Corporate Issuers

CFA® Level I, published weight 6–9%. Governance, working capital, capital allocation, capital structure.

What the outline covers

Organizational Forms, Corporate Issuer Features, and Ownership
Investors and Other Stakeholders
Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
Working Capital and Liquidity
Capital Investments and Capital Allocation
Capital Structure
Business Models

Sample questions

These 5 questions are free in the app too. Try each one before opening the answer.

Question 1

A project requires an initial outlay of $1,000,000 and generates $300,000 per year for five years. At a cost of capital of 10%, the NPV is closest to:

Outlay 1,000,000 · CF 300,000 × 5 yrs · r = 10%

A. −$62,000
B. +$137,000
C. +$500,000
D. +$1,137,000

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B. The five-year annuity factor at 10% is 3.7908, so PV = 300,000 × 3.7908 = $1,137,236. NPV = 1,137,236 − 1,000,000 ≈ +$137,000.

Reading: Corporate Issuers — Capital Investments and Capital Allocation, LOS 5.c

Question 2

When NPV and IRR give conflicting rankings for two mutually exclusive projects, an analyst should most appropriately:

A. Choose the project with the higher IRR
B. Choose the project with the higher NPV
C. Choose the project with the shorter payback
D. Reject both projects

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B. NPV measures the value added in currency terms and assumes reinvestment at the cost of capital, which is the economically defensible assumption.

Reading: Corporate Issuers — Capital Investments and Capital Allocation, LOS 5.d

Question 3

A firm has a target capital structure of 40% debt and 60% equity, a pre-tax cost of debt of 6%, a cost of equity of 11% and a tax rate of 25%. Its WACC is closest to:

w_d 40% · r_d 6% · w_e 60% · r_e 11% · t 25%

A. 8.40%
B. 8.40% before tax only
C. 7.80%
D. 9.20%

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A. WACC = 0.40 × 6% × (1 − 0.25) + 0.60 × 11% = 1.80% + 6.60% = 8.40%. Only the debt component is tax-affected.

Reading: Corporate Issuers — Capital Structure, LOS 6.b

Question 4

A firm reports days of inventory on hand of 60, days sales outstanding of 45 and days of payables of 30. Its cash conversion cycle is:

DOH 60 · DSO 45 · DPO 30

A. 45 days
B. 75 days
C. 105 days
D. 135 days

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B. CCC = DOH + DSO − DPO = 60 + 45 − 30 = 75 days. This is the length of time cash is tied up in the operating cycle.

Reading: Corporate Issuers — Working Capital and Liquidity, LOS 4.c

Question 5

The conflict of interest between controlling and minority shareholders is best described as:

A. A principal–agent problem
B. A principal–principal problem
C. A stakeholder externality
D. A regulatory arbitrage

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B. Both parties are owners, so it is a principal–principal conflict. The principal–agent problem sits between shareholders and managers.

Reading: Corporate Issuers — Corporate Governance, LOS 3.a

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