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:

describe types of real options relevant to capital investment.

What are real options?

Real options refer to projects involving tangible assets versus financial instruments. Real options can include the decision to expand, defer or wait, or abandon a project entirely. A real option gives a firm’s management the right, but not the obligation to undertake certain business opportunities or investments.

What are the types of Real Options?

There are four types of real options:

Timing Options

a.  Investments in any project may not be a one-time affair, it may be divided into multiple periods of time over the course of the project. This is also called project sequencing. The timing option gives the investor an option to alter the timing of investment.

b.  There may be better information available to the investors after some time has passed since the beginning of the project. Basing the decision regarding the further investment after taking into account the available (updated) information adds to the value of the investment.

c.  The investor may delay or prepone the investment based on the updated information.

d.  This also helps in improving the NPV of the project.

Sizing Options

a.  As discussed above, the investments in a project may be spread across the course of the project, and may not be just a one-time affair.  The sizing options give the investors an option to change the size of the investment from the initially scheduled one, after taking into account the information available to them after a certain time has passed in the project.

b. The expansion projects allow the investors to make more investment than initially scheduled if the financial results of the project are strong and promising.

c.  The abandonment projects, on the other hand, allow investors to abandon the project completely after the initial investments if the company’s financial results are disappointing.

d.  The investors may also increase or decrease the size of investments according to the new and updated information available to them during the course of the project.

e. The availability of these options also increases the value of the project and the company.

Flexibility Options

a. There are various flexibility options such as price-setting options and production flexibility options.

b.  The price-setting options allow the managers to change the price of the products and services as per the conditions and situation even after the initial planning.

c.  The production flexibility options allow to increase or decrease the levels of production during the course of the project.

d.  These options provide flexibility to the project, thus increasing their value.

Production Options

a.  Here, the whole investment is considered as an option. The payoffs from the investments are contingent on an underlying asset, just like most financial options.

b.  The investors have an option to increase the production and thus increasing the returns when required. Also, they have the option to control the production if, say, they want to control the supply and market prices.

c. You can consider the diamond mining industry as an example. When the cartels want to control the supply, they reduce production. And when they want to cash in, they increase the production. These decisions are made to maximize the investor’s wealth.

What are the approaches to real options analysis?

a.  Without considering the options, using the discounted cash flow (DCF) approach, calculate the NPV of the project. If the NPV of the project is positive then accept the project. This is because options only add positive value to the project. And if the project has a positive value even without considering the real options, then options would only increase to the value further.

b.  In order to calculate the real value of the project after considering the impact of real options, reduce the cost of options from the above NPV and add the value of the option.

Project NPV = NPV (based on DCF alone) – Cost of Options + Value of options

c.  Make use of decision trees in analysis.

d.  Use option pricing models such as the Black-Scholes model, binomial option pricing model, etc.

Previous
Next