Corporate Issuers
The CFA® exam Corporate issuers topic covers assessing corporate governance and understanding how companies make investing and financing decisions. Many academic studies have shown that effective governance is highly correlated with overall financial performance. Environment, social, and governance (ESG) factors have become increasingly important concerns for investors and companies have taken notice. Therefore, evaluating how these factors affect a company’s bottom line is critical to increasing long-term shareholder value and making management decisions regarding financing and investment.
Financial analysts must cultivate the ability to identify the risks and investment opportunities associated with short-and long-term financing options and techniques. This enables management to make effective use of leverage and working capital in their daily decisions.
This topic also covers the effects of mergers and acquisitions on corporate structures and the relative value and benefit to all parties involved.
Candidates will find that the content covered in Corporate Issuers is interwoven with material from Financial Statements Analysis and Quantitative Methods. Despite its relatively low weighting, Corporate Issuers’ concepts are at the core of corporate finance throughout the CFA Program.
What to Expect in CFA Level 1 Corporate Issuers?
Corporate Issuers, formerly known as Corporate Finance, is among the CFA’s more lightly weighted topics. Corporate Issuers provides an introduction to corporate governance and to corporate financing and investments; 10% of Level 1 readings are dedicated to the topic. Candidates will study the increasing influence of environmental, social, and governance-related factors on a company’s bottom line, the capital allocation process, and the assessment of capital investment opportunities.
Exam Weighting
The CFA Corporate Issuers topic has a weight of 8%-12% of the CFA Level 1 exam, so approximately 15-21 of the 180 CFA Level 1 exam questions focus on this topic.
| Topic Weight | No. of Learning Modules | No. of Formulas | No. of Questions |
|---|---|---|---|
| 8-12% | 8 | ca. 40 | ca. 16 |
Level 1 Corporate Issuers Syllabus, Readings, and Changes
The CFA Level 1 curriculum includes 8 total Learning Modules for 2023. For 2023, the CFA Level I curriculum was revised with an enhanced focus on capital and corporate issuers. The current Learning Modules, and their changes from 2022, are:
| Corporate Issuers (Formerly Corporate Finance) L1 Changes | |
|---|---|
| Corporate Structures and Ownership | New |
| Introduction to Corporate Governance and Other Esg Considerations | Revised |
| Business Models | New |
| Capital Investments (formerly Uses of Capital) | Updated |
| Working Capital (formerly Sources of Capital) | Updated |
| Cost of Capital-Foundational Topics | No Changes |
| Capital Structure | Major Revision |
| Measures of Leverage | No Changes |
The exam weight of the Corporate Issuers section increased from 2018 to 2021. Since 2021, weight has fluctuated between 8-12%.
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|
| 7% | 10% | 10% | 8-12% | 8-12% | 8-12% |
Corporate Structures and Ownership
This new learning module introduces the corporate structure and its legal and financial implications for the firm and its investors, including how corporate structure affects liability, tax, risk, returns, and costs of financing. Topics explored in depth include
- Forms of share distribution and corporate voting and their effects on control
- Principal-agent issues and how they are affected by corporate structures
- Common liability and tax issues and how they affect the firm’s financing decisions
Governance and Other ESG Considerations
The 2008-2009 global financial crisis is a prime example of poor corporate governance. This event has led to increased regulations designed to protect investors and financial markets from risky governance practices.
- This reading covers how a company’s corporate governance practices influence corporate profitability and performance.
- Critical components in such an assessment include identifying conflicts of interest, analyzing governance structure and controls, and understanding operational transparency.
- Environmental and social issues have become increasingly important to investors. Candidates will explore how these considerations impact investment analysis.
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 (formerly Sources of Capital)
- Candidates will explore financing methods and options as they relate to raising capital.
- The reading looks at how to analyze a company’s liquidity position via liquidity sources, peer comparison, short-term funding options, and capital alternatives.
- The information presented in this reading is fundamental to keeping businesses alive by ensuring solvency.
Cost of Capital-Foundational Topics
Company growth is highly correlated with investments that engender revenue and profit growth. These investments require borrowed funds (debt-financing) or owner investment (equity financing).
- This reading introduces candidates to the concept of the cost of capital, techniques to calculate it, and underlying assumptions. This includes tax effects, the cost of debt and equity, and the influence of capital from various sources.
- Candidates will learn to calculate and interpret the weighted average cost of capital (WACC) and employ the yield-to-maturity and debt-rating approaches.
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.
Measures of Leverage
Fixed costs are related to a company’s operations (i.e. rent, depreciation), and its financing (i.e interest expense), and result in operating and financial leverage, respectively, that affect how companies can profit from revenues. Leverage enables companies to generate money more quickly, albeit at greater risk.
- This reading will introduce candidates to the elementary features of leverage.
- Candidates will learn about the various risks associated with leverage, how to calculate and interpret leverage, and the effects of leverage on a company’s return on equity and net income.
- Candidates will find some overlap between the “Measures of Leverage” reading and the material they covered in “Financial Statement Analysis”.
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.
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.
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.
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%
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 for 2023, of which 4 (8% of the total curriculum) center on Corporate Issuers.
For 2023, 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 2023 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 | Updated |
| Cost of Capital: Advanced Topics | New |
| Corporate Restructuring (formerly Mergers and Acquisitions) | Major Revision |
The weight of the Corporate Issuers section decreased from 2018 to 2019 and has since stayed consistent.
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|
| 5-15% | 5-10% | 5-10% | 5-10% | 5-10% | 5-10% |
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.
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
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.
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
What to Expect in CFA Level 3 Corporate Issuers?
In CFA Institute’s Level 3 curriculum, Corporate Issuers do not exist as a separate topic, but its foundational ideas are tested implicitly, with a focus on Portfolio Management. While CFA Level 3 Corporate Issuers is not a separate topic, you can explore our level 3 study guide for more information about Level 3 topics.
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 Guide 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.
