English for Management Studies

PART III: Question 16-19 . Read the article and choose the best option to complete each statement.. For questions 16-19, mark one letter A, B, or C on your Answer Sheet. Raising funds for schemes and dreams Companies require capital. Start-up companies - especially high-risk, high-reward, innovation-based companies - frequently need considerably more capital than the founder's wallet holds. This means that entrepreneurs have to seek outside finance. Debt finance, such as bank loan, is generally much more Reading Page 6 readily available for the purchase of an existing company or for the management buyout of a part of a large, existing company than it is for a start-up. Essentially, the risk of such a transaction is lower because the business itself already exists and its trading history can be analysed. After this, another category of capital is available for innovation companies that they have actually established themselves. This is due to the fact that although they have not yet hit the fast-growth curve, they have managed to reduce risk in a variety of ways. Firstly, they have already built a product or service (thereby reducing technical risk). Secondly, they have made some sales (diminishing market risk). Thirdly, they have gathered together an effective management team (diminishing people risk). Although these companies are still put in the high-risk category, they present an attractive balance of risk and reward from the investor's point of view. Lack of available investment capital for start-ups, or "start-up" capital, means that the success of a start-up depends on how well an entrepreneurs' business plan takes into account the needs of a potential investors. Investors need a healthy return on their capital investment. The return they ask for mainly depends on the amount of risks the investment presents: the greater the risk, the greater required reward. They usually measure return using a calculation known as IRR (internal rate of return). This shows the return in terms of the annual percentage the investor is likely to get over the lifetime of the investment. In simplified term, an IRR of 60 per cent means that the investors receive the sum of the original capital plus 60 per cent of the capital for each year of the investment. It is also important to realise that investors are usually building a portfolio of investments, which they view as a group. They know that most of the companies will fail completely, some will succeed and but only a few of will be very successful. So every company in the a portfolio has potentially to be potentially a big winner, because those big winners are covering the losses on the losers. Therefore, the only way for entrepreneurs to interest investors is to demonstrate that they understand the risk factors, and to present a persuasive business plan, with whatever data they can find, to show that the risk will diminish. However, smart investors do not rely solely on IRR calculation because it can be misleading. This is because most of the variables upon which IRR depends are hard to know in the early stages of investment, especially how long the investment will last and what the selling price will be. Nevertheless, while smart investors may not entirely depend on it, smart entrepreneurs will ensure that their proposition shows the potential for an IRR of the magnitude that investors like to see before taking the big step of investing in start-up company. 16. The problem for most entrepreneurs is that they don't have enough A. time B. ideas C. money 17. The riskiest type of company is_ A. an established company B. a start-up C. a management buyout of part of large existing company Reading Page 7 18. The main thing that an investor looks for is a start-up company which _ A. has an interesting product or service B. will pay them back within the first year C. will survive and make a healthy profit 19. The IRR (intemal rate of return). A. shows how profitable the investment is expected to be B. shows how popular the product or service will be C. indicates how risky the investment could be Question 20-25 Decide the following statements are true (T) or false (F). 20. Banks tend to prefer to lend money to low-risk companies. 21. It is easier for potential investors to make investment decisions about a business which is already running. 22. Innovation companies which have actually built a product or service are considered to be low-risk investments. 23. Investors in start-up companies will not invest in risky venture, however profitable they might potentially be. 24. The IRR shows the rate of return on the investment for the first year. 25. Start-up investors expect all their investments to succeed. Question 26-30 Choose the best explanation for each phase from the article. 26. "Investors need a healthy return on their capital investment". (paragraph 3) A. large return B. safe return 27. ".. because those big winners are covering the losses on the losers". (paragraph 4) A. be more numerous than B. financially compensate the investor for 28. "... it can be misleading." (p aragraph 5) A. inaccurate B. highly accurate 29. "... most of the variables upon which ...". (paragraph 5) A. individual factors B. changeable amounts 30. "... an IRR of the magnitude that investors like to see ..." (paragraph 5) A. size B. magnificence