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.           Accounts Receivable

Accounts receivables include all the payments that are receivable by a company, whether in the normal course of business or otherwise. There are different aspects of accounts receivable that need to be managed properly so that the company can have a regular and timely flow of revenues and it doesn’t face liquidity issues. Some of the important aspects of accounts receivable management are:

1.1.1.       Credit Management

a.  Credit management is the process of managing the credit granting and its recovery. It basically involves preparing and following credit policies.

b.  If the credit policies of the company are too lenient, the company may face a lot of bad debts and late recovery.

c.  If the credit policies of a company are too tight, it may lose sales.

d.  The credit policies of a company should be so balanced, so that it may maximize revenues and have timely recoveries.

1.1.2.       Collection Management

a.  It is the process of managing and monitoring the process from the time of sale to the time of payment being received.

b.  These include policies for timely reminders, changing credit terms appointment of collection agencies, offering discounts for early payments, etc.

1.1.3.       Receipts Management

a.  At times there is a lag between the times when the payments are received to the time when the cash is available for use. Such period is called the float period.

b.  The management of this float period is called receipts management.

c.  The companies might have to pay a certain fee, at times, to reduce the float period. The management must manage this trade-off between the cost and benefits of reducing the float period.

d.  The receipts system can be improved by moving to electronic payment, making use of lockboxes, and clearing the float, etc.

NOTE:

The tools that might help in the process of accounts receivable management are aging schedules, weighted average collection period, etc.

1.2.           Inventory

a.  Inventory is the stock of raw material, work-in-progress, and finished goods that are either ready for sale or will be ready for sale in the course of business.

b.  The main aim of the system of inventory management is to maintain a level of inventory that ensures the availability of stock without any excess.

c.  The shortages, if any, in the inventory and create a stock-out risk, which, in turn, may hurt the level of sales.

d.  The excess inventory inflates the storage cost, increases the risk of obsolescence and shrinkage, and requires extra financing for working capital.

e.  Inventory can be held for the same reasons as holding money, i.e. for transaction purposes, as a precautionary measure, and for speculative reasons.

1.2.1.       Economic Order Quantity

a.  In order to find out the best level of inventory that minimizes the cost of holding and ordering the same, we should find out the economic order quantity (EOQ).

b. The formula for calculating the EOQ is:

EOQ= √(2SO/C)

Where,

                  S                = Usage in units per period

                  O               = Ordering cost per order

                  C               = Carrying cost per unit per period

c.  This can be analyzed with the help of the following figure:

EOQ Working Capital Management CFA Level 1 study notes

We can see, in the above figure, the optimal order size is the quantity, where the total cost of holding the inventory is minimum.

1.2.2.       Just-in-Time

a.  This is another method of maintaining inventory, where the inventory is ordered, as and when it falls to the minimum level.

b.  This method of keeping inventory reduces the in-process inventory and associated carrying cost.

c.  The reorder points under this system are determined by using the historical usage rate.

NOTE:

To determine the efficiency of the inventory management system, we can calculate and compare the inventory turnover ratio or the number of days of inventory, with the industry and historical data.

1.3.           Accounts Payable

a.  Accounts payables are the money owed by the company to its creditors in the ordinary course of the business.

b.  The longer the number of days of payables, the shorter is the credit conversion cycle.

c.  If the payment to the creditors is made too late, there is a deterioration of credit relationships and credibility with them and the company may miss out on the early payment discounts if any offered by them.

d.  If the company makes the payment to the creditors too early, there is a loss of interest income (which could have been received on the assets, had the money been invested, instead of paying them to the creditors), and there is an increase in interest expense (if the payments are made from the borrowed funds).

The implicit rate of discount can be calculated using the following formula:

Implicit Rate Formula Working Capital Management CFA level 1 Study notes

Where,

                  d = Number of days beyond discount period.

 

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