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

1.1.           Calculation of Comparable Yields

a.  There are basically two types of securities, i.e. the interest-bearing securities and the discount securities.

b.  The interest-bearing securities are those securities that pay the interest to the security holders at the pre-specified rate, at regular intervals. These securities sell at par throughout their maturity life and mature at par plus the interest.

c.  The discount securities are those securities that are issued at discount but mature at par. The difference between the discounted price and the par value represents the interest.

d.  There are three different kinds of yields, i.e. money market yield, bond equivalent yield, and discount basis yield.

e.  Money market yield can be calculated using the following formula:

Money Market Yield= [(Face Value-Purchase Price)/(Purchase Price)]×[360/(No.of days)]

f.  Bond equivalent yield is calculated using the following formula:

Bond Equivalent Yield= [(Face Value-Purchase Price)/(Purchase Price)] × [365/(No.of days)]

g.  Discount Basis yield is calculated using the following formula:

Discount Basis Yield = [(Face Value-Purchase Price)/(Face Value)] × [360/(No.of days)]

Example 1:

Suppose a 90-day U.S. T-Bill is selling at a discount of 8% having the face value of $ 100.

We can find its purchase price using the formula:

Discount Basis Yield= [(Face Value-Purchase Price)/(Face Value)] × [360/(No.of days)]

0.08=[(100-Purchase Price)/100] × (360/90)

Purchase Price = $ 98

Having found the purchase price, we can now find the other comparable yields, i.e. money market yield and bond equivalent yield, as follows:

Money Market Yield= [(Face Value-Purchase Price)/(Purchase Price)] × [360/(No.of days)]

= [(100-98)/98] × [360/90]  = 8.16%

Similarly,

Bond Equivalent Yield= [(Face Value-Purchase Price)/(Purchase Price)] × [365/(No.of days)]

=  [(100-98)/98] × [365/90] = 8.28%

1.2.           Comparison of Portfolio Returns Against a Benchmark

a.  For the comparison purpose, the returns should be expressed as a bond equivalent yield.

b.  The overall return is calculated as a weighted average of the yields of different assets in a portfolio.

1.3.           Evaluation of a Company’s Short-Term Investment Policy Guidelines

The company’s guidelines may call for a passive investment policy. Such policy is characterized by:

a.  A limited number of transactions,

b.  Very few rules,

c.  Roll-over maturities, and

d.  Benchmark against T-bill rates

The main purpose of the passive strategy is safety and liquidity.

A company may also have a more active strategy. Such strategy involves:

a.  Matching approach, where the timings of cash outflow are matched with investment maturities. This strategy is also known as a self-liquidating approach. Here, both fixed assets as well as the permanent portion of non-operating working capital are financed using the long-term debt and equity.

b.  Mismatching approach, where we do not match the levels of fixed assets and the permanent levels of nonoperating working capital with the level of fixed capital (consisting of long-term debts and equity). There are two possibilities here:

     i.  The total equity, as well as long-term debt, maybe less than the fixed assets as well as the permanent portion of non-operating working capital. The permanent capital may also be somewhat financed by short-term debt. This is the aggressive approach of capital management.

    ii.  The total equity, as well as long-term debt, may be more than the fixed assets as well as the permanent portion of non-operating working capital. Some portion of temporary capital may also be somewhat financed by long-term debt. This is a conservative approach to capital management.

c.  Laddering Approach, where the maturity of debt is scheduled equally in a systematic manner over the term of the ladder.

While evaluating the cash management investment policy, we must evaluate the:

a.  Purpose, i.e. the reason why the portfolio was created, the investment strategies followed, and the securities that qualify as a result.

b.  Authorities, e. the persons responsible and accountable for the portfolio management, and consequences if the investment strategies are not followed.

c.  Limitations/Restriction on the types of securities maximum positions and minimum credit ratings required.

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