CFA Level 1 - Corporate Finance

Apply capital budgeting principles by evaluating incremental after-tax cash flows, considering timing, opportunity costs and sunk costs, and recognizing conventional and non-conventional cash flow patterns and cannibalization effects.

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.

Calculate IRR as the discount rate that sets NPV to zero, compare it with the required return, and interpret how cash flows affect IRR across projects.

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.

Calculate the AAR by dividing the average net income by the average book value, using straight-line depreciation, zero salvage value, and a 40 percent tax rate.

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.

Shows how the marginal cost of capital rises with capital raised and how the optimal budget occurs when it equals the marginal return, guiding fcff and fcfe and wacc-based valuation.

Compute the before-tax cost of debt using yield to maturity and debt rating methods, illustrated by a 10-year, semi-annual 5% bond with a $1,000 par value.

Examine issues in estimating debt cost, comparing fixed vs floating rates, term structure, and how callable, putable, unrated bonds and leases affect yield and cost of capital.

Calculate the cost of preferred stock as dividends per share divided by market price, assuming a fixed-rate perpetual, non-convertible. Examples show a 7-dollar dividend at 100 dollars per share.

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.

Use the capital asset pricing model to compute cost of equity by adding beta times the market risk premium to the risk-free rate, with methods to estimate ERP.

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.

Apply the dividend discount model (DDM) to estimate the cost of equity as next period dividend over price plus the sustainable growth rate from retention and ROIC.

The bond yield plus risk premium approach adds a premium to a company's long-term debt yield, reflecting higher equity risk and historical bond-stock spreads to estimate the cost of equity.

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.

Derive asset beta from equity beta, strip leverage and taxes, then estimate a non-public company's levered beta using a comparable public firm and apply capm to estimate cost of equity.

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.

Defines the operating breakeven point as the units where operating income is zero, using fixed operating costs and contribution per unit, with examples of companies and operating and financial leverage.

Assess liquidity by examining liquid assets and their speed to cash, and centralize cash flow while managing drags on receipts and balancing primary and secondary liquidity sources.

Assess a company's liquidity by analyzing current and quick ratios and the cash ratio, relating current assets to current liabilities to gauge solvency and credit worthiness.

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.

Manage short-term funds by keeping working capital highly liquid and low risk, then investing in short-term instruments like T-bills, federal agency securities, certificates of deposit, repos, and money market funds.

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.

Assess credit risk drivers and limit exposure to securities with default risk, using short maturities and issuer diversification. Favor government securities to reduce market, liquidity, and foreign exchange risk.

Group short-term strategies into passive and active. Passively roll over to prioritize safety and liquidity while benchmarking yields; actively match, mis-match, or apply lettering to align maturities with cash outflows.

Create a formal investment policy prioritizing liquidity and return, with governance over managers. Evaluate short-term funds using bond-equivalent yields, weighted by investment size, and benchmark against standards.

Balance credit terms to optimize sales and collectibility in accounts receivable management. Monitor balances, aging, and past-due status; record transactions; and measure performance with days sales outstanding and aging schedules.

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.

Explore credit scoring models, including the Chris Gary model, to classify borrowers by credit worthiness and enable data-driven lending for banks and corporations, weighing cash, organization type, and payment history.

Analyze cash collection systems by payment methods, from bank lockboxes and point-of-sale systems to direct debits, and assess clearing times using the float factor.

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.

Balance inventory levels with production and sales plans to avoid overstock, stockouts, and obsolescence, using just-in-time and reliable forecasts to balance the transactions, precautionary, and speculative motives.

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.

Learn how accounts payable manages supplier payments to optimize working capital, balancing early payment discounts, float, and vendor relations through centralized processes, credit tracking, and electronic disbursement.

Analyze the cost of trade discounts and forgoing trade credit using terms like 2/10 net 60, and compare discount period costs to short-term borrowing rates to optimize payment timing.

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.

Explore short-term borrowing options from banks and money markets, including uncommitted lines, committed lines, and revolvers, and learn how unsecured vs secured facilities, collateral, and negotiated rates shape them.

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.

Compute borrowing costs by adding interest and fees for line of credit, banker's acceptance, and commercial paper, annualizing after one-month adjustments to reveal the lowest all-inclusive rate.

Shareholders own stock with dividends and voting rights. They sit last in the capital structure to claim assets, while controlling and minority shareholders influence boards and management.

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.

Managers seek to maximize remuneration and protect jobs via equity-based pay, while employees pursue fair pay, development, and security; both depend on the company's viability and may conflict in takeovers.

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.

Understand how the board links shareholders to management, oversees audit and risk, and governs remuneration policies and related party transactions to support transparency and governance.

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.

Explore the board of directors as a governance link between shareholders and management, covering board composition, independence, diversity, and election structures across markets.

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.

Explore factors affecting stakeholder relationships and corporate governance, including shareholder engagement and activist shareholders. Examine proxy contests, tender offers, and anti-takeover measures shaping governance.

The legal environment compares common law and civil law, shaping rights and remedies for shareholders and creditors. Media and governance services influence governance reforms, including ratings and proxy voting.

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.