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 F requires us to:

describe functions and responsibilities of a company’s board of directors and its committees

 

1.1.  Composition of the Board of Directors

a.  A board of directors consists of people with a diverse mix of expertise, backgrounds, and competencies, for example, specialized knowledge, functions, etc. Some companies even seek diversity based on age, gender and culture.

b.  There may be two different types of structure of the board of directors, i.e. one-tier structure and two-tier

c.  The one-tier structure consists of executive directors (mainly, consisting of members of senior management) and non-executive directors (mainly consisting of external directors). The non-executive directors are usually independent, having no material relationship with the company, based on employment, ownership, or remuneration.

d.  The two-tier structure consists of two classes of directors, i.e. supervisory and management classes.

e.  The CEO and the chair position of a company are increasingly separated these days, and if these cannot be separated there is a use of a lead independent director.

1.2.  Staggered Board

a.  The boards of directors are divided into classes that are elected separately in consecutive years.

b.  For example, on the board of twelve directors, four may be appointed to the executive position, each for a term of three years.

c.  This system provides for continuity along with entrenchment.

1.3.  Functions and Responsibilities

a.  The board of directors is delegated with two main duties, i.e. duty of care and duty of loyalty.

b.  In accordance with the duty of care, the board members must act on a fully informed basis, in good faith, with due diligence and care.

c.  In accordance with the duty of loyalty, the directors must act in the interest of the company and its shareholders.

d.  The board has the following functions and responsibilities:

i.  guides and approves the strategic direction of the company,

ii.  appoints CEO and delegates strategic implementation to the top management,

iii.  establishes performance criteria,

iv.  monitors and reviews the performance of the company,

v.  ensures the effectiveness of the company’s audit and control systems,

vi.  ensures proper enterprise risk management (ERM) system is in place, and

vii.  reviews all the major acquisitions, mergers, divestitures before they are referred to the shareholders.

1.4.  Committees

1.4.1.  Audit Committees

The main functions of an audit committee are:

a.  to oversee the audit and control system,

b.  monitor the financial reporting process,

c.  supervise the internal audit function, and

d.  recommend the external auditors.

1.4.2.  Governance Committee

The governance committee ensures that the company adopts good corporate governance procedures and drafts the charters of the boards and committees, the company’s code of ethics, conflict of interest policy.

1.4.3.  Remuneration or Compensation Committees

The main functions of the remuneration or compensation committees are:

a.  to develop and propose the remuneration for the board and other key executives, and

b.  to set performance criteria and evaluate the performance of managers.

1.4.4.  Nomination Committees

The main purpose of such a committee is:

a.  to identify candidates who are qualified to serve as directors, and

b.  recommend their nomination by shareholders.

1.4.5.  Risk Committee

The risk committee:

a.  helps determine the risk policy, profile, and appetite of the company,

b.  oversees the establishment and implementation of ERM policy in the company.

1.4.6.  Investment Committee

a.  An investment committee reviews the material investment opportunities proposed by the management, for large projects, acquisitions, and expansions.

b.  It also establishes the investment policies of the company.

1.4.7.  NOTE:

The types of committees used may vary according to the applicable jurisdictions, but their composition depends upon the scope of the committee. For example, the audit committee mainly consists of independent directors only or the external directors (of which the majority should be independent).

 

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