4 Corporate Issuers

2023年CFA二级企业发行人科目，主要内容有4个模块，其中第一个部分最重要，学习过程中应加强对公式和概念方面的理解和记忆

Corporate Issuers

• Analysis of Dividends and Share Repurchases
  • Dividends
    • Procedure of Dividend Payment
    • Cash Dividends
      • Regular
      • Extra or special (irregular) dividends
        • A company that does not pay dividends on a regular schedule
        • A dividend that supplements regular cash dividends with an extra payment
      • Liquidating Dividends
        • Goes out of business and the net assets of the company (after all liabilities have been paid) are distributed to shareholders
        • Sells a portion of its business for cash and the proceeds are distributed to shareholders
        • Pays a dividend that exceeds its accumulated retained earnings (impairs stated capital)
      • The effect on shareholders' wealth and financial ratios
        • Reduces both the value of the company's assets (cash is being paid out) and the market value of equity (by reducing retained earnings)
        • Liquidity ratio (e.g.,cash ratio and current ratio) decreases
        • Financial leverage ratios(e.g.,debt-to-equity ratio and debt-to-asset ratios) increases
    • Stock Dividends
      • Non-cash form of dividends: the company distributes additional shares of its common stock to shareholders instead of cash
      • The effect on shareholders' wealth and financial ratios
    • Stock Splits
      • The effect on a two-for-one stock split
      • Reverse Stock Split
        • Increase the share price
        • Reduce the number of shares outstanding
        • No effect on the market value of the firm's equity
    • Both stock dividends and stock splits have no effect on total shareholders' equity
      • A stock dividend is accounted for as a transfer of retained earnings to contributed capital
      • A stock split does not affect any of the balances in shareholder equity accounts
    • Dividend reinvestment plan(DRP)
      • Advantages
        • Encourage a diverse shareholder base by providing small shareholders an easy means to accumulate additional shares
        • Stimulate long-term investment in the company
        • New-issue DRPs allow the company to raise new equity capital without the flotation costs associated with the secondary equity issuance using investment bankers
        • DRPs allow the accumulation of shares using cost averaging
      • Disadvantages
        • The extra record keeping involved in jurisdictions where capital gains are taxed
        • Cash dividends are fully taxed in the year received even when reinvested
  • Theories of dividend policy and company value
    • Dividend policy does not matter
      • Perfect capital market assumptions
        • No taxes or transaction costs, and symmetric information among all investors
        • No meaningful distinction between dividends and share repurchases under MM assumption
      • Dividend is irrelevant to company value
    • Dividend policy matters
      • Bird in the hand
        • Prefer cash dividend to capital gains as it is more certain
        • A company that pays dividends will have a lower cost of equity capital, resulting in a higher share price
      • Tax aversion
        • Taxable investors prefer the way that incurs lower tax
        • Dividends are taxed at higher rates than capital gains in some countries
        • Extreme: this argument would advocate a zero dividend payout ratio
      • Signaling
        • A company's BOD and management may use dividends to signal to investors about the company's prospects
        • Dividend increases or decreases may affect share price
          • A company's dividend initiation or increase tends to be associated with share price increases
          • Dividend cuts or omissions present powerful and often negative signals
      • Agency costs
        • Between shareholders and managers
          • Managers may have an incentive to maximize their own welfare at the company's expense
          • Potential investment agency problem might be alleviated by the payment of dividends
        • Between shareholders and bondholders
          • The payment of dividends reduces the cash cushion available to the company for the disbursement of fixed payments to bondholders
          • The payment of large dividends could lead to underinvestment in profitable projects
  • Factors affecting dividend policy
    • Investment opportunities: More profitable investment opportunity, less cash dividend
    • The expected volatility of future earnings: The more volatile earnings are, the greater the risk that a given dividend increase may not be covered by earnings in a future time period
    • Financial flexibility: A company with substantial cash holdings is in a relatively strong position to meet unforeseen operating needs and to exploit investment opportunities with minimum delay
    • Flotation costs: make it more expensive for companies to raise new equity capital than to use their own internally generated funds
    • Contractual and legal restrictions
      • Impairment of capital rule: dividend paid < retained earnings
      • Debt covenants: a response to the agency problems that exist between shareholders and bondholders
    • Tax considerations: effective tax rate depends on taxation systems
      • Double taxation system: Corporate earnings are taxed at the corporate level and then taxed again at the shareholder level if they are distributed to taxable shareholders as dividends
      • Dividend imputation tax system
        • Corporate profits distributed as dividends are taxed just once at the shareholder's tax rate
        • Effective tax rate = shareholder's marginal tax rate
        • When earnings that have been taxed at the corporate level are distributed to shareholders in the form of dividends, shareholders receive a tax credit,known as a franking credit
        • If the shareholder's marginal tax rate is higher than the company's, the shareholder pays the difference between the two rates
      • Split-rate tax system
        • Corporate earnings that are distributed as dividends are taxed at a lower rate at the corporate level than earnings that are retained
        • At the individual level, dividends are taxed as ordinary income. Earnings as dividends are still taxed twice, but the relatively low corporate tax rate on earnings mitigates that penalty
    • Shareholder preference for current income vs. capital gains
      • All else equal, the lower an investor's T(D) relative to T(CG), the stronger preference for dividends
      • Other issues impinge on this preference
        • T(CG) do not have to be paid until the shares are sold, whereas T(D) must be paid in the year received even if reinvested
        • In some countries, shares are held at the time of death benefit from a step-up valuation ortax exemption as of the death date
        • Tax-exempt institutions (e.g. pension funds and endowment funds) are major shareholders in most industrial countries and are exempt from both T(D) and T(CG)
  • Types of dividend policies
    • Stable dividend policy (most common)
      • Not reflect short-term volatility in earnings
      • Target payout adjustment model
        • The expected increase in dividends = (Expected earnings * target payout ratio – previous dividend) * adjustment factor
        • Target payout ratio: the proportion of earnings that the company intends to distribute (pay out) to shareholders as dividends over the long term
        • Adjustment factor: divided by the number of years over which the adjustment in dividends should take place
    • Constant dividend payout ratio policy (seldom used)
      • A higher degree short-term volatility in earnings and/or in investment opportunities
      • Involves more uncertainty
    • Global trends in payout policies
      • The fraction of companies paying cash dividends has been in long-term decline in most developed markets
      • The fraction of companies engaging in share repurchases has trended upward
      • There has been a negative relationship between dividend initiations/increases and enhanced corporate governance and transparency
  • Share repurchase
    • Shares that have been issued and subsequently repurchased are classified as
      • Treasury shares: may be reissued
      • Canceled shares: will be retired
      • not then considered for dividends, voting, or computing earnings per share
    • Share repurchase methods
      • Buy in the open market: the most common; maximum flexibility
      • Buy back a fixed number of shares at fixed price (tender offer)
        • Fixed price; repurchase a specific number of shares at a fixed price; at a premium to the current market price
        • Set a fixed date and a fixed price tender offer can be accomplished quickly
      • Dutch auction
        • The company stipulates a range of acceptable prices
        • Uncovers the minimum price at which the company can buy back the desired number of shares with the company paying that price to all qualifying bids
      • Repurchase by direct negotiation
    • The impact on financial statements and ratios
      • Using the company's surplus cash (internal financing)
        • Balance sheet
          • Both asset and equity decrease
          • Leverage ratio (D/E) increases
        • Income statement: A repurchase increases EPS only if the funds used for the repurchase would not earn their cost of capital if retained by the company
      • Using debt to finance the repurchase (external financing)
        • Balance sheet
          • Asset constant, debt increases and equity decreases
          • Leverage (D/E) increases even more
        • Income statement
          • Earnings yield<after-tax cost of financing the repurchase, EPS decreases
          • Earnings yield>after-tax cost of financing the repurchase, EPS increases
          • Earnings yield=after-tax cost of financing the repurchase, EPS constant
      • The effect of a share repurchase on book value per share(BVPS)
        • BVPS > market price (repurchase price), BVPS increases
        • BVPS < market price (repurchase price), BVPS decreases
        • BVPS = market price (repurchase price), BVPS constant
    • Share repurchases vs. cash dividends
      • Share repurchases are equivalent to cash dividends of equal amount in their effect on shareholders' wealth
      • Share repurchases usually subject to more restrictions
      • Share repurchases may not commit the company to follow through with repurchasing shares
      • Share repurchases in general do not distribute cash in a proportionate manner
    • Rationales for share repurchases
      • Potential tax advantages.
      • Share price support/signaling that the company considers its shares a good investment
      • Added managerial flexibility
      • Offsetting dilution from employee stock options
      • Increasing financial leverage
  • Analysis of dividend safety
    • Calculation of dividend coverage ratio
      • Net income method: Dividend coverage ratio = net income/dividend paid
      • Free cash flow method: FCFE coverage ratio = FCFE/(dividends + share repurchases)
    • Scenarios that may raise concerns about dividend safety
      • Companies that support their dividends and repurchases by reducing productive capital spending, by adding net debt or by some combination of the two
      • Extremely high dividend yields in comparison with a company's past record and forward-looking earnings
• Environmental, Social, and Governance (ESG) Considerations in Investment Analysis
  • Global Variations in Ownership Structures
    • Environmental, social, and governance (ESG)
    • Ownership structures
      • Dispersed vs. Concentrated ownership
        • Dispersed ownership: many shareholders, none of which has the ability to individually exercise control over the corporation
        • Concentrated ownership: reflects an individual shareholder or a group (called controlling shareholders) with the ability to exercise control over the corporation
        • Dual-class shares: grant one share class superior or sole voting rights, whereas the other share class inferior or no voting rights
      • Horizontal vs. vertical ownership
        • Horizontal ownership: involves companies with mutual business interests that have cross-holding share arrangements with each other
        • Vertical ownership (pyramid ownership): involves a company or a group that has a controlling interest in two or more holding companies, which results in controlling interest in the target company
    • Conflicts within different ownership structures
      • Principal-agent problem: The combination of dispersed ownership and dispersed voting power vs. managers
      • Principal-principal problem
        • The combination of concentrated ownership and concentrated voting power vs. managers + minority shareholders
        • The combination of dispersed ownership and concentrated voting power
      • The combination of concentrated ownership and dispersed voting power arises with voting caps
    • Types of influential shareholders
      • Banks
      • Families
      • State-Owned Enterprises (SOEs)
      • Institutional Investors
      • Group Companies
      • Private Equity Firms
      • Foreign Investors
      • Managers and Board Directors
  • Evaluating Corporate Governance Policies and Procedures
    • Effective corporate governance is critical for a company's reputation and competitiveness
    • Shareholder activism: shareholders attempt to compel a company to act in a desired manner
    • Board policies and practices
      • Board of Directors Structure
      • Board Independence
      • Board Committees
      • Board Skills and Experience
      • Board Composition
      • Other Considerations in Board Evaluation
    • Executive remuneration
      • Transparency of compensation
      • Performance criteria for incentive plans (both short term and long term)
      • The linkage of remuneration with the Company strategy
      • Pay differential between the CEO and the average worker
    • Shareholder voting rights
  • Identifying and Evaluating ESG-related Risks and Opportunities
    • Materiality and investment horizon
    • Approaches to identify ESG factors
      • Proprietary methods
      • Ratings and analysis from ESG data providers
      • Not-for-profit industry initiatives and sustainability reporting frameworks
    • ESG integration
• Cost of Capital: Advanced Topics
  • Cost of Capital Factors
    • Weighted average cost of capital (WACC)
      • 公式
      • Determining WACC is challenging
        • There is no single, "right" methodto calculate the costs of each source of capital
        • Assumptions are needed regarding long-term target capital structure, which might not be the current capital structure
        • The company's marginal tax rate must be estimated and might be different than its average or effective tax rate
    • Cost of Capital
      • • ERP(equity risk premium): a market risk premium for bearing systematic risk
        • IRP (idiosyncratic risk premium): a company-specific risk premium
    • Factors influencing a company's cost of capital
      • Top-Down, External
        • Capital Availability
          • Greater capital availability typically leads to more favorable terms for corporate issuers and lower associated costs of capital
          • Lower perceived risk translates into lower credit spreads, ERPs, and costs of capital for companies in more mature economies
          • In less developed capital markets, a lack of corporate debt markets could require companies to rely on other means for funding, such as bank loans or the shadow banking system
        • Market Conditions
          • Lower interest rates and tighter credit spreads (during expansionary times), decrease costs of debt and equity capital
          • Higher relative rates of inflation increase the cost of capital for companies
          • In countries with greater exchange rate volatility , companies have higher costs of capital
        • Legal and Regulatory Considerations, Country Risk
          • Investors in environments offering greater investor protections typically demand lower credit spreads and ERPs, leading to lower costs of capital for corporate issuers
          • Regulatory policies and guidelines set by government or other related entities
        • Tax Jurisdiction: The higher a company's marginal income tax rate, the greater the tax benefit associated with using debt in the capital structure
      • Bottom-Up, Company Specific
        • Revenue, Earnings and Cash Flow Volatility
        • Asset Nature and Liquidity
        • Financial Strength, Profitability, and Financial Leverage
        • Security Features
  • Estimating the Cost of Debt
    • Factors affecting methods of estimating the cost of debt
      • Type of debt
        • Traded Debt (YTM)
        • Non-Traded Debt
          • If credit ratings exist, apply matrix pricing to estimate a YTM
          • If no credit rating exists, first estimates a bond's rating class; then matrix pricing
        • Bank debt
          • Amortizing loans typically have a lower cost of debt
        • If a company has recently taken on new bank debt, the interest rate on that loan could be a good estimate of the company's cost of debt
        • Leases
          • The present value of the residual value and the lessor's direct initial costs are often not known to the lessee (company) or analyst
            • The incremental borrowing rate (IBR)
              • If this rate is not known, the analyst might use the non-traded debt estimation method
      • Debt liquidity
      • Credit rating
      • Debt currency
    • International Considerations: country risk rating (CRR)
      • 定义: A CRR is a rating applied to a country based on the assessment of risk pertaining to that country, in areas such as economic conditions, political risk, exchange rate risk, and securities market development and regulation
      • 处理: By comparing the median interest rate with the benchmark country's rate, the country risk premium can be derived
  • The equity risk premium (ERP)
    • Historical Approach
      • 公式: historical ERP= a broad-based equity market index return -government debt return
      • Analyst's assumptions
        • Returns are stationary
        • Markets are relatively efficient
      • Decisions in the development of a historical ERP
        • Equity Index Selection: Broad-based, market-value weighted indexes are typically chosen (e.g., S&P 500 Index, Russell 3000 Index)
        • Time Period: trade-off
        • Selection of the Mean Type
        • Selection of the Risk-Free Rate Proxy
      • Limitations
        • ERPs can vary over time so estimates based on a long time series of historical data are not representative of the future ERP
        • Survivorship bias
    • Forward-looking Approach
      • Survey-based estimates
        • 方法: gauge expectations by asking people what they expect
        • Limitations: these estimates tend to be sensitive to recent market returns
      • Dividend discount models
        • Gordon growth model(GGM)
        • GGM ERP (assumes growth rate is constant)
          • 公式: GGM ERP= Dividend yield on the index based on year-ahead aggregate forecasted dividends and aggregate market value +Consensus long-term earnings growth rate -Long term government bond yield
          • For rapid growing economies, an analyst might assume multiple earnings growth stages
            • A fast growth stage
            • A transition growth stage
            • A mature growth stage
        • Assumption: the growth rate of earnings, dividends, and prices will grow at the same rate, resulting in a constant P/E
          • P/E increases (or decreases) can result from an increase (or decrease) in the earnings growth rate or a decrease (or increase) in risk
      • Macroeconomic modeling (Grinold-Kroner model)
        • 替代计算（选择长期预测数据）
      • Limitations
  • The Cost of Equity (Required Return on Equity)
    • Public companies
      • DDMs
      • the bond yield plus risk premium build-up method
        • re=rd+RP
        • Advantages: Estimating a company's cost of debt provides a starting point estimate of the return demanded by that company's debt investors
        • Disadvantages
          • Determination of RP is relatively arbitrary
          • Approach requires company to have traded debt
          • If the company has multiple traded debt securities, each with different features, there is no prescription regarding which bond yield to select
            • Common practice: use the company's long term bond YTM
      • risk-based models
        • re = Compensation for the time value of money + Compensation for bearing risk
        • 类型
          • CAPM
            • β is a measure of the sensitivity of the company stock's returns to changes in the ERP
            • market model: estimate βi
          • Fama–French Models
            • Required return of stock j = rf + β1ERP + β2SMB + β3HML
            • The five-factor Fama–French model
              • re = rf + β1ERP + β2SMB + β3HML + β4RMW + β5CMA
              • RMW: profitability premium, equal to the average difference in equity returns between companies with robust and weak profitability
              • CMA: investment premium, equal to the average difference in equity returns between companies with conservative and aggressive investment portfolios
        • Summary
          • The use of risk-based models is similar
            • Historical returns are used to estimate the relationship between a company's stock's excess returns and these factors
            • Slope coefficients from the estimated regression, along with expectations for the factor risk premiums and the risk-free rate, are used to calculate an estimate of the company's required return on equity
          • Analyst's considerations
            • Estimates from the different risk factor models often yield different results
            • The beta coefficient on the market factor (ERP) normally differs between the single factor CAPM and multifactor models
            • The use of a short-term risk-free rate when computing excess returns to estimate the factor betas in these risk-based models can result in the understatement of the risk-free rate
    • Private companies
      • The required return on equity for private companies
        • A size premium (SP)
        • An industry risk premium (IP)
        • A specific-company risk premium (SCRP)
      • Two choices to estimate the required return on equity
        • Expanded CAPM
          • 公式
          • 注意事项
            • β: a peer group of publicly traded companies in the same industry
            • Determine whether additional risk premia for company size and other company-specific risk factors are warranted. If warranted, add relevant size and company-specific risk premium
        • Build-up approach
          • 公式
          • 各部分关系
    • International considerations
      • Extended CAPM
        • Global CAPM
          • A global market index is the single factor, there are no assumed significant risk differences across countries
          • Expanding this model to include a second factor, such as domestic market index returns, mitigates this to a degree but depends on the availability of reliable financial data in the emerging market
        • International CAPM
        • Country spread and risk rating models
          • ERP = ERP for a development market + (λ × Country risk premium)
            • λ is the level of exposure of the company to the local country
            • Country risk premium= the yield on emerging market bonds - the yield on developed market government bonds (sovereign yield spread)
      • Comparison of International Adjustment Methods
        • If the company's operations are global, but limited to developed countries, the GCAPM and ICAPM are reasonable methods to apply
        • If however, the company's operations extend to developing countries, the estimation of the CRP using the sovereign yield approach might be appropriate, but these estimations are based on historical rates and might not reflect the risk premium going forward
• Corporate Restructuring
  • Corporate Evolution, Actions, and Motivations
    • Corporate issuers change over time
      • Evolutionary: launching new products and expanding capacity
      • Revolutionary: changes to the legal and accounting structure of the issuer (e.g.,acquisitions, divestitures and spin offs)
    • Corporate Life Cycle and Actions
    • Types of corporate restructurings
      • Investment
        • Equity investment: a company purchasing a material stake in another company's equity but less than 50% of its shares
        • Joint venture: two or more companies form and jointly control a new, separate company to achieve a business objective
        • Acquisition: one company (the acquirer) purchases most or all of another company's (the target), shares to gain control of either an entire company, a segment of the other company, or a specific group of assets
      • Divestment
        • 原因: Conglomerate discount——An issuer trading at a valuation lower than the sum of its parts
        • 类型
          • Sale
          • Spin off: a company separates a distinct part of its business into a new, independent company
      • Restructuring
        • Opportunistic improvement
        • Forced improvements
      • Leveraged Buyouts
    • Motivations for Corporate Structural Change
      • 特点: all types of changes have been found to be pro-cyclical
  • Evaluating Corporate Restructurings
    • 过程
    • Initial Evaluation
      • What is happening and why: involves reading the issuer's press release, securities filings, conference call transcripts, and relevant third-party research
      • Materiality
        • Size
          • For restructuring involving a transaction: the value of the transaction relative to the issuer's enterprise value (EV) (>10%)
          • For restructurings not involving a transaction, it is the scale of the intended action that is material
        • Fit: how the change fits in with earlier actions, previously announced strategies, and the analyst's own expectations for the issuer
      • Time
    • Preliminary Valuation
      • Comparable company analysis
        • 方法
          • Uses the valuation multiples of similar, listed companies to value a target
          • Common multiples used include enterprise value to EBITDA or sales, price to earnings, (less commonly) enterprise value to free cash flow to the firm
          • It is more often employed for assessing the valuation of targets in spin offs than for acquisitions or sales because of premium
        • 优缺点
          • Advantages
            • Reasonable approximation of a target company's value relative to similar companies in the market
            • The required data are readily available
            • The estimates of value are derived directly from the market
          • Disadvantages
            • A comparable set of listed companies can be difficult to find or may not exist
            • The method is sensitive to market mispricing
            • To estimate a fair takeover price, analysts must add an estimated takeover premium
      • Comparable transaction analysis
        • 方法: Analysts use valuation multiples from historical acquisitions of similar targets
        • 优缺点
          • Advantages
            • The value estimates come from actual transaction prices for similar targets
            • It is not necessary to separately estimate a takeover premium because it is embedded in the comparable transaction multiples
          • Disadvantages
            • The market for corporate control is illiquid
            • Historical valuation multiples reflect not only historical industry conditions, but also historical macroeconomic conditions that can significantly influence transaction multiples
            • There is a risk that past acquirers over-or underpaid
      • Premium paid analysis
        • Takeover premium (PRM)=(DP-SP)/SP
        • The meanings
          • DP = deal price per share of the target
          • SP = unaffected stock price of the target
  • Modeling and Valuation
    • Pro forma financial statements
      • 过程
      • Pro Forma Income Statement (Acquisition) Modeling
    • Pro Forma Weighted Average Cost of Capital