CFA Level 2 - Corporate Finance

Demonstrate cash flow components of a conventional expansion, including investment and working capital, where inventories and receivables create outflows, payables provide inflows, and working capital is recovered at project end.

organize capital budgeting cash flows by calculating the initial outlay as fixed capital plus networking capital. apply after-tax operating cash flows, including depreciation, and note replacement and terminal proceeds.

Use the Fisher equation to convert real rates to nominal rates with inflation. Compare real versus nominal cash flows, discounting, and how inflation affects depreciation tax shields and NPVs.

Compare mutually exclusive projects with unequal lives by evaluating the entire replacement chain, not just the first period, using least common multiple or equivalent annual annuity methods.

Determine the least common multiple of lives (2 for s, 3 for l) to replicate until six years, then compare NPVs at 10% and choose the higher.

Use the equivalent annual annuity approach to convert NPV into an annual cash flow and compare project options by the highest EAA.

Capital rationing occurs when a fixed capital budget limits project funding; consider hot and soft rationing, maximize npv under the constraint using profitability index.

Apply scenario analysis to capital investments by calculating NPV across pessimistic, most likely, and optimistic cases with changes in unit price, sales, costs, depreciation, salvage value, and required return.

Estimate a project’s discount rate with CAPM and arbitrage pricing theory, using beta and market risk premium, and apply pure play or accounting beta methods when data are unobservable.

Explore real options in capital budgeting, including timing, abandonment, expansion, flexibility, and fundamental options, and learn how to value them with DCF, decision trees, and option pricing models.

Examine how an abandonment option alters a 200k, four-year project with 40k/80k cash flows and a 150k year-1 salvage, turning negative NPV into a potentially positive value.

Identify common capital budgeting pitfalls, including ignoring economic responses, pet projects, bad cash-flow accounting, and learn to rely on NPV over IRR or payback, accounting for overhead cost.

Compare economic income and accounting income using after-tax cash flow plus change in market value, and explain economic depreciation versus accounting depreciation and the exclusion of interest.

Compute economic profit by subtracting the whack from after-tax operating profit, then use the net present value of the economic profits to derive market value added and the company value.

Explore residual income valuation by computing equity-based residual income as net income minus the equity charge, discounting with the cost of equity, and adding to beginning equity to value the firm.

Explore claims valuation by splitting cash flows between debt holders and shareholders, computing the present value of each claim, and reconciling them with asset value.

Maximize value by minimizing the weighted average cost of capital through an optimal capital structure, using market-value weights, debt and equity costs, and the marginal tax rate.

This lecture explains how leverage creates expected costs of financial distress, including direct bankruptcy expenses and indirect agency costs, foregone opportunities, driven by default probability and asset recovery.

Agency costs come from conflicts among managers, shareholders, and bondholders, with monitoring, bonding, residual loss; Jensen's free cash flow hypothesis says debt disciplines managers, lowering costs but raising credit risk.

Explore asymmetric information where managers know more than outsiders, raising returns to cover agency costs, and apply the pecking order from internal funds to public equity issuance signaling overvaluation.

Explore the static trade-off theory of capital structure, showing how tax benefits and distress costs determine the optimal debt-to-equity ratio and minimize the weighted average cost of capital.

Explore how institutional and legal environments and taxation affect international capital structure and leverage. Analyze how markets, banks, corruption, accounting standards, and macroeconomic factors shape debt maturity and funding.

Explore regular dividends and dividend reinvestment plans, including open market and scrip DRPs, with cost averaging and potential discounts. Understand tax and cost-basis implications for reinvested dividends.

Explain extra or special dividends paid with regular dividends to signal strong earnings, and describe liquidating dividends paid when a company winds down, distributing net assets to shareholders.

Learn how stock dividends distribute additional shares without changing total value or ownership, lower the cost per share, and affect EPS and liquidity.

Stock splits leave equity and value unchanged while doubling shares and halving earnings per share, with dividend yield unchanged; reverse splits raise price and reduce shares, keeping value constant.

Examine how dividend policy affects shareholder value under Modigliani–Miller, and how taxes, transaction costs, and the clientele effect shape payout choices.

Determine investor preference between dividends and capital gains by calculating after-tax value, using tax rates and ex-dividend price changes, and apply the formal dividend-capital gains formula.

Dividend actions signal firm health to investors: increases imply positive earnings growth and undervaluation, cuts imply problems; managers use dividends to reduce information asymmetry and curb overinvestment.

Investment opportunities and expected earnings volatility shape dividend policy; firms balance financial flexibility, flotation costs, contractual and regulatory restrictions, and tax considerations to decide dividend levels.

Illustrates the double taxation system, where corporate earnings are taxed at the corporate level and again as shareholder dividends, using examples with corporate tax and personal tax rates.

Explain the dividend imputation tax system with franking credits, where corporate taxes offset shareholder taxes, using a 30% rate and 15% vs 47% marginal rates.

this lecture explains a split-rate tax system where retained earnings face a 35 percent tax while dividends are taxed at 20 percent, producing net distributions and an effective tax rate.

Explore the stable dividend policy and the target payout adjustment model, linking next-year dividends to earnings and the target payout ratio. Luna Inc. demonstrates a rise from $0.40 to $0.488.

Explain a constant dividend payout ratio policy where dividends vary with earnings, illustrated by Kalman foods data showing about 33 percent payout of current earnings.

The residual dividend policy pays dividends only from leftover earnings after financing current capital expenditures, yielding volatile payouts tied to retained earnings and the equity portion of the capital structure.

Explore multiple share repurchase methods, from open market buys offering flexibility and speed to fixed-price tender offers, dutch auctions, and direct negotiation with major shareholders, including premiums and risks.

Analyze how share repurchases impact assets, equity, and leverage, and how earnings per share changes with buybacks financed by surplus cash or borrowing.

Learn how share repurchases affect bvps: a premium lowers bvps, a discount raises bvps, compute bvps after buyback as equity minus buyback divided by shares outstanding after.

Share repurchases act like cash dividends and may be tax advantageous when capital gains taxes are lower than dividend taxes, reduce shares outstanding, signal undervaluation, and increase leverage and flexibility.

Analyze dividend safety with the payout and coverage ratios to assess sustainability, risk of cuts, and the use of cash flow available to equity holders for dividends or buybacks.

Integrate environmental, social, and governance factors into investment analysis to broaden risk assessment and identify opportunities across equity and fixed income securities.

Explore dispersed and concentrated ownership structures, highlighting how controlling shareholders shape firms through horizontal and vertical arrangements, dual-class shares that disconnect ownership from control, and pyramidal structures.

Examine how dispersed and concentrated ownership and voting power drive governance policies, revealing conflicts between shareholders and managers and the roles of controlling shareholders and voting caps.

Explore how banks, families, state owned enterprises, private equity, and institutional investors influence corporate governance through lending, ownership, interlocking directorates, and related party transactions.

evaluate corporate governance policies and procedures, board structure and independence, and governance committees to assess ethics, related party transactions, and investor implications in capital markets.

Evaluate the effectiveness of styles' board of directors at a publicly traded Italian retailer by examining independence, tenure, Donato family representation, and absence of CEO-chair duality, plus gender diversity.

Analyze how executive remuneration links strategy to performance through transparent short-term and long-term incentive criteria, addressing say-on-pay, clawbacks, KPI disclosures, and CEO pay ratios.

Know how shareholder voting rights shape investment outcomes. Compare one vote per share with dual class structures that grant founders and management more voting power, signaling investor risk.

Identify industry-specific ESG factors and governance considerations across energy and banking sectors, then apply qualitative and quantitative data approaches using annual reports, ESG data providers, and not-for-profit initiatives.

Learn how ESG integration informs equity and fixed income analysis, using forecasting, valuation adjustments, discount rates, and scenario analysis to assess risk, opportunities, and credit spreads.

Green bonds earmark proceeds for environmental or climate projects, with issuers labeling bonds and disclosing the eligibility criteria under the green bond principles, sometimes supported by independent reviews.

Examine how Frisell drinks' water usage intensity affects costs and margins, illustrating ESG integration through intensity reduction, improved gross margins, and possible effects on stock and credit spreads.

Examine how social factors in ESG affect a pharmaceutical firm through Well Pharma's product quality controversies, regulatory warnings, and recalls, and show their impact on revenues, costs, and valuation.

Analyze governance factors of a major bank holding company, focusing on board composition, independence, and gender diversity, plus the NPL-based credit risk assessment and its valuation impact after reforms.