CFA I 级corporate governance详图

I summarised the corporate governance part in detail. hope it would help you in exam. tks

corporate governance0

introduction to corporate governance and other ESG considerations

stake-holder management

definition

shareholder theroy

stakeholder theroy

stakeholder groups

shareholders

board of directors

senior managers

employees

creditors

suppliers

principal-agent

hired to obey principle

while have conflict of interest

conflict between

shareholders and manager or directors

managers depend on firm perfomance

shareholders hold portfolio to avoid risk

information asymmetry

groups of shareholders

majority against minority

related party transaction

和自己公司做生意来获利

creditors and shareholders

equity holders prefer

more risks

while creditors have limited upside from good result

issuing new debt to increase risk

shareholders and other stakeholders

shareholder management

understanding of their interest

effective communications

infrastructure basement

legal infrustructure

contractual infrustructure

organizational infrustructure

governmental infrustructure

standard practices

required by corporate laws

including

annual general meeting

after the end of financial year

provide audited financial statement to SH

ordinary resolution

approval of auditor

election of directors

majority of vote

extraodinary general meeting

special resolution

merger or takeover

require amendment of corprate bylaws

supermajority of vote

2/3

3/4

called anytime

voting

proxy 代理投票

majority voting

一人投一个

cumulative voting

一人投多个，更有利于小股东

board of derectors and its committees

board structure

one tire board

single board of directors

internal directors

senior managers emoloyed by the firm

external directors/non-execitive directors

who are not company management

independent directors

have no other relationships

lead independent director

able to call ind dir meetings

two tire board

supervisory board

exclude executive directors

managemend board

executive directors

led by CEO

Staggered board

some board position election hold each year

defence of takeover

board responsibility

act in shareholders' interest

selecting senior management

strategic firection

approving capital structure change

reviewing company performance

planning for continuity of management

internal control and risk management

quality of audited financial report

board committees

audit committee

governance committee

norminations committee

提名高管候选

compensation/remuneration

高管薪资

risk committee

investment committee

factors affecting corporate governance

factors affect stakeholder relationships

market factors

activist shareholder

initiating shareholder lawsuits

seeking representation on the board of directors

proxy fight

tender offer

to takeover company

hostile takeover

conflict of interest

shareholder want to takeover

managers passes anti takeover measures

non-market factors

legal enviornment

common-law system

better protect shareholder and creditor

civil law system

沟通渠道

以前可以转移注意力

互联网发展后事件更易发酵

potential risk and benifits

risk of poor governance and stakeholder management

benifit part of stakeholder while harm others

accounting fraud

poor recordkeeping

choose lower-than-optimal risk

benifits of effective governance and stakeholder management

avoid legal risk

improve performance

factors

company ownership and voting structure

dual class structure

one class of shares may be entitled to several votes per share

founding shareholders

maitain control of the broad

composition of a company's board

whether they responsive to shareholder interests

management incentives and remuneration

concern if

remuneration plan offer greater

performance-based incentive pay is stable

means easy goals

not aligned with current company strategy

high relative to compareable companies in industry

composition of shareholders

relative strength of shareholders' right

if weak

the goal is hard to achieve

management of long term risk

external consideration on investment(ESG investing)

AKA

sustainable investing

responsible investing

socially responsible investing

how to use

negative screening

不投资污染，侵犯人权

positive screening

投资环保，保护人权

full integration

传统基本面分析中加入esg因素

themestic investing

投资esg goals

engagement/active ownership

用公司权力作为platform to promote esg

green finance

green bonds

overlay/portfolio tilt

risk factor/premium

Capital Budgeting

capital project

capital budgeting process

longer than a year

reasons

often involves the purchase of costly long term assets

apply to other corporate decisions

working capital management

strategic mergers and acquisiton

maximizing shareholfer value

four steps

1.idea generation

2.analysing project proposals

3.create the firm-wide capital budget

4.monitoring decisions and conducting a post-audit

follow up and summarize

catagories

replacement project to maintain the business

replacement ptojects for cost reductions

expansion projects

new product and market development

mandatory projects

other project

basic principle

decision are based on cash flows not accounting income

incremental cash flows

sunk cost

externalties

may affect other project

cannibalization

sign of cash flow

change only once

conventional cash flow pattern

-+

has more than one changes

unconventional cash flow pattern

-+-

cash flow are based on oppotunity cost

oppo cost should be included in the project cost

the timing of the cash flow

保证资金链不断裂

cash flows are on after-tax basis

financing costs are reflected in the project's required rate of return

affected by

independent vs. mutually exclusive project

independent project

every project are unrelated

mutually exclusive

only one in a set of project can be implemented

project sequencing

实行顺序

unlimited funds vs. capital rationing

unlimited

钱多，positive NPV 都可

capital rationing

钱少，需筛选

methods

NPV

discount rate:

cost of capital

positive NPV can increase shareholders' wealth

decision for independent project:

keep positive, abandon negative

NPV profile

x:discount rate

y:corresponding NPVs

crossover rate

2 projects' NPVs are equal

project line intersect because of a difference in the timing of the cash flow

pro and con

advantage

it is a direct measure of the expected increase in the value of the firm

weakness

does not include any consideration of the size of the project

IRR

is the discount rate when

NPV=0

PV(inflow)=PV(outflow)

decision rule:

1.determine the required rate of return

normally firm's cost of capital

2.if IRR

>ROR, accept

<ROR,reject

hurdle rate

minimum IRR

pros and cons

advantage

it measures profitability as a percentage

weakness

the possibility of producing rankings of mutually exclusive projects different from those from NPV analysis

may have a multiple IRRs or no IRR

Payback period

years to recober the initial cost of an investment

越小越好

pros/cons

pro

unconsiderate terminal or salvage value

con

good method of project liquidity

discounted payback period

可用计算器

profitability index

the ratio of the present value of future cash flows to initial cash outlay

if PI

>1,accept

the NPV must be positive

the IRR must be greater than discount rate

<1,reject

conflicting project rankings

NPV rules, because

it measures the expected increase in wealth

reinvest in IRR is unrealistic

relations between NPV, company value and share price

in theroy:+NPV will increase stock price

in reality: more complex because stock price related to expectation

Cost of Capital

Weighted Average Cost of Capital(WACC)

basic definitions

aka

marginal cost of capital(MCC)

component cost of capital

cost of capital of each components

cost of debt

kd

rate at which firm can raise new debt

yield to maturity on existing debt

before-tax

kd(1-t)

after-tax cost of debt

explain

market interest rate(YTM) on new(marginal)debt

not the coupon rate on the firm's existing debt

kps

cost of preferred stock

kce

cost of common equity

can be viewed as oppotunity cost

calculations

WACC=Wd(Kd(1-t))+Wps*Kps+Wce*Kce

cost of debt capital

2.YTM unavailable: matrix pricing

yield- to-maturity approach

debt-rating approach

add together

cost of noncallable,nonconvertible preferred stock

Kps=Dps/P

Dps=preferred dividends

P=market price of preferred

cost of equity capital

1.CAPM

Kce=Rf+beta(E(Rmkt)-Rf)

the dividend discount model approach

P0=D1/Kce-g

D1=next year dividend

Kce=required rate of return on common equity

g=firm's expected constant growth rate

Kce=D1/P0+g

calculate g

growth rate

g=(retention rate)(return on equity)=(1-payout rate)(ROE)

bond yield plus risk premium approach

Kce=bond yield+risk premium

target capital structure

based on the firm's target capital structure

or the industry average capital structure

WACC and the investment opportunity schedule

the intersect point is optimal capital budget

when ios>wacc, accept

project cost of capital

project beta

pure-play method

based on the equity beta of a publicly traded firm which have similar project

larger leverage, larger beta

beta asset = beta equity *

beta project=beta asset *

challenging issues

estimated using historical returns data

the estimate is affected by which index is chosen to represent the market return

estimate may need adjustment sinse betas are believed to revert toward 1

estimated beta of small firms may be to adjusted upward to reflect risk inherent in small firms that is not captured by the usual estimation methods

cost of equity

country risk premium

sovereign yield spread

yield of developing country's government bonds-

treasury bonds of similar maturities

Kce=Rf+beta[E(Rmkt)-Rf+CRP]

marginal cost of capital(MCC)

the cost of raising an additional dollar of capital

MCC schedue have a upward slope

breakpoint

occurs when cost of any component change

flotation cost

fees charged by invesment bankers when a company raises external equity capital

incorrect treatment

add in the rate to calculate

correct treatment

a cash out flow in CF0

Measures of Leverage

definitions

leverage

the amount of fixed cosrs a firm has

fixed operating cost

building lease

equipment lease

fixed financing cost

interest payment on debt

business risk

risk associated with operating income

sales risk

operating risk

financial risk

debt

when leverage rise, effect on

net income decrease

return on equity could increase or decrease

rate of change on ROE would increase

degrees of leverage

degree of operating leverage

Q=quantity of units sold

P=price per unit

V=variable cost per unit

F=fixed cost

S=sales

TVC=total variable costs

notes

the denominator in this form is operating earnings(EBIT)

degree of operating leverage for a company depends on the level of sales

卖越多，杠杆越小

degree of financial leverage

ratio of the percentage change in net income(or EPS) to the percentage change in EBIT

when there is no leverage,DFL=DOL=1

degree of total leverage

DTL=DOL*DFL

breakeven quantity of sales

definition

breakeven quantity

level of sales to cover all fixed and variable cost

quantity of sales that revenue equal total cost

where net income is 0

contribute margin

price-variable cost per unit

operating breakeven of sales

Working capital management

Source of liquidity

primary souurce of liquidity

used in normal day-to-day operations

including

trade credits from vendors

lines of credit from bank

effective cash flow management

secondary sources of liquidity

can change finacial structure

including

short-term or long live assets

negotiating debt agreements

filing for banckruptcy and reorganizing the company

factors influcing liquidity position

drags on liquidity

delay or reduce cash inflows

increase borrowing costs

pulls on liquidity

accelerate cash outflows

liquidity comparision between peer companies

ratios

current ratio

current asset/current liabilities

the higher, the higher ability to pay short-term bills

if less than 1

negative working capital(current assets-current liabilities)

probably facing a liquidity crisis

quick ratio

without inventory

receivable turnover

credit sales/average receivables

good if close to industry norm

number of days recivables

good if close to industry norm

if high, customer pay bill too slow

if low, company too strict to have customer

inventory turnover

COGS/average inventory

number of days of inventory

payable turnover ratio

purchase/average trade payables

number of days of payables

working capital effectiveness

operating cycle

the average number of days that it takes to turn raw material into cash proceeds from sale

=days of inventory+days of receivables

cash conversion cycle

aka net operating cycle

trun the firm's cash investment in inventoru back into cash

太高不好，说明投资远超working capital

daily cash position

available uninvested cash balance that could

make routine purchase

pay expenses as they come due

affected by

typical cash inflow

cash from sales and collections of receivables

cash received from subsidiaries

tax refunds

borrowing

typical cash out flow

payments to employees and vendors

cash transferred to subsidiaries

payments of interest and principal on debt

investment in securities

taxes paid

dividneds paid

short term securities

include

US Treasury bills

short term federal agency securities

bank certificates of deposit

banker's acceptance

time deposit

repurchase agreements

commercial paper

money market mutual funds

adjustable rate preferred stock

yield calculation

%discount

discount basis yield(bank discount yield)

money market yield

bond equivalent yield

managements

cash management investment policy

investment policy statement

accounts receivable management

aging schedule

inventory management

inventory level

low

lost sale due to stock-out

high

carrying cost

leaded by

increasing average day's inventory,or

decreasing inventory turnover

misleading if across industry

e,g, grocery and art gallary

accounts payable management

pay too early

affect turnover

pay too late

damage relationship

discount

"2/10 net60"

get 2%discount if pay in 10 days, due in 60 days

cost of not taking discount

如果不在折扣期付清，则越晚越好

source of short-term funding

from banks

lines of credit

used by large company

uncommitted line of credit

committed(regular) line of credit

more reliable

bank charge fee

less than a year

interest rate in terms of reference rate like LIBOR

revolving line of credit

banker's acceptance

used by export firms

factoring

actual sale of receivables at a discount from their face values

non-bank

small firm

finance companies for short term funding

higher cost

large firm

issue short term debt called commercial paper

sells to investor(direct placement)

sells through dealer(dealer-placed paper)

interest cost is less than bank