SSV9X - 0969149105 Book 3: Corporate Issuers and Equity Investments SchweserNotes™ 2022 Level I CFA® SSV9X - 0969149105 SCHWESERNOTES™ 2022 LEVEL I CFA® BOOK 3: CORPORATE ISSUERS & EQUITY INVESTMENT ©2021 Kaplan, Inc All rights reserved Published in 2021 by Kaplan, Inc Printed in the United States of America ISBN: 978-1-0788-1602-1 These materials may not be copied without written permission from the author The unauthorized duplication of these notes is a violation of global copyright laws and the CFA Institute Code of Ethics Your assistance in pursuing potential violators of this law is greatly appreciated Required CFA Institute disclaimer: “CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by Kaplan Schweser CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.” Certain materials contained within this text are the copyrighted property of CFA Institute The following is the copyright disclosure for these materials: “Copyright, 2021, CFA Institute Reproduced and republished from 2022 Learning Outcome Statements, Level I, II, and III questions from CFA® Program Materials, CFA Institute Standards of Professional Conduct, and CFA Institute’s Global Investment Performance Standards with permission from CFA Institute All Rights Reserved.” Disclaimer: The SchweserNotes should be used in conjunction with the original readings as set forth by CFA Institute in their 2022 Level I CFA Study Guide The information contained in these Notes covers topics contained in the readings referenced by CFA Institute and is believed to be accurate However, their accuracy cannot be guaranteed nor is any warranty conveyed as to your ultimate exam success The authors of the referenced readings have not endorsed or sponsored these Notes SSV9X - 0969149105 CONTENTS Learning Outcome Statements (LOS) STUDY SESSION 9—Corporate Issuers (1) READING 27 Introduction to Corporate Governance and Other ESG Considerations Exam Focus Module 27.1: Stakeholder Management Module 27.2: Factors Affecting Corporate Governance Key Concepts Answer Key for Module Quizzes READING 28 Uses of Capital Exam Focus Module 28.1: Capital Allocation Principles Module 28.2: Net Present Value and Internal Rate of Return Module 28.3: Real Options and Capital Allocation Pitfalls Key Concepts Answer Key for Module Quizzes READING 29 Sources of Capital Exam Focus Module 29.1: Sources of Capital Key Concepts Answers to Module Quizzes STUDY SESSION 10—Corporate Issuers (2) READING 30 Cost of Capital—Foundational Topics Exam Focus Module 30.1: Weighted Average Cost of Capital Module 30.2: Beta Estimation and Flotation Costs Key Concepts Answer Key for Module Quizzes READING 31 Capital Structure Exam Focus Module 31.1: Capital Structure Theories Module 31.2: Capital Structure Decisions SSV9X - 0969149105 Key Concepts Answer Key for Module Quizzes READING 32 Measures of Leverage Exam Focus Module 32.1: Measures of Leverage Key Concepts Answer Key for Module Quiz Topic Quiz: Corporate Issuers STUDY SESSION 11—Equity Investments (1) READING 33 Market Organization and Structure Exam Focus Module 33.1: Markets, Assets, and Intermediaries Module 33.2: Positions and Leverage Module 33.3: Order Execution and Validity Key Concepts Answer Key for Module Quizzes READING 34 Security Market Indexes Exam Focus Module 34.1: Index Weighting Methods Module 34.2: Uses and Types of Indexes Key Concepts Answer Key for Module Quizzes READING 35 Market Ef iciency Exam Focus Module 35.1: Market Ef iciency Key Concepts Answer Key for Module Quiz STUDY SESSION 12—Equity Investments (2) READING 36 Overview of Equity Securities Exam Focus Module 36.1: Types of Equity Investments Module 36.2: Foreign Equities and Equity Risk Key Concepts Answer Key for Module Quizzes SSV9X - 0969149105 READING 37 Introduction to Industry and Company Analysis Exam Focus Module 37.1: Industry Analysis Module 37.2: Pricing Power and Company Analysis Key Concepts Answer Key for Module Quizzes READING 38 Equity Valuation: Concepts and Basic Tools Exam Focus Module 38.1: Dividends, Splits, and Repurchases Module 38.2: Dividend Discount Models Module 38.3: Relative Valuation Measures Key Concepts Answer Key for Module Quizzes Topic Quiz: Equity Investments Formulas Index SSV9X - 0969149105 LEARNING OUTCOME STATEMENTS (LOS) STUDY SESSION The topical coverage corresponds with the following CFA Institute assigned reading: 27 Introduction to Corporate Governance and Other ESG Considerations The candidate should be able to: a describe corporate governance b describe a company’s stakeholder groups, and compare interests of stakeholder groups c describe principal–agent and other relationships in corporate governance and the licts that may arise in these relationships d describe stakeholder management e describe mechanisms to manage stakeholder relationships and mitigate associated risks f describe functions and responsibilities of a company’s board of directors and its committees g describe market and non-market factors that can affect stakeholder relationships and corporate governance h identify potential risks of poor corporate governance and stakeholder management, and identify bene its from effective corporate governance and stakeholder management i describe factors relevant to the analysis of corporate governance and stakeholder management j describe environmental and social considerations in investment analysis k describe how environmental, social, and governance factors may be used in investment analysis The topical coverage corresponds with the following CFA Institute assigned reading: 28 Uses of Capital The candidate should be able to: a describe the capital allocation process and basic principles of capital allocation b demonstrate the use of net present value (NPV) and internal rate of return (IRR) in allocating capital and describe the advantages and disadvantages of each method c describe expected relations among a company’s investments, company value, and share price d describe types of real options relevant to capital investment e describe common capital allocation pitfalls The topical coverage corresponds with the following CFA Institute assigned reading: 29 Sources of Capital The candidate should be able to: a describe types of inancing methods and considerations in their selection b describe primary and secondary sources of liquidity and factors that in luence a company’s liquidity position c compare a company’s liquidity position with that of peer companies d evaluate choices of short-term funding SSV9X - 0969149105 STUDY SESSION 10 The topical coverage corresponds with the following CFA Institute assigned reading: 30 Cost of Capital—Foundational Topics The candidate should be able to: a calculate and interpret the weighted average cost of capital (WACC) of a company b describe how taxes affect the cost of capital from different capital sources c calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-rating approach d calculate and interpret the cost of noncallable, nonconvertible preferred stock e calculate and interpret the cost of equity capital using the capital asset pricing model approach and the bond yield plus risk premium approach f explain and demonstrate beta estimation for public companies, thinly traded public companies, and nonpublic companies g explain and demonstrate the correct treatment of lotation costs The topical coverage corresponds with the following CFA Institute assigned reading: 31 Capital Structure The candidate should be able to: a describe how a company’s capital structure may change over its life cycle b explain the Modigliani–Miller propositions regarding capital structure c describe the use of target capital structure in estimating WACC, and calculate and interpret target capital structure weights d explain factors affecting capital structure decisions e describe competing stakeholder interests in capital structure decisions The topical coverage corresponds with the following CFA Institute assigned reading: 32 Measures of Leverage The candidate should be able to: a de ine and explain leverage, business risk, sales risk, operating risk, and inancial risk and classify a risk b calculate and interpret the degree of operating leverage, the degree of inancial leverage, and the degree of total leverage c analyze the effect of inancial leverage on a company’s net income and return on equity d calculate the breakeven quantity of sales and determine the company’s net income at various sales levels e calculate and interpret the operating breakeven quantity of sales STUDY SESSION 11 The topical coverage corresponds with the following CFA Institute assigned reading: 33 Market Organization and Structure The candidate should be able to: a explain the main functions of the inancial system b describe classi ications of assets and markets c describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes SSV9X - 0969149105 d describe types of inancial intermediaries and services that they provide e compare positions an investor can take in an asset f calculate and interpret the leverage ratio, the rate of return on a margin transaction, and the security price at which the investor would receive a margin call g compare execution, validity, and clearing instructions h compare market orders with limit orders i de ine primary and secondary markets and explain how secondary markets support primary markets j describe how securities, contracts, and currencies are traded in quote-driven, orderdriven, and brokered markets k describe characteristics of a well-functioning inancial system l describe objectives of market regulation The topical coverage corresponds with the following CFA Institute assigned reading: 34 Security Market Indexes The candidate should be able to: a describe a security market index b calculate and interpret the value, price return, and total return of an index c describe the choices and issues in index construction and management d compare the different weighting methods used in index construction e calculate and analyze the value and return of an index given its weighting method f describe rebalancing and reconstitution of an index g describe uses of security market indexes h describe types of equity indexes i describe types of ixed-income indexes j describe indexes representing alternative investments k compare types of security market indexes The topical coverage corresponds with the following CFA Institute assigned reading: 35 Market Efficiency The candidate should be able to: a describe market ef iciency and related concepts, including their importance to investment practitioners b contrast market value and intrinsic value c explain factors that affect a market’s ef iciency d contrast weak-form, semi-strong-form, and strong-form market ef iciency e explain the implications of each form of market ef iciency for fundamental analysis, technical analysis, and the choice between active and passive portfolio management f describe market anomalies g describe behavioral inance and its potential relevance to understanding market anomalies STUDY SESSION 12 The topical coverage corresponds with the following CFA Institute assigned reading: 36 Overview of Equity Securities The candidate should be able to: a describe characteristics of types of equity securities SSV9X - 0969149105 b describe differences in voting rights and other ownership characteristics among different equity classes c compare and contrast public and private equity securities d describe methods for investing in non-domestic equity securities e compare the risk and return characteristics of different types of equity securities f explain the role of equity securities in the inancing of a company’s assets g contrast the market value and book value of equity securities h compare a company’s cost of equity, its (accounting) return on equity, and investors’ required rates of return The topical coverage corresponds with the following CFA Institute assigned reading: 37 Introduction to Industry and Company Analysis The candidate should be able to: a explain uses of industry analysis and the relation of industry analysis to company analysis b compare methods by which companies can be grouped c explain the factors that affect the sensitivity of a company to the business cycle and the uses and limitations of industry and company descriptors such as “growth,” “defensive,” and “cyclical” d describe current industry classi ication systems, and identify how a company should be classi ied, given a description of its activities and the classi ication system e explain how a company’s industry classi ication can be used to identify a potential “peer group” for equity valuation f describe the elements that need to be covered in a thorough industry analysis g describe the principles of strategic analysis of an industry h explain the effects of barriers to entry, industry concentration, industry capacity, and market share stability on pricing power and price competition i describe industry life-cycle models, classify an industry as to life-cycle stage, and describe limitations of the life-cycle concept in forecasting industry performance j describe macroeconomic, technological, demographic, governmental, social, and environmental in luences on industry growth, pro itability, and risk k compare characteristics of representative industries from the various economic sectors l describe the elements that should be covered in a thorough company analysis The topical coverage corresponds with the following CFA Institute assigned reading: 38 Equity Valuation: Concepts and Basic Tools The candidate should be able to: a evaluate whether a security, given its current market price and a value estimate, is overvalued, fairly valued, or undervalued by the market b describe major categories of equity valuation models c describe regular cash dividends, extra dividends, stock dividends, stock splits, reverse stock splits, and share repurchases d describe dividend payment chronology e explain the rationale for using present value models to value equity and describe the dividend discount and free-cash- low-to-equity models f calculate the intrinsic value of a non-callable, non-convertible preferred stock g calculate and interpret the intrinsic value of an equity security based on the Gordon (constant) growth dividend discount model or a two-stage dividend discount model, as appropriate SSV9X - 0969149105 ... Disclaimer: The SchweserNotes should be used in conjunction with the original readings as set forth by CFA Institute in their 2022 Level I CFA Study Guide The information contained in these Notes covers topics contained in the readings referenced by CFA Institute and is believed to be... stability on pricing power and price competition i describe industry life-cycle models, classify an industry as to life-cycle stage, and describe limitations of the life-cycle concept in forecasting.. .Book 3: Corporate Issuers and Equity Investments SchweserNotes? ?? 2022 Level I CFA? ? SSV9X - 0969149105 SCHWESERNOTES? ?? 2022 LEVEL I CFA? ? BOOK 3: CORPORATE ISSUERS & EQUITY INVESTMENT