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CFA Level 1 Study Notes – Corporate Issuers

CFA Level 1 Study Notes – Corporate Issuers

Study Session 10

Reading 31 (27 for 2022) – Corporate Governance and ESG: An Introduction

LOS a : describe corporate governance

– LOS b: describe a company’s stakeholder groups and compare interests of stakeholder groups

– LOS 31c: describe principal–agent and other relationships in corporate governance and the conflicts that may arise in these relationships

– LOS d: describe stakeholder management

– LOS e: describe mechanisms to manage stakeholder relationships and mitigate associated risks

– LOS f: describe functions and responsibilities of a company’s board of directors and its committees

– LOS g: describe market and non-market factors that can affect stakeholder relationships and corporate governance

– LOS h: identify potential risks of poor corporate governance and stakeholder management and identify benefits from effective corporate governance and stakeholder management

– LOS i: describe factors relevant to the analysis of corporate governance and stakeholder management

– LOS j: describe environmental and social considerations in investment analysis

– LOS k: describe how environmental, social, and governance factors may be used in investment analysis

Reading 32  – Capital Budgeting (Removed in 2022)

LOS a: describe the capital budgeting process and distinguish among the various categories of capital projects
LOS b: describe the basic principles of capital budgeting
LOS c: explain how the evaluation and selection of capital projects is affected by mutually exclusive projects, project sequencing, and capital rationing
LOS d: 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
LOS e: 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
LOS f: contrast the NPV decision rule to the IRR decision rule and identify problems associated with the IRR rule
LOS g: describe expected relations among an investment’s NPV, company value, and share price

Reading 33 (30 for 2022) – Cost of Capital (-Foundational Topics, for 2022)

-LOS a. calculate and interpret the weighted average cost of capital (WACC) of a company;
-LOS b. describe how taxes affect the cost of capital from different capital sources;
LOS c: describe the use of target capital structure in estimating WACC and how target capital structure weights may be determined (LOS c in R31 2022)
LOS d: explain how the marginal cost of capital and the investment opportunity schedule are used to determine the optimal capital budget 
LOS e: explain the marginal cost of capital’s role in determining the net present value of a project
LOS f: calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-rating approach (LOS c in 2022)
LOS g: calculate and interpret the cost of noncallable, nonconvertible preferred stock (LOS d in 2022)
LOS h: calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yield plus risk-premium approach
LOS i: calculate and interpret the beta and cost of capital for a project
LOS j: describe uses of country risk premiums in estimating the cost of equity
LOS k: 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
– LOS l: explain and demonstrate the correct treatment of flotation costs (LOS g in 2022)

New LOSes for 2022

-LOS e. calculate and interpret the cost of equity capital using the capital asset pricing model approach and the bond yield plus risk premium approach;

-LOS f. explain and demonstrate beta estimation for public companies, thinly traded public companies, and nonpublic companies;

Study Session 11

Reading 34 (32 for 2022) – Measures of Leverage

-LOS a. define and explain leverage, business risk, sales risk, operating risk, and financial risk and classify a risk;
-LOS b. calculate and interpret the degree of operating leverage, the degree of financial leverage, and the degree of total leverage;
-LOS c. analyze the effect of financial leverage on a company’s net income and return on equity;
-LOS d. calculate the breakeven quantity of sales and determine the company’s net income at various sales levels;
-LOS e. calculate and interpret the operating breakeven quantity of sales.

Reading 35 – Working Capital Management (Removed in 2022)

LOS a: describe primary and secondary sources of liquidity and factors that influence a company’s liquidity position 
LOS b: compare a company’s liquidity measures with those of peer companies
LOS c: 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
LOS d: describe how different types of cash flows affect a company’s net daily cash position
LOS 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
– LOS f: evaluate a company’s management of accounts receivable, inventory, and accounts payable over time and compared to peer companies
LOS g: evaluate the choices of short-term funding available to a company and recommend a financing method

(Dividends and Shares Repurchases: Basics – until 2017)

LOS 38a: describe regular cash dividends, extra dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits, including their expected effect on shareholders’ wealth and a company’s financial ratios
LOS 38b: describe dividend payment chronology, including the significance of declaration, holder-of-record, ex-dividend, and payment dates
LOS 38c: compare share repurchase methods
LOS 38d: calculate and compare the effect of a share repurchase on earnings per share when 1) the repurchase is financed with the company’s excess cash and 2) the company uses debt to finance the repurchase
LOS 38e: calculate the effect of a share repurchase on book value per share
LOS 38f: explain why a cash dividend and a share repurchase of the same amount are equivalent in terms of the effect on shareholders’ wealth, all else being equal

CFA Level 1 Study Notes 2022 – New Readings

Reading 28: Uses of Capital

-LOS a: describe the capital allocation process and basic principles of capital allocation;

-LOA 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;

-LOS c: describe expected relations among a company’s investments, company value, and share price;

-LOS d: describe types of real options relevant to capital investment;

-LOS e. describe common capital allocation pitfalls.

Reading 29: Sources of Capital

-LOS a: describe types of financing methods and considerations in their selection;

-LOS b: describe primary and secondary sources of liquidity and factors that influence a company’s liquidity position;

-LOS c: compare a company’s liquidity position with that of peer companies;

-LOS d: evaluate choices of short-term funding

Reading 31: Capital Structure

-LOS a. describe how a company’s capital structure may change over its life cycle;
-LOS b. explain the Modigliani–Miller propositions regarding capital structure;
-LOS c. describe the use of target capital structure in estimating WACC, and calculate and interpret target capital structure weights;
-LOS d. explain factors affecting capital structure decisions;
-LOS e. describe competing stakeholder interests in capital structure decisions.

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