Экономические науки / 3.Финансовые отношения

Nananakina D.A.

Donetsk national university of economics and trade named after Mikhail Tugan-Baranovsky

ISSUE OF RATIONAL STRUCTURE OF FUNDS OF STOCK COMPANIES

With the view to improve the profitability of the enterprise own funds not only internal but borrowed funds may be used. Correct and competent use of borrowed funds is very important for businesses because it allows to streamline its operations and maximize profits in the short and long-time interval.

Questions of assessing of enterprise funds were considered in the writings of such scholars as Akulov V.B., Litovsky A.M., Malko I.H, Surgay M.A.

But the problem of estimating the structure of funds of stock companies (SC) is still poorly understood.

The objective of this study is to examine the rational structure of the business company funds, and analyze the best combination of own funds and external funding sources.

That is the amount of capital that allows SC to formulate and implement specific goals. But the amount of capital is a concept that already predetermines the insufficiency failure of own sources of funding. The effect of financial leverage allows to apply not only internal financial, but also other sources.

Own funds is an important link in the relationship with all other economic actors. That is the value of equity that gives reason to feel comfortable on the market [1].

Borrowings is an important lever that allows mitigate conflicts between shareholders and managers. But borrowing creates a new set of conflicts between managers and creditors, which forms an additional source of risk in the SC [1].

Ukrainian scientists are right, when they argue that SC should not make full use of its borrowing power. This will give it an opportunity to properly respond to market changes while increasing its debt power (for example, to attract bank loans) [2].

It is important that both internal and external sources of financing are interdependent, but are not interchangeable.

The main internal sources of financing for SC is undistributed profits and depreciation (both can be used not only for maintaining the production at the same level, but also as a source of increasing production).

External sources of financing of SC are: 1) private offering of stock, 2) the public offering of stock, 3) financing from loans, 4) tax remissions, 5) non-payment, 6) combined methods. The pros and cons of them are considered in Table 1.

Table 1

Advantages and disadvantages of financing sources

Sources	Pluses	Minuses
Private offering of stock	Control is not lost. The risk increases slightly	Limited funding. High price to attract (dividend per share)
Public offering of stock	Financial risk does not increase. Uncertain term. A considerable amount of attraction fund	Control can be lost. High price to attract (dividend)
Financing from loans	Control is not lost. Low price to attract (percentage)	Financial risk is increasing. Defined return term
Tax remissions	Not related to the economic situation of firms (the state of its internal environment)	High probability of cancellation in case of change of political situation (external environment)
Nonpayment	Considerable savings through non-payment in time	high dependency on the state of the environment

SC makes specific decisions about bringing exact external sources, depending on the correlation of the pros and cons. However, some very important rules relating to the issue of shares should not be forget.

In the case of low dividends per share and a negative differential of financial leverage it is preferable to make emission of shares. Here there is a build of own funds (they cost less expensive (the price - dividend) than the attraction of credits (price - per cent) with a negative differential).

Otherwise - a high dividends per share, a positive differential value and the effect of financial leverage – resort to the issue of shares can not be done. This is wrong signal to investors, which they can respond inadequately, which may cause panic among shareholders with a negative result. Build of leverage through borrowings should be used, which will cost less than other external sources [1].

These two rules are important, but they can not be absolute. When making specific decisions all the circumstances faced by SC must be weigh. In addition, two more new points should be given into consideration. The first one is an analysis of different options of additional funding through the prism of comparison of net margin equity and net income per share on the various structures of a liability. The second one is the calculation of threshold of a net operating result [2].

Let's start with the first. 

Net income per share = (1- Income tax) * ( Net operating results of the investment - Percentage of the loan) / Number of ordinary shares (1)

Net return on equity = Net profit / Assets (2)

The following example can be given demonstration:

SC is considering an alternatives: either the additional emission of 1,000 ordinary shares of the former denomination, or mobilization of credit to the same amount at 14% per annum. Two possible scenarios are considered - pessimistic and optimistic. (Table 2)

Table 2

Pessimistic and optimistic variants of scenario

Indices	Issue of shares (Ordinary)		Attraction of credit (shoulder = 1)
	Pes.	Opt.	Pes.	Opt.
Net operating results of the investment	2000	4000	2000	4000
Credit interest	-	-	1400	1400
Profit before tax	2000	4000	600	2600
Income tax (32%)	640	1,280	192	832
Net income	1360	2720	408	1768
Number of ordinary shares (units)	2000	2000	1000	1000
Economic profitability (%)	10	20	10	20
Estimated average rate of interest (%)	-	-	14	14
Net income per share	0.68	1.36	0.408	1.768
Net return on equity (%)	6.8	13.6	4.08	17.68

It turns out that the most preferable option would be optimistic connected with borrowing in the form of credits or loans. Least attractive is pessimistic variant, also connected with additional borrowing.

Economically, it's all quite simple to explain - in the optimistic scenario there is a positive differential of financial leverage, pessimistic - negative.

Thus, in the case of a pessimistic variant additional shares must be resorted to (6.8%> 4.08). In the case of an optimistic scenario - would be preferable to attract additional loans (17.68> 13.6).

These calculations should be introduced to the shareholders. Their calm is one of the most important conditions for the normal development of SC.

The second question is the definition of the threshold (critical) size of net operating results of the investment, in which earnings per share and net profitability of own funds are the same for the option of additional shares, and additional loans. To quantify this net operating results of the investment following equation should be resolved:

Economic profitability = (Net operating results of the investment/ (Own funds + Borrowings)) * 100 = Estimated average rate of interest (3)

Net operating results of the investment = Economic profitability * (Own funds + Borrowings) = Estimated average rate of interest * (own funds + borrowings) (4) [1]

For our example net operating results of the investment = 2800. The economic meaning of this number is that for values of net operating results of the investment less than 2,800, it is more advantageous to use only their own funds. When NORI exceed 2800, it is more profitable to use borrowed funds in the form of bank loans.

Absolute conclusions in making specific decisions on funding sources can not be taken. Many other factors associated with the SC should be taken into account. These are: growth of production, stability of growth rate, profitability and asset structure, and other indicators of production efficiency, the power of impact of the financial and operating leverage and the related measure of the overall risk of SC, conditions of taxation, strategy of SC (profit maximization, or consolidation on its own market segment) as well as non-economic factors such as the predictability of the behavior of shareholders, an opportunity for managers conduct of their objective at meetings of shareholders, and other.

Thus, we must proceed from the need to maximize the net return on assets and net income per common share, which will ultimately optimize the structure of liabilities, i.e., solve the reasoning of the sources of SC. This, at first glance, the simple formula requires a "framework of restrictions." There is the effect of financial leverage (the value of the differential and shoulder) and the effect of operating leverage (the proportion of fixed costs and their proximity to the threshold of profitability as well as to the period when the inevitable becomes a sharp increase in fixed costs). So, again we face a measure of the overall risk associated with SC. It serves as an indicator of the likelihood of the certain result of SC (output, NORI, net profitability of own funds and net income per share) and allow a certain degree of accuracy to optimize the SC’s liabilities, i.e., to optimize the sources of funds.

In Ukraine the practice in solving this problem may be unique, as SC, which are efficiently run, often use non-traditional sources of financing, such as the fight for tax remissions or the use of the practice of non-payment (which leads to formation of the most profitable monopolists that actually manage non-payments in the economy).

This position may be considered justified if we remember that stocks are heavily undervalued, consequently, the role of issue of shares as a source of funding is not only limited, but discounted. Also exist abnormally high rate of interest, which makes credit unavailable for many SC (when the profitability of production is below the rate of interest on loans).

There is a hope that with a time of development of normal market relations in our country, the role of such funding sources as an additional issue of shares and borrowings, will be expanded, and the theory described will be used in practice.

Literature:

1. Малько И.Х. Оценка финансового состояния предприятия // Бизнес Информ: научный журнал. -2009. - №5. – с.53-56.

2. Сургай М.А. Характеристика показателей оценки финансового состояния предприятия // Модели управления в рыночной экономике. – 2009. -№12. – с.62-64.