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

LOS E requires us to:

describe mechanisms to manage stakeholder relationships and mitigate associated risks

1.1.  General Meetings

a.  The companies are required to hold an annual general meeting (AGM) within a specified period of time, depending upon the legal requirements applicable to the company.

b.  The main purpose of the general meetings (especially, the AGM) is to vote for the appointment of directors and the auditors and to pass the special resolution.

c.  Another purpose of the AGM is to provide the performance overview of the company and answer questions of the shareholders.

d.  The company may also hold and call for an extraordinary general meeting (EGM), if necessary. The main purpose of an EGM is to vote on special resolutions, required on an urgent basis between the two AGMs. For example, an EGM may be called upon to discuss potential mergers and acquisitions or sales of assets.

e.  The resolutions in certain EGM may require super-majority votes of over two-thirds of 75%.

f.  The votes may also be cast in person, or as a proxy vote (if allowed). Under proxy voting, any person other than the one entitled to vote may vote on his behalf.

g.  There are also provisions for cumulative voting. Here, if one shareholder is holding 100 shares, one vote by such shareholder would be weighted equally to 100 votes.

1.2.  Board of Directors

a.  The board of directors is a team appointed or elected by the shareholders to provide broad oversight of the company.

b.  The board of directors oversights the affairs of the company, and is generally accountable to the shareholders for the company’s performance.

c.  The board of directors is generally responsible for the appointment of the management of the company.

1.3.  The Audit Function

a.  The companies usually go through two types of audits, i.e. internal audit and external audit.

b.  These audits are performed usually annually, or at the specified interval of time, by the independent

c.  The main purpose of the audit is to provide a reasonable assurance of the accuracy and fair presentation of financial statements.

1.4.  Reporting and Transparency

a.  There are certain regulatory disclosures required in the annual reports and the investor’s relation statements, with regards to the financial and other statuses of the company. These provide decent information to the investors.

b.  The reporting requirements reduce the information asymmetry between the management and the investors.

c.  This also acts as a good source to assess the performance of the managers and the directors.

d.  The information provided in these reports also aids in the valuation of the company.

1.5.  Policies on Related Party Transactions

a.  There are certain policies laid down by the law, describing the procedures for mitigating, managing, and disclosing the cases of related party transactions, if any.

b.  According to these policies, the directors and the managers must disclose any material interest in any transaction during the reporting period.

1.6.  Remuneration Policies

a.  The remuneration policies of any company should have schemes for the share-based payments or profit-sharing, align the management interests with those of shareholders. This would result in asymmetry of the interests of shareholders with management.

b.  To avoid ‘short-termism’ in the relationship of management with the company, the company could make use of shares instead of options, with longer-term vesting periods.

1.7.  Say-on-Pay

There are mandatory requirements for shareholders to decide the pay of executive management. Here, the management’s pay is decided and approved through the vote of the management. The management’s vote may be:

a.  Non-mandatory and non-binding, as in the case of Canada;

b.  Mandatory but non-binding, as in the case of the U.S. and France; or

c.  Mandatory and binding, as in the case of the U.K. and Netherlands.

1.8.  Contractual Agreement with the Creditors

There may be different types of agreements with the creditors that restrict the differences between the parties. They are:

a.  There are legal contracts with the bondholders that bind the company with them.

b.  They are specific terms and conditions between the company and the credit providers that restrict certain activities of the company that may be detrimental to the interest of such creditors.

c.  They are specific assets backing the debt, to protect the creditors against insolvency.

1.9.  Employee’s Law and Contracts

There are many labor laws, unions, employment contracts, employee stock option plans (ESOPs), code of ethics, standards of conduct, etc that manages the stakeholder’s relationship between the employees and the company.

1.10.  Others

There are other contractual agreements with customers and suppliers, and laws and regulations for the protection of customers and their environment.

The publically traded companies are generally required to annually publish corporate governance reports describing their governance structure and explain any deviation.

 

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