Note: this cheat sheet is updated for the latest 2024 and 2025’s curriculum.
Although a relatively small topic weight, CFA Level 1 Corporate Issuers is one of those topics that is highly interlinked with Financial Statement Analysis 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! 🙂
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 6%-9%, which means 11-16 questions of the 180 questions of CFA Level 1 exam is centered around this topic.
It is covered in Topic 4 which contains 7 Learning Modules (LMs).
Here’s a summary of CFA Corporate Issuers chapter readings:
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.
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 |
Private company can go public via:
Public companies can go private via:
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 |
Cash conversion cycle = Days of inventory on hand (DOH) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO)
EAR \space of \space supplier \space financing= \bigg[\bigg(1+\frac{d}{1-d}\bigg)^{\frac{365}{Payment \space period-Discount \space period}}\bigg]-1
Total working capital = current assets – current liabilities
Free cash flow = Cash flow from operations – Investments in long-term assets
Current \space ratio=\frac{Current \space assets}{Current \space liabilities}
Quick \space ratio=\frac{Cash+Short \space term \space marketable \space instruments + Receivables}{Current \space liabilities}
Cash \space ratio=\frac{Cash+Short \space term \space marketable \space instruments}{Current \space liabilities}
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.
Objectives of short-term borowing strategies:
Factors influencing a company’s short-term borrowing strategies:
NPV=\displaystyle \sum_{t=1}^n \frac{CF_t}{(1+R)^t} - Initial \space outlay
IRR is the discount rate (r) such that NPV is 0.
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. |
ROIC=\frac{After \space tax \space net \space profit}{Average \space book \space value \space of \space invested \space capital}
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. |
Project \space NPV (w \space option)= Project \space NPV \space (w/o \space option) - Option \space cost + Option \space value
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
This proposition states that the market value of a company is not affected by its capital structure, assuming:
This means that value of the levered firm (VL) equals the value of unlevered firm (VU).
V_L=V_U
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.
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
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.
An easy, statement-based chapter to read, no notes needed from us! 😀
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View Comments
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 ;)