Note: this cheat sheet is updated for the latest 2023’s curriculum.
Since 2022, Corporate Finance has been renamed as Corporate Issuers with a major revision on the topic.
Although a relatively small topic weight, CFA Level 1 Corporate Issuers is one of those topics that is highly interlinked with FRA and Quantitative Methods, therefore mastering this relatively light topic should pay dividends (sorry) for your overall exam.
To help you with your revision, we decided to create our Cheat Sheet series of articles, which focuses on one specific topic area for each CFA Level. ☕
More Cheat Sheets will be published in the coming weeks, sign up to our member’s list to be notified first.
By referring to the CFA Learning Outcome Statements (LOS), we prioritize and highlight the absolute key concepts and formula you need to know for each topic. With some tips at the end too!
Use the Cheat Sheets during your practice sessions to refresh your memory on important concepts.
Let’s go – don’t forget to bookmark and come back to this often! 🙂
- CFA Level 1 Corporate Issuers: An Overview
- LM1: Corporate Structures and Ownership
- LM2: Introduction to Corporate Governance and Other ESG Considerations
- LM3: Business Models and Risks
- LM4: Capital Investments
- LM5: Working Capital
- LM6: Cost of Capital – Foundational Topics
- LM7: Capital Structure
- LM8: Measures of Leverage
- CFA Level 1 Corporate Issuers Tips
CFA Level 1 Corporate Issuers: An Overview

Corporate Issuers is a central topic across all Level 1 and 2 of the CFA exams, and drops off in Level 3. Its relatively low topic weighting is deceptive, given how integrated corporate finance concepts are in finance.
In Level 2, Corporate Issuers repeats and tests a lot of the same fundamental concepts, so if you can gain a solid understanding in Level 1, it will save you time and agony when you are studying for Level 2. Kind of like Ethics where mastering it earlier generates a high return in investment for future levels.
CFA Level 1 Corporate Issuer’s topic weighting is 8%-12%, which means 14-22 questions of the 180 questions of CFA Level 1 exam is centered around this topic.
It is covered in Topic 4 which contains 8 Learning Modules (LMs).
Here’s a summary of CFA Corporate Issuers chapter readings:
Learning Module # | Sub-topic | Description |
---|---|---|
1 | Corporate Structures and Ownership | A brief introduction to firm structures, compares private vs public companies and discusses the principal-agent relationship. |
2 | Introduction to Corporate Governance and Other ESG Considerations | Basically discusses how to set companies up with the right policies. This section has a bit of overlap with Ethics, but the questions are usually less subjective. Put your Ethics hat on and think from the perspective of an investor when you read the LOS statements; and remember, independence is ALWAYS important. |
3 | Business Models and Risks | Explains various types of business models and types of risks companies face. |
4 | Capital Investments | Covers how will a company budget their capital assets and how will they decide to invest in certain projects. You must have a solid understanding of net present value (NPV) as this is the core of Corporate Finance. As much as this session focuses on calculations, there is also quite a bit of theory in understanding various methods and the pros/cons of each, given a certain situation. Does a project make sense economically, and if so, at what cost? |
5 | Working Capital | This chapter explores a corporate’s financing options, considerations and factors that affect a firm’s financing choices. |
6 | Cost of Capital – Foundational Topics | This chapter introduces the concept of cost of capital, why it is important, its assumptions and how to estimate it. |
7 | Capital Structure | We look at a firm’s capital structure (mix of debt and equity financing), and what factors affect this to achieve an optimal capital structure. |
8 | Measures of Leverage | Leverage is, essentially, the practice of borrowing money to make more money faster. This increased return obviously comes at an increased risk so it’s important to know how to measure leverage. Candidates must understand and calculate the measures of leverage and the impact debt can have (both positively and negatively) on a company’s bottom-line. This section has some calculations that also overlap with Financial Reporting & Analysis so pay close attention. |
The topic of Corporate Issuers is a relatively interesting reading and I find it does provide some ‘real life’ practicality compared to other study sessions. It teaches a very big picture overview of the fundamentals a company will use to evaluate their investing and or financing decisions.
In essence, the CFA Level 1 Corporate Issuers topics teaches you:
– practical fundamentals of finance, e.g. net present value (NPV) concept;
– how to decide which investments to make.
– why working capital management is important.
LM1: Corporate Structures and Ownership

Business structures
Sole Trader | General Partnership | Limited Partnership | Corporation (Limited Companies) |
---|---|---|---|
Extension of owner | Set by partnership agreement | Set by partnership agreement | Legal identity is separated from owners |
Owner operated | Partner operated | Operated by GP | Operated by management team voted by shareholders |
Owner has unlimited liability | Partners share unlimited liability | GP has unlimited liability, LPs have limited liability | Limited business liability for shareholders |
Business profits taxed as personal income | Business profits shared & taxed as personal income | Business profits shared & taxed as personal income | Business profits are taxed twice (double taxation): corporation and dividend tax |
Owner’s risk appetite and capital constrains business growth | Partners’ risk appetite and capital constrains business growth | GP’s ability, partners’ risk appetite and capital constrains business growth | Financed with equity and debt |
Public and Private Corporations
Private company can go public via:
- IPO
- Direct Listing
- Acquisition either when a private company is acquired by a larger public company, or via a Special Purpose Acquisition Company (SPAC)
Public companies can go private via:
- Leveraged buyout (LBO)
- Management buyout (MBO)
Risk-return profile of equity vs debt
Investor’s perspective | Equity | Debt |
---|---|---|
Return potential | Unlimited | Limited to interest and principal payments |
Maximum loss | Initial investment | Initial investment |
Investment risk | Higher | Lower |
Investment interest | Maximize company value (net assets less liabilities) | Timely repayment |
LM2: Introduction to Corporate Governance and Other ESG Considerations

Factors relevant to corporate governance and stakeholder management analysis
- Economic ownership and voting control: e.g. dual class structures, power to elect board members.
- Board of directors representation: assess whether the current skillset, expertise and diversity in board of directors meet the current and future needs of the firm.
- Remuneration and company performance: analysts must check if the executive remuneration are aligned with performance of the company.
- Investors in the company: examine the investor structure for cross shareholdings, affiliated stakeholders and activist shareholders.
- Strength of shareholder rights: analysts need to assess the strength of shareholders’ rights vs other comparable companies
- Managing long-term risks: analysts need to form a view of management quality and their ability to manage long-term risks to the firm.
ESG Investment Strategies
Responsible investing:
- ESG integration (ESG investing): the practice of including material ESG factors in the investment process. A material factor here is defined as the ability to impact a company’s ability to deliver sustainable returns in the long term.
- Socially responsible investing (SRI): Choosing whether or not to invest in a company based on social and environmental profiles (e.g. choosing not investing in tobacco companies but a solar panel manufacturer).
- Thematic investing: Investment based on a single theme, e.g. climate change.
- Impact investing: Investing in companies to meet social and environmental targets, as well as financial returns.
ESG Investment Approaches
- Negative screening
- Positive screening
- ESG integration
- Thematic investing
- Engagement / active ownership
- Impact investing
ESG Factors Used in Investment Analysis
Environmental factors:
- Natural resource management
- Water conservation
- Pollution prevention
- Energy efficiency and reduced emissions
- Existence of carbon assets
- Compliance with environmental and safety standards
Social factors:
- Community impact
- Human rights and employees’ welfare
- Data privacy and security
- Access to affordable healthcare products
LM3: Business Models and Risks

Profitability and unit economics
\small Breakeven \space point=\frac{Fixed \space cost}{Contribution \space margin}=\frac{Fixed \space cost}{Unit \space price - Variable \space cost \space per \space unit}
Business models: financial implications
External factors:
- Economic conditions
- Demographics trends
- Sector demand
- Industry cost characteristics
- Political, legal and regulatory environment
- Social and political trends
Firm-specific factors:
- Firm maturity
- Competitive position
- Business model (asset light, lean startups, pay-in-advance)
Business models: risks
Macro risk:
- exchange rates
- interest rates
- economic activity
- legal and regulatory changes
- political instability
- country-specific risk
Business risk:
- Industry risks (cyclicality, industry structure, competitive intensity, competitive dynamics within the value chain, long term growth demand and outlook etc)
- Company-specific risks (competitive risk, product market risk, execution risk, capital investment risk, ESG risk)
Financial risk:
Operating leverage measures the sensitivity of operating profit (EBIT) to changes in revenue.
\small Operating \space Leverage= \frac{Contribution \space Margin}{EBIT} = \frac{Sales-Variable\space costs}{EBIT}
Financial leverage measures the sensitivity of net profit to a change in operating profit.
Financial \space Leverage=\frac{EBIT}{EBT}
Total \space Leverage=Operating \space Leverage \space × Financial Leverage\newline =\frac{Contribution \space Margin}{EBT}
LM4: Capital Investments

Basic principles of capital allocation
- Decisions are based on cash flows, not accounting concepts. Include incremental after-tax cash flows, (positive/negative) externalities. Exclude sunk cost because it is already incurred.
- Cash flows are not accounting net income or operating income.
- Cash flows must account for opportunity cost.
- Cash flows must be on an after-tax basis.
- Timing of cash flows is vital.
- Ignore financing costs, as it is already included in cost of capital.
Net present value (NPV)
NPV=\displaystyle \sum_{t=1}^n \frac{CF_t}{(1+R)^t} - Initial \space outlay
- For independent projects:
- If NPV > 0, accept project;
- If NPV < 0, reject project.
- For mutually exclusive projects: accept the project with the highest (positive) NPV.
Internal rate of return (IRR)
IRR is the discount rate (r) such that NPV is 0.
- For independent projects:
- If IRR > required rate of return, accept project;
- If IRR < required rate of return, reject project.
- For mutually exclusive projects:
- accept the project with the higher IRR, as long as IRR > required rate of return.
- use the NPV rule if NPV and IRR rules conflict.
NPV vs IRR methods: Pros and Cons
NPV method | IRR method |
---|---|
Pros: It’s a direct measure of value uplift in the firm. | Pros: It shows the return on each $ invested, and allows a direct comparison with the required rate of return. |
Cons: It doesn’t consider project size. | Cons: It may conflict with NPV analysis, or have multiple IRRs or no IRR for projects with unconventional cash flows. It also incorrectly assumes that intermediate cash flows are reinvested at IRR rate. |
Return on Invested Capital (ROIC)
ROIC=\frac{After \space tax \space net \space profit}{Average \space book \space value \space of \space invested \space capital}
Real options
Timing options | Option to delay investments until more information is received. |
Sizing options | Option to expand, grow or abandon as the project progresses. |
Flexibility options | Option to alter operations once investment is made, such as changing prices, or increasing production. |
Fundamental options | Option to alter investment decision based on future events. |
Common capital allocation pitfalls
- Failure to include economic responses
- Misusing capital budgeting templates
- Pet projects
- Basing investment decisions on earning metrics (EPS, net income or ROE), instead of incremental cash flows
- Using IRR to make investment decisions, instead of NPV
- Poor accounting of cash flows
- Over or underestimating overhead costs
- Misestimating discount rate
- Spending all of the investment budget just because it is available
- Failure to consider investment alternatives
- Improper handling of sunk cost and opportunity costs
LM5: Working Capital

Corporate financing options
Internal | External (financial intermediaries) | External (capital markets) | External (other) |
---|---|---|---|
After-tax operating cash flows | Lines of credit (uncommitted and committed) | Commercial paper | Leasing |
Accounts payable | Revolving credit | Public and private debt | |
Accounts receivable | Secured loans | Hybrid securities (convertibles and preferred equity) | |
Inventory and marketable securities | Factoring | Common equity |
Managing and measuring liquidity
Primary sources of liquidity | Secondary sources of liquidity |
---|---|
Cash (bank accounts) | Negotiating debt contracts |
Short term funds (lines of credit) | Liquidating assets |
Cash flow management | Filing for bankruptcy |
Drags on liquidity means delayed/reduced cash inflows, e.g. bad debt, late/uncollected receivable payments.
Pulls on liquidity means accelerated cash outflows, e.g. earlier debt repayment.
For references of formulae for liquidity and activity ratio, please refer to Reading 20 in FRA for the full list. Here are 2 additional ones not covered in FRA:
Operating cycle = Number of days of inventory + Number of days of receivables
Net operating cycle = Number of days of inventory + Number of days of receivables – Number of days payables
Evaluating short term financing choices
Objectives of short-term borowing strategies:
- Ensure sufficient capacity to handle peak cash needs
- Maintain sufficient sources of credit
- Borrow at cost effective rates
Factors influencing a company’s short-term borrowing strategies:
- Sizes and creditworthiness
- Legal and regulatory considerations
- Sufficient access
- Flexibility of borrowing options
LM6: Cost of Capital – Foundational Topics

Weighted average cost of capital (WACC)
WACC is the cost of each component of capital (debt, preferred stock and common equity) in the proportion they are used in a company.
WACC = wdrd (1-t) + wprp + were
Cost of debt
Yield to maturity approach:
P_0=\displaystyle\sum_{t=1}^n\big[\frac{PMT_t}{(1+\frac{r_d}{2})^t}\big]+\frac{FV}{(1+\frac{r_d}{2})^n}
where:
- P0 = current market price of bond
- PMTt = interest payment in period t
- rd = yield to maturity
- n = number of period to maturity
- FV = maturity value of the bond
Cost of preferred stock
r_P=\frac{Dividend \thickspace per \thickspace share \thickspace of \thickspace preferred \thickspace stock}{Current \thickspace preferred \thickspace stock \thickspace price \thickspace per \thickspace share} = \frac{D_P}{P_P}
Cost of equity
Capital asset pricing model (CAPM) approach
r_e = R_F + \beta_i [E(R_m)-R_F]
Bond yield plus risk premium method
re= rd + risk premium, where rd is cost of debt
Estimating beta
Blume’s method of beta adjustment
Adjusted \thickspace \beta=\frac{2}{3}(Unadjusted \thickspace \beta)+\frac{1}{3}{(1.0)}
Unlevered asset beta for a comparable company
\beta_U=\beta_E \Bigg[\frac{1}{1+(1-t)\frac{D}{E}}\Bigg]
Relevered project beta for target company
\beta_{E'}=\beta_U \Big[{1+(1-t)\frac{D'}{E'}}\Big]
LM7: Capital Structure

Modigliani-Miller (MM) Propositions
MM Proposition 1 (without taxes)
This proposition states that the market value of a company is not affected by its capital structure, assuming:
- Investors have homogenous expectations
- Perfect capital markets
- No agency cost
- Investors can borrow and lend at risk free rate
- Financing and investment decisions are independent
This means that value of the levered firm (VL) equals the value of unlevered firm (VU).
V_L=V_U
MM Proposition 2 (without tax)
This proposition states that cost of equity increases with debt-to-equity ratio (financial leverage).
r_e=r_0+(r_0-r_d)\frac{D}{E}
where re= cost of equity, r0= cost of capital of company financed only with equity and no debt, rd= cost of debt, D/E = debt to equity ratio.
As leverage increases, cost of equity increases but not cost of debt or WACC.
MM Proposition 1 (with Taxes)
With taxes included, this proposition states that the value of a levered company equals the value of unlevered company plus value of debt tax shield.
V_L=V_U+tD
MM Proposition 2 (with Taxes)
With taxes included, this proposition states that cost of equity increases with debt-to-equity ratio (financial leverage), with an adjustment for tax rate.
r_e=r_0+(r_0-r_d)(1-t)\frac{D}{E}
The cost of equity increases as leverage increases, but not as quickly compared to the case without taxes. Cost of debt remains constant.
Thus, WACC reduces as firm increases leverage, increasing the value of the firm.
LM8: Measures of Leverage

Degree of operating leverage (DOL)
DOL=\frac{\% \thickspace change \thickspace in\thickspace operating\thickspace income}{\% \thickspace change \thickspace in\thickspace units\thickspace sold}=\frac{Q(P-V)}{Q(P-V)-F}
Degree of financial leverage (DFL)
DFL=\frac{\% \thickspace change \thickspace in\thickspace net \thickspace income}{\% \thickspace change \thickspace in\thickspace operating\thickspace income}=\frac{Q(P-V)-F}{Q(P-V)-F-C}
Degree of total leverage (DTL)
DTL=\frac{\% \thickspace change \thickspace in\thickspace net \thickspace income}{\% \thickspace change \thickspace in\thickspace units\thickspace sold}=DOL \times DFL = \frac{Q(P-V)}{Q(P-V)-F-C}
Breakeven
Breakeven point is the number of units produced and sold at which net income is zero, where revenue equals cost.
Q_{BE}=\frac{F+C}{P-V}
Operating breakeven point is the number of units produced and sold at which operating income is zero.
Q_{OBE}=\frac{F}{P-V}
where Q = quantity, P = price, V = variable cost per unit, F = fixed operating cost, C = fixed financial cost.
CFA Level 1 Corporate Issuers Tips

- Practice using your calculator
- In comparison to some of the more difficult study sessions such as Derivatives, or subjective sessions like Ethics – Corporate Issuers should be a relatively easy section to pick-up some points and time on exam day.
- There are not a lot of ways a calculation question can be modified for this section, so if you have a solid understanding of the fundamentals – you should be set.
- Practice using your calculator and get familiar with how to solve for various NPV questions as that is guaranteed to show up and be tested.
- Check out our BA II Plus guide or HP 12C calculator guide for relatively unknown tips and techniques when using your CFA calculator.
- Lots of formulae, but don’t just memorize
- Although this section at first glance may appear to be heavily formula based, do not skim over the basic theoretical concepts that the LOS mentions.
- These can often be where the CFA Institute tries to deliver a trickier question versus a typical punch and crunch calculation.
- A helpful tip that I find is to go through the LOS one by one and hand-write all the formulas that are described as “calculate” or “evaluate” as this will give you an overview of things you can quickly start to memorize, without getting lost in all the detail.
More Cheat Sheet articles will be published and updated continuously. Get ahead of other CFA candidates by signing up to our member’s list to get notified.
Meanwhile, here are other related articles that may be of interest:
- CFA Level 1 Cheat Sheets series: Quant Methods | Economics | FRA | Derivatives | Fixed Income | Equity Investments | Ethics | Alt Investments | Portfolio Management
- CFA Level 1: How to Prepare and Pass CFA in 18 Months
- CFA Level 1 Tips: Top 10 Advice from Previous Candidates
- 18 Actionable Ways to Improve Your Study Memory
- How to Study Effectively: Proven Methods that Work for CFA, FRM and CAIA
- The Ultimate Guide to CFA Practice Questions
Maybe static trade-off theory should be added to the summary 🙂
DFL formula should be P-V not F-V
Thanks for spotting that shivani! corrected 😉