5. Make word combinations matching the two parts of the table. Then use the correct forms of the word combinations to complete these sentences below.

1) offer	a) an issue
2) go	b) a prospectus
3) produce	c) shares
4) underwrite	d) public

After three very profitable years, the company is planning to 1) ……….. 2) ……… and we’re 3) …………… 100,000 4) ………… for sale. We’ve 5) ……………. a very attractive 6) ………….., and although a leading investment bank is 7) ……….. the 8) ……………., we don’t think they’ll buy any of the shares.

6. Discuss the following.

• Have there been any big flotations in the news recently?

• Are there any public companies whose stocks you would like to buy?

7. Financial Planning

1. Read the text and answer the following questions.

• What does financial planning involve?

• What does calculating discounted cash flow value mean?

• What does a company do if it wants to choose between possible investments in a new project?

A. Financial Planning

Alia Rahal works in the financial planning department of a large manufacturing company:

‘Financial planning involves calculating whether new projects would be profitable. We have to calculate the probable rate of return: the amount of income we’d receive each year from the investment, expressed as a percentage of the total amount invested. If we're going to finance a project with our own money, the rate of return must be at least as high as we could get by depositing the money in a bank instead, or by making another risk-free investment, like buying government bonds.

If we need to borrow money to finance a new investment, its projected rate of return has to be higher than the cost of capital - the amount we have to pay to borrow the money.’

B. Discounted cash flows

‘We usually calculate the discounted cash flow value of an investment. This means discounting or reducing future cash flows to get their present values - in other words, calculating the present value of money to be received in the future. This is because the value of money decreases over time. Firstly, there’s nearly always inflation, so cash will have lower purchasing power in the future: you'll be able to buy less with the same amount of money. And secondly, if you had the money now, you could get income by using or investing it. The return we could get by investing the money in other ways is the opportunity cost of capital. So waiting for money is also a cost. This is the time value of money: how much more it is worth to receive money now rather than in the future.’

C. Comparing investment returns

'If we have to choose among possible investments in new projects, we work out the net present value (NPV) of each project by adding up all the expected cash flows, discounted to their present value, minus the initial investment. To do this, we have to select a discount rate or capitalization rate. This is usually the interest rate we pay for borrowing the capital, but we could increase it if there's a lot of uncertainty or risk.

Discounting sounds complicated, but it isn't. It’s the opposite of compounding interest. For example, if you invest $1,000 at 10% for five years, it will yield 1.61 times its original value. So you get back $1,610, including $610 compound interest. A discount rate of 10% has a discount factor of one divided by 1.61, which is 0.62. So $620 invested now will be worth $ 1,000 in five years if it’s invested at 10%.

When we’re comparing alternative investments, we also calculate the internal rate of return (IRR). That’s the interest rate or discount rate that gives a net present value of zero in today’s money values. In other words, the present value of the cash that we’re going to receive from an investment is the same as the present value of borrowing that cash. We normally choose the investment with the highest IRR.’