and corporate cash flows stable. The paradox is that when those
conditions cease – when the outside world gets tougher – the pressure will come off the public
company. Until the next time, at any rate.
Financial Times

Business Skills

118
14. Make a presentation on advantages and shortcomings of a public company as compared to
a private one. If you think that the talk of a public company demise is premature, prove it.
Reflection Spot
15. Say what competencies and skills you have acquired or enhanced

119
ACTIVE VOCABULARY OF UNIT 7
1. private equity, private equity funds
2. private equity firm
3. entity n independent, separate/ business/ legal ~; to form ~
4. bureaucracy n government/ state ~; to eliminate, reduce/ increase ~
5. compromise n possible,/ sensible/ uneasy/ inevitable ~; to agree on, arrive at, come to,
find, reach/ look for, seek/ offer suggest/ reject ~
6. edge n competitive/ slight ~; to give sb/smth / gain, have~; an edge over sb/smth
7. discipline n rigid, strict/lax ~; to enforce, impose/ maintain/ accep, submit to ~
8. account n bank, current, deposit, savings/ joint ~; to have, hold/ open/ close ~; to credit
smth to/put smth into/ debit smth from/ draw amth out of/ pay smth from, take
smth out of, withdraw smth from ~;
to hold sb to account
9. proprietor n active/ sole ~
proprietary class
proprietary goods
10. club deal
11. barbarian shareholder
12. scrutiny n careful, close, intense, thorough ~; to be subject to, to come under/ submit to/
undergo/ be open to ~
13. wealth n economic/ financial ~; to possess accumulate/ distribute, redistribute ~
14. shareholder activist
15. cycle n complete entire, whole / credit~; to go through/ complete/ repeat ~; ~ repeat
(itself)
16. trend n dominant/ underlying/ adverse, dangerous/ secular ~; to begin, set, start/
continue/ buck, go against/ reverse/ reject ~; ~ develop, emerge, continue/
suggest smth
17. behaviorism,
18. behavioral theory
19. leverage n sufficient, extra, maximum/ economic/ political ~; to have, gain , obtain/
apply/ take on ~
20. balance sheet entries
21. balance sheet items

120
ROLE-PLAY: OTHER PEOPLE’S MONEY

1. Fill in the blank boxes with the information from the film:

COMPANY

Name and type of the company

Products

Location

Time of foundation

Financial situation and market evaluation


(book value vs. market value)

Problems if any

LARRY GARFIELD

Business he is engaged in

121
Appearance and traits of character

Intentions regarding the company


and his attitude towards “greenmail”

Attitude towards Kate Sullivan

Addressing the shareholders’ meeting

ANDREW JORGENSON

Position

Accomplishments

How long with the company

Traits of character

Style of management

Measures proposed to save the


Company

122
Report for the stockholders’ meeting

KATE SULLIVAN

Position

Traits of character

Her proposition as regards the


rescue of the company
1) to Jorgenson
2) to Garfield
Attitudes towards
1) the company
2) Garfield

Final proposition to Larry

BILL COLES

Position

How long with the company

Traits of character

Attitudes towards
1) the company
2) Larry’s intentions

2. From the list of words and word combinations given below pick those which will help you
to describe the above characters:

123
charming, efficient, short, stocky, vehement fighter, strong-willed, greedy, unscrupulous,
callous, bad guy, caring about people, having smarts, sexy, old-liner, heartless arrogant, ruthless,
using obvious physical assets to advantage, moral, likable, smart, funny, desperate but harmless,
having a keen sense of humor, rich, powerful, a big man in very little shoes, a little man walking
like a giant, pragmatic, turncoat, time-server, always looking out for his own interests,
treacherous.

3. Answer the comprehension questions:

a) What business is Larry Garfield in and how do you explain his nickname “The
Liquidator”?
b) What is Larry’s next target and why does he view this takeover operation as an easy one?
c) How can you describe the situation in New England Wire & Cable?
d) What puts Kate Sullivan in the middle of the struggle to fight off the takeover attempt by
Larry the Liquidator?
e) What is her legal advice to New England Wire & Cable and how does she substantiate it?
f) Kate offers Larry “greenmail” to drop a hostile takeover bid; explain what it means.
g) What agreement do Kate and Larry reach? What course of action does each of them
decide on?
h) What makes Kate seek and obtain a court injunction?
i) What law of free enterprise does Larry follow? Do you agree with his interpretation of
the law?
j) What was the court’s decision?
k) What is Andrew Jorgenson? Why does he fight so vehemently Larry’s attempt to take
over the company? Who does he pin his hopes on?
l) Who else approaches Larry with a proposition? What does it all boil down to?
m) How did Larry feel about the result of the vote?
n) Who comes up with a plan to remake the company after Larry’s acquisition and why?
o) Do you consider it a way out for all the parties concerned?

4. Develop active vocabulary

Accrued expense – an accounting expense recognized in the books before it is paid for. It is a
liability, usually current. These expenses are usually periodic and
documented upon a company’s balance sheet due to the high probability of
collection.

124
Firms will typically incur periodic expenses such as wages, interest and taxes. Even though they
are to be paid at some future date they are indicated on the firm’s balance sheet at the point in
time when the firm can reasonably expect their payment, until the time they are paid.

Advances from customers – if the customer pays in advance, then there is an obligation that
arises and the firm records this as an increase in an asset (cash) and
an increase in liability (advances from customers)

Assets - all things owned by a person or business that have some monetary value.
Current assets – a balance sheet account that represents the value of all assets that are
reasonably expected to be converted into cash within one year in the
normal course of business. Current assets include cash, accounts
receivable, inventory, marketable securities, prepaid expenses and
other liquid assets that can be readily converted to cash.
Current assets are important to businesses because they are the assets that are used to fund day-
to-day operations and pay ongoing expenses

Fixed assets – a long-term tangible piece of property that a firm owns and uses in the
production of its income and is not expected to be converted into cash any
sooner than at least one year’s time.
Buildings, real estate, equipment and furniture are good examples of fixed assets. Fixed assets
are sometimes collectively referred to as ‘plant’.

Intangible assets - generally, intangible long-term assets, such as trademarks and


patents are not categorized as fixed assets but more specifically
referred to as fixed intangible assets.
Goodwill – an account that can be found in the assets portion of a company’s balance
sheet. This account arises when a company purchases an asset for more than
assets book value. This most often occurs when one company acquires another
company , for a price that is higher than what the target company’s books say
it is worth.

At cost – if you sell something at cost , you sell it for the same amount that you spent when you
made it or bought it.

125
Tangible assets are stated at cost or valuation less accumulated depreciation.

Book value - the value of an asset or group of assets of a business as shown in its account
books.
Kohlberg Kravis Roberts paid $15 billion for RJR-Nabisco (more than double its book value);
Philip Morris bought Kraft for $12.9 billion (four times book value).

Buy-out - the buying of the entire interest in a business.


Peter Thompson now explained that he wanted to go beyond the concept of a management buy-
out and to involve all the staff who wanted to buy shares.

Buy-up - the buying of as many of the shares of a company as one can buy, usually to get
control of the company.
A predator company (the offerer) can buy up to 15% of a company’s shares without restrictions,
but above that level must then wait seven days before being allowed to buy up another10%.

Capital gain – an increase in the value of a capital asset (investment or real estate) that gives it a
higher worth than the purchase price. The gain is not realized until the asset is
sold. A capital gain must be claimed on income taxes.
Long-term capital gains are usually taxed at a lower rate than regular income. This is done to
encourage entrepreneurship and investment in the economy.

Chapter 11 (American) – a provision in the federal bankruptcy law which allows a financially
troubled company to postpone payment to creditors while it works out
a plan to repay them.

Court injunction – a court order prohibiting an action (in this case preventing Garfield from
buying more New England Wire & Cable shares).

Golden parachute – a form of severance that is paid to employees of a company, should the
the company be taken over by another one.
Like golden parachutes – which are received by the top executives in the corporation – silver
parachutes include severance pay, stock options and bonuses but are offered to a larger number
of employees.

Hostile takeover – any takeover unwanted by the present management.


The 13th Company Law Directives will put an end to the more blatant, ‘poison pill’ tactics that

126
enable companies under the threat of a hostile takeover to make themselves unappetizing.

In play – used to describe a company which is a target of a takeover.

Lean and mean – used to describe a company or organization that reduces its workforce by
getting rid of “deadwood” (unproductive employees) in order to be more
profitable.

Leveraged buy-out (LBO) – buying a company with borrowed funds, using the company itself
as collateral.
The biggest is RJR-Nabisco, a food-and-tobacco giant taken private early last year in a record
$25 billion leveraged buy-out.

Liabilities – the term usually refers to financial liabilities of which the commonest form is a debt
of any kind.
Current liabilities – a company’s debt or obligations that are due within one year.
Current liabilities appear on a company’s balance sheet and
include short-term debt, accounts payable, accrued liabilities and
other debts.
Analysts and creditors will often use the current ratio (which divides current assets by
liabilities), or the quick ratio,(which divides current assets minus inventories by current
liabilities), to determine whether a company has the ability to pay off its current liabilities.
Long-term liabilities – recorded on the balance sheet, a company’s liabilities for leases,
bond repayments and other debt due in more than one year.

To liquidate – to sell off a company’s assets.

Marketable securities – very liquid (can be converted into cash very quickly) securities as they
tend to have maturities of less than one year. Further more, the rate at
which these securities can be bought or sold has little effect on their
prices.
Examples of marketable securities include commercial paper, banker’s acceptances, Treasury
Bills and other money market instruments.

Outstanding shares – stock currently held by investors, including restricted shares owned by

127
the company\s officers and insiders, as well as those held by the public.
Shares that have been repurchased by the company are not considered
outstanding stock.

Paid-in capital in excess of par – because par value has nothing to do with market value, most
of the time stockholders pay more for the stock than the par
value. The amount over the par is called Paid-In Capital In
Excess Of Par (also Additional Paid-in Capital or Capital
Surplus)
Assume that a company issues 1 million shares with a par value of $50 per share. When the
shares are purchased by investors, however, they pay $70 per share – a premium of $20 of par
value. When the capital received from this issue is recorded, $50 million will be allocated to
a share capital or paid-in-capital account. The excess $20 million will be allocated to the
capital surplus account as additional paid-in capital.

Predator – a company that tries to take control of other companies.


We have allowed our leading businesses to be bought up by foreign predators.

Proxy – an agent legally authorized to act on behalf of another party. Shareholders not attending
a company’s annual meeting may choose to vote their shares by proxy by allowing
someone else to cast votes on their behalf.
Management often encourages shareholders to vote by proxy so that ownership interests are
fully represented even if shareholders are unable to attend the company’s annual meetings in
person.

Proxy fight – when a group of shareholders are persuaded to join forces and gather
enough shareholder proxies to win a corporate vote.
The term is mainly used in the context of takeovers. The acquirer will persuade the existing
shareholders to vote out company management in favor of a slate of directors favorable to the
acquirer. If the shareholders, through their proxy votes ,agree, the acquiring company can get
control of the company without paying a premium price for the firm.

Raiders – people who look for companies that they can buy cheaply, often with the thought of
stripping them.

128
Retained earnings - the percentage of net earnings not paid out as dividends, but retained by
the company to be reinvested in its core business or to pay debt. It is
recorded under shareholders’ equity on the balance sheet.

Ripple effect – the spreading effects caused by an event.


Any new policy can be described as having a ripple effect.

Rule 13d (Williams Act) – the Williams Act and amendments now comprise Sections 13(d) and
14(d) of the SECURITIES EXCHANGE ACT of 1934. The law
requires the bidder opening a tender to file with both the
SECURITIES AND EXCHANGE COMMISSION and the
TARGET COMPANY a statement detailing the terms of the offer,
the bidder’s background, the cash source, and his or her plans for the
company if there is a takeover.

Salvage value – the estimated value that an asset will realize upon its sale at the end of its useful
life. The value is used in accounting to determine depreciation amounts and in
the tax system to determine deductions. The value can be a best guess of the end
value or can be determined by a regulatory body such IRS (Internal Revenue
Service).
The salvage value is used in conjunction with the purchase price and accounting method to
determine the amount by which an asset depreciates each period. For example, with a straight
line basis, an asset that cost $5000 and a salvage value of $1000 and a useful life of five years
would be depreciated at $800 ($5000 - $1000/5years) each year.

Shark repellent – something that makes a company in play less attractive to a raider. For
example, if the board of directors substantially increased the dividend,
it would encourage the stockholders to hold onto their stocks while reducing
the capital in the company, thus making a raid not only more difficult but less
attractive.
Example of shark repellent also include Golden Parachute contracts with executives, a defense
merger with another company, a super-majority provision2, and so on.

2
A corporate amendment in a company’s charter requiring a large majority (anywhere from 67% - 90% of
shareholders to approve important changes, such as a merger.

129
To strip – to buy up cheaply companies that are showing poor results, then sell off the assets one
by one at a profit and close down the business.

Survival of the fittest – the principle that only the people, animals or things that are best
adapted to their surroundings will continue to exist.

To take private – a move by management to buy up the stock of its company so that it is not
traded on the stock exchange. This is done to prevent a hostile takeover and is
usually financed through a leveraged buy-out.

Tender offer takeover – a hostile takeover not negotiated with the management of the target
firm. The offer is usually made directly to the stockholders of the
targeted firm.

White knight – a friendly acquirer who is sought by the target of a hostile takeover bid.
During the takeover battle it was suggested that Cadbury Schweppes should act as a white
knight to Rowantree, in order to form a strong British company able to compete effectively with
the Swiss.

Widow-and-orphan stock – relatively low risk stocks from well-known firms that pay high
dividends.
Widow-and-orphan stocks are generally chosen during bear markets and ignored during bull
markets. This is because these companies are perceived to be able to maintain their dividend
payment.

Working capital – the excess of total current assets over total current liabilities. It represents the
net amount of a company’s relatively liquid resources and the margin of
safety available to meet the financial demands of the operating cycle.
The size of the working capital is an indicator of the liquidity and solvency of a company
particularly when related to other financial indicators in the form of financial ratios.
5 . Study the report presented by Jorgenson at the stockholders’ annual
meeting. Be ready to say whether you side with or against him. Substantiate your
choice.

130
REPORT FOR THE STOCKHOLDERS MEETING

February 27, 200…


Market Prognosis

As loyal stockholders, many of you know that New England Wire and Cable has performed
only moderately well for the past decade. However, we have survived these difficult times
and have great plans and prospects for the future. We have survived numerous recessions, a
major depression and two World Wars. To allow a company with such a history of survival
to be taken over and broken up for its value by a man who cares for nothing but money
would be devastating to this community and detrimental to the industrial infrastructure of our
nation. Our industrial strength and manufacturing capabilities continue to be stolen and
disbanded by these mergers and acquisition specialists interested only in making money.
They make nothing and contribute even less to our economy. At least the robber barons of
old left something in their wake. These men leave nothing but a blizzard of paper to cover the
pain.

Can you, in good conscience, allow this man to destroy this company just because its value
dead is greater than its value alive at this point in time? While this may be true for now, are
you willing to sacrifice the possibility of even greater future benefits for a single payment?
The new $150 billion transportation bill has designated federal funds to be spent on
rebuilding our nation’s highways and bridges. This means a potential for New England Wire
and Cable to operate with considerable profits. As you know, the parent company, New
England and Wires, has been operating with a loss recently, including a $3 million loss last
year, while the remaining companies have been operating with significant profits, which
allowed us to report a net income of $125,000. However, the construction activity that the
transportation bill will generate will result, according to our prognosis, in a profit of $1
million already this year. The estimated profits for New England Wire and Cable based on
the activity generated by the transportation bill alone will be $10 million over the next five
years.
This possible takeover has also sparked us, as the management team, to examine our
operations and determine what we can do to improve the operations and profitability of our
company. We have concluded that it will be entirely feasible for us to restructure and
consolidate in such a manner that we will be able to save significant amounts of money
through a reduction in operating expenses.

131
While the offer presented to all of you stockholders may be very attractive, I hope that you
will be able to look beyond the immediate capital gains and vote for the future of New
England Wire and Cable , our local community, and American industry.

Andrew Jorgenson
Chairman

6. Write a transcript of Garfield’s speech at the annual meeting. Say what your attitude towards
his vision of the company is.

7. Interpret a Balance Sheet and an Income Statement:

• Analyze the balance sheet of New England Wire and Cable in order to give an opinion
on whether the company is able to avoid defaulting on its financial obligations and, thus,
avoid experiencing financial distress.
a) Compute its current ratio (divide its current assets by its current liabilities);
b) Find out the company’s quick ratio3 ( subtract inventories from current assets and
divide the difference – called quick assets – by current liabilities);
• Determine the profitability of the company by computing its:
a) Net profit margin ( divide its net income by total sales)
b) Return on assets – ROA (divide the company’s net income by total assets)
c) Return on equity – ROE (Divide its net income by total Stockholders’ equity)
• What can you say about the protection of creditors from insolvency judging by the
company’s debt-to-equity ratio?
• Whose position do the financial statements favor?

NEW ENGLAND WIRE AND CABLE


Balance Sheet
December 31,200…

Assets

Current Assets
Cash $10,000, 000
Accounts receivable 6,000, 000

3
Many analysts believe it is important to determine a firm’s ability to pay off current liabilities without relying on
the sale of inventories.

132
Inventories 12,000, 000
U.S. Government and other
marketable securities 2,000, 000

Total Current Assets $30,000, 000

Property, plant, and equipment


Land $100, 000
Equipment 120,000,000
Building 500,000
Accumulated Depreciation:
Equipment 60,000, 000
Accumulated Depreciation:
Building 400,000

Total PP and E $60,200, 000

Total Assets $90,200 000

Liabilities and Stockholders’ Equity

Current Liabilities
Accounts payable $2,200, 000
Accrued Taxes (other than
income taxes) 250,000
Accrued Compensation and
Benefits 50,000
Advances from Customers
on Contract 2,500, 000

Total Current Liabilities $5,000 000

Stockholders’ Equity
Common Stock $40,000, 000
Authorized and outstanding
(4,000,000 shares of $10 par value)

133
Paid in Capital in Excess of Par 5,000,000
Retained Earnings 37,200,000
Total Stockholders’ Equity $85,200,000
Total Liabilities and Stockholders’ Equity $90,200,000

NEW ENGLAND WIRE AND CABLE


Combined Statement of Income
And Retained Earnings
For the Year Ended December 31, 200…

Sales revenue $20,000,000


Cost of Goods Sold 13,750,000
Depreciation Expense 2,000,000
Compliance Expense 2,500,000
Selling and administrative Expenses 1,625,000

Net Income $125,000

Retained earnings Jan.1 37,200,000


Cash Dividends Declared and Paid 125,000
Retained Earnings Dec.31 $37,200,000

8. Points for discussion

• Do you feel, as does Jorgensen, that the board of directors has a social responsibility to
the workers and the local community? Or do you side with Garfield, maintaining that
the directors’ only responsibility is to the stockholders and thus to maximize profits? If
you side with Jorgenson , how far are you willing to go in subsidizing jobs at a factory
that is losing money?
• After his buy-up is temporally stopped by a court injunction, Garfield complains about
the present state of capitalism. He rants on about lawyers and others who are destroying
the capitalist system. He feels that anyone should have the right to buy out any company
he wishes. He feels that the fact that he is not allowed to buy up and do whatever he wants

134
with a company (including selling off part of it for a quick profit and even closing down
factories, thus throwing people into unemployment) shows that the capitalist system is
being destroyed.
a) First, discuss Garfield’s concept of a free market and whether or not you agree
with it.
b) Second, discuss whether it is government regulations, such as the injunction
imposed on Garfield, or raiders like Garfield who pose the greatest threat to the
capitalist system. Be specific about what restrictions, if any, you feel should be
placed on raiders like Garfield.
c) Why do Garfield’s arguments appeal to most stockholders?

9. Meeting terminology and procedures:

The following statements include standard meeting terminology, which Jorgenson would use in
chairing the meeting. Learn them in preparation form your dramatization of the meeting.

Opening the meeting

I declare the meeting open.

Approval of the annual report

Are there any additions, corrections, or questions concerning the annual report and the
Accounts?

The agenda

The main item on the agenda is the question of the election of a new board of directors.

Opening the floor to debate


After both teams have made their presentations, an announcement such as the following is
made.

The floor is hereby open to debate.


Mr. X. now has the floor.

Point of order

When someone questions whether proper meeting procedure is being followed, he or she is
raising a point of order.

Point of order, Mr. Chairman; I believe I was next on the list of speakers, not Mr. Y.

135
Point of information

Inserting a point of information allows someone the right to ask a question relevant to the
present discussion without putting his or her name on the speakers’ list and waiting for his or
her turn.

Point of information. I would like to know what Mr. Garfield intends to do with this
factory here in Pawtucket if he takes over the company.

Keeping Order

If someone does not adhere to the proper rules of procedure for a meeting, the chairperson
can rule that person out of order.

Order, order, Mr. W, you are out of order. It is not your turn to speak.

Making a Proposal or Motion

I propose that we…


I move that we…

Seconding a Proposal

Once a formal proposal or motion has been made, it must have a second – that is, one other
person who supports the proposal or motion.

Calling for the Vote

When the chairperson or any other participant in the meeting with voting rights feels that an
item has been discussed sufficiently, he or she can call for the vote. If there are no objections,
then the chairperson can move on to the vote. If there are objections, a vote must be taken to
conclude discussion. If over 50 percent of those present with voting rights vote for
concluding the discussion, then they can go on to the final vote. If not, the discussion of the
item in question continues.

PARICIPANT: I call for the vote.


CHAIRPERSON: Are there any objections? [No objections are raised.] Hearing no
objections, we will now proceed tp the vote.

Secret Ballot

136
The vote will be determined by secret ballot, so please fill out your ballots and hand them
in to Mr. Coles.

The Result of the Vote

The ballots have been counted and the results are: Mr. Jorgenson and the present board of
Directors , votes; Mr. Garfield votes.

Adjourning the Meeting

The meeting is adjourned.

All students should be familiar with the above terms. The Person who plays Jorgenson will
actively use all of them during the meeting.

10. Role play: New England Wire & Cable’s Annual meeting:

a) The roles of the present management – Jorgenson, Coles, a representative from the
workers, a local politician.
b) Garfield.
c) The stockholders should ask questions of the two teams and then vote for one of the
teams to assume the management of New England Wire & Cable.

11. Write responses to the annual meeting:

a) Write a newspaper article about the meeting. The article should give a brief summary of
the two sides’ positions, questions that were raised by stockholders, the result of the vote,
and what the decision will mean for the local community
b) Write the justification of why you voted as you did.

Memorable quotes from Other People’s Money

Kate Sullivan: Some day the laws will change to put you out of business.
Lawrence Garfield: Change the laws all you want, but you can’t stop the game. I’ll still be
here. I adapt.

[Kate offers Lawrence ‘greenmail’ to drop an unfriendly take-over bid]


Kate Sullivan: It’s not illegal.
Lawrence Garfield: It’s immoral – a distinction lawyers ignore.

137
Lawrence Garfield: I love money more than the things it can buy… but what I love more than
money is other people’s money.

Lawrence Garfield: Make as much as you can for as long as you can. Whoever has the most
when he dies is the winner.

Lawrence Garfield: I take from the rich, I give to the middle class… Well, the upper middle
class.

138
Приложение № 1

Глоссарий

139
Active Vocabulary
A
account n bank, current, deposit, savings/ joint ~; to have, hold/ open/ close ~; to credit ~
smth to/put smth into/ debit smth from/ draw smth out of/ pay smth from, take smth
out of, withdraw smth from ~; to hold sb to account
accrual-basis accounting
additional paid-in capital (syn. capital surplus)
agency costs
alignment (of interests) to bring smth into alignment
allocate v ~ capital, funds,(for smth, to sb)
allocation n to make ~
allowance for doubtful accounts
asset(s) n important/ valuable/ fixed/ tangible/ intangible/ liquid, depreciable/ foreign, overseas/
personal/ national, state ~/to have, own, possess/ accumulate/ acquire/ dispose of, sell~
B
Balance Sheet
balance sheet entries
balance sheet items
barbarian shareholder
behavioral theory
behaviorism,
bid prices upwards (bid prices down) v
book v ~ profit, expenses
book value
bureaucracy n government/ state ~; to eliminate, reduce/ increase ~
buyback (repurchase) n to make ~
C
capitalize on v
cash flow numbers
cash-hungry business
cash in on v
cash market
claim on assets to have/ assert/ lay/ establish/ prove/ withdraw ~
club deal
COGS (Costs of Goods Sold)

140
collide v interests ~
collusion n to be involved in, have/ avoid/ cause ~
compromise n possible,/ sensible/ uneasy/ inevitable ~; to agree on, arrive at, come to, find,
reach/ look for, seek/ offer suggest/ reject ~
confidence (in the market) to enjoy/ express/ feel/ have/ lack ~
(convertible) bonds n long-term/ government/ treasury/ junk; to buy/ invest in/ issue/ redeem~
“cook the books” (accounting tricks)
core consumer index
correction n to make/ need/ require ~
credibility n to have/ lack/ gain/ restore/ establish/ enhance/ damage/ undermine ~
credibility gap
crisis of confidence
cumulative preferred stock
current assets – cash, inventories, accounts receivable
current (expected) earnings n to have/ calculate/ declare ~
(current) ratio n to achieve, have/ improve, increase/ reduce/ calculate,
work out ~
cycle n complete entire, whole / credit~; to go through/ complete, repeat ~; ~ repeats (itself)
D
dealmaker
debt capital
depreciation (amortization)
derivatives market
dilution (of capital, earnings per share ) to cause, result in ~
discipline n rigid, strict/lax ~; to enforce, impose/ maintain/ accept, submit to ~
dividend) payout n to make/ get/ suspend/ withhold ~
Dogs of the Dow
dotcom bubble n ~ bursts
due diligence n to show ~
E
edge n competitive/ slight ~; to give sb/smth / gain, have~; an edge over sb/smth
enhance the reliability of accounts
entity n independent, separate/ business/ legal ~; to form ~
entrenchment strategy
equity (finance)

141
equity capital
exercise stock options
exposure n to smth; to suffer/ increase/ limit/ minimize, reduce/ avoid ~
extraordinary items
F
fair-value accounting
file a report with the SEC v
Financial Accounting Standards Board, the
fixed assets – property, plant & equipment
forward price/earnings multiple
forward-looking estimates
fundamentals n basic ~, to teach/ grasp/ master/ go back to ~
G
go broke
Goldilocks economy
gross margin
H
high-flying business
historic cost (value) accounting
I
Income Statement
incur v ~ expenses, losses
inflate v to ~ earnings/ rate of return/ figures
inflection point
intangible assets – patents, trade marks, goodwill, brand recognition
integrity n to have/ lack/ restore/ ensure/ maintain/ threaten ~
integrity of published profits
International Accounting Standards Board, the
International Financial Reporting Standards, the
intrinsic value
K
keep a business in house

142
L
leverage n sufficient, extra, maximum/ economic/ political ~; to have, gain , obtain/ apply/
leverage ratio
liabilities n current. long-term ~; to have/ take on/ meet ~
liquidity ratio
long (short) position n to open. close/ take ~
M
market momentum
market sentiment n to express/ agree with/ echo ~
mature business
momentum n to gather/ lose/ maintain/ gain/ sustain ~
momentum trading
money-losing company
N
net worth
O
old-line company
operating profit (operating costs)
outpace v ~ the market, competitors
P
policymakers
portfolio management
present value (net present value)
price-to-book numbers
prime broker n to be/ act as ~
private equity
private equity firm
private equity funds
profit taking
pro-forma (operating) profits
proprietary class
proprietary goods
proprietary technology
proprietor n active/ sole ~
pro-shareholder practice n to introduce/ adopt/ follow/ promote/ modify/ prevent ~

143
prospectus n to produce/ look through ~
Q
quantitative (qualitative) fundamentals
quick ratio
R
R&D (Research & Development)
rally n ~ takes place/ breaks up/ ends/~ against smth/ for smth/ in support of smth
Random Walk Theory
ratings agency
recession n damaging/ painful/ deep, severe/ mild/ prolonged/ short-lived ~/to cause,/go into,
plunge into/beat/come out of, emerge from/suffer from/survive ~
retain control (over a company)
returns from shares (equity returns), return on investment
risk n to reduce/ increase/ hedge against/ pose a risk to sb
risk premium
riskless government debt
S
safe haven n to create/ offer sb/ provide sb with ~
scrutiny n careful, close, intense, thorough ~/ to be subject to, to come under/ submit to/
undergo/ be open to ~
self-dealing
sell-off n
SG&A (Selling, General & Administrative expenditures)
shareholder activist
shareholders’ equity: paid-in capital, retained earnings
small caps (large caps)
standard setter
startup n
strategic alliance n to build up, create enter in, form, make/ break off/ seek ~
T
technology shares n
tenure n as chairman; to have/ get/ grant sb ~
top-notch employee
tracking stock n to issue/ acquire, buy, invest in/ dispose of, sell/ deal in, trade/ have, hold,
own~

144
track record n good/ impressive/ poor ~; to have/ possess ~
trade on momentum v
Treasury stock
trend n dominant/ underlying/ adverse, dangerous/ secular ~; to begin, set, start/
continue/ buck, go against/ reverse/ reject ~; ~ develops, emerges, continues/ suggests smth
U
unlock the market value
upbeat economic data
V
value investing
value n to put, place set a ~ on smth/ increase, raise, double/ lower, reduce/ calculate, work out ~
variable
variable costs
volatile adj. to be/ become/ remain ~
volatility n
vote of (no) confidence
W
wealth n economic/ financial ~; to possess, accumulate/ distribute, redistribute ~
Z
Zero-sum game

145
Приложение №2

Формы контроля, зачётные и экзаменационные требования


Критерии оценок

146
Модуль «Язык профессии и специальный перевод» -3 (2 ак кредита ECTS)
Формы контроля:
Зачет/ Государственный экзамен
Зачет:
Тест для проверки знания терминологии.
Анализ студенческих портфолио и рейтинг как составляющие общей оценки.
Участие студента в ролевой игре «Чужие деньги» и степень его владения навыками
ведения дискуссии, искусством аргументации, убеждения и проч.
К Государственному экзамену допускаются магистранты, имеющие зачет за 3-й семестр
обучения в магистратуре. Он (зачет) проводится в устной форме для студентов, чей
итоговый рейтинг ниже 70%. Студенты сдают материал семестра (устно) и предъявляют
портфолио с выполненными письменными работам за семестр.
Требования Государственного экзамена и его структура:
Письменный экзамен: модуль «Язык профессии и специальный перевод»
1. Перевод со словарем с английского языка на русский текста экономического
содержания. Объем - 1500 п.зн. Время выполнения – 45мин.
2. Перевод со словарем с русского языка на английский текста экономического
содержания. Объем - 1500 п.зн. Время выполнения – 45 мин.
Устный экзамен:
1. Перевод с листа английского текста экономического содержания на русский язык
(1300 п.зн.).
2. Мини-презентация (~2 мин.) на английском языке на одну из пройденных в течение
семестра тем.
Проверяются:
• переводческие навыки
• знание экономической терминологии и языка бизнеса
• знание экономических реалий
• владение деловым стилем русского языка
• умение аргументировано излагать на английском языке точку зрения на
экономическую проблему

147
Критерии оценки знаний и компетенций

Оценка Описание критериев оценки


Студент продемонстрировал отличное владение активным
А(90-100)
терминологическим аппаратом, активной грамматикой и правилами
перевода. Искажения отсутствуют, допущено не более одной неточности
в переводе. Высокая скорость перевода и отличное владение
профессиональным русским языком.
Студент продемонстрировал очень хорошее владение активным
В (82-89)
терминологическим аппаратом, активной грамматикой и правилами
перевода. Допущено не более 1 искажения или 2 неточностей в переводе.
Высокая скорость перевода и хорошее владение профессиональным
русским языком.
Студент продемонстрировал хорошее владение активным
С (75-81)
терминологическим аппаратом, активной грамматикой и правилами
перевода. Допущено не более 2 искажений или 3 неточностей в
переводе. Достаточно высокая скорость перевода и достаточно хорошее
владение профессиональным русским языком.
Студент продемонстрировал посредственное усвоение активного
D (67-74)
терминологического аппарата, тематического, лексико-грамматического
и переводческого материала семестра. Допущено не более 3 искажений
или 4 неточностей в переводе. Средняя скорость перевода и
посредственное владение профессиональным русским языком.
Студент продемонстрировал весьма удовлетворительное владение
E (60-66)
активным терминологическим аппаратом, активной грамматикой и
правилами перевода. Допущено не более 4 искажений или 6 неточностей
в переводе. Низкая скорость перевода и почти удовлетворительное
владение профессиональным русским языком.
Неудовлетворительное владение переводческой компетенцией,
F (менее 60)
выражающееся в неудовлетворительном владении активным
терминологическим аппаратом, активной грамматикой и правилами
перевода. Допущено более 4 искажений или 6 неточностей в переводе.
Низкая скорость перевода и плохое владение профессиональным
русским языком.

148
Приложение № 3

Образцы материалов для подготовки к экзаменам

149
Письменный экзамен
1. Текст для письменного перевода со словарём с английского языка.

Barbarians in love
Global private equity firms are seduced by the China dream
Объём – 1745 п. зн.
Three widely held opinions about China (it’s big, expanding and filled with entrepreneurs) and
some spectacular returns on deals mean many buy-out big-shots are reinventing themselves as
China hands. There is a gap in China’s financial system that private equity can fill. Most capital
is channelled through state-controlled banks that offer low returns on deposits and cheap loans to
state-controlled companies. Both savers, who want better returns on their investments, and
entrepreneurs, who need capital, should be keen on bypassing the state-bank system.
China is also particularly seductive for Western buy-out firms. They are keen to find new deals
there, now that the boom in leveraged buy-outs in rich countries is over. They also want to
ensure that the companies they already own do more business in the Middle Kingdom.
Blackstone recently held a gathering in China for 33 chief executives of its portfolio companies
to discuss, among other things, how to expand their activities there.
But gaining control of acquired companies, which is usually deemed essential for buy-outs, is
also difficult. Many industries are considered “strategic” and therefore off limits, or open to
investment only in exceptional cases, such as finance. Across all sectors a typical Chinese
private equity investment is a non-controlling stake of 15-40% in an operating company, with the
money intended (but not always used) as growth capital. For dollar-based funds, which had been
the norm until yuan-denominated ones took off, laborious government approvals are required to
close deals. These can take months or even years. Those who have attempted to take a majority
stake in a company have tended to fail.
Given these hurdles, finding suitable investments is hard. As a result, too many firms are chasing
too few deals. One executive at a leading American buy-out firm says that, more than any
potential regulatory issue in China, he is concerned about the “intense amount of competition”
from local firms, which outmanoeuvre Western firms on deals and also poach their staff.

The Economist 2010

150
2. Текст для письменного перевода со словарём с русского языка.
МСФО
Объём текста ~ 1146 п. зн
Кризис заставил компании задуматься об эффективности, как никогда стала важна
отчетность. Но прежде чем использовать данные, порой приходится задумываться: а
насколько они качественные?
Отчетность по МСФО, хотя до сих пор и не получила повсеместного официального
признания в России, априори необходима для инвесторов и кредиторов. Поскольку редкий
бизнес обходится исключительно собственными средствами, готовить ее приходится
большинству компаний с масштабом доходов от 100 млн рублей в год. Кроме того,
принятый 10 августа закон «О консолидированной финансовой отчетности» после
вступления в силу увеличит число компаний, которым необходимы отчетность по МСФО
и её аудит. Действие закона распространяется на кредитные, страховые, а также
организации, ценные бумаги которых обращаются на торгах фондовых бирж. Их
консолидированная финансовая отчетность должна составляться в соответствии с МСФО.
Правда, еще не решено, с какого момента закон вступит в силу.
Отчетность по международным стандартам можно получить двумя методами –
трансформации из РСБУ и параллельного учета. Первый вариант менее дорогой с точки
зрения единовременных вложений: задаются алгоритмы, составляются
трансформационные таблицы. Второй подразумевает опору на первичную информацию. В
обоих случаях вопрос автоматизации не теряет актуальности.
ФИНАНС.РУ. 2010
Устный экзамен
1. Текст для перевода с листа.

Five Deadly Business Sins


Two avoidable mistakes were enough to trip up Eastman Kodak,
once one of America's mightiest companies
By Rick Wartzman
Объём текста ~ 1375 п. зн.
Just how lethal are Peter Drucker’s “five deadly business sins”? You might ask Eastman Kodak
which has committed at least a couple of them and now finds itself on the verge of bankruptcy.
Word emerged last week that Kodak, founded in 1892 and for many decades widely celebrated
as one of the world’s greatest companies, may soon file for Chapter 11 protection if it can’t raise
enough cash by selling off pieces of its patent portfolio. The news was a sharp reminder of how
incredibly challenging it is to sustain any organization, even the most iconic.
151
How did it come to this? In certain respects, Kodak has been on the defensive since it began
facing heightened competition from its arch rival Fuji some 30 years ago. But fundamentally the
company has slipped because it fell prey to two of what Drucker identified in a 1993 essay as a
quintet of “avoidable mistakes that will harm the mightiest business.”
The first is a preoccupation with high profit margins. The second: “slaughtering tomorrow’s
opportunity on the altar of yesterday.” (The three other deadly business sins, according to
Drucker, are “mispricing a new product by charging ‘what the market will bear’; “cost-driven
pricing” in which you merely add up your expenses and then stick a profit margin on top—a
subject I’ve explored previously; and “feeding problems” while “starving opportunities.”
Few things are as seductive to a business as fat profit margins, and cranking out little yellow
boxes of film proved extremely lucrative to Kodak for a long time. For a company in this
situation, “the economic returns from the alternatives are simply comparatively unattractive,”

BusinessWeek January 14, 2012


2. Мини-презентация на одну из пройденных в течение семестра тем (Например, Гипотеза
эффективного рынка) – 11/2 мин.

152

Вам также может понравиться