CFA Corporate Finance

• Corporate Issuers, previously known as Corporate Finance, is only included in Levels I and II of the CFA exam.
• Many of the Corporate Finance fundamentals apply to the financial reporting and investment decisions made within a business.
• Net present value, internal rate of return, and return on invested capital are three commonly used formulas in the Corporate Issuers sections of the CFA exam.
• Understanding the logic and calculation of WACC will be important in the Corporate Issuers sections.

Corporate Issuers, formally known as the Corporate Finance section of the CFA exam, is found throughout Levels I and II. Although the topic materials are not as heavy as others, do not let that fool you.Corporate Finance is a broad topic. By taking a deeper look, you will see much of these concepts apply to financial reporting and investment decisions made within an organization.

Level I will include ESG and corporate governance and the diverse uses and sources of capital.To properly prepare for the CFA exam, you’ll need to spend a lot of time studying and completing practice questions. UWorld offers thousands of practice questions, online mentoring, live classes, and study sessions to help you not only learn, but understand.

ESG and corporate governance takes several factors into consideration. One of which includes long-term financial risk management (FRM). Additionally, examining the investor structure within the organization will be important. Lastly, it is important to consider investment strategies like impact and thematic investing.

ESG and Corporate Governance Practice Question

Which of the following is not an environmental factor used in investment analysis?

1. Water conservation
2. Community impact
3. Energy efficiencies

Answer B.

There are several basic principles when discussing capital allocation. For instance, the timing of cash flow.When determining whether to pursue a project or investment opportunity, there are multiple calculations that can be used. These include net present value (NPV), internal rate of return (IRR), and return on invested capital (ROIC).

Uses of Capital Practice Question

If the NPV>0 you should:

1. Accept the project
2. Reject the project
3. Compare to the IRR and ROIC

Answer A.

There are four types of corporate financing options:

• Internal (ie: accounts receivable and payable)
• External financial intermediaries (ie: revolving credit and secured loans)
• External capital markets (ie: hybrid securities and common equity)
• Other external financial sources (ie: leasing)

An important piece of sources of capital is liquidity. Primary sources of liquidity would include cash and lines of credit. The secondary sources would be liquidating assets or filing for bankruptcy.

Sources of Capital Practice Question

A factor that influences a company’s short-term borrowing strategies would be:

1. The flexibility of the borrowing options
2. Their creditworthiness
3. Both of the above

Answer C.

As you begin preparing for Level II of the CFA exam, you may notice the elements of Corporate Issuers changing a bit. Use the fundamentals acquired in Level I as your foundation to build from. UWorld’s study materials will take a closer look into the specific areas Level II will focus on.

Similar to Level I, Level II will focus on the quantitative methods of Corporate Finance. However, do not disregard the theoretical concepts. Level II will take you deeper into capital structure, dividend and share repurchases, and mergers and acquisitions.

Capital structure is the mix of debt and equity a firm uses to finance its investments. The objective of a capital structure decision is to identify the financial leverage that will maximize the value of the firm by minimizing the weighted average cost of capital (WACC).WACC is calculated by multiplying the cost of each capital source (cost of debt and cost of equity) by its relevant weight by market value and then adding them together to determine the total.

Capital Structure Practice Question

Agency costs of equity are most likely to be higher for a company relative to its peers if it has:

1. A lower debt-to-equity ratio
2. Better corporate governance
3. Higher accounting transparency

Answer: A. Theory states that agency costs are expected to decrease with higher levels of debt financing. This is because research shows that higher levels of debt limit the ability of the management of the company to inefficiently allocate its cash. Thus, having a lower debt-to-equity ratio is likely to be associated with higher agency costs. Good corporate governance and strong accounting transparency reduce agency costs.

A dividend is a distribution of profits paid to eligible shareholders.Most dividends paid by companies are cash dividends, which take place on a regular schedule. For preferred stock, cash dividends are typically paid at a higher rate than common stock.

Alternatively, there are irregular dividends that supplement a cash dividend. These do not occur on a regular schedule. Stock dividends are another dividend option. These are not cash and are issued when a company pays out additional common shares to shareholders.

Analysis of Dividends and Share Repurchases Practice Question

If a company wanted to reduce their current ratios, which dividend would they issue?

1. Stock
2. Irregular
3. Cash

Answer C.

When a company buys out a portion or all of another company’s shares, giving them complete control over it, an acquisition occurs. When a company completely absorbs another firm, it is considered a merger.There are many forms of mergers. These include statutory, subsidiary, horizontal, vertical, and conglomerate. Each merger type has its own benefits.

Some motives for considering a merger or acquisition include company growth and/or expansion, increasing market power, diversifying project or service offerings, and potential tax considerations.

Mergers and Acquisitions Practice Question

Elms Tires and T&K Tires merged in an effort to experience economies of scale. This merger is a:

1. Horizontal merger
2. Vertical merger
3. Conglomerate merger

Answer A.

One tip we suggest is becoming familiar with calculating this section’s formulas. You should also focus on the theoretical concepts.

Get Used to Your Calculator

We encourage learning how to calculate formulas like NPV, IRR, and ROIC quickly and efficiently. Doing so will allow you to reallocate more time into more complex sections, like Derivatives.

Understand the Theory Behind the Formulae

Although this section may appear to be formula-focused, it is important not to overlook the theoretical concepts. The CFA exam questions may target these areas with more advanced questions.

Find an Experienced Study Program to Support You

When investing in a study platform, review all the resources available to you. UWorld offers an array of study sessions with experienced instructors, online mentoring, and more.

With a 90% pass rate, we’re confident we’ll help you pass the CFA exam the first time.

View UWorld’s CFA Study Materials

The answer is, it depends. You’ll have to dive deeper into your personal career goals, work experience, and what is covered on the CFA exam to see what makes the most sense for you.

Useful CFA Topics for Corporate Finance: Portfolio Management, Equity Research, and Hedge Funds

Some of the Corporate Finance areas included within the CFA exam include capital budgeting and working capital management. It will also dive into other elements like the degree of operating leverage and determining breakeven costs.

Now, some of that you may have learned already. However, preparing for the CFA exam will help you understand some of the more advanced components of Corporate Finance like foreign exchange and international equity research. This in itself will put you ahead of your potential colleagues who are not charterholders.

Learn more about how UWorld helps you understand these topics with our CFA study materials.

Is Your Ideal Employer a CFA Charterholder?

When key decision-makers possess a CFA, having one yourself can certainly help you stand out against your competition.

More often than not, you’ll find a CFA charterholder in a decision-making role within a large firm.

Successfully passing the CFA exam will open many doors.At UWorld, we understand the careers within the financial sector, and how the CFA can assist with progression of career goals in these specific roles.

Research Analysts and the CFA

Research analysts utilize a combination of mathematical processes and qualitative data to identify trends and patterns. That data then allows them to make appropriate recommendations for investment management and financial planning. According to the CFA Institute, approximately 15% of CFA charterholders are research analysts.

Portfolio Manager and the CFA

Corporate Finance portfolio managers are responsible for their company’s fund or group of funds. By staying up to date on the markets and business news that may impact the funds they manage, they are able to make informed decisions regarding buying and selling assets as the markets vary. The CFA Institute confirms that 22% of CFAs are portfolio managers.

Chief Financial Officer and the CFA

Chief Financial Officers (CFOs) hold the c-suite position of Corporate Finance. The CFA Institute confirms approximately 7% of all Chartered Financial Analysts are chief-level executives.