CFA® Level I Corporate Issuers

The 7 learning modules

1. 01 Organizational Forms, Corporate Issuer Features, and Ownership

   Compares sole proprietorships, general and limited partnerships, and limited companies by legal identity, owner liability, access to capital and how profits are taxed. It then looks at the features that define a corporation, including the separation of owners from managers and the double taxation of distributed profits, and at the differences between public and private companies: listing, liquidity, disclosure, and the routes between the two, such as IPOs, direct listings, SPACs and buyouts. Expect questions that ask you to identify a form from its features or to work out the total tax on a company's profits.

   6 lessons in the Academy →

2. 02 Investors and Other Stakeholders

   Sets the claims of lenders against those of shareholders. Debtholders have a fixed, senior claim with limited upside, while shareholders have a residual claim with unlimited upside, which is why the two groups prefer different levels of risk. You compare the shareholder and stakeholder views of the firm, meet each stakeholder group (board, managers, employees, customers, suppliers, governments) and see how environmental, social and governance factors can create risks and opportunities for investors. Questions often show how debt financing magnifies the variability of ROE.

   7 lessons · 2 videos in the Academy →

3. 03 Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

   Covers the main governance conflicts: shareholders and managers, controlling and minority shareholders, and shareholders and creditors. You then match each conflict to the mechanisms that manage it, such as corporate reporting, voting rights and shareholder activism, loan covenants, board structure and committees, executive pay, employee and supplier contracts, and regulation. The module ends with the operational, legal, regulatory, reputational and financial risks of weak governance, and the benefits of strong governance.

   7 lessons · 1 video in the Academy →

4. 04 Working Capital and Liquidity

   Measures how long cash is tied up in operations through the cash conversion cycle, and how a company can shorten it. You distinguish primary sources of liquidity (cash, operating cash flow, short-term funding) from secondary sources (selling assets, renegotiating debt, bankruptcy protection), identify drags and pulls on liquidity, and evaluate it with the current, quick and cash ratios. The last part covers working capital strategies and short-term funding choices, including the effective cost of passing up a supplier's early-payment discount.

   7 lessons · 4 videos in the Academy →

5. 05 Capital Investments and Capital Allocation

   Classifies capital projects (going concern, regulatory, expansion, new lines of business) and evaluates them with NPV and IRR using incremental after-tax cash flows. You learn why sunk costs are ignored while cannibalisation and opportunity costs are included, and use ROIC to judge whether a company earns more than its cost of capital. The module also covers the principles and common pitfalls of capital allocation and the main real options: timing, sizing (expansion and abandonment), flexibility and fundamental options.

   8 lessons · 4 videos in the Academy →

6. 06 Capital Structure

   Starts with the weighted average cost of capital and the factors that shape how a company finances itself, including its life-cycle stage, business risk and operating leverage (fixed costs as a share of total costs). The core is the Modigliani–Miller propositions with and without taxes, followed by the static trade-off theory, in which the tax benefit of debt is weighed against the costs of financial distress. It finishes with target capital structures, the pecking order theory and the agency costs of equity.

   6 lessons · 4 videos in the Academy →

7. 07 Business Models

   Describes what a business model is: who the customers are, what is offered, how it reaches them and how it is priced. You meet the main pricing approaches (price discrimination such as tiered and dynamic pricing, value-based pricing, auctions, bundling, razor–razorblade, penetration pricing, freemium and subscriptions) and the idea of a value proposition. The module then looks at conventional models and variations such as franchising, and at platform businesses that depend on network effects. Questions are mostly classification, with some simple unit economics such as breakeven volumes.

   8 lessons in the Academy →

What the questions cover

• Organisational forms of business, and public versus private ownership
• The claims of lenders and shareholders, stakeholder groups and ESG factors
• Governance conflicts, the mechanisms that manage them, and governance risks
• Working capital, the cash conversion cycle, liquidity sources and liquidity ratios
• Capital investment decisions: NPV, IRR, ROIC, capital allocation pitfalls and real options
• The cost of capital, the Modigliani–Miller propositions and optimal capital structure
• Business models, pricing approaches and platform businesses

Key formulas

Cash conversion cycle

$\displaystyle \text{CCC} = \text{DOH} + \text{DSO} - \text{DPO}$DOH and DPO use cost of goods sold; DSO uses sales. A shorter cycle means less cash tied up in operations.Learn it: The operating cycle and the cash conversion cycle →

Cost of trade credit (effective annual rate)

$\displaystyle \left(1 + \frac{\text{Discount}}{1 - \text{Discount}}\right)^{\frac{365}{\text{Payment period} - \text{Discount period}}} - 1$The cost of forgoing the discount. Compare it with the bank rate: if trade credit costs more, borrow and take the discount.

Net present value

$\displaystyle \text{NPV} = \sum_{t=0}^{n} \frac{\text{CF}_t}{(1 + r)^t}$CF0 is usually the negative initial outlay. Accept independent projects with a positive NPV.Learn it: The capital allocation process and NPV →

Internal rate of return

$\displaystyle \sum_{t=0}^{n} \frac{\text{CF}_t}{(1 + \text{IRR})^t} = 0$Solve with the calculator's cash flow function. Accept when the IRR exceeds the required return.Learn it: IRR, and choosing between IRR and NPV →

Return on invested capital

$\displaystyle \text{ROIC} = \frac{(1 - t) \times \text{Operating profit}}{\text{Average total long-term liabilities and equity}}$Value is created when ROIC exceeds the cost of capital.Learn it: Return on invested capital (ROIC) →

Weighted average cost of capital

$\displaystyle \text{WACC} = w_d r_d (1 - t) + w_p r_p + w_e r_e$Use market-value (or target) weights. Only the cost of debt is adjusted for tax.Learn it: The cost of capital and WACC →

MM Proposition I with taxes

$\displaystyle V_L = V_U + tD$Without taxes, V_L = V_U: capital structure does not affect value.Learn it: Modigliani-Miller with taxes, and the cost of financial distress →

MM Proposition II with taxes

$\displaystyle r_e = r_0 + (r_0 - r_d)(1 - t)\frac{D}{E}$Without taxes, drop the (1 − t) term. r0 is the cost of capital of the all-equity firm.Learn it: Modigliani-Miller with taxes, and the cost of financial distress →

The Corporate Issuers formula sheet: the key formulas explained

Common mistakes

• Using the debt-to-equity ratio as the weight of debt in WACC. A D/E of 0.6 means a debt weight of 0.6/1.6 = 0.375, and MM Proposition II needs D/E, not D/V.
• Forgetting the tax adjustment on the cost of debt in WACC, or applying (1 − t) to the cost of equity or preferred stock as well.
• Adding DPO in the cash conversion cycle instead of subtracting it, or computing DSO on cost of goods sold. Paying suppliers faster lengthens the cycle.
• Choosing between mutually exclusive projects by IRR. When the rankings conflict, NPV decides, because it measures the value added in currency terms at the right discount rate.
• Including sunk costs or financing costs in project cash flows. Interest is captured in the discount rate, and money already spent is irrelevant; opportunity costs and cannibalisation, on the other hand, must be included.
• Assuming that MM Proposition II means cheaper debt lowers WACC in a world without taxes. The rising cost of equity exactly offsets it, so WACC and firm value are unchanged.
• Counting prepaid expenses or inventory in the quick ratio. Only cash, short-term marketable securities and receivables belong in the numerator.

How to study it

• Know when NPV and IRR rank mutually exclusive projects differently, and why NPV is the one to follow.
• Governance questions often ask which mechanism best reduces a given conflict. Name the two parties in the conflict first, then pick the mechanism that ties them together.
• Learn the Modigliani–Miller results as a sequence: no taxes, then taxes, then costs of financial distress. Most capital structure questions ask where a statement sits in that story.
• Practise the cash conversion cycle and the cost of trade credit until they take under a minute. They are the most reliable numerical marks in the topic.
• For the descriptive modules, learn the lists: the stakeholder groups, the types of real options, the pricing models. Many questions simply ask you to classify an example.

Try 3 Corporate Issuers questions

Practise and prove Corporate Issuers

The question bank and the mock exams are the practice half of CheapMocks Academy. Try the free sample questions, see the topic weights for the whole exam and the latest Level I pass rates.

Corporate Issuers FAQ