FINANCING OF INVESTMENTS, The essence, classification...

Chapter 5. FINANCING INVESTMENTS

As a result of studying this chapter, the student must:

know

o sources of investment financing, their nature and classification;

o own, borrowed and attracted sources of investment financing;

o methods and forms of investment financing and their essence;

o the price of capital and the weighted average price of capital and the methodology for calculating them;

be able to

o distinguish between own, borrowed and attracted sources of investment financing;

o calculate the price of capital and the weighted average price of capital;

own

o conceptual apparatus within the framework of this chapter;

o the methodology for calculating the price of capital and the weighted average price of capital.

5.1. The essence, classification and structure of sources of investment financing

The search for sources of investment financing has always been one of the most important problems in investment activity. In modern conditions for the United States, this problem is perhaps the most acute and urgent.

Investments can be made by:

o own financial resources and on-farm reserves of the investor (profits, depreciation, cash savings and savings of citizens and legal entities, funds paid by authorities

insurance in the form of compensation for losses from accidents, natural disasters, etc.);

o borrowed funds of investors or transferred funds (bank and budget loans, bonded loans, etc.);

o attracted financial resources of the investor (funds received from the sale of shares, share and other contributions of members of labor collectives, citizens, legal entities);

o financial resources, centralized by associations (unions) of enterprises in accordance with the established procedure;

o funds of off-budget funds;

o federal budget funds provided on a non-repayable and repayable basis, budget funds of the constituent entities of the United States;

o funds of foreign investors.

Financing of capital investments in construction projects and facilities can be carried out at the expense of both one and several sources.

In general, all sources of funding are divided into centralized (budgetary) and decentralized (extrabudgetary). Centralized sources usually include funds from the federal budget, the budgets of US entities, local budgets and extrabudgetary funds. All the rest (net profit, depreciation, bank loans, securities issue, etc.) are considered decentralized.

Sources of funds used by the enterprise to finance its investment activities are usually divided into own, borrowed and attracted.

To its own sources include profit, depreciation, intra-farm reserves, funds paid by insurance bodies in the form of compensation for losses from accidents, natural disasters and other means.

Borrowing sources are loans from banks and credit organizations, bond issues, targeted state loans, tax investment loans, investment leasing, investment seleng.

Attracted sources are the issue of ordinary shares, the issue of investment certificates, contributions of investors to the authorized capital, gratuitously provided funds, etc.

By the degree of generation of risk, the sources are classified as risk-free and risk-generating. Classification by this criterion can be useful in determining the optimal structure of investment financing.

The risk-free includes sources of financing, the use of which does not lead to an increase in the risks of the enterprise: retained earnings, depreciation, intrasystem funding (receipt of funds for specific purposes from higher organizations inferior).

Attracting sources that generate risk leads to an increase in the company's risks. Such are the borrowed sources (their attraction increases the financial risk of the enterprise, since it is connected with the unconditional obligation to repay the debt within the established period with the payment of interest for use), the issue of ordinary shares (use of this source is connected with the shareholder risk).

The structure of investments by sources of financing is accordingly understood as their distribution and ratio in the context of funding sources. Improving this investment structure is to increase the proportion of off-budget funds to the optimal level. This should be understood as the optimal share of state participation in the investment process.

The structure of investments in fixed assets by sources of financing has changed significantly in recent years, as evidenced by the data shown in Table. 5.1.

Table 5.1

Structure of investments in fixed assets by sources of financing,% to total

Metric

1995

2000

2003

2004

2005

2006

2007

2008

2009

2010

Investments in fixed assets - total

100

100

100

100

100

100

100

100

100

100

Including by source of funding:

Custom

Tools

49.0

47.5

45.2

45.4

44.5

42.1

40.4

39.5

37.1

41.2

of them:

Profit remaining at the disposal of the organization

20.9

23.4

17.8

19.2

20.3

19.9

19.4

18.5

16.0

14.7

Depreciation

22.0

18.1

21.2

22.8

20.9

19.2

17.6

17.3

18.2

20.5

Engaged

Tools

51.0

52.5

54.8

54.6

55.5

57.9

59.6

60.5

62.9

58.8

of them:

bank loans

-

2.9

6.4

7.9

8.1

9.5

10.4

11.8

10.3

8.7

including loans from foreign banks

-

0.6

1.2

1.1

1.0

1.6

1.7

3.0

3.2

2.0

borrowed funds of other organizations

-

7.2

6.8

7.3

5.9

6.0

7.1

6.2

7.4

5.6

Budgetary

Tools

21.8

22.0

19.6

17.8

20.4

20.2

21.5

20.9

21.9

19.4

including:

from the federal budget

10.1

6.0

6.7

5.3

7.0

7.0

8.3

8.0

11.5

10

from the budgets of the constituent entities of the United States

10.3

14.3

12.1

11.6

12.3

11.7

11.7

11.3

9.2

8.2

means of off-budget funds

11.5

4.8

0.9

0.8

0.5

0.5

0.5

0.4

0.3

0.3

Other

-

15.6

21.1

20.8

20.6

21.7

20.1

21.2

23.0

24.8

Source. Russia in figures, 2011. gks.ru/bgd/regl/

Based on the data in this table, you can draw the following conclusions:

a) in general, the structure of investment in fixed assets by sources of their financing over the analyzed period has changed quite significantly. There is a tendency to decrease own funds and increase borrowings (the share of own funds decreased from 49.0 to 41.2%, and the share of raised funds increased from 51.0 to 58.8%);

b) for the entire period of the study, the share of decentralized sources prevailed over centralized (budgetary), which is typical for a market economy. The whole history of the development of market relations has shown that private investments are used better than budgetary ones.

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