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

1.   What is a business organization?

a.  Business organizations are entities involved in commercial activities conducting the owner’s regular occupation, profession, or trade.

b.  There are three types of business organizations based on their structures:

        b.1. For-profit organizations, also known as businesses or companies;

        b.2.  Not-for-profit non-governmental organizations; and

        b.3.  Government or government organizations

2.   What are the factors that determine business structures?

Different attributes define a business structure. Some of them are:

a.  Legal Identity. Different business structures have different legal identities. For example, some businesses have a legal identity separate from their owner and others have the same identity as their owners.

b.  Owner-manager relationship. Sometimes the owners of the businesses manage the business and sometimes the managers are the employees of the business.

c.  Owner liability. There are different legal liabilities for the owners of the business depending on the structure of the business. For example, in businesses with unlimited liabilities, the owner is liable for actions and debt taken by the business whereas in businesses with limited liabilities the owners’ responsibility is limited to their capital contributions.

d.  Tax structure. This attribute defines the applicable taxation on the profits and losses of the business.

e.  Access to financing. Some business structures such as partnerships and corporations can raise a higher amount of finance in comparison with sole proprietorship businesses.

3.   What are the different types of capital structures?

Based on the above attributes we have the following types of capital structures:

a.  Businesses

        a.1.  Sole Proprietorship

        a.2.  Partnership

               a.2.1.  General Partnership

               a.2.2.  Limited Partnership

        a.3.  Limited company

b.  Not-for-Profit Businesses

c.  Governments

3.1.         Sole proprietorship (Sole Trader)

a.  In a sole proprietorship business, the owner invests all the capital, manages the operations, and has full ownership of the risk and returns of the business.

b.  Some examples of sole proprietorship businesses are freelance writers, yoga trainers, tutors, plumbers, etc.

3.1.1.      Features of sole proprietorship business

a.  The capital is provided by the proprietor, and he controls the operations of the business.

b.  The owner fully participates in the risk and returns of the business.

c.  The business does not have a separate legal identity apart from the owner.

d.  There is no legal requirement to dissolve the business. The business dissolves when the business activity ceases, or the owner dies.

e.  The business profits are taxed as the personal income of the owner.

f.  This type of structure is simple and flexible.

g.  The owner is personally liable for the debt and the activities of the business.

3.2.         Partnerships

In partnership, the firms can generate a higher amount of capital, which is often brought by additional partners. These additional partners also share the risks and returns of the business. There are two types of partnerships: general partnership and limited partnership.

3.2.1.     What are general partnerships?

General partnership is an extension of sole proprietorship, in the sense that additional partners bring in additional capital. They also share the risk and return along with the control of the business.

3.2.1.1.           What are the main features of a general partnership?

a.  There is more than one owner of the business.

b.  These owners bring additional capital for business operations.

c.  Along with the additional capital, the partners also bring in their share of expertise.

d.  the partners share the control over the business operations.

e.  The risks and the returns are shared amongst the partners in the agreed ratio.

f.  In general partnerships, the liability over the debt and actions of the firm are unlimited and shared amongst the partners in the agreed ratio. If one partner is unable to pay his share of debt the remaining partners are liable to pay to pay for the same.

g.  The business is also not separate legal identity apart from the identity of its owners.

h.  The profits and losses are taxed as personal incomes of the owners.

3.2.2.     What is a limited partnership?

a.  A limited partnership is a partnership agreement like a general partnership with a minor difference. In a limited partnership, there are two types of partners. There is one general partner with unlimited liabilities. And the remaining partners are generally limited partners who have limited liability.

b.  The potential losses of the limited partners are limited up to the size of their investment. Therefore, the personal assets of the limited partners are protected against the obligations of the business.

3.2.2.2. What are the main features of a limited partnership?

a.  Business in such a partnership is often managed by the general partner. The limited partners often bring in their expertise, but their responsibility is limited as agreed in the partnership agreement.

b.  The personal assets of the limited partners are considered separate from the business. Therefore, they’re not tied to the debt and other obligations of the business.

c.  The partnership agreement under such a partnership is often complex. They are customized according to different profit and loss-sharing agreements.

d.  Limited partnerships are also pass-through businesses for taxation purposes. That is, the businesses are not taxed separately. Their profits are transferred to the business owners and taxed as their personal incomes.

e.  Sometimes, under limited liability partnerships, there are no general partners either. Here the risk of all the partners is limited up to their capital contributions. Such type of partnership firm structure is generally permitted only for professional service firms only.

3.3.         Corporations (or limited liability companies)

a.  Limited liability companies, or simply corporations are like limited liability partnerships but have more features than these partnerships.

b.  The ownership of capital is divided into smaller units called shares. The shares have improved transferability features and the owners of these shares are called shareholders. The shareholders are the owners of the company, and they can transfer ownership through the sale of shares.

3.3.1.     What are the features of corporations or limited liability companies?

a.  Limited liability company have a separate legal identity which is different from the identity of its owners or shareholders.

b.  The shareholders often point the board of directors who manages the affairs of the company through annual and general meetings.

c.  Corporations are not pass-through entities for the taxation purposes. The profits in losses of the corporations are taxed and the remaining profits are passed on to the owners generally in terms of dividends.

d.  Corporations generally have higher access to capital and expertise. Therefore, for the projects involving higher capital corporations are preferred form of business structure.

3.3.2.     What are different types of corporations?

There are many three types of corporations: nonprofit corporations, public for-profit corporations, and private for-profit corporations.

3.3.2.1.           Nonprofit corporations

a.  Nonprofit corporations are often established for charitable purposes such as providing public health, religious purposes, Promoting education, etc.

b.  The structure of nonprofit corporations are similar to the for-profit corporations. The owners are called shareholders who appoints the board of directors for management purposes.

c.  These corporations do not distribute the profits as dividends. They plough back the profit and use the same for the purpose of the corporation.

d.  These corporations also do not generally pay the taxes.

3.3.2.2.           Public for-profit corporations.

a.  These corporations are incorporated to earn profits for their owners or shareholders. These are profit driven companies.

b.  The shares of these corporations are usually listed on the stock exchanges, and they’re often publicly traded.

c.  For public corporations there’s no limit to the number of owners or transferability of shares. Therefore, these corporations have greater access to capital, and unlimited growth potential.

3.3.2.3.           Private for-profit corporations

a.  Unlike public corporations, under most jurisdictions, private corporations have limit to the number of shareholders. Therefore, the amount of capital that these companies can raise is also limited in comparison with the public corporations.

b.  The shares of private companies are generally not traded on stock exchanges. They are generally traded through the buyer-seller agreement.

c.  The profits of these companies are also transferred to the owners through dividend opens.

d.  These companies are also managed by the board of directors appointed by the shareholders of the company.

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