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 D requires us to:

describe stakeholder management

 

The principal-agent relationship is a relationship created due to an arrangement between two parties, where one party legally appoints others to act on its behalf. Here, the principal hires an agent to act on its behalf. The agent is expected to act in the best interest of the principal, and there should be no conflict of interest in carrying out the act.

Some of the important examples of principal-agent relationship are:

1.1.  Shareholders & Managers / Directors

The shareholders are the owners of the company who appoints the managers or the directors to work on their behalf, in managing the affairs of the companies. Here, the shareholders are the principals who appoint managers/directors as their agents.

The agents are expected to work in the best interest of the company and the shareholders; however, they may seek to maximize their personal benefits to the detriment of the shareholders. Some of the potential problems that may arise in the principal-agent relationship between the shareholders and managers are:

a.  Risk Tolerance. The management may be more risk-averse (thus restricting the number of returns to the shareholders), in order to protect their positions.

b.  Information Asymmetry. It may, at times, be difficult for the shareholders to judge the soundness of strategic decisions.

c.  The Board Composition. The board may be comprised of too many insiders, such as executive directors.

1.2.  Controlling & Minority Shareholders

Controlling shareholders are those shareholders that own more than fifty percent of the company’s shares and control the composition of the board of directors and thus the affairs of the company. Minority shareholders, on the other hand, are those shareholders who own less than half of the company’s shares and do not have control over the affairs of the company. There exists a principal-agent relationship between the controlling and minority shareholders by the virtue of the ability to control shareholders to control the affairs of the company on the behalf of the minority.

Generally, the opinions of the minority shareholders are outweighed by the influence of the controlling shareholders. Thus, a few issues that could be a cause of conflict between the principal-agent relationships between these two parties are:

a.  Related Party Transactions. Controlling shareholders have an interest in the transaction between the company and the third party suppliers, which may be a detriment to the interest of the minority shareholders.

b.  Dual Class Shares. There are two classes of shares, i.e. the voting shares (typically belonging to the management) and non-voting shares. The voting shareholders may be biased in their decisions, creating a conflict of interest.

1.3.  Managers & Board of Directors

The managers are responsible for the actual affairs of the company, and the board of directors relies on the information provided by the managers.

The Board of director’s oversight can be compromised if management limits the information provided to them (especially to the non-executive directors).

1.4.  Shareholders & Creditors

Creditors usually have no control over the affairs of the company; it is usually controlled by the shareholders. The main reasons for conflict between the shareholders and creditors are:

a.  The shareholders prefer higher returns even if it means greater potential risks. Whereas, creditors prefer stable performance & lower-risk activities.

b.  Also, the presence of debt or creditors in the capital structure may either add to the leverage effects or lower the levels of shareholders’ payout.

1.5.  Other Stakeholders

There is a conflict of interest between other stakeholders as well. Some of them are:

a.  Customers vs. Creditors. There is a continuous conflict in respect of cutting costs and the quality of goods and services provided to the customers.

b.  Customers vs. Suppliers. There is a conflict with regards to the lenient credit terms to the customers vs. timely payment to the suppliers.

c.  Shareholders vs. Government Regulator. The shareholders face issues with respect to the costly regulation and tax minimization strategies.

 

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