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
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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.
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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.
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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.
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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.
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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.
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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. 
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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
About Lesson

LOS C requires us to:

compare a company’s liquidity position with that of peer companies

Liquidity ratios are covered in detail in Financial Reporting Analysis.

We can analyze a company’s liquidity position by analyzing and comparing the liquidity and activity ratios of a company with others in the industry or peers.

1.  Liquidity Ratios

Liquidity ratios are the ratios that depict the ability of a company to meet its short-term obligations. Some of the common measures of liquidity of a company are:

1.1.  Current Ratio

The current ratio assesses the adequacy of current assets to pay off the entity’s short-term liabilities. The common norm is 2:1. The current ratio can be calculated by using the formula:

Current Ratio Formula

1.2. Quick Ratio (Acid Test Ratio)

Quick Ratio assesses how adequate are the highly liquid current assets to settle the company’s short-term liabilities. Inventory is deducted as it is difficult to sell it urgently and prepaid expenses are deducted as it is not possible to cash it back once paid. Commonly, 1:1 is the norm. The quick ratio can be calculated using the formula:

Quick Ratio Formula

1.3.  Cash Ratio

This is a more stringent ratio considering only cash in hand, cash at the bank, and marketable securities as liquid assets to cover short-term liabilities. A higher ratio is better. It can be calculated as:

Cash Ratio Formula

2.  Activity Ratios

Activity Ratios are the measure of the efficiency of a firm. It measures the degree of efficiency with which a firm manages its assets and the operating efficiency of the firm. These ratios measure the ongoing operational performance of the firm.

Some of the activity ratios and their respective formulas are:

2.1.  Inventory Turnover Ratio

This ratio shows the number of times the inventory is sold and replaced over the reporting period. It can be calculated as follows:

Inventory Turnover Ratio Formula

The lower the inventory turnover ratio, the longer the time between when the good is produced or purchased and when it is sold. Whereas, an abnormally high inventory turnover and a short processing time could mean inadequate inventory, which could lead to outages, backorders, and slow delivery to customers, adversely affecting sales. Meanwhile, an extremely low inventory turnover value implies capital is being tied up in inventory and could signal obsolete inventory.

2.2.  Days of Inventory on Hand

This ratio measures the number of days a firm takes to sell its average balance of inventory. It can be calculated as follows:

Days of Inventory on Hands Formula

2.3.  Receivables Turnover Ratio

This ratio represents the number of times in a year a business collects its accounts receivables. This ratio can be calculated as follows:

Receivables Turnover Ratio Formula

The lower the turnover ratio, the more time it takes for a company to collect on a sale and the longer before a sale becomes cash. This ratio is a better and a detailed analysis tool than the current or quick ratio. A company could have a favorable current or quick ratio, but if the receivables turn over at a slower pace, the liquidity ratios would not be a good measure of liquidity. The same applies to the inventory turnover as well.

2.4.  Days of Sales Outstanding

This ratio measures the number of days a firm takes to collect its revenues/receivables after the sales have been made. It can be calculated as follows:

Days of Sales Outstanding Formula

2.5.  Payables Turnover ratio

This ratio represents the number of times in a year a business pays to its account’s payables. It can be calculated as follows:

Payables Turnover Ratio Formula

The longer the time, the better it is for the company, since it is an interest-free loan and offsets the lack of cash from receivables and inventory turnovers.

2.6.  Number of Days Payable

This ratio measures the number of days a firm takes to pay its creditors after the purchases have been made. It can be calculated as follows:

Number of Days Payable Formula

2.7.  Cash Conversion Cycle

The cash conversion cycle is the period that exists from when the company pays out money for the purchase of raw materials to the suppliers to when it gets the money back from the buyers of the company’s finished goods. This ratio can be calculated as follows:

Cash Conversion Cycle Formula

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