CFA® Corporate Issuers
Summary, Syllabus, Topics, and Sample Questions (L1, L2, L3)

The Corporate Issuers section of the CFA exam delves into the assessment of corporate governance and the comprehension of how companies navigate investment and financing decisions. Numerous academic studies have consistently demonstrated a strong correlation between effective governance and overall financial performance. In today's landscape, environmental, social, and governance (ESG) factors have gained significant prominence, attracting attention from both investors and corporations. Consequently, evaluating how these factors impact a company's financial bottom line is imperative, thereby enhancing long-term shareholder value and informing managerial decisions regarding financing and investments.

Financial analysts must nurture their capability to discern the risks and investment opportunities associated with various short- and long-term financing options and strategies. This aptitude empowers management to judiciously utilize leverage and working capital in decision-making. The Corporate Issuers topic also encompasses the ramifications of mergers and acquisitions on corporate structures, evaluating their relative value and benefits for all parties involved. Notably, candidates will discover the content covered in Corporate Issuers to be intricately intertwined with materials from Financial Statements Analysis and Quantitative Methods. Despite its relatively modest weightage, the concepts explored in Corporate Issuers constitute the bedrock of corporate finance knowledge throughout the CFA Program.

Level 1

Level 2

Level 3

Level 1

What to Expect in CFA Level 1 Corporate Issuers?

The subject of Corporate Issuers, previously referred to as Corporate Finance, holds a relatively lower weight in the CFAI curriculum. Corporate Issuers serve as an initial exploration into corporate financing investments, constituting approximately 6-9% of Level 1 readings. Within this area, candidates will delve into the growing impact of environmental, social, and governance (ESG) factors on a company’s financial performance, the intricacies of capital allocation, and the evaluation of potential capital investment prospects.

Exam Weighting

The CFA Corporate Issuers topic has a weight of 6-9% of the CFA Level 1 exam, so approximately 11-16 of the 180 CFA Level 1 exam questions focus on this topic.

Topic Weight	No. of Learning Modules	No. of Formulas	No. of Questions
6-9%	7	ca. 40	ca. 16

Level 1 Corporate Issuers Syllabus, Readings, and Changes

The CFA Level 1 curriculum for 2024 comprises a total of 7 Learning Modules. Notably, the curriculum has undergone revisions from the 2023 version, placing increased emphasis on Working Capital and Investment-focused readings. The current Learning Modules reflect these changes, providing candidates with a more refined and updated content structure:

Corporate Issuers L1 Changes
Organizational Forms, Corporate Issuer Features, and Ownership	Updated
Investors and Other Stakeholders	New
Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits	Updated
Working Capital and Liquidity	New
Capital Investments and Capital Allocation	No Changes
Capital Structure	No Changes
Business Models	Major Revision

Organizational Forms, Corporate Issuer Features, and Ownership

Candidates need to compare organizational forms, describe corporate issuer features, and differentiate between publicly and privately owned companies. This entails understanding various business structures, articulating key corporate issuer attributes, and recognizing the distinctions and implications of public versus private ownership. The goal is to ensure a nuanced understanding of organizational forms, corporate issuers, and ownership dynamics in a concise manner.

Investors and Other Stakeholders

Candidates must compare the financial claims and motivations of lenders and shareholders, articulate a company’s stakeholder groups and compare their interests, and describe the environmental, social, and governance (ESG) factors considered by investors in evaluating corporate issuers.

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

In this section, candidates are tasked with a comprehensive understanding of corporate governance, focusing on the principal-agent relationship, mechanisms for stakeholder management, and the risks and benefits associated with effective governance practices:

Understand the intricacies of the principal-agent relationship and identify potential conflicts among stakeholder groups.
Explore the concept of corporate governance, delving into the various mechanisms employed to manage stakeholder relationships and mitigate associated risks.
Emphasize the significance of recognizing and addressing potential risks linked to poor corporate governance and stakeholder management, while highlighting the substantial benefits derived from effective governance practices and engaged stakeholder relationships.

Business models

This new learning module introduces various business models and explores their use in financial analysis. The material discusses how models can be used to

Forecast profitability
Describe the competitive environment
Assess pricing pressures and cost margins

and generally recognize the forces at work in the firm’s environment and project how those forces will affect the firm’s potential risk and returns.

Capital Investment (formerly Uses of Capital)

This reading covers how companies allocate capital assets and make investment decisions. Candidates will learn to draw connections between a company’s share price and its investment and value.
The importance of net present value (NPV) valuation and internal rate of return (IRR) in capital allocation is a keystone of this reading and corporate finance in general. Candidates will encounter quite a bit of theory alongside technical calculations.

This section provides candidates with the knowledge to avoid common capital allocation pitfalls in order to determine whether a project is economically viable.

Working Capital and Liquidity

Candidates will explore the cash conversion cycle and compare issuers’ cash conversion cycles
The readings explains liquidity and compares issuers’ liquidity levels
Candidate will also learn issuers’ objectives and to compare methods for managing working capital and liquidity

Capital Investments and Capital Allocation

The focus of the topic is on understanding various types of capital investments, exploring the capital allocation process, including the calculation of net present value (NPV), internal rate of return (IRR), and return on invested capital (ROIC), and contrasting their applications in capital allocation. Additionally, the topic delves into the principles of capital allocation, highlighting common pitfalls. Furthermore, candidates are expected to describe types of real options relevant to capital investments.

Capital Structure

The particular combination of debt and equity a company uses to finance its operations, assets, and growth is referred to as its capital structure.

Candidates will learn to describe changes in a company’s capital structure over time and important factors that influence capital structure decisions.

The reading also covers how the company’s life cycle, the cost of capital, financing considerations, and competing stakeholder interests affect financing decisions.

CFA Corporate Issuers Level 1 Sample Questions and Answers

The sample questions are typical of the probing multiple-choice questions on the L1 exam. During the exam, you have about 90 seconds to read and answer each question, carefully designed to test knowledge from the CFA Curriculum. UWorld’s question bank is built to expose you to exam-like questions and illustrate and explain the concepts tested thoroughly.

Question 1
Question 2
Question 3

According to the Modigliani-Miller propositions (with taxes), if a company increases its debt level, its market value will most likely :

decrease since the costs of financial distress are increasing.
remain the same since the market value is unaffected by the capital structure.
increase proportionally to the change in debt.

Submit

Explanation

Modigliani-Miller propositions

	Without corporate taxes	With corporate taxes
Proposition I: value of company (MM I)	V_L = V _U	V _L = V _U + t D
Proposition I: value of company (MM I)	V_L = market value of leveraged company V_U = market value of unleveraged company	t = company’s marginal tax rate D = market value of debt
Proposition II: cost of equity capital (MM II)	r_e = r₀ + ( r₀ – r_d ) ( D / E )	r_e = r₀ + ( r₀ – r_d ) (1 – t ) ( D / E )
Proposition II: cost of equity capital (MM II)	r₀ = weighted average cost of capital for 100% equity company t = company’s marginal tax rate r₀ = cost of equity	D/E = debt-to-equity ratio using market values for debt and equity r_d = pretax cost of debt

The Modigliani-Miller (MM) propositions assume perfect capital markets (ie, no arbitrage, no transaction or bankruptcy costs, and symmetric information) and assert that a company’s market value equals the present value of its future cash flows. Modigliani and Miller propose that, in the absence of taxes:

A company’s capital structure does not affect its value (MM I without taxes); and
A company’s cost of equity (r_e) is directly proportional to its debt-to-equity ratio (D/E), but WACC remains constant (MM II without taxes).

However, these propositions change when there are corporate taxes:

The market value of a levered company is greater than the value of an unlevered but otherwise identical company; tax-exempt interest payments improve the levered company’s cash flows, increasing its value. The difference in value is the amount of the debt tax shield (tD), which is the product of a company’s tax rate (t) and value of debt (D) (MM I with taxes).
A company’s r_e is directly proportional to D/E, adjusted by (1 − t). Greater leverage will increase the cost of equity, but at a slower pace due to taxes. The greater the tax rate (t), the slower the increase in r_e when D/E increases (MM II with taxes).

Therefore, with taxes, an increase in debt will proportionally increase a company’s value and reduce its WACC.

(Choice A) The MM propositions assume no cost of financial distress.

(Choice B) The market value would remain the same in the absence of taxes.

Things to remember:
The Modigliani-Miller (MM) propositions assume perfect capital markets (ie, no arbitrage, no transaction or bankruptcy costs, and symmetric information). When these propositions include corporate taxes, greater leverage will increase a company’s market value (MM I) and reduce its WACC (MM II).

A company is considering two mutually exclusive projects with conventional cash flows. Compared to the internal rate of return (IRR), a benefit of using the net present value (NPV) as the decision criterion is most likely that the NPV method:

avoids the risk of multiple IRRs.
provides greater certainty of future cash flows.
assumes reinvestment at the required rate of return.

Submit

A privately held technology conglomerate wants to estimate the cost of equity for its new robotics division by referencing the beta of a comparable robotics company that is publicly traded.

	Debt (€ millions)	Equity (€ millions)	Equity Beta	Tax Rate
Comparable company	150	450	1.5	20%
New robotics division	20	80	NA	15%

The risk-free rate is 3%, and the expected market return is 11%. Using the pure-play method, the new robotics division’s cost of equity is closest to:

12.47%
14.49%
15.54%

Submit

Explanation

The pure-play method is used to derive a private company or division’s beta from a comparable public company. Betas are not available for private companies; therefore, analysts must:

select a comparable public company,
unlever the beta to remove the public company’s financial risk, and
relever the beta to reflect the private company’s specific financial risk.

The rationale behind this approach is that firms may have similar unlevered (ie, asset) betas due to similar operating risk but different levered (ie, equity) betas due to differences in capital structure (which affects financial risk).

In this question, use the pure-play method to calculate the levered beta (ie, equity beta) for the private company’s robotics division. Then use this equity beta to calculate the cost of equity.

Use the pure-play method to calculate the private company’s levered beta (ie, equity beta).

Steps	Calculations
Unlever public company’s beta to remove financial leverage impact	β_u,_public = β_u,_public / [1 + ( ( 1 – t_public ) D_public / E_public )] β_u,_public = 1.5 / 1 + ( ( 1 – 0.2 ) x 150 / 450 ) = 1.1842
Relever the unlevered beta above to include the financial leverage impact specific to private company	β_L,_private = β_u,_public [ 1 + ( ( 1 – t _private ) D_private / E_private )] β_L,_private = 1.1842 [ 1 + ( (1 – 0.15) x 20 / 80 )] = 1.4359

Calculate the private company’s cost of equity using CAPM.

R_e	= R_F + β_i [ E ( R_M ) – R_F ]
	= 0.03 + 1.4359 ( 0.11 – 0.03 )
	= 14.49%

(Choice A) 12.47% results from using unlevered beta (ie, asset beta) to calculate the cost of equity. Levered beta (ie, equity beta) should be used to calculate the cost of equity since financial leverage impacts the cost of equity.

(Choice C) 15.54% results from incorrectly unlevering beta by using the inverse of the correct equation, and then incorrectly relevering beta by using the inverse of that correct equation.

Things to remember:
The pure-play method is used to derive a private company’s beta by unlevering a public company’s beta and then relevering it. Once the private company’s beta is calculated, it can be used to derive the cost of equity using the CAPM equation.

Level 2

What to Expect in CFA Level 2 Corporate Issuers?

CFA Level 2 Corporate Issuers, formerly known as Corporate Finance, remains one of the more lightly weighted CFA topics on the exam. 10% of Level 2 readings are dedicated to the topic. The readings dive deeper into the evaluation of capital budgeting projects, capital structure policy, dividend policy, corporate governance, and mergers and acquisitions.

Candidates will study the company decision processes related to investment projects, dividend policies, share repurchases, and M&A.

Exam Weighting

CFA Level 2 Corporate Issuers has a weight of 5-10% of the total exam content, such that approximately 6 of the 88 CFA Level 2 exam questions focus on this topic.

Topic Weight	No. of Learning Modules	No. of Formulas	No. of Questions
5-10%	4	ca. 40	ca. 4-8 questions or 1-2 items sets

Level 2 Corporate Issuers Syllabus, Readings, & Changes

The CFA Level 2 curriculum includes 49 total learning modules of which 4 (8% of the total curriculum) center on Corporate Issuers. For 2024, the CFA Program curriculum’s changing approach to ESG moves away from treating it as a matter of internal corporate governance and instead places a strong emphasis on external analysis of the ESG practices of businesses. This development elevates CFA to the forefront of investment in the institute and its members. ESG is an important aspect of this way of thinking.

The Learning Modules are:

Corporate Issuers (Formerly Corporate Finance)
Analysis of Dividends and Share Repurchases	No change
Environmental, Social, and Governance (ESG) Considerations in Investment Analysis	Updates
Cost of Capital: Advanced Topics	Updates
Corporate Restructuring	No change

Analysis of Dividends and Share Repurchases

This reading focuses on dividends on common shares paid by publicly traded companies. Companies offer dividends to shareholders as a return on their investment in a company’s equity, typically derived from a company’s net profits.

Candidates will learn how various forms of dividends affect shareholders’ wealth and company financial ratios and valuation.
This is understood through a comparison of different dividend policy theories and models, calculations, and analysis of broad trends in corporate payout policies.

Environmental, Social, and Governance (ESG) Considerations in Investment Analysis

Investors have become increasingly concerned with how a company is governed and its relationship to environmental and social issues. This reading explores the effects of ESG factors on a company’s bottom line by looking at investment risks and opportunities from an ESG perspective.

Furthermore, candidates will learn to distinguish between country-specific variations in ownership structures and their effects on governance policies and practices.

Cost of Capital: Advanced Topics

Picking up where the Level 1 curriculum leaves off, this new reading takes a deeper look into determining and/or estimating the costs of capital, including

Factors that affect both top-down and bottom-up analytical models
The costs of debt
The different approaches to modeling the cost of equity

As always, the goal is to understand the effects of the cost of capital on firm value and investment returns.

Corporate Restructuring

This “new” learning module borrows material from the now-deleted reading on Mergers and Acquisitions, exploring more ways that a company can transform as it seeks to grow or shrink or become more efficient by absorbing the resources and capabilities of another, increasing its market power, or diversifying.

This reading introduces candidates to the complexities and risks associated with mergers and acquisitions, as well as divestments such as spin-offs.
Candidates will learn to explain common motivations for restructurings, contrast their various iterations, and compare the various financial advantages and disadvantages of each.
The goal of the reading is to enable candidates to determine whether such a move would be a viable business strategy by understanding the costs, risks, and likelihood of a business restructuring actually coming to fruition.

CFA Corporate Issuers Level 2 Sample Questions and Answers

The sample questions here are typical of the L2 exam’s complexity and depth: formatted as item sets, with a vignette to deliver a scenario that tests the CFA L2 Curriculum. (On the actual exam, each vignette applies to four questions; we’ve thrown in a couple extra to get a bit more learning in). And be sure to review the illustrated explanations we’ve provided for each question: UWorld’s question bank is designed to expose you to exam-like questions and explain the concepts tested thoroughly.

Passage

Compass Engineering’s board of directors is deciding between cash dividends or a share repurchase program as a method to begin returning cash to shareholders. Liam Fischer, a member of the board, states that both cash dividends and share repurchases have certain advantages that should be considered:

Advantage 1: Share repurchases tend to be more flexible. Although dividends can be raised, lowered, or suspended, they appear to create an expectation among investors that the distribution will continue in the future. Share repurchases do not seem to create the same expectation.

Advantage 2: If the tax rates for capital gains and dividends are the same, and the information coefficient is the same, then shareholders’ wealth will be greater with cash dividends since all shareholders receive cash.

Alicia Wu, the chairman of the board, indicates that Compass should review the long-term trends in the country (the United Kingdom) before deciding.

After deliberation, the board favors a share repurchase program. Jessica King, another member of the board, is concerned about the effect of share repurchases on Compass’ EPS. She collects the following data for 20X2:

Exhibit 1 Compass’ Financial and Market Information for Proposed Share Repurchases
Net income (Millions)	£650
Cash on hand (Millions)	£500
Shares outstanding (Millions)	100
Current share price	£115
Expected purchase price	£125
Pretax cost of debt	6%
Tax rate	20%

In addition, King wonders what effect share repurchases have on companies’ book values. She gathers data from three of Compass’ peers who have made a share repurchase:

Exhibit 2 Financial Information on Compass’ Peers
	Peer 1	Peer 2	Peer 3
Net income	150	300	350
Book value of equity	3,000	5,000	6,500
Shares outstanding	500	600	650
Value of shares repurchased	90	80	310
Number of shares repurchased	15	10	30
After-tax cost of debt	5.5%	6.0%	5.0%

The board members then discuss the best approach for Compass to repurchase shares. King has identified two possible scenarios, both using the same amount to repurchase shares: Scenario 1: Purchase shares using all cash on hand. Scenario 2: Purchase shares with funds from an issuance of debt. Wu states that her preference is to choose a method by which the company can control the process and execute it quickly. She also prefers a process that would allow Compass to discover the minimum price at which it can repurchase the desired number of shares.

Question 1
Question 2
Question 3

Which of Fischer’s stated advantages about cash dividends and share repurchases are correct ?

Advantage 1 only
Advantage 2 only
Both Advantages 1 and 2

Submit

Explanation

Potential benefits of repurchases vs. dividends
Tax advantages (lower tax rates, deferral of tax payments) Share price support Signaling (ie, management believes stock is undervalued) Greater flexibility for managers Offsetting dilution from employee stock option plans Increasing financial leverage (ie, lower equity)

In theory, dividends and share repurchases are equivalent in their effect on shareholder wealth, all else equal. Both forms of shareholder returns transfer corporate wealth to shareholders as cash, which:

effectively lowers the value of the company (and its shares), and
results in overall shareholder wealth remaining the same since the shareholders’ receipt of cash is balanced by a decrease in share value, all else equal (Choices B and C).

In practice, dividends and share repurchases can have advantages over each other. A major advantage of dividends is that repurchases may be legally restricted in some jurisdictions. However, the potential benefits of share repurchases include greater flexibility for managers:

Repurchases do not create the investor expectations of continuity that dividends do.
Companies are not obligated to execute a complete share repurchase program.
The timing of share repurchases is at the managers’ discretion.

Investors have different expectations of regular cash dividends and share repurchases; therefore, share repurchases are more likely viewed by investors as a substitute for special, not regular, cash dividends.

Things to remember:
In theory, dividends and share repurchases have an equivalent effect on shareholder wealth, all else equal. However, repurchases provide greater flexibility for managers, due in part to repurchases not creating the same investor expectations of continuity that dividends generate.

Which of the following best describes global trends that may affect Compass’ decision on how to return cash to shareholders?

The fraction of companies repurchasing shares has increased over time.
The payout ratios for companies paying cash dividends have declined over time.
The fraction of companies paying cash dividends has remained steady over time.

Submit

Based on Scenario 1 and Exhibit 1, a share repurchase would cause Compass’ 20X2 EPS to be closest to:

£6.72
£6.77
£6.80

Submit

Explanation

Share repurchases are a popular alternative to cash dividends for returning cash to shareholders. Repurchases allow companies to purchase shares currently being held by shareholders using one of several methods. Once repurchased, the shares are either held for reissue (ie, treasury shares) or retired (ie, canceled shares).

The repurchase leaves fewer shares for investors to hold (ie, shares outstanding), which often results in a change to a company’s per-share financial ratios (eg, EPS). Like dividends, share repurchases are made using corporate cash, whether the cash is on hand or obtained through the issuance of new debt.

When cash on hand is used, EPS always increases.
When new debt is issued, the change in EPS depends on the company’s after-tax cost of debt and its earnings yield.

In this question, Compass’ EPS following the share repurchase would be £6.77, calculated below.

Steps	Calculations
Calculate number of shares repurchased	= Cash used for repurchase / purchase price = 500,000,000 / 125 = 4,000,000
Calculate remaining shares after repurchase	= Shares outstanding – Shares repurchased = 1,000,000 – 4,000,000 = 96,000,000
Calculate EPS after repurchase	= Net income / Shares outstanding after repurchase = 650,000,000 / 96,000,000 ≈ 6.77

(Choice A) £6.72 results from incorrectly applying the company’s tax rate to the cash used to repurchase shares, arriving at cash of £400 million [£500 million × (1 − 0.2)].

(Choice C) £6.80 incorrectly uses the company’s share price instead of the purchase price to calculate the number of shares repurchased. Companies do not always repurchase shares at the market price.

Things to remember:
Share repurchases are a popular alternative to cash dividends. They often result in a change to a company’s per-share financial ratios. When cash on hand is used for a repurchase, EPS will always increase. When new debt is issued instead, the change in EPS depends on a company’s after-tax cost of debt and its earnings yield.

Level 3

Study Tips for Corporate Issuers

Foundational Knowledge: Learn the material well, since the practice of sourcing and using capital is what creates capital market. Most of the CFA curriculum, at all levels, eventually gets back to understanding them.
Calculator proficiency: You are guaranteed to come across NPV questions. Learn how to use your calculator's requisite functions efficiently.
Formulae Concepts: CFA Level 1 Corporate Issuers covers many formulae, but the CFAI will test your understanding and make sure that you aren’t just crunching numbers.

Visit our CFA Level 1 Study Guide and CFA Level 2 Study Schedule for more information.

Frequently Asked Questions

Is the CFA Corporate Issuers topic hard?

Corporate Issuers is often considered an easier CFA topic. The formulae are quite intuitive and the concepts are largely based on material covered in other topics. However, the relative ease of Corporate Issuers depends on the candidate’s understanding of those borrowed concepts: CAPM model (Portfolio Management), TVM (Quantitative Methods), and financial ratios (Financial Statements Analysis).

How can I study Corporate Issuers for the CFA exam?

After moving through a QBank the best method to monitor your current understanding of the content is by taking Mock exams. UWorld’s mock exams closely replicate the actual CFA exam experience to help you prepare and boost your confidence on test day. Like the actual CFA exam, our mock exams consist of two 2-hour, 15-minute sessions, each with 90 multiple-choice questions spanning multiple subjects and not included in the standard QBank.

How do I practice CFA Corporate Issuer questions?

The best way to study for the exam is practicing with a QBank across all chapters and readings. The UWorld CFA QBank offers over 220 questions and detailed explanations covering Corporate Issuers.

Is the CFA charter useful for Corporate Issuers?

Yes, the CFA charter is useful for corporate issuers–and vice versa. Candidates will study the fundamentals of evaluating a company’s investing and financing decisions in the CFA Level Corporate Issuers topic. The remaining CFA topics either provide a foundation for or expand upon the knowledge gained in the Corporate Issuers topic.

CFA® Corporate Issuers
Summary, Syllabus, Topics, and Sample Questions (L1, L2, L3)

What to Expect in CFA Level 1 Corporate Issuers?

Level 1 Corporate Issuers Syllabus, Readings, and Changes