CFA Level 1 - Corporate Finance

Compare independent and mutually exclusive projects, showing how independent projects can be accepted if profitable, while mutually exclusive option is chosen; explain sequencing and capital rationing to maximize shareholder value.

Explore net present value (NPV) in capital budgeting, discount cash flows at the risk-adjusted cost of capital, and use examples to decide to accept or reject.

learn to calculate npv and irr in Microsoft Excel using cash flows, a 10 percent cost of capital, and the initial outlay to compare two projects.

Explore how the payback period measures the time to recover the initial investment, highlighting liquidity, simplicity, and ignoring the time value of money and cash flows beyond the payback period.

Identify the discounted payback period, which discounts cash flows to find when cumulative present value recovers the initial investment, and note its liquidity focus and exclusion of later cash flows.

The profitability index equals the present value of future cash flows divided by the initial outlay, or 1 plus NPV over outlay, guiding accept/reject decisions in capital budgeting.

Explore how the NPV profile maps project NPV across discount rates, identify the crossover rate, and compare projects using NPV and IRR for conventional cash flows.

Contrast methods by ranking projects using npv or irr for conventional, independent, and mutually exclusive cases. Emphasize choosing higher npv for shareholder wealth maximization; note reinvest at the discount rate.

Nonconventional cash flows can yield multiple or no IRRs. Plot the NPV profile to guide acceptance, since conventional cash flows avoid IRR ambiguity.

Learn how net present value relates to share price, showing that positive npv implies a proportional price rise, while in practice earnings expectations, not npv, often drive short-term moves.

Calculate the weighted after-tax cost of debt, preferred shares, and common equity using market-value weights. Demonstrate the marginal cost of capital with a worked example.

Explore the cost of equity capital, the rate of return required by common shareholders, and estimation methods such as CAPM, the dividend income model, and bond yield plus risk premium.

Learn how the historical equity risk premium approach estimates forward-looking ERP from long-run market and risk-free returns, averaging period premiums while weighing arithmetic versus geometric means and data limitations.

Estimate the equity risk premium with the dividend income model and Gordon Growth approach, then compare market returns to risk-free rates and explore a survey-based estimate.

Estimate a stock's beta using the market model by regressing stock returns on market returns. Choose estimation period and return frequency, compute intercept and beta, and note Bloom's adjustment.

Estimate beta for publicly traded companies using historical data of stocks and indexes from Yahoo Finance or Google Finance, and apply simple regression in Excel with intercept and slope.

Estimate beta for a not publicly traded company or project using the pure play method by selecting a comparable publicly traded company and adjusting its beta for financial leverage.

Learn how to incorporate country risk premium into the capital asset pricing model by adding sovereign spreads, the risk-free rate, and volatility multipliers to the market risk premium and beta.

The marginal cost of capital (MCC) schedule shows how debt and equity costs rise at breakpoints, shaping the weighted average cost of capital within the target capital structure.

Treat flotation costs as fees for issuing new equity, deflating share price, or raising the upfront outlay; a 4% flotation raises external equity cost and lowers NPV.

Explain how leverage raises risk and equity value via higher discount rates, increasing potential losses during downturns. Show that higher leverage makes net income more sensitive to sales changes.

Learn how the degree of operating leverage (DOL) links changes in operating income to unit sales using contribution margin and fixed costs, with company X and Y examples.

The degree of financial leverage measures how net income responds to operating income, using operating income minus interest, with higher fixed financing costs increasing leverage and DuPont roe decomposition.

Determine the degree of total leverage by combining operating and financial leverage, using contribution margin to show how percentage changes in units sold drive net income.

Determine the break-even point where revenue equals total costs, including fixed operating and financing costs. Analyze how the contribution per unit and fixed costs influence leverage and profits.

Learn how turnover ratios measure asset management efficiency, including receivables turnover and day sales outstanding, plus inventory and payables turnover with practical 2010–2011 examples.

Compute and interpret the operating cycle and cash conversion cycle by analyzing days inventory on hand, days receivables, and days payables to assess financing needs and cash generation.

Manage cash positions to avoid negative cash, maintain a liquidity buffer with short-term investments and overdrafts, and forecast cash flows across short-term, medium-term, and long-term horizons.

Explore how short-term securities like t-bills and banker's acceptances are priced at discount or with interest, determine face value-based purchase price and proceeds, and calculate yields.

Effective credit management aligns sales, accounting, and treasury to set a tailored policy, grant appropriate terms, and apply decision rules across open, documentary, installment, and revolving credit.

Learn how cash concentration consolidates deposits and moves funds via electronic funds transfer, enabling overnight clearance and cost-effective, reliable bank lockbox operations.

Analyze accounts receivable performance using the aging schedule and the credit policy benchmark, and compute the weighted average collection period to diagnose late payments and improve collections.

Compare economic order quantity and just-in-time approaches to inventory, detailing how safety stock, reorder points, and lead times integrate with MRP to minimize ordering and carrying costs.

Compute the inventory turnover ratio as cost of goods sold divided by inventory and assess days of inventory. Declines reflect higher inventory levels or changes in product mix.

Optimizes cash disbursements by delaying funding until checks clear, using electronic payments when cost effective, and guarding against fraud with controlled disbursement services and positive pay.

Short-term borrowing strategies ensure capacity for peak cash needs with diversified credit sources and cost-effective rates. Balance passive and active approaches, and manage maturities to optimize flexibility and cost.

Explore asset-based loans secured by company assets, including blanket liens on accounts receivable and inventory, and alternatives like assignment of receivables, factoring, trust receipts, and warehouse receipts with third-party supervision.

Explain how creditors provide debt financing through bonds and banks, use covenants to restrict borrower actions, and secure fixed interest and principal payments based on cash flow stability.

the board protects shareholder interests, sets strategy, and monitors management; compares one-tier boards in the us, uk, and india with two-tier boards in germany, netherlands, finland, and china.

Explains how customers seek value, safety, and after-sale support, linking customer satisfaction to future revenue and profit. Shows suppliers and governments monitor cash flows, taxes, and compliance as key stakeholders.

Explore principal-agent relationships in corporate governance, highlighting conflicts between shareholders and managers, information asymmetry, risk preferences, and the impact of controlling shareholders and dual-class structures.

Explore principal-agent conflicts in corporate finance, where shareholders seek higher returns and creditors seek stability, while dividends, leverage, and conflicts with customers, suppliers, and regulators shape cash flows.

Identify, prioritize, and understand stakeholder interests; actively engage and communicate to manage corporate relationships. Understand how legal, contractual, organizational, and government infrastructures define rights, responsibilities, and powers in stakeholder management.

Explore how general meetings empower shareholders to vote on audits, elect directors, and approve financial statements, with rules on ordinary and special resolutions, proxies, and cumulative voting.

Say on pay enables shareholders to vote on executive remuneration, with binding or non-binding forms varying by country; critics argue boards should determine pay to better align principals and agents.

Explore how employee rights, labor laws, unions, and governance frameworks shape stakeholder management, including HR policies, employee stock ownership plans, and compliance to align management with employees, customers, and regulators.

Define director duties of care and loyalty; oversee strategy and risk management; monitor financial reporting, internal audit, and remuneration aligned with long-term interests; ensure succession and approvals for major transactions.

Explore how a company's board of directors uses audit, governance, remuneration, nomination, risk, and investment committees to oversee reporting, governance, and strategy, while remaining accountable to shareholders.

Misaligning incentives and weak control systems threaten value and stakeholder welfare. Compromising audits, information flows, and governance invites fraud, legal risk, and bankruptcy.

Discover how effective corporate governance enhances operational efficiency, risk management, and transparency through clear responsibilities, strong internal controls, robust audit practices, and fair treatment of related party transactions.

Assess how governance structures, such as dual-class voting and insider-controlled boards, affect voting power, independence, and valuation, and evaluate related party risks and diversity tradeoffs.

Analysts assess remuneration programs by examining base salary, short-term bonuses, and multi-year equity incentives, ensuring transparent disclosures and alignment with shareholder interests and company performance.

Analyze cross shareholdings and affiliated stockholders as takeover defences, and assess activist and short-term investors' impact on governance, voting rights, and compliance-or-explain standards.

Analyze how governance and stakeholder management shape long-term risk and investor relations. Evaluate how environmental and human capital transparency, penalties, and activist shareholders influence share value and risk assessment.

Explore environmental, social, and governance factors driving investment decisions, quantify ESG impacts, and examine sustainable and responsible investing, including terms like socially responsible investing and exclusionary screens.

Explore ESG implementation approaches from value-based to values-based investing, including negative and positive screening, ESG integration, thematic investing, and impact investing, with examples like green finance and green bonds.

Explore how environmental, social, and governance issues drive investor costs, illustrated by Deepwater Horizon, Wal-Mart, and Volkswagen, and why universal owners use ESG to promote sustainable growth.

Assess material esg factors that affect a company’s long-term business model, including environmental risks, carbon assets, stranded assets, and governance and social dimensions.