CFA Level 1 Study Notes 2020

Reading 31- 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

– 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 – Cost of Capital

-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 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 g: calculate and interpret the cost of noncallable, nonconvertible preferred stock 
– 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 

Study Session 11

Reading 34 – 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

– 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

Reading 27 – 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 c: 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 28: Uses of Capital

-LOS 28a: describe the capital allocation process and basic principles of capital allocation;

-LOA 28b: 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 28c: describe expected relations among a company’s investments, company value, and share price;

-LOS 28d: describe types of real options relevant to capital investment;

-LOS 28e. describe common capital allocation pitfalls.

Reading 29: Sources of Capital

-LOS 29a: describe types of financing methods and considerations in their selection;

-LOS 29b: describe primary and secondary sources of liquidity and factors that influence a company’s liquidity position;

-LOS 29c: compare a company’s liquidity position with that of peer companies;

-LOS 29d: evaluate choices of short-term funding

Reading 30  – Cost of Capital -Foundational Topics

-LOS 30a. calculate and interpret the weighted average cost of capital (WACC) of a company;

-LOS 30b. describe how taxes affect the cost of capital from different capital sources;

– LOS 30c: calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-rating approach 

– LOS 30d: calculate and interpret the cost of noncallable, nonconvertible preferred stock 

-LOS 30e. calculate and interpret the cost of equity capital using the capital asset pricing model approach and the bond yield plus risk premium approach;

-LOS 30f. explain and demonstrate beta estimation for public companies, thinly traded public companies, and nonpublic companies;

– LOS 30g: explain and demonstrate the correct treatment of flotation costs 

Reading 31: Capital Structure

-LOS 31a. describe how a company’s capital structure may change over its life cycle;
-LOS 31b. explain the Modigliani–Miller propositions regarding capital structure;
-LOS 31c. describe the use of target capital structure in estimating WACC, and calculate and interpret target capital structure weights;
-LOS 31d. explain factors affecting capital structure decisions;
-LOS 31e. describe competing stakeholder interests in capital structure decisions.

Reading 32 – Measures of Leverage

-LOS 32a. define and explain leverage, business risk, sales risk, operating risk, and financial risk and classify a risk;
-LOS 32b. calculate and interpret the degree of operating leverage, the degree of financial leverage, and the degree of total leverage;
-LOS 32c. analyze the effect of financial leverage on a company’s net income and return on equity;
-LOS 32d. calculate the breakeven quantity of sales and determine the company’s net income at various sales levels;
-LOS 32e. calculate and interpret the operating breakeven quantity of sales.

CFA Level 1 Study Notes 2023

Reading 28 – Corporate Structures and Ownership

LOS 28a: compare business structures and describe key features of corporate issuers

LOS 28b: compare public and private companies

LOS 28c: compare the financial claims and motivations of lenders and owner

Reading 29 – Introduction to Corporate Governance and Other ESG Considerations

LOS 29a: describe a company’s stakeholder groups and compare their interests

LOS 29b: describe the principal-agent relationship and conflicts that may arise between stakeholder groups

LOS 29c: describe corporate governance and mechanisms to manage stakeholder relationships and mitigate associated risks

LOS 29d: describe both the potential risks of poor corporate governance and stakeholder management and the benefits from effective corporate governance and stakeholder management

LOS 29e: describe environmental, social, and governance considerations in investment analysis

LOS 29f: describe environmental, social, and governance investment approaches

Reading 30 – Business Models and Risks

LOS 30a: Describe key features and types of business models.

LOS 30b: Describe expected relations between a company’s external environment, business model, and financing needs.

LOS 30c: Explain and classify types of business and financial risks for a company.

Reading 31 – Capital Investments

LOS 31a: describe types of capital investments made by companies

LOS 31b: describe the capital allocation process and basic principles of capital allocation

LOS 31c: 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 31d: describe common capital allocation pitfalls

LOS 31e: describe expected relations among a company’s investments, company value, and share price

LOS 31f: describe types of real options relevant to capital investment

Reading 32 – Working Capital & Liquidity

LOS 32a: compare methods to finance working capital

LOS 32b: explain expected relations between working capital, liquidity, and short-term funding needs

LOS 32c: describe sources of primary and secondary liquidity and factors affecting a company’s liquidity position

LOS 32d: compare a company’s liquidity position with that of peers

LOS 32e: evaluate short-term funding choices available to a company

Reading 33 – Cost of Capital – Foundational Topics

-LOS 33a. calculate and interpret the weighted average cost of capital (WACC) of a company;

-LOS 33b. describe how taxes affect the cost of capital from different capital sources;

– LOS 33c: calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-rating approach 

– LOS 33d: calculate and interpret the cost of noncallable, nonconvertible preferred stock 

-LOS 33e. calculate and interpret the cost of equity capital using the capital asset pricing model approach and the bond yield plus risk premium approach;

-LOS 33f. explain and demonstrate beta estimation for public companies, thinly traded public companies, and nonpublic companies;

– LOS 33g: explain and demonstrate the correct treatment of flotation cost

Reading 34 – Capital Structure

LOS 34a: explain factors affecting capital structure

LOS 34b: describe how a company’s capital structure may change over its life cycle

LOS 34c: explain the Modigliani–Miller propositions regarding capital structure

LOS 34d: describe the use of target capital structure in estimating WACC, and calculate and interpret target capital structure weights

LOS 34e: describe competing stakeholder interests in capital structure decisions

Reading 35 – Measures of Leverage

-LOS 35a. define and explain leverage, business risk, sales risk, operating risk, and financial risk and classify a risk;
-LOS 35b. calculate and interpret the degree of operating leverage, the degree of financial leverage, and the degree of total leverage;
-LOS 35c. analyze the effect of financial leverage on a company’s net income and return on equity;
-LOS 35d. calculate the breakeven quantity of sales and determine the company’s net income at various sales levels;
-LOS 35e. calculate and interpret the operating breakeven quantity of sales.

CFA Level 1 Study Notes 2024

Learning Module 1 – Organization Forms, Corporate Issuer Features, and Ownership

-LOS a: compare the organizational forms of business;

-LOS b: describe key features of corporate issuers;

-LOS c: compare publicly and privately owned corporate issuers;

Learning Module 2 – Investors and Other Stakeholders

-LOS a: compare the financial claims and motivations of lenders and shareholders;

-LOS b: describe a company’s stakeholder groups and compare their interests;

-LOS c: describe environmental, social, and governance factors of corporate issuers considered by investors;

Learning Module 3 – Corporate Governance-Conflicts, Mechanisms, Risk and Benefits

-LOS a: describe the principal-agent relationship and conflicts that may arise between stakeholder groups;

-LOS b: describe corporate governance and mechanisms to manage stakeholder relationships and mitigate associated risks;

-LOS c: describe potential risks of poor corporate governance and stakeholder management and the benefits of effective corporate governance and stakeholder management;

Learning Module 4 – Working Capital and Liquidity

-LOS a: explain the cash conversion cycle and compare issuer’s cash conversion cycles;

-LOS b: explain liquidity and compare issuers’ liquidity levels;

-LOS c: describe issuers’ objectives and compare methods for managing working capital and liquidity;

Learning Module 5 – Capital Investments and Capital Allocation

-LOS a: describe types of capital investments;

-LOS b: describe the capital allocation process, calculate net present value (NPV), internal rate of return (IRR), and return on invested capital (ROIC), and contrast their use in capital allocation;

-LOS c: describe principles of capital allocation and common capital allocation pitfalls;

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

Learning Module 6 – Capital structures

-LOS a: calculate and interpret the weighted-average cost of capital for a company;

-LOS b: explain factors affecting capital structure and the weighted-average cost of capital;

-LOS c: explain the Modigliani-Miller propositions regarding capital structures;

-LOS d: describe optimal and target capital structures;

Learning Module 7 – Business Models

-LOS a: describe key features of business models;

-LOS b: Describe various types of business models;