CFA Level 1 – Corporate Finance

Study Session 12: Corporate Finance (1)
Reading 31 Introduction to Corporate Governance and Other ESG Considerations
11 LOSs | 3 Quizzes
Describe corporate governance
Describe a company’s stakeholder groups and compare interests of stakeholder groups
Describe principal–agent and other relationships in corporate governance and the conflicts that may arise in these relationships
Describe stakeholder management
Describe mechanisms to manage stakeholder relationships and mitigate associated risks
Describe functions and responsibilities of a company’s board of directors and its committees
Describe market and non-market factors that can affect stakeholder relationships and corporate governance
Identify potential risks of poor corporate governance and stakeholder management and identify benefits from effective corporate governance and stakeholder management
Describe factors relevant to the analysis of corporate governance and stakeholder management
Describe environmental and social considerations in investment analysis
Describe how environmental, social, and governance factors may be used in investment analysis
Reading 31 Introduction to Corporate Governance and Other ESG Considerations – Quiz 1
Reading 31 Introduction to Corporate Governance and Other ESG Considerations – Quiz 2
Reading 31 Introduction to Corporate Governance and Other ESG Considerations – Quiz 3
Reading 32 Capital Budgeting
 7 LOSs | 3 Quizzes
Describe the capital budgeting process and distinguish among the various categories of capital projects
Describe the basic principles of capital budgeting
Explain how the evaluation and selection of capital projects is affected by mutually exclusive projects, project sequencing, and capital rationing
Calculate and interpret net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, and profitability index (PI) of a single capital project
Explain the NPV profile, compare the NPV and IRR methods when evaluating independent and mutually exclusive projects, and describe the problems associated with each of the evaluation methods
Contrast the NPV decision rule to the IRR decision rule and identify problems associated with the IRR rule
Describe expected relations among an investment’s NPV, company value, and share price
Reading 32 Capital Budgeting – Quiz 1
Reading 32 Capital Budgeting – Quiz 2
Reading 32 Capital Budgeting – Quiz 3
Reading 33 Cost of Capital
 12 LOSs | 3 Quizzes
Calculate and interpret the weighted average cost of capital (WACC) of a company
Describe how taxes affect the cost of capital from different capital sources
Describe the use of target capital structure in estimating WACC and how target capital structure weights may be determined
Explain how the marginal cost of capital and the investment opportunity schedule are used to determine the optimal capital budget
Explain the marginal cost of capital’s role in determining the net present value of a project
Calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-rating approach
Calculate and interpret the cost of noncallable, nonconvertible preferred stock
Calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yieldplus risk-premium approach
Calculate and interpret the beta and cost of capital for a project
Describe uses of country risk premiums in estimating the cost of equity
Describe the marginal cost of capital schedule, explain why it may be upward sloping with respect to additional capital, and calculate and interpret its break-points
Explain and demonstrate the correct treatment of flotation costs
Reading 33 Cost of Capital – Quiz 1
Reading 33 Cost of Capital – Quiz 2
Reading 33 Cost of Capital – Quiz 3
Study Session 11: Corporate Finance (2)
Reading 34 Measures of Leverage
 5 LOSs | 2 Quizzes
Define and explain leverage, business risk, sales risk, operating risk, and financial risk and classify a risk
Calculate and interpret the degree of operating leverage, the degree of financial leverage, and the degree of total leverage
Analyze the effect of financial leverage on a company’s net income and return on equity
Calculate the breakeven quantity of sales and determine the company’s net income at various sales levels
Calculate and interpret the operating breakeven quantity of sales
Reading 34 Measures of Leverage – Quiz 1
Reading 34 Measures of Leverage – Quiz 2
Reading 35 Working Capital Management
 7 LOSs | 3 Quizzes
Describe primary and secondary sources of liquidity and factors that influence a company’s liquidity position;
Compare a company’s liquidity measures with those of peer companies
Evaluate 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
Describe how different types of cash flows affect a company’s net daily cash position
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
Evaluate a company’s management of accounts receivable, inventory, and accounts payable over time and compared to peer companies
Evaluate the choices of short-term funding available to a company and recommend a financing method
Reading 35 Working Capital Management – Quiz 1
Reading 35 Working Capital Management – Quiz 2
Reading 35 Working Capital Management – Quiz 3
Corporate Finance – Exam
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Identify potential risks of poor corporate governance and stakeholder management and identify benefits from effective corporate governance and stakeholder management

CFA Level 1 – Corporate Finance Reading 31 Introduction to Corporate Governance and Other ESG Considerations Identify potential risks of poor corporate governance and stakeholder management and identify benefits from effective corporate governance and stakeholder management

Effective management of conflicts of interest between different stakeholders and implementation of adequate controls results in better relationships with stakeholders, increased efficiency and profitability.

Risks of poor governance and stakeholder management

 A poor corporate governance structure may create various risks for a company and its stakeholders such as weak control system, ineffective decision making, legal, regulatory and reputational risks, and default and bankruptcy risks. 

  • A weak control system may allow one stakeholder to benefit at the expense of other stakeholders or the company. 
  • When there is information asymmetry, i.e. when the board and shareholders do not have access to information which management has, management may benefit themselves at the expense of shareholders and other stakeholders. It might lead to management taking too little or too many risks. Management might be overcompensated, they may focus on short-term, and/or enter into related party transactions to the detriment of the company and its shareholders.
  • Compliance weaknesses and lack of proper reporting may expose a company to legal, regulatory and reputational risks. This is because in today’s markets, information flows rapidly.
  • Poor corporate governance can affect a company’s financial position leading it to default on its debt related obligations which may potentially force a company into bankruptcy. 

Benefits of effective governance and stakeholder management

Effective governance framework results in improved efficiency, improved control, better operating and financial performance, and lower default risk and lower cost of debt.

  • An effective governance framework defines responsibilities across company which ensures that corporate decisions are properly monitored to mitigate risks and improve efficiency.
  • Improved control mechanisms (enhanced through effective audit systems) may help manage legal and regulatory risks and their associated costs at early stages. Adoption of formal procedures about conflicts of interest allow companies to promote fairness in its relationships.
  • Effective corporate governance can help a company improve its operating and financial performance by avoiding investment losses and legal costs, responding quickly to market changes, setting fair and proper remuneration, etc.
  • Proper function of audit systems, improved transparency and reporting and control of information asymmetries can help in the management of conflict of interest with creditors, reduce default risk and enable a company to access debt capital at low cost.
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