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CFA Level 1 > Corporate issuers > Flashcards

Corporate issuers Flashcards

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CFA flashcards
1
Q

Dual-class structure

A

Different classes out outstanding commons stocks with different voting rights e.g. founders have majority voting rights without majority shares. CFA advocates against

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2
Q

Primary liquidity sources for corporate issuers (4)

A
  • Cash on hand
  • Marketable securities on hand
  • Bank borrowing
  • Cash generated from business
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3
Q

Primary liquidity sources for corporate issuers (4)

A
  • Cash on hand
  • Marketable securities on hand
  • Bank borrowing
  • Cash generated from business
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4
Q

Secondary liquidity sources for corporate issuers

A
  • Cash saved by suspending dividends to shareholders
  • Delaying/ reducing capital investments
  • Selling assets
  • Introducing additional equity
  • Restructuring debt to extend maturity
  • Bankruptcy protecting filing (suspends need to service liabilities)
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5
Q

Drag on liquidity

A

Occurs when inflows lag e.g. when excess inventory builds up or becomes obsolete

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6
Q

Pull on liquidity

A

Occurs when cash flows accelerate e.g. when suppliers reduce credit lines or demand faster payments (decreased DPO)

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7
Q

Current ratio

A

current assets/ current liabilities

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8
Q

Quick ratio

A

cash and MS + AR/ current liabilities

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9
Q

Cash ratio

A

cash and MS / current liabilities

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10
Q

Conservative approach to managing working capital

A

Greater proportion of STA. Finance working capital using long term debt and equity
Pros:
- More permanent capital w less need to debt rollover
- Greater flex during market disruptions
- High prob of meeting short term obs
Cons:
- Higher costs and lower profitability
- Long term lenders may have constraints like minimum interest coverage ratio

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11
Q

Aggressive approach to managing working capital

A
  • Hold less short term assets than LT, finance working capital using short term debt
    Pros: Lower costs
    Cons: Vulnerable to market disruptions and not meeting obligations
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12
Q

Moderate approach to managing working capital

A

Looks for middle ground:
- Permanent assets funded using long term sources of capital
- Variable (seasonable) current assets funded using short term sources

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13
Q

Factors affecting approach to short term funding (5)

A
  • Company size
  • Creditworthiness
  • Legal systems
  • Regulatory concerns
  • Underlying assets
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14
Q

Cash Conversion Cycle formula

A

CCC = DOH + DOS - DPO

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15
Q

Capital allocation process def

A

Identifying and evaluation capital projects (where cash flows form it will be received for longer than a year)

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16
Q

Capital allocation process (4)

A

1) Idea generation
2) Analysing Project Proposals
3) Create firm-wide capital budget
4) Monitoring decisions and conducting a post-audit

17
Q

Diff between private and public companies (3)

A
  • Private don’t change on exchange (value not readily observable and difficult to transfer shares)
  • Few regulatory requirements for private
  • Private raise capital through private placement, restricted to accredited investors and high net worth individuals rather than shares
18
Q

Private companies can ‘go public’ three ways

A
  • Issue shares in IPO (may be exchange specific requirements). Use bank to underwrite issue.
    -Direct listing of existing shares w stock exchange. Doesn’t raise new capital but faster than IPO
  • SPAC - Set up to acquire a future company, raises capital through IPO and puts funds in trust. Blank check, specified time frame
19
Q

Value of a company

A

Debt + Equity

20
Q

Issuing additional debt vs equity

A

Prevents dilution of shareholders proportional ownership/ higher ROE

21
Q

Total working capital

A

Current assets - current liabilities

22
Q

Total working capital

A

Current assets - current liabilities

23
Q

Net working capital

A

Current assets (- cash and marketable securities) - current liabilities (excluding short term and current debt)

24
Q

Capital Allocation principles (3)

A
  • Decisions based on post tax CF (not accounting income)
  • Incremental cash flows used only
  • Timing of cash flows is important
25
Q

Types of real options (5)

A
  • Timing
  • Abandonment
  • Expansion/ growth
  • Flexibility
  • Fundamental
26
Q

Characteristics affecting proportion of debt in capital structure (5)

A
  • Growth and stability of revenue
  • Growth and stability of cash flows
  • Amount of business risk
  • Amount and liquidity of company assets
  • Cost and availability of debt financing
27
Q

Assumptions leading to MM 1 (5)

A
  • Capital markets are perfectly competitive
  • Investors have homogenous expectations
  • Investors can borrow and lend at the risk free rate
  • There are no agency costs
  • Investment decisions are independent of financing decisions
28
Q

A business model should (5):

A

1) Identify potential customers
2) Describe key assets and suppliers
3) Describe product or service
4) Explain how firm will sell products and services
5) Explain pricing strategies

CFA Level 1 (7 decks)

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