Пойгина Л.Б., Туринова Л.А. - English for Masters. Management Part 2 (Пойгина Л.Б., Туринова Л.А. - English for Masters. Management Part 2.pdf)

МОСКОВСКИЙ ГОСУДАРСТВЕННЫЙ УНИВЕРСИТЕТ им. М.В. ЛОМОНОСОВА  ЭКОНОМИЧЕСКИЙ ФАКУЛЬТЕТ     Л.Б. Пойгина, Л.А. Туринова   ENGLISH FOR MASTERS. MANAGEMENT   Part 2 МоскваТЕИС2010ББК65                             Пойгина Л.Б., Туринова Л.А. English for Masters. Management. Part 2. ‐ M.: Экономический факультет МГУ. ТЕИС, изд. 2‐е, расширенное и дополненное, 2010 — 81 с.  ISBN 5‐7218‐0610‐9      © Экономический факультет МГУ, 2010      © ТЕИС, 2010 Part 2Management: Financial Statement Analysis,Accounting in Management, InsuranceText 1.1. Pre-reading exercise.Skim through the text and identify which logical part deals with each of the following subjects:a)Definition of financial statement analysisb)Analysis of riskc)Functions of financial statement analysisd)Introductione)Increasing use of debtf)Technical vs.

Interpretive aspects of analysisFinancial Statement Analysis:An overviewI ___________________________Banks frequently invest much of their assets in loans made to commercial customers. For this reason,banks depend on their commercial loan officers to make sound judgments about the financial stability of thebusinesses applying for loans. Financial statement analysis gives the loan officer much of the informationrequired to make sound lending decisions.

When making loan decisions, the loan officer must be concernedwith the needs of the business as well as the community. Through careful financial statement analysis andsound lending decisions, the commercial loan officer can contribute to the profitability of the bank and to thegrowth of local businesses while meeting the needs of the community.

Text 1 provides a broad overview offinancial statement analysis as it applies to credit analysts, defines financial statement analysis, discusses theconcept of risk, and presents the functions of financial statement analysis.II _________________________The reason for studying financial statement analysis is the increasing use of debt to finance business. Theanalysis of a firm's debt and its capacity to safely acquire more debt is the main subject.

The importance ofdebt markets continues to grow because debt allows owners of businesses to obtain capital without dilutin gthen equity. That is, for a firm with rapidly increasing sales and profits, shareholders wish to defer bringing innew shareholders and thereby dividing the profits. By borrowing at an interest rate unrelated to these growingprofits, the firm can avoid new sales of common stock. This deferral of sharing of a growing base can bringgreater rewards in the future when additional stock is sold.The Glass-Steagall Act of 1933 segregated the commercial banks from the equity markets, leaving thetightly regulated investment banking firms to serve as the sole source of equity financing. Because of thecompetition among investment bankers, commercial banks, insurance companies, and others, innovative debtinstruments became common in the aggressive debt markets.

One example of debt instrument innovation iscommercial paper. Commercial paper permits the most creditworthy companies to borrow on a short-termbasis directly from individuals and institutions, bypassing the commercial banks. With the advent of thisborrowing instrument, commercial banks lost an important portion of their prime credit-worthy borrowers tothe direct market. Another example of debt instrument innovation is revolving credit, which allows principalto be advanced and repaid as needed.

A third example is subordinated-convertible debt that offers equityincentives in exchange for reduced interest rates. Convertible debt is usually subordinated to other seniorlenders, but purchasing it is still safer than purchasing common stock of higher-risk firms. Later, as3dividends increase and the market price rises nearly to the conversion equivalent price, it can be converted toequity at a present price.Another major factor behind an increase in demand for debt was the advent of corporate, income taxes.Corporate treasurers quickly recognized that being able to deduct interest expenses made borrowing a lessexpensive source of capital, after taxes, than equity with its nondeductible dividends.Commercial banks, becoming more aggressive in their pursuit of income sources relaxed their creditstandards, especially in the markets for loans to developing countries and for real estate development.Moreover, intensified corporate acquisition and the related leveraged buyout v activ ity in the 1980s:increased the demand for corporate debt.

In many corporate acquisitions and leveraged buyouts, most of acompany's equity is replaced by debt. In the case of the RJR buyout, the issuance of new debt was $27billion. In a paradox of defense against unfriendly acquisitions, some corporations acquired substantial debtto make themselves less likely takeover candidates. These substitutions of debt for common stock reportedlyhave removed an average of $100 billion from the stock markets annually over the .entire decade of the1980s. Therefore, for nearly 20 years the debt markets have been the major supplier of net .

new capital tobusinesses.III ____________________A critical component of the commercial lending process, financial statement analysis helps the loanofficer decide whether a loan should be made and under what terms and conditions. The commercial lendingprocess normally begins with an interview between the commercial client and the loan officer and continuesthrough the stages of credit investigation, financial statement analysis, loan structuring and pricing, loannegotiation, loan documentation and closing, and loan follow-up.

Thus, financial statement analysis is animportant factor not only in the lending decision, but also in the monitoring process after the loan is closed.Financial statement analysis focuses on the company's past and current financial performance as reflectedin its financial statements, rather than on such factors as the company's management style and credit history.Nevertheless, such nonfinancial considerations do help establish the direction and depth the financialstatement analysis should take.Financial statement analysis involves the systematic examination and interpretation of information toassess a company's past performance for the purpose of predicting future viability.

Financial statementanalysis helps pinpoint unique characteristics — operating or financial — that affect a business's likelihoodof success or failure. It presents a picture of the company that includes the following:Financial Structure — the assets the company maintains and the Jiabilities /t has incurred to acquire andkeep those assets, including the company's capacity or flexibility to deal with both planned and unplannedchange;Operating Cycle — the stages the business goes through to bring its products or services to the market,andTrends and Comparative Performance — the direction that the business operation is going as evidencedby comparison of financial results from more than one year and with other companies in the same industryand size.IV_________________Commercial credit analysts examine the financial information available to them by applying techniquesbased on sound logic and accounting principles.

They perform many technical operations that includecalculating ratios, reformatting information for clarity, evaluating the company's goals, comparing statisticswith those of other businesses, and projecting future operating results.This technical manipulation on f the data is only a small part, however, of what is needed to complete acomprehensive and effective financial statement analysis of a company. Once the credit analyst has crunchedthe numbers (calculated ratios, analyzed trends, and compared firms), the results must be interpreted todetermine the reasons behind the numbers. The goal is to learn not only what is happening, but -why it ishappening. It is also important to consider how past events and current trends might affect the company's future repayment ability.The crux of financial statement analysis, then, is to understand and correctly interpret the results of thetechnically manipulated data.

To accomplish this, the analyst must first obtain considerable backgroundinformation about4the company's ownership,its management,its lines of businessits competition and the markets in which the company operates,its operational aspectsthe characteristics of the industrythe company's position within the industry,pertinent government regulationsthe company's susceptibility to adverse changes in the general economy, andthe extent to which demographic trends and consumer preferences may affectthe company's operations.Understanding these organizational and environmental factors provides meaning to the abstract numbersderived in the technical examination. This information, along with the financial information, helps the loanofficer reach a conclusion as to the risks of a proposed loan.V ____________ _______The bank's role as commercial lender provides a limited return on funds of depositors.

It earns itscontracted-for rate of interest on the loan regardless of the borrower's profitability. This' limited returncoupled with the thin margin between the bank's interest return and its cost of funds and its typical highleverage-requires the bank to take only a restrained risk in the extension of credit.Nevertheless, risk is an inescapable part of commercial lending. The principal risk-called credit risk bybankers-is that the borrower will not meet the terms of the loan and that secondary repayment sources, suchas collateral, will be insufficient to cover the losses.