Limited Time Offer: Save 10% on all 2021 and 2022 Premium Study Packages with promo code: BLOG10    Select your Premium Package »

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.

Featured Study with Us
CFA® Exam and FRM® Exam Prep Platform offered by AnalystPrep

Study Platform

Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Online Tutoring
    Our videos feature professional educators presenting in-depth explanations of all topics introduced in the curriculum.

    Video Lessons

    Sergio Torrico
    Sergio Torrico
    Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
    So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
    Kriti Dhawan
    Kriti Dhawan
    A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
    nikhil kumar
    nikhil kumar
    Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
    Great support throughout the course by the team, did not feel neglected
    Benjamin anonymous
    Benjamin anonymous
    I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
    Daniel Glyn
    Daniel Glyn
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.