B. Corporate Finance

Financial risk and return
a. Calculating return
b. Types of financial risk
c. Relationship between risk and return
Long-term financial management
a. Term structure of interest rates
b. Types of financial instruments
c. Cost of capital
d. Valuation of financial instruments
Raising capital
a. Financial markets
b. Financial institutions
c. Initial and secondary public offerings
d. Dividend policy and share repurchases
e. Lease financing
f. Debt financing
Working capital management
a. Net working capital
b. Cash management
c. Marketable securities management
d. Accounts receivable management
e. Inventory management
f. Types of short-term credit
g. Short-term credit management
Corporate restructuring
a. Mergers and acquisitions
b. Other forms of restructuring
International finance
a. Fixed, flexible, and floating exchange rates
b. Managing transaction exposure
c. Financing international trade

Part 2 – Section B.1. Financial risk and return

The candidate should be able to:

a. calculate rates of return
b. identify and demonstrate an understanding of systematic (market) risk and unsystematic (company) risk
c. identify and demonstrate an understanding of credit risk, foreign exchange risk, interest rate risk, and market risk
d. demonstrate an understanding of the relationship between risk and return
e. distinguish between individual security risk and portfolio risk
f. demonstrate an understanding of diversification
g. define beta and explain how a change in beta impacts a security’s price
h. demonstrate an understanding of the Capital Asset Pricing Model (CAPM) and calculate the expected risk-adjusted returns using CAPM

Part 2 – Section B.2. Long-term financial management

The candidate should be able to:

a. describe the term structure of interest rates and explain why it changes over time
b. define and identify the characteristics of common stock and preferred stock
c. identify and describe the basic features of a bond such as maturity, par value, coupon rate, redemption provisions, conversion provisions, covenants, options granted to the issuer or investor, indentures, and restrictions
d. identify and evaluate debt issuance or refinancing strategies
e. value bonds, common stock, and preferred stock using discounted cash flow methods
f. demonstrate an understanding of duration as a measure of bond interest rate sensitivity
g. explain how income taxes impact financing decisions
h. define and demonstrate an understanding of derivatives and their uses
i. identify and describe the basic features of futures and forwards
j. distinguish a long position from a short position
k. define options, and distinguish between a call and a put by identifying the characteristics of each
l. define strike price (exercise price), option premium, and intrinsic value
m. demonstrate an understanding of the interrelationship of the variables that comprise the value of an option (e.g., relationship between exercise price and strike price, and value of a call)
n. define interest rate and foreign currency swaps
o. define and identify characteristics of other sources of long-term financing, such as leases, convertible securities, and warrants
p. demonstrate an understanding of the relationship among inflation, interest rates, and the prices of financial instruments
q. define the cost of capital and demonstrate an understanding of its applications in capital structure decisions
r. determine weighted average cost of capital (WACC) and the cost of its individual components
s. calculate the marginal cost of capital
t. explain the importance of using marginal cost as opposed to historical cost
u. demonstrate an understanding of the use of the cost of capital in capital investment decisions
v. demonstrate an understanding of how income taxes impact capital structure and capital investment decisions
w. use the constant growth dividend discount model to value stock and demonstrate an understanding of the two-stage dividend discount model
x. demonstrate an understanding of relative or comparable valuation methods, such as price/earnings (P/E) ratios, market/book ratios, and price/sales ratios

Part 2 – Section B.3. Raising capital

The candidate should be able to:

a. identify the characteristics of the different types of financial markets and exchanges
b. demonstrate an understanding of the concept of market efficiency, including the strong form, semi-strong form, and weak form of market efficiency
c. describe the role of the credit rating agencies
d. demonstrate an understanding of the roles of investment banks, including underwriting, advice, and trading
e. define IPOs
f. define subsequent/secondary offerings
g. describe lease financing, explain its advantages and disadvantages, and calculate the net advantage to leasing using discounted cash flow concepts
h. define the different types of dividends, including cash dividends, stock dividends, and stock splits
i. identify and discuss the factors that influence the dividend policy of a company
j. demonstrate an understanding of the dividend payment process for both common and preferred stock
k. define share repurchase and explain why a company would repurchase its stock
l. define insider trading and explain why it is illegal
m. identify the advantages and disadvantages of debt financing vs. equity financing

Part 2 – Section B.4. Working capital management

The candidate should be able to:

Working capital

a. define working capital and identify its components
b. calculate net working capital
c. explain the benefit of short-term financial forecasts in the management of working capital

Cash

d. identify and describe factors influencing the levels of cash
e. identify and explain the three motives for holding cash
f. prepare forecasts of future cash flows
g. identify methods of speeding up cash collections
h. calculate the net benefit of a lockbox system
i. define concentration banking
j. demonstrate an understanding of compensating balances
k. identify methods of slowing down disbursements
l. demonstrate an understanding of disbursement float and overdraft systems

Marketable securities

m. identify and describe reasons for holding marketable securities
n. define the different types of marketable securities, including money market instruments, T-bills, treasury notes, treasury bonds, repurchase agreements, federal agency securities, banker’s acceptances, commercial paper, negotiable CDs, Eurodollar CDs, and other marketable securities
o. evaluate the trade-offs among the variables in marketable security selections, including safety, marketability/liquidity, yield, maturity, and taxability
p. demonstrate an understanding of the risk and return trade-off

Accounts receivable

q. identify the factors influencing the level of receivables
r. demonstrate an understanding of the impact of changes in credit terms or collection policies on accounts receivable, working capital, and sales volume
s. define default risk
t. identify and explain the factors involved in determining an optimal credit policy

Inventory

u. define lead time and safety stock, and identify reasons for carrying inventory and the factors influencing its level
v. identify and calculate the costs related to inventory, including carrying costs, ordering costs, and shortage (stockout) costs
w. explain how a just-in-time (JIT) inventory management system helps manage inventory
x. identify the interaction between high inventory turnover and high gross margin (calculation not required)
y. demonstrate an understanding of economic order quantity (EOQ) and how a change in one variable would affect the EOQ (calculation not required)

Short-term credit and working capital cost management

z. demonstrate an understanding of how risk affects a company’s approach to its current asset financing policy (aggressive, conservative, etc.)
aa. identify and describe the different types of short-term credit, including trade credit, short-term bank loans, commercial paper, lines of credit, banker’s acceptances, and letters of credit
bb. estimate the annual cost and effective annual interest rate of not taking a cash discount
cc. calculate the effective annual interest rate of a bank loan with a compensating balance requirement and/or a commitment fee
dd. demonstrate an understanding of factoring accounts receivable and calculate the cost of factoring
ee. explain the maturity matching or hedging approach to financing
ff. demonstrate an understanding of the factors involved in managing the costs of working capital

General

gg. recommend a strategy for managing current assets that would fulfill a given objective

Part 2 – Section B.5. Corporate restructuring

The candidate should be able to:

a. demonstrate an understanding of the following:
- 1. mergers and acquisitions, including horizontal, vertical, and conglomerate
  1. leveraged buyouts
b. identify and describe defenses against takeovers (e.g., golden parachute, leveraged recapitalization, poison pill (shareholders’ rights plan), staggered Board of Directors, fair price, voting rights plan, white knight)
c. identify and describe divestiture concepts such as spin-offs, split-ups, equity carve-outs, and tracking stock
d. evaluate key factors in a company’s financial situation and determine if a restructuring would be beneficial to shareholders
e. identify possible synergies in targeted mergers and acquisitions
f. value a business, a business segment, and a business combination using the discounted cash flow method
g. evaluate a proposed business combination and make a recommendation based on both quantitative and qualitative considerations

Part 2 – Section B.6. International finance

The candidate should be able to:

a. demonstrate an understanding of foreign currencies and how foreign currency affects the prices of goods and services
b. identify the variables that affect exchange rates
c. calculate whether a currency has depreciated or appreciated against another currency over time and evaluate the impact of the change
d. demonstrate how currency futures, currency swaps, and currency options can be used to manage exchange rate risk
e. calculate the net profit/loss of cross-border transactions and evaluate the impact of this net profit/loss
f. recommend methods of managing exchange rate risk and calculate the net profit/loss of the recommended methods
g. identify and explain the benefits of international diversification
h. identify and explain common trade financing methods, including cross-border factoring, letters of credit, banker’s acceptances, forfaiting, and countertrade