CORPORATE ISSUERS

Unraveling Corporate Issuers for CFA Level 1: Your Playful Path to Understanding Corporations

Hey there, future finance gurus! Are you ready to dive deep into the world of corporate issuers? In this article, we’ll guide you through the key readings for the Corporate Issuers topic of the CFA Level 1 exam. We’ll provide a brief overview of each reading and share some valuable tips on what to focus on. So, let’s get started on this exciting journey to corporate mastery!

1. Corporate Structures and Ownership

We’re delving into the diverse universe of corporate structures, starting with sole proprietorships and partnerships (both general and limited), characterized by personal tax treatments and varied levels of liability. Then, there are corporations, distinct entities with limited liability for shareholders, though they may grapple with double taxation. Understanding these nuances helps paint a clearer picture of how businesses organize and operate.

Explore the topic of corporate structures and ownership to gain a deeper understanding here.

2. Corporate Governance and ESG

Embark on a captivating journey through Corporate Governance and ESG, starting with an overview of corporate governance and its key players. Understand the complex relationships in a corporate setting, explore stakeholder management, and take a peek into the world of boards and committees. Discover the factors influencing stakeholder relationships and corporate governance, learn about its risks and benefits, and finally, understand how to analyze these elements and consider ESG factors as an investor.

3. Business Models and Risks

Breaking down the essence of a business model, it’s all about how a company plans to earn money, from target customers and product offerings to channel and pricing strategies. In the vast commercial landscape, traditional business models coexist with innovative digital and hybrid models, with each model presenting different macro, business, and financial risks. Companies must be mindful of their chosen business models, understanding that their risk exposure and growth potential are closely intertwined, especially when considering the amplifying effect of leverage.

Explore the world of business models and risks to become an expert here.

4. Capital Investments

Dive deep into the fascinating world of Capital Investments, starting with understanding the capital allocation process and its basic principles. Learn how to make smart investment decisions using criteria like NPV and IRR, and be aware of common pitfalls in capital budgeting. Finally, grasp the concept of real options and their role in capital budgeting decisions.

  • The Capital Allocation Process: Learn about identifying and evaluating projects, and how these relate to strategic decisions like mergers and acquisitions.
  • Basic Principles of Capital Allocation: Get a handle on principles such as prioritizing cash flows, accounting for after-tax implications, and understanding sunk costs and project sequencing.
  • Investment Decision Criteria: Understand the role of NPV and IRR in investment decisions, and how to calculate them using a financial calculator.
  • Common Pitfalls in Capital Budgeting: Identify common mistakes in capital budgeting, from overlooking economic responses to mishandling sunk and opportunity costs.
  • Real Options: Delve into the concept of real options, their types, and how they can influence capital budgeting decisions.

5. Working Capital and Liquidity

Embark on a captivating journey through the world of Working Capital and Liquidity, exploring various sources of funds and understanding liquidity management. Learn about evaluating short-term financing choices and the importance of managing liquidity to meet a company’s short-term commitments.

  • Sources of Funds: Uncover the different internal and external sources of company financing, including accounts receivables, payables, and leasing.
  • Managing and Measuring Liquidity: Learn about liquidity management, understanding primary and secondary sources of liquidity, and becoming familiar with liquidity and turnover ratios.
  • Evaluating Short-Term Financing Choices: Discover the factors that influence the effectiveness of short-term financing strategies and the pros and cons of passive versus active borrowing strategies.

6. Cost of Capital – Foundational Topics

Delve into the fascinating realm of Cost of Capital, learning about the Weighted Average Cost of Capital (WACC), the costs associated with different capital sources, Project Beta, and the concept of flotation costs. Gain insights into how these components contribute to effective capital decision making.

  • Weighted Average Cost of Capital: Uncover the key components of WACC, how to calculate it, and its significance in a firm’s capital decisions.
  • Costs of the Different Sources of Capital: Learn how to determine the cost of different capital sources like debt, preferred stock, and common equity.
  • Project Beta: Get to grips with Project Beta, discovering the pure-play method, and learning how to unlever and re-lever beta based on different capital structures.
  • Flotation Costs: Dive into understanding flotation costs, how they impact capital project evaluations, and the right way to account for these costs.

7. Capital Structure

Unravel the intricacies of capital structure, diving into how it influences and is influenced by a company’s life cycle, exploring diverse theories, and investigating factors that affect decisions. Get to grips with stakeholders’ interests and how they shape the bigger picture.

  • Capital Structure and Company Life Cycle: Understand the symbiotic relationship between a company’s life cycle and its capital structure, exploring how varying blends of debt and equity are used at different stages of growth.
  • Theories of Capital Structure I – MM Propositions: Delve into Modigliani and Miller’s propositions, uncovering the significance of capital structure, its interaction with taxes and cost of capital, and how these theories set the stage for the static trade-off theory.
  • Theories of Capital Structure II – Static Trade-off Theory: Master the static trade-off theory, learning how it influences a firm’s target capital structure and the interplay between tax shield benefits and financial distress costs.
  • Factors Affecting Capital Structure Decisions: Discover the myriad of factors that influence capital structure decisions, from debt ratings and business characteristics to external impacts, agency costs, asymmetric information costs, and the pecking order theory.
  • Stakeholder Interests in Capital Structure Decisions: Gain insights into how various stakeholders, including public debt holders, common stockholders, and preferred stockholders, view capital structure decisions, revealing their motivations and concerns.

8. Measures of Leverage

Unearth the thrilling realm of leverage, beginning with its fundamental definitions, then journeying through its various forms, including operating, financial, and total leverage, and finally pinpointing the breakeven point where total cost meets revenue.

  • Definitions in Leverage: Discover the fundamental concepts of leverage, focusing on fixed costs, and understand how varied cost structures can affect a company’s risk and profitability via a tale of two sports shoe manufacturers.
  • Business Risk and the Degree of Operating Leverage: Learn about business risk, focusing on the unpredictability of sales and operating income, and learn to calculate a firm’s degree of operating leverage.
  • Financial Risk and the Degree of Financial Leverage: Dive into the realm of financial risk, mastering how to calculate a company’s degree of financial leverage and understanding the trade-off between risk and potential returns.
  • Degree of Total Leverage: Uncover how to compute the degree of total leverage, merging insights from operating and financial leverage, and grasp its importance and effect on a company’s net income.
  • Breakeven Point: Explore a firm’s cost structure to find the breakeven point, delve into the concept of contribution margin, and learn how to calculate the operating breakeven point.

Conclusion

There you have it, folks! We’ve covered the key readings for the Corporate Issuers topic of the CFA Level 1 exam. Keep in mind that the best way to prepare for the exam is to practice, practice, practice. So, don’t forget to review these concepts regularly, and apply them to real-world examples. With a playful attitude and a solid understanding of the material, you’ll be well on your way to acing the CFA Level 1 exam. Good luck, and happy studying!