Acquisition Of Capital

Acquisition Of Capital

A corporation needs capital in order to start up, operate and expand its business. The process of acquiring this capirtal is known as financing. A corporation uses two basis type of financing: equity financing and debt financing. Equity financing refers to funds that are invested by owners of the corporation. Debt financing, on the other hand, refers to funds that are borrowed from sources outside the corporation.

Equity financing (obtaining owner funds) can be exemplified by the sale of corporate stock. In this type of transaction, the corporation sells units of ownership known as shares of stock. Each share entitles the purchaser to a certain amount of ownership. For example, if someone buys 100 shares of stock from Ford Motor Company, that person has purchased 100 shares worth of Ford’s resources, materials, plants, production, and profits. The person who purchases shares of stock is known as a stockholder or shareholder.

All corporations, regardless of their size, receive their starting capital from issuing and selling shares of stock. The initial sales involve some risk on the part of the buyers because the corporation has no record of performance. If the corporation is successful, the stockholder may profit through increased valuation of the share of stock, as well as by receiving dividends. Dividends are proportional amounts of profit usually paid quarterly to stockholders. However, if the corporation is not successful, the stockholder may take a severe loss on the initial stock investment.

Often equity financing does not provide the corporation with enough capital and it must turn to debt financing, or borrowing funds. One example of debt financing is the sale of corporate bonds. In this type of agreement, the corporation borrows money from an investor in return for a bond. The bond has a maturity date, a deadline when the corporation must repay all of the money it has borrowed. The corporation must also make periodic interest payments to the bondholder during the time the money is borrowed. If these obligations are not met, the corporation can be forced to sell its assets in order to make payments to the bondholders.

All business need financial support. Equity financing (as in the sale of stock) and debt financing (as in the sale of bonds) provide important means by which a corporation may obtain its capital.

Comprehension

A. Answers the following questions about acqusition of funds. Questions with asterisk (*) cannot be answered directly from the text.

1. Why does a corporation need capital?

A corporation needs capital in order to start up, operate, and expand its business

2. What are the two basic types of financing used by a corporation?

A corporation uses two basic types of financing: equity financing and debt financing

3. From whom are funds acquired for each type of financing?

Equity financing refers to funds that are invested by owners of the corporation and debt financing on the other hand refers to funds that are borrowed from sources outside the corporation

4. What does one share of stock entitle the purchases to?

Each share entitles the purchaser to a certain amount of ownership.

5. Why do the initial sales of stock involve some risk?

The initial sales involve some risk on the part of the buyers because the corporation has no record of performance.

6. How might a stockholder benefit from his or her stock?

If the corporation is successful, the stockholder may profit through increased valuation of the shares of stock, as well as by receiving dividends. Dividends are proportional amounts of profit usually paid quarterly to stockholders.

7. If the corporation is not successful, how might the stockholder be affected?

If the corporation is not successful, the stockholder may take a severe loss on the initial stock investment.

8. How does the corporation benefit from selling bonds? How does the bondholder benefit from purchasing bonds?

I think to increase a corporation investment.

9. *Have you or has someone you know ever purchased bonds? * Describe the experience.

Yes, i have, like a MLM. But i think isn’t a investment, just commercial business.

10. *In your present financial situation, would the purchase of stocks or bonds be a wise investment? *Why or why not?

I like to invest my money in the bank, like a deposito, insurance.

B. Circle the letter of the answer that best completes each of the sentences below.

1.The process of acquiring capital is known as:

c. financing

2. The unit of ownership in a corporation is a:

d. stock

3. All corporations receive their starting capital by:

d. selling stock

4. The sale of corporate bonds is an example of….financing.

a. debt

5. A corporation may be forced to sell its assets if it does not:

c. make the required payments to bondholders

Vocabulary Execises

A. Write down any terms that you did not understand in the reading. Find each term in the reading, look at its context, and try to figure out the meaning. Discuss these terms with your classmates.

B. Look at the terms in the left-hand column and find the correct synonyms or definition in the right-hand column. Copy the corresponding letters in the blanks.

1. g. a sum paid for borrowing money interest payment (line 27)

2. severe (line 20)

3. f. the contract or promise that compels one the follow a certain course of action obligation (line 28)

4. h. any thing or place from which something is obtained source (line 6)

5. entitle (line 9)

6. c. accouring at regular time periodic (line 27)

7. issue (line 15)

8. i. a time limit for finishing something deadline (line 26)

9. a. satisfy Met (line 29)

10. initial (line 15)

C. Complete the sentences with the noun, verb, and adjective forms provided.

1. Consideration/ considered/ considerable

a. After careful consideration by the board of directors, a decision was made to issue more shares of stock.

b. A corporation must raise a considerable amount of capital in order to purchase essential assets.

c. Before buying her new car Nancy concidered the price, the size, and the mileage.

2. Initiation/ has initiated/ initial

a. My initiation impression of the applicant was not accurate.

b. Ms. Marovitz is an aggressive and competent manager, she has initiated a number of new programs since joining the firm.

c. With the initial of sick-leave benefits, employees could miss a certain amount of work due to illness without loss of pay.

3. Investment/ to invest/ invested

a. Mr. Lee decided to invest $ 5.000 in Lyman Product, Inc

b. Although he had recearched the market carefully, he took a loss on his invested.

c. A stockholders investment funds are usually not tax deductible.

4. Acquisition/ to acquire/ acquired

a. There are numerous ways for business acquisition capital.

b. The acquired of funds is an important aspect of financial management

c. The ability to type accurately and quickly Is an to acquire skill.

5. Finance/ are financed/ financial

a. Are financed information is provided by income statements and balance sheets.

b. Some students financial by their parents until they graduate from college.

c. There are many job opportunities for individuals who major in the field of finance.

TEXT ANALYSIS

Look at the reading to answer these questions.

1. What does each of the following refer to?

Lines	Words	Referents
2	This capital	A corporation
8	This type of transaction	Equity financing
28	These obligations	Periodic interest payments
29	Its	Obligation

2. Two different connective words or phrases are used to show contrast (lines 5 and 19). Find these connective and copy them below. Then write down the concepts that are being contrasted.

CONNECTIVES	CONCEPTS BEING CONTRASTED
Debt and equity financing	Equity financing refers to funds that are invested by owners of the corporation. Debt financing, on the other hand, refers to funds that are borrowed from sources outside the corporation
Dividends	If the corporation is successful, the stockholder may profit through increased valuation of the share of stock, as well as by receiving dividends. However, if the corporation is not successful, the stockholder may take a severe loss on the initial stock investment.

3. In the reading, examples of equity and debt financing are given. What are the examples? What are the risk factor for each?

Equity Financing

Example : stocks

Risk factors : the corporation has no record of performance

Debt financing

Examples : obligation

Risk factors : If these obligations are not met, the corporation can be forced to sell its assets in order to make payments to the bondholders.

4. Two terms are defined in the reading using this form:

Definitionà verb to be à known as à term being defined

Find and copy these definition in the space below

a. The process of acquiring this capital is

Application

Read the following situation and make recommendations for financial investment. Base your recommendation on information provided in this unit or on your own knowledge of finance.

Situation 1;

Mr. and Mrs. Jeong are in their early sixties. They are both close to retirement. They have saved approximately $ 50,000 during their working years. They want to put their money in a secure investment that will provide them with a regular income. What do you recommend?

My recommendation to Mr and Mrs. Jeong to invest their money in deposito

Situation 2:

Susan Clairmont is in her late twenties. She is single, owns a home, and has a successful law pratice. She finds that she can live very comfortably on 65 percent of income. She is looking for an investment that will yield the highest return. What do you recommend?

My recommendation to Susan to invest her money in debt financing because she can get benefit from the money which is borrowed by the corporation.

Situation 3:

John and Mary Huston are parents of for young children. John works as an engineer and Mary is a homemaker. They are able to save a small amount of John’s salary.

My recommendation to John n Mary Huston to saving money in the bank because immadiately easy to take out the money .