Course Content
Organizational Forms, Corporate Issuer Features, and Ownership
This is Reading 22 of CFA Level 1, Corporate Issuers, 2024 course. This reading consists of three LOSs, i.e.,: a. compare the organizational forms of businesses b. describe key features of corporate issuers c. compare publicly and privately owned corporate issuers
0/3
LOS A: Compare the organizational forms of businesses.
LOS B: Describe key features of corporate issuers
LOS C: Compare publicly and privately owned corporate issuers
INTRODUCTION TO CORPORATE GOVERNANCE AND OTHER ESG CONSIDERATIONS
This chapter is covered under study session 10, reading 31 of the study materials as provided by the CFA Institute.
0/11
Introduction
LOS A: Describe corporate governance
00:00
LOS B: Company’s Stakeholders
08:17
LOS C: Principal-Agent Relationship
08:13
LOS D: Stakeholder’s Management
02:39
LOS E: Mechanisms of Stakeholders Management
09:25
LOS F: Board of Directors and Committees
06:57
LOS G: Factors Affecting Stakeholders Relationship and Corporate Governance
04:43
LOS H: Risks of Poor Corporate Governance & Benefits of Corporate Governance
03:14
LOS I: Analysts’ Consideration
04:32
Factors Affecting Company & ESG Implementation Methods
05:00
USES OF CAPITAL
This chapter is covered under study session 9, reading 28 of the study materials as provided by the CFA Institute. After reading this chapter, the candidate should be able to: a. a describe the capital allocation process and basic principles of capital allocation; b. demonstrate the use of net present value (NPV) and internal rate of return (IRR) in allocating capital and describe the advantages and disadvantages of each method; c. describe expected relations among a company’s investments, company value, and share price; d. describe types of real options relevant to capital investment; e. describe common capital allocation pitfalls.
0/6
Introduction
LOS A: Capital Budgeting Process
20:19
LOS B: NPV and IRR
19:58
LOS C: Company’s Investment, Value, and Share Price
06:42
LOS D: Real options
08:54
LOS E: Capital Allocation Pitfalls
05:42
Sources of Capital
This topic is covered under LOS 29 of study session 9. After reading this chapter, you should be able to: a. describe types of financing methods and considerations in their selection; b. describe primary and secondary sources of liquidity and factors that influence a company’s liquidity position; c. compare a company’s liquidity position with that of peer companies; d. evaluate choices of short-term funding.
0/4
Corporate Financing Options
24:21
Sources and Factors That Influence Liquidity
10:28
Comparing Liquidity Position
08:23
Short Term Funding
06:59
Cost of Capital
This chapter is covered under study session 10, reading 30 of the study material as provided by the CFA institute. After reading this chapter, the candidate should be able to: a) calculate and interpret the weighted average cost of capital (WACC) of a company; b) describe how taxes affect the cost of capital from different capital sources; c) calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-rating approach; d) calculate and interpret the cost of noncallable, nonconvertible preferred stock; e) calculate and interpret the cost of equity capital using the capital asset pricing model approach and the bond yield plus risk premium approach; f) explain and demonstrate beta estimation for public companies, thinly traded public companies, and nonpublic companies; g) explain and demonstrate the correct treatment of flotation costs.
0/10
Introduction
LOS A: Weighted Average Cost of Capital
12:25
LOS B: The Effect of Taxes on Capital Budgeting Decision
08:33
LOS C: Calculating Cost of Debt
08:27
LOS D: Calculating Cost of Preferred Stock
04:01
LOS E: Calculating Cost of Common Equity
12:40
LOS F: Estimating Company & Project β (Beta)
11:16
LOS J: Country Risk
LOS K: Marginal Cost of Capital Schedule
LOS L: Floatation Cost
Measures of Leverage
This chapter is covered under study session 11, reading 34 of the study material as provided by the CFA institute. After reading this chapter, the candidate should be able to: a. Define and explain leverage, business risk, sales risk, operating risk, and financial risk and classify a risk, given a description. b. Calculate and interpret the degree of operating leverage, the degree of financial leverage, and the degree of total leverage. c. Analyze the effect of financial leverage on a company’s net income and return on equity. d. Calculate the breakeven quantity of sales and determine the company’s net income at various sales levels. e. Calculate and interpret the operating breakeven quantity of sales.
0/5
Introduction
LOS A: Risk and Components of Risk
LOS B and C: Degree of Leverage
LOS D: Break-Even Points
Impact of Leverage on Bankruptcy
Working Capital Management
This chapter is covered under study session 11, reading 35 of the study material as provided by the CFA institute. After reading this chapter, the candidate should be able to: a. describe primary and secondary sources of liquidity and factors that influence a company’s liquidity position; b. compare a company’s liquidity measures with those of peer companies; c. evaluate the working capital effectiveness of a company based on its operating and cash conversion cycles, and compare the company’s effectiveness with that of peer companies; d. describe how different types of cash flows affect a company’s net daily cash position; e. calculate and interpret comparable yields on various securities, compare portfolio returns against a standard benchmark, and evaluate a company’s short-term investment policy guidelines; f. evaluate a company’s management of accounts receivable, inventory, and accounts payable over time and compared to peer companies; g. evaluate the choices of short-term funding available to a company and recommend a financing method. 
0/7
Introduction
LOS A: Liquidity Management
LOS C: Cash Conversion Cycle
LOS D: Impact of Cash Flow on Net Daily Cash Position
LOS E: Yield, Returns, and Policies
LOS F: Accounts Receivables, Inventories & Accounts Payable
LOS G: Short Term Funding
Corporate Issuers

LOS D requires us to:

evaluate choices of short-term funding.

 

1.  What is short-term funding?

Short-term loans are loans that must be paid back quickly, within a period ranging from a six-month to a year, up to 18-months.

2.  What are the sources of short-term funding?

There are basically three sources of providing short-term finance. They are:

2.1.  Banks

Banks provide provides finance in form of short-term, self-liquidating loans. Some of the major short-term finances that the banks provide are:

a.  Single Payment Notes. These are the short-term notes that require a single payment instead of monthly installments.

b.  Lines of Credit. They are the arrangements between the banks and the borrower, where a limit is fixed, up to which they can withdraw or take a loan for a short-term period of up to 365 days. There are two types of lines of credit, i.e., committed (where a management fee is paid to have the formal contract) and uncommitted LOCs.

c.  Revolving Credit Agreement. This is a slightly longer line of credit for a period higher than 1 year.

d.  Banker’s Acceptance. It is a contract for future payment or time draft which is accepted and guaranteed by the bank.

e.  Factoring. Factoring is also an arrangement where the bills receivables are discounted with the bankers against the payment of the factoring fee.

2.2.  Money Market

These are the markets where highly liquid instruments with very short maturities are traded.  The most common money market instruments that are traded are commercial papers.

2.3.  Others

There are other sources of short-term funding such as asset-based loans (which are non-bank financed loans backed by the collaterals like accounts receivable and inventories).

3.  What are the objectives of short-term borrowing strategies?

Before going for the short-term funding, a company needs to consider the following:

a.  The company needs to consider if there is sufficient capacity. The amount of funding should be enough to suffice the needs of the company and it should not have to raise funding every time there is a need for funds. At the same time, there should not be excess unused funds lying idle with the company.

b.  There should be sufficient sources of the funds, and all the funds should not come from just one source.

c.  The rates at which the funding is raised should be cost-effective.

4.  What are some important considerations before opting for short-term finance?

You need to look at the following before going in for short-term finance:

a.  One needs to look at the size of the organization and its creditworthiness, of both the lender and the borrower. The bigger the size and creditworthiness of the borrower, the lesser is the risk of default. And same is for the lender as well, the larger the size, the better are the terms at which the credit is available.

b.  You should also consider the legal and regulatory restrictions applicable to the industry involved. Higher the regulations, greater are the restrictions, and lower are the risks involved in lending and borrowing.

c.  One should also consider the available options for the lenders, rates, etc. Sufficient access to the options makes borrowing more economical.

d.  Another important factor that must be considered is the flexibility of borrowing options. If the borrower provides you with an option to make the prepayment, or alter the maturity of the debt, it helps in the active management of debt.

5.  Computing the cost of Short-Term Funding

The Line of Credit (LOC) cost can be calculated as follows:

Line of Credit Cost Formula

The Banker’s Acceptance cost can be calculated as follows:

Banker's Acceptance Cost Formula

The cost of Commercial Paper can be calculated as follows:

Cost of Commercial Paper Formula

The backup line cost in the above commercial paper cost is the cost to roll another paper to pay for the maturing one.

 

Previous
Next