- Chapter 1 - 5
- 1. Ethics and Standards
- 1.1 Introduction
- 1.2 Code of Ethics
- 1.3 The Standards of Professional Conduct
- 1.4 Standard I-A: Knowledge of the Law
- 1.5 Standard I-B: Independence And Objectivity
- 1.6 Standard I-C: Misrepresentation
- 1.7 Standard I-D: Misconduct
- 1.8 Standard II-A: Material Nonpublic Information
- 1.9 Standard II-B: Market Manipulation
- 1.10 Standard III-A: Loyalty, Prudence And Care
- 1.11 Standard III-B: Fair Dealing
- 1.12 Standard: III-C: Suitability
- 1.13 Standard III-D: Performance Presentation
- 1.14 Standard III-E: Preservation Of Confidentiality
- 1.15 Standard IV: Duties to Employers, Standard IV-A: Loyalty
- 1.16 Standard IV-B: Additional Compensation Arrangements
- 1.17 Standard IV-C: Responsibilities Of Supervisors
- 1.18 Standard V-A: Diligence And Reasonable Basis
- 1.19 Standard V-B: Communication With Clients And Prospective Clients
- 1.20 Standard V-C: Record Retention
- 1.21 Standard VI-A: Disclosure Of Conflicts
- 1.22 Standard VI-B: Priority Of Transaction
- 1.23 Standard VI-C: Referral Fees
- 1.24 Standard VII: CFA Responsibilities
- 1.25 Disciplining CFA Members
- 1.26 Global Investment Performance Standards (GIPS)
- 1.27 GIPS: Composites And Verification
- 1.28 GIPS: Key Characteristics
- 1.29 GIPS: Disclosure And Scope
- 1.30 GIPS: Requirements And Recommendations
- 1.31 GIPS: Fundamentals Of Compliance And Conclusion
- 2. Quantitative Methods
- 2.1 Introduction
- 2.2 What Is The Time Value Of Money?
- 2.3 The Five Components Of Interest Rates
- 2.4 Time Value Of Money Calculations
- 2.5 Time Value Of Money Applications
- 2.6 Net Present Value and the Internal Rate of Return
- 2.7 Money Vs. Time-Weighted Return
- 2.8 Calculating Yield
- 2.9 Statistical Concepts And Market Returns
- 2.10 Basic Statistical Calculations
- 2.11 Standard Deviation And Variance
- 2.12 Skew And Kurtosis
- 2.13 Basic Probability Concepts
- 2.14 Joint Probability
- 2.15 Advanced Probability Concepts
- 2.16 Common Probability Distributions
- 2.17 Common Probability Distribution Calculations
- 2.18 Common Probability Distribution Properties
- 2.19 Confidence Intervals
- 2.20 Discrete and Continuous Compounding
- 2.21 Sampling and Estimation
- 2.22 Sampling Considerations
- 2.23 Calculating Confidence Intervals
- 2.24 Hypothesis Testing
- 2.25 Interpreting Statistical Results
- 2.26 Correlation and Regression
- 2.27 Regression Analysis
- 3. Microeconomics
- 3.1 Introduction
- 3.2 Supply and Demand
- 3.3 Price Elasticity
- 3.4 Elasticity of Demand
- 3.5 Elasticity of Supply
- 3.6 Marginal Benefit and Marginal Cost
- 3.7 Market Efficiency
- 3.8 Price Ceilings and Floors
- 3.9 Effect of Taxes on Supply and Demand
- 3.10 Opportunity Costs
- 3.11 Achieving Economic & Technological Efficiency
- 3.12 Types of Markets & Concentration Measures
- 3.13 Modifying Output
- 3.14 Marginal and Average Total Cost Curves
- 3.15 Perfectly Competitive Markets
- 3.16 Effects on Equilibrium in the Short and Long Run
- 3.17 Characteristics of Monopolies
- 3.18 Inefficiencies of Monopolies
- 3.19 Monopolistic Competition
- 3.20 Oligopolies
- 3.21 Conclusion
- 4. Macroeconomics
- 4.1 Introduction
- 4.2 Gross Domestic Product (GDP)
- 4.3 Nominal vs. Real GDP, and the GDP Deflator
- 4.4 Limitations of GDP and Alternative Measures
- 4.5 Components of Marginal Product and Marginal Revenue
- 4.6 The Demand and Supply of Financial and Physical Capital
- 4.7 Economic Rent and Opportunity Cost
- 4.8 Monitoring Cycles, Jobs, and Price Level
- 4.9 Key Labor Market Indicators
- 4.10 Types of Unemployment
- 4.11 The Consumer Price Index & Inflation
- 4.12 Aggregate Supply & Aggregate Demand
- 4.13 Short and Long-run Macroeconomic Equilibrium
- 4.14 Economic Theories
- 4.15 Money, Banks, and the Federal Reserve
- 4.16 The Banking System
- 4.17 Goals and Targets of the U.S. Federal Reserve
- 4.18 Money, Interest, Real GDP, and the Price Level
- 4.19 The Equation of Exchange
- 4.20 Inflation
- 4.21 Phillips Curve
- 4.22 Fiscal Policy Basics
- 4.23 Effects of Fiscal Policy
- 4.24 The Multiplier Effect
- 4.25 Discretionary Fiscal Policy and Automatic Stabilizers
- 4.26 Monetary Policy and Price Level Stability
- 4.27 Expectations of Monetary Policy
- 5. Global Economic Analysis
- 5.1 Introduction
- 5.2 Production Possibility Curves
- 5.3 Trade Efficiency Rule
- 5.4 Terms of Trade
- 5.5 Tariffs and Quotas
- 5.6 Trade Restrictions
- 5.7 International Finance
- 5.8 Purchasing Power Parity and Interest Rate Parity
- 5.9 Foreign Exchange
- 5.10 Spread Calculations
- 5.11 Spot Market Calculations
- 5.12 Forward Market Calculations
- 5.13 Interest Applications
- 5.14 Foreign Exchange Parity Relations
- 5.15 Currency Appreciation and Depreciation
- 5.16 Effect of Monetary Policy
- 5.17 Fixed vs. Pegged Exchange Rate Systems
- 5.18 Absolute and Relative Purchasing Power Parity
- 5.19 Relative Purchasing Power Parity
- 1. Ethics and Standards
- Chapter 6 - 10
- 6. Financial Statements
- 6.1 Introduction
- 6.2 Financial Statement Analysis
- 6.3 Accounting Process
- 6.4 Income Statement Basics
- 6.5 Income Statement Components
- 6.6 Income Statement: Non-recurring Items
- 6.7 Balance Sheet Basics
- 6.8 Balance Sheet Components - Assets
- 6.9 Balance Sheet Components - Liabilities
- 6.10 Balance Sheet Components - Marketable & Nonmarketable Instruments
- 6.11 Shareholders' (Stockholders') Equity Basics
- 6.12 Components of Stockholders' Equity
- 6.13 Accounting for Dividends
- 6.14 Accounting for Equities
- 6.15 Revenue Recognition
- 6.16 Revenue Recognition Methods and Implications
- 6.17 Revenue Recognition and Accounting Entries
- 6.18 Revenue Recognition Effects on Cash Flows and Financial Ratios
- 6.19 The Cash Flow Statement
- 6.20 Cash Flow Statement Basics
- 6.21 Cash Flow Computations - Indirect Method
- 6.22 Cash Flow Computations - Direct Method
- 6.23 Free Cash Flow
- 6.24 Management Discussion and Analysis & Financial Statement Footnotes
- 6.25 The Auditor and Audit Opinion
- 6.26 Financial Reporting Objectives and Enforcement
- 6.27 Accounting Qualities
- 6.28 Setting and Enforcing Global Accounting Standards
- 7. Financial Ratios
- 7.1 Introduction
- 7.2 Internal Liquidity Ratios
- 7.3 Operating Profitability Ratios
- 7.4 Return on Investment Ratios
- 7.5 Operating Efficiency Ratios
- 7.6 Business Risk Ratios
- 7.7 Financial Risk Ratios
- 7.8 Growth Potential Ratios
- 7.9 Return on Equity and the Dupont System
- 7.10 Uses and Limitations of Financial Ratios
- 7.11 Basic Earnings Per Share
- 7.12 Dilutive Effect of Splits and Dividends
- 7.13 Dilutive Securities
- 7.14 Calculating Basic and Fully Diluted EPS in a Complex Capital Structure
- 8. Assets
- 8.1 Introduction
- 8.2 Choosing the Appropriate Accounting Method For Investment Securities
- 8.3 Accounting for Credit Transactions
- 8.4 Basics of Inventories
- 8.5 Effects of Misstated Inventory
- 8.6 Inventory Valuation
- 8.7 Inventory Analysis
- 8.8 Converting LIFO to FIFO
- 8.9 Converting FIFO to LIFO
- 8.10 Effects of Inventory Accounting
- 8.11 Causes a Decline in LIFO Reserve
- 8.12 Long Term Asset Basics
- 8.13 Depreciation Accounting
- 8.14 Accelerated Depreciation
- 8.15 Natural Resource Assets
- 8.16 Effects of Capitalizing vs.Expensing
- 8.17 Computing the Effect of Capitalizing vs. Expensing
- 8.18 Capitalizing Intangible Assets
- 8.19 Depreciation
- 8.20 Fixed Asset Disclosures
- 8.21 Asset Impairment
- 9. Liabilities
- 9.1 Introduction
- 9.2 Current Liability Basics
- 9.3 Income Tax Terminology
- 9.4 Tax Deferred Liabilities
- 9.5 Permanent Vs. Temporary Items
- 9.6 Adjustments To Financial Statements From Tax Rate Changes
- 9.7 Long-Term Liability Basics
- 9.8 Journal Entries and Accounting Impact
- 9.9 Total Interest Cost Components
- 9.10 Reporting The Retirement Or Conversion of Bonds
- 9.11 Accounting For Long-Term Liabilities
- 9.12 Post-Retirement Obligations
- 9.13 Effects Of Debt Issuance
- 9.14 Implications Of Debt Issuance
- 9.15 Effect Of Changing Interest Rate On Debt Market Value
- 9.16 Capital And Operating Leases
- 9.17 Effects Of Capital Vs. Operating Leases
- 9.18 Determining The Value Of The Lease And The Lease Asset
- 9.19 Sale And Leaseback
- 9.20 Types Of Off-Balance-Sheet Financing
- 9.21 Effects Of Off-Balance Sheet Financing Transactions On Financial Ratios
- 9.22 Accounting For Leases
- 10. Red Flags
- 6. Financial Statements
- Chapter 11 - 15
- 11. Corporate Finance
- 11.1 Introduction
- 11.2 Agent-Principle Relationship
- 11.3 Capital Budgeting Basics
- 11.4 The Cost of Capital
- 11.5 Cost of Retained Earnings
- 11.6 Cost of Newly Issued Stock
- 11.7 Target Capital Structure
- 11.8 Marginal Cost of Capital
- 11.9 Factors Affecting the Cost of Capital
- 11.10 Payback Period
- 11.11 Net Present Value (NPV) and the Internal Rate of Return (IRR)
- 11.12 The NPV Profile
- 11.13 Cash Flow and NPV Applications
- 11.14 Advantages and Disadvantages of the NPV and IRR Methods
- 11.15 Applying NPV Analysis to Project Decisions
- 11.16 Comparing Projects With Unequal Lives
- 11.17 Types of Risk
- 11.18 Risk-Analysis Techniques
- 11.19 Security Market Line and Beta Basics
- 11.20 Factors that Influence a Company's Capital-Structure Decision
- 11.21 Business and Financial Risk
- 11.22 Operating Leverage and its Effects on a Project's Expected Rate of Return
- 11.23 Financial Leverage
- 11.24 Sales and Leverage
- 11.25 Effects of Debt on the Capital Structure
- 11.26 Tax and Bankruptcy Costs
- 11.27 The MM Capital Structure vs. The Tradeoff Theory of Leverage
- 11.28 Signaling Prospects Through Financing Decisions
- 11.29 Degree of Total Leverage
- 11.30 Dividend Theories
- 11.31 Dividend Growth Rate and the Effect of Changing Dividend Policy
- 11.32 Setting Dividends
- 11.33 Dividend Payment Procedures
- 11.34 Stock Dividends and Repurchases
- 12. Securities Markets
- 12.1 Introduction
- 12.2 Issuing Bonds
- 12.3 Types of Markets
- 12.4 Exchange Market Structure
- 12.5 Exchange Market Characteristics
- 12.6 Short Selling
- 12.7 Buying on Margin and Maintenance Margin
- 12.8 Effects of the Institutionalization of capital markets
- 12.9 Characteristics of Security Indexes
- 12.10 Computing Indexes
- 12.11 Domestic vs. Global Indexes
- 12.12 The Efficient Market Hypothesis
- 12.13 Weak, Semi-Strong and Strong EMH
- 12.14 Market Anomalies
- 12.15 Implications of Efficient Markets
- 13. Equity Investments
- 13.1 Introduction
- 13.2 Security Valuation
- 13.3 The Dividend Discount Model (DDM)
- 13.4 DDM and the Earnings Multiplier
- 13.5 Developing Input Estimates Used in the DDM
- 13.6 Earnings Analysis
- 13.7 Determining the EPS of a Company
- 13.8 Life Cycle Analysis: The Business Cycle
- 13.9 Life Cycle Analysis: The Industry Life Cycle
- 13.10 The Concentration Ratio and the Herfindahl Index
- 13.11 Considerations of Global Industry Competition
- 13.12 Analyzing a Company - Types of Stock
- 13.13 Technical Analysis
- 13.14 Using Price Multiples
- 14. Fixed Income Investments
- 14.1 Introduction
- 14.2 Bond Features
- 14.3 Basic Coupon Structures
- 14.4 Early Retirement
- 14.5 Provisions for Redeeming Bonds
- 14.6 Refunding
- 14.7 The Importance of Embedded Options
- 14.8 Institutional Investors and Financing Purchases
- 14.9 Interest Rate Risk
- 14.10 Call and Prepayment Risk
- 14.11 Reinvestment Risk
- 14.12 Yield Curve Risk
- 14.13 Credit Risk
- 14.14 Liquidity Risk
- 14.15 Exchange-Rate Risk
- 14.16 Volatility Risk
- 14.17 Inflation Risk
- 14.18 Event Risk
- 14.19 Pricing Bonds
- 14.20 Duration
- 14.21 International Bonds
- 14.22 Government Bonds
- 14.23 Mortgage-Backed Securities (MBS)
- 14.24 Federal Issues
- 14.25 Bondholder's Rights
- 14.26 Other Types of Bonds
- 14.27 Asset-Backed Securities (ABS)
- 14.28 Yield Curves
- 14.29 The Term Structure of Interest Rates
- 14.30 Types of Yield Measures
- 14.31 Intermarket vs. Intramarket Sector Spreads
- 14.32 Options and their Benefits
- 14.33 After Tax Yield of a Taxable Security
- 14.34 London Interbank Offer Rate (LIBOR)
- 14.35 Bond Valuation Basics
- 14.36 Cash Flow
- 14.37 Bond Value and Price
- 14.38 Arbitrage-free Valuation Approach
- 14.39 Typical Yield Measures
- 14.40 Assumptions Underlying Traditional Yield Curve Measures
- 14.41 Importance of Reinvestment Income and Reinvestment Risk
- 14.42 Spot Rates and Bond Valuation
- 14.43 Differentiating Between Spreads
- 14.44 What are Forward Rates?
- 14.45 Forward Rates vs Spot Rates
- 14.46 Measuring Interest Rate Risk
- 14.47 Price Volatility
- 14.48 Effective, Modified, and Macaulay Duration
- 14.49 Convexity
- 14.50 Price Value of a Basis Point (PVBP)
- 15. Derivatives
- 15.1 Introduction
- 15.2 What is a Derivative?
- 15.3 Common Characteristics of Futures and Forwards
- 15.4 Fundamental Differences Between Futures and Forwards
- 15.5 Forward Contracts
- 15.6 Future Contracts
- 15.7 Options: Calls and Puts
- 15.8 Options: Basic Characteristics
- 15.9 Swaps
- 15.10 Purposes and Benefits of Derivatives
- 15.11 Criticisms of Derivatives
- 15.12 Arbitrage
- 15.13 Forward Markets and Contracts: Settlement Procedures
- 15.14 Terminating a Forward Contract Prior to Expiration
- 15.15 End Users and Dealers
- 15.16 Equity Forward Contracts
- 15.17 Forward Contracts on Bonds
- 15.18 Eurodollar Time Deposit Markets
- 15.19 Characteristics of Forward Rate Agreements (FRAs)
- 15.20 Currency Forward Contracts
- 15.21 Futures vs. Forwards
- 15.22 Futures Markets Margin
- 15.23 The Futures Trade Process
- 15.24 Computing the Margin Balance for a Futures Account
- 15.25 Closing and Terminating a Futures Position
- 15.26 Other Types of Derivatives
- 15.27 European vs. American Options and Moneyness
- 15.28 Exchange Traded Options
- 15.29 Interest Rate Options vs. FRAs
- 15.30 Interest Rate Caps and Floors
- 15.31 Minimum and Maximum Values for Options
- 15.32 Straddles and Strangles
- 15.33 Option Prices and the Time to Expiration
- 15.34 Put-Call Parity
- 15.35 Effect of Cash Flows on Put-Call Parity and the Lower Bounds
- 15.36 Swap Markets and Contracts
- 15.37 Currency Swaps
- 15.38 Interest Rate and Equity Swaps
- 15.39 Managing Risk with Options Strategies: Long and Short Call and Put Positions
- 15.40 Managing Risk with Options Strategies: Covered Calls and Protective Puts
- 11. Corporate Finance
- Chapter 16 - 17
- 16. Alternative Investments
- 16.1 Introduction
- 16.2 Open and closed-end funds
- 16.3 Net Asset Value
- 16.4 Fees
- 16.5 Investment Strategies
- 16.6 Exchange Traded Funds (ETFs)
- 16.7 Real Estate Investments
- 16.8 Real Estate Calculations
- 16.9 The Stages in Venture Capital Investing
- 16.10 Venture Capital Investment Characteristics and NPV
- 16.11 Hedge Fund Basics
- 16.12 Hedge Fund Classifications
- 16.13 Hedge Fund Risks and Performance
- 16.14 Fund of Funds Investing
- 16.15 Alternative Investment Valuation
- 16.16 Commodities as Alternative Investments
- 17. Portfolio Management
- 17.1 Introduction
- 17.2 Rate of Return Basics
- 17.3 The Risk Premium
- 17.4 The Security Market Line (SML)
- 17.5 The Portfolio Management Process
- 17.6 Return Objectives and Investment Constraints
- 17.7 Portfolio Management Theories
- 17.8 Portfolio Calculations
- 17.9 Capital Market Theory
- 17.10 The Capital Market Line
- 17.11 The Capital Asset Pricing Model (CAPM)
- 16. Alternative Investments
Corporate Finance - Factors Affecting the Cost of Capital
These are the factors affecting cost of capital that the company has control over:
Uncontrollable Factors Affecting the Cost of Capital
These are the factors affecting cost of capital that the company has no control over:
- Capital-structure policy
- Dividend policy
- Investment policy
- Capital Structure Policy
As we have been discussing above, a firm has control over its capital structure, targeting an optimal capital structure. As more debt is issued, the cost of debt increases, and as more equity is issued, the cost of equity increases. - Dividend Policy
Given that the firm has control over its payout ratio, the breakpoint of the MCC schedule can be changed. For example, as the payout ratio of the company increases the breakpoint between lower-cost internally generated equity and newly issued equity is lowered. - Investment Policy
It is assumed that, when making investment decisions, the company is making investments with similar degrees of risk. If a company changes its investment policy relative to its risk, both the cost of debt and cost of equity change.
Uncontrollable Factors Affecting the Cost of Capital
These are the factors affecting cost of capital that the company has no control over:
- Level of interest rates
- Tax rates
- Level of Interest Rates
The level of interest rates will affect the cost of debt and, potentially, the cost of equity. For example, when interest rates increase the cost of debt increases, which increases the cost of capital. - Tax Rates
Tax rates affect the after-tax cost of debt. As tax rates increase, the cost of debt decreases, decreasing the cost of capital.
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