Table of Contents Getting Started Flyer Table of Contents Page List Book 4: Corporate Finance, Portfolio Management, and Equity Investments Reading Assignments and Learning Outcome Statements Corporate Governance and ESG: An Introduction LOS 34.a: Describe corporate governance LOS 34.b: Describe a company's stakeholder groups and compare interests of stakeholder groups LOS 34.c: Describe principal–agent and other relationships in corporate governance and the conflicts that may arise in these relationships LOS 34.d: Describe stakeholder management LOS 34.e: Describe mechanisms to manage stakeholder relationships and mitigate associated risks LOS 34.f: Describe functions and responsibilities of a company's board of directors and its committees LOS 34.g: Describe market and non-market factors that can affect stakeholder relationships and corporate governance LOS 34.h: Identify potential risks of poor corporate governance and stakeholder management and identify benefits from effective corporate governance and stakeholder management LOS 34.i: Describe factors relevant to the analysis of corporate governance and stakeholder management 10 LOS 34.j: Describe environmental and social considerations in investment analysis 11 LOS 34.k: Describe how environmental, social, and governance factors may be used in investment analysis 12 Key Concepts LOS 34.a LOS 34.b LOS 34.c LOS 34.d LOS 34.e LOS 34.f LOS 34.g LOS 34.h LOS 34.i 10 LOS 34.j 11 LOS 34.k 13 Concept Checkers Answers – Concept Checkers Capital Budgeting LOS 35.a: Describe the capital budgeting process and distinguish among the various categories of capital projects LOS 35.b: Describe the basic principles of capital budgeting LOS 35.c: Explain how the evaluation and selection of capital projects is affected by mutually exclusive projects, project sequencing, and capital rationing LOS 35.d: Calculate and interpret net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, and profitability index (PI) of a single capital project LOS 35.e: Explain the NPV profile, compare the NPV and IRR methods when evaluating independent and mutually exclusive projects, and describe the problems associated with each of the evaluation methods LOS 35.f: Describe expected relations among an investment's NPV, company value, and share price Key Concepts LOS 35.a LOS 35.b LOS 35.c LOS 35.d LOS 35.e LOS 35.f Concept Checkers Answers – Concept Checkers Cost of Capital LOS 36.a: Calculate and interpret the weighted average cost of capital (WACC) of a company LOS 36.b: Describe how taxes affect the cost of capital from different capital sources LOS 36.c: Describe the use of target capital structure in estimating WACC and how target capital structure weights may be determined LOS 36.d: Explain how the marginal cost of capital and the investment opportunity schedule are used to determine the optimal capital budget LOS 36.e: Explain the marginal cost of capital's role in determining the net present value of a project LOS 36.f: Calculate and interpret the cost of debt capital using the yield-tomaturity approach and the debt-rating approach LOS 36.g: Calculate and interpret the cost of noncallable, nonconvertible preferred stock LOS 36.h: Calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yield-plus risk-premium approach LOS 36.i: Calculate and interpret the beta and cost of capital for a project 10 LOS 36.j: Describe uses of country risk premiums in estimating the cost of equity 11 LOS 36.k: Describe the marginal cost of capital schedule, explain why it may be upward-sloping with respect to additional capital, and calculate and interpret its break-points 12 LOS 36.l: Explain and demonstrate the correct treatment of flotation costs 13 Key Concepts LOS 36.a LOS 36.b LOS 36.c LOS 36.d LOS 36.e LOS 36.f LOS 36.g LOS 36.h LOS 36.i 10 LOS 36.j 11 LOS 36.k 12 LOS 36.l 14 Concept Checkers Answers – Concept Checkers Measures of Leverage LOS 37.a: Define and explain leverage, business risk, sales risk, operating risk, and financial risk and classify a risk LOS 37.b: Calculate and interpret the degree of operating leverage, the degree of financial leverage, and the degree of total leverage LOS 37.c: Analyze the effect of financial leverage on a company's net income and return on equity LOS 37.d: Calculate the breakeven quantity of sales and determine the company's net income at various sales levels LOS 37.e: Calculate and interpret the operating breakeven quantity of sales Key Concepts LOS 37.a LOS 37.b LOS 37.c LOS 37.d LOS 37.e Concept Checkers Answers – Concept Checkers 10 Working Capital Management LOS 38.a: Describe primary and secondary sources of liquidity and factors that influence a company's liquidity position LOS 38.b: Compare a company's liquidity measures with those of peer companies LOS 38.c: Evaluate working capital effectiveness of a company based on its operating and cash conversion cycles and compare the company's effectiveness with that of peer companies LOS 38.d: Describe how different types of cash flows affect a company's net daily cash position LOS 38.e: Calculate and interpret comparable yields on various securities, compare portfolio returns against a standard benchmark, and evaluate a company's short-term investment policy guidelines LOS 38.f: Evaluate a company's management of accounts receivable, inventory, and accounts payable over time and compared to peer companies LOS 38.g: Evaluate the choices of short-term funding available to a company and recommend a financing method Key Concepts LOS 38.a LOS 38.b LOS 38.c LOS 38.d LOS 38.e LOS 38.f LOS 38.g Concept Checkers Answers – Concept Checkers 11 Self-Test Assessment: Corporate Finance Self-Test Assessment Answers: Corporate Finance 12 Portfolio Management: An Overview LOS 39.a: Describe the portfolio approach to investing LOS 39.b: Describe types of investors and distinctive characteristics and needs of each LOS 39.c: Describe defined contribution and defined benefit pension plans LOS 39.d: Describe the steps in the portfolio management process LOS 39.e: Describe mutual funds and compare them with other pooled investment products Key Concepts LOS 39.a LOS 39.b LOS 39.c LOS 39.d LOS 39.e Concept Checkers Answers – Concept Checkers 13 Risk Management: An Introduction LOS 40.a: Define risk management LOS 40.b: Describe features of a risk management framework LOS 40.c: Define risk governance and describe elements of effective risk governance LOS 40.d: Explain how risk tolerance affects risk management LOS 40.e: Describe risk budgeting and its role in risk governance LOS 40.f: Identify financial and non-financial sources of risk and describe how they may interact LOS 40.g: Describe methods for measuring and modifying risk exposures and factors to consider in choosing among the methods Key Concepts LOS 40.a LOS 40.b LOS 40.c LOS 40.d LOS 40.e LOS 40.f LOS 40.g Concept Checkers Answers – Concept Checkers 14 Portfolio Risk and Return: Part I LOS 41.a: Calculate and interpret major return measures and describe their appropriate uses LOS 41.b: Describe characteristics of the major asset classes that investors consider in forming portfolios LOS 41.c: Calculate and interpret the mean, variance, and covariance (or correlation) of asset returns based on historical data LOS 41.d: Explain risk aversion and its implications for portfolio selection LOS 41.e: Calculate and interpret portfolio standard deviation LOS 41.f: Describe the effect on a portfolio's risk of investing in assets that are less than perfectly correlated LOS 41.g: Describe and interpret the minimum-variance and efficient frontiers of risky assets and the global minimum-variance portfolio LOS 41.h: Explain the selection of an optimal portfolio, given an investor's utility (or risk aversion) and the capital allocation line Key Concepts LOS 41.a LOS 41.b LOS 41.c LOS 41.d LOS 41.e LOS 41.f LOS 41.g LOS 41.h 10 Concept Checkers Answers – Concept Checkers 15 Portfolio Risk and Return: Part II LOS 42.a: Describe the implications of combining a risk-free asset with a portfolio of risky assets LOS 42.b: Explain the capital allocation line (CAL) and the capital market line (CML) LOS 42.c: Explain systematic and nonsystematic risk, including why an investor should not expect to receive additional return for bearing nonsystematic risk LOS 42.d: Explain return generating models (including the market model) and their uses LOS 42.e: Calculate and interpret beta LOS 42.f: Explain the capital asset pricing model (CAPM), including its assumptions, and the security market line (SML) LOS 42.g: Calculate and interpret the expected return of an asset using the CAPM LOS 42.h: Describe and demonstrate applications of the CAPM and the SML LOS 42.i: Calculate and interpret the Sharpe ratio, Treynor ratio, M2, and Jensen's alpha 10 Key Concepts LOS 42.a LOS 42.b LOS 42.c LOS 42.d LOS 42.e LOS 42.f LOS 42.g LOS 42.h LOS 42.i 11 Concept Checkers Answers – Concept Checkers 16 Basics of Portfolio Planning and Construction LOS 43.a: Describe the reasons for a written investment policy statement (IPS) LOS 43.b: Describe the major components of an IPS LOS 43.c: Describe risk and return objectives and how they may be developed for a client LOS 43.d: Distinguish between the willingness and the ability (capacity) to take risk in analyzing an investor's financial risk tolerance LOS 43.e: Describe the investment constraints of liquidity, time horizon, tax concerns, legal and regulatory factors, and unique circumstances and their implications for the choice of portfolio assets LOS 43.f: Explain the specification of asset classes in relation to asset allocation LOS 43.g: Describe the principles of portfolio construction and the role of asset allocation in relation to the IPS Key Concepts LOS 43.a LOS 43.b LOS 43.c LOS 43.d LOS 43.e LOS 43.f LOS 43.g Concept Checkers Answers – Concept Checkers 17 Self-Test Assessment: Portfolio Management Self-Test Assessment Answers: Portfolio Management 18 Market Organization and Structure LOS 44.a: Explain the main functions of the financial system LOS 44.b: Describe classifications of assets and markets LOS 44.c: Describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes LOS 44.d: Describe types of financial intermediaries and services that they provide LOS 44.e: Compare positions an investor can take in an asset LOS 44.f: Calculate and interpret the leverage ratio, the rate of return on a margin transaction, and the security price at which the investor would receive a margin call LOS 44.g: Compare execution, validity, and clearing instructions LOS 44.h: Compare market orders with limit orders LOS 44.i: Define primary and secondary markets and explain how secondary markets support primary markets 10 LOS 44.j: Describe how securities, contracts, and currencies are traded in quote-driven, order-driven, and brokered markets 11 LOS 44.k: Describe characteristics of a well-functioning financial system 12 LOS 44.l: Describe objectives of market regulation 13 Key Concepts LOS 44.a LOS 44.b LOS 44.c LOS 44.d LOS 44.e LOS 44.f LOS 44.g LOS 44.h LOS 44.i 10 LOS 44.j 11 LOS 44.k 12 LOS 44.l 14 Concept Checkers Answers – Concept Checkers 19 Security Market Indexes LOS 45.a: Describe a security market index LOS 45.b: Calculate and interpret the value, price return, and total return of an index LOS 45.c: Describe the choices and issues in index construction and management LOS 45.d: Compare the different weighting methods used in index construction LOS 45.e: Calculate and analyze the value and return of an index given its weighting method LOS 45.f: Describe rebalancing and reconstitution of an index LOS 45.g: Describe uses of security market indexes LOS 45.h: Describe types of equity indexes LOS 45.i: Describe types of fixed-income indexes 10 LOS 45.j: Describe indexes representing alternative investments 11 LOS 45.k: Compare types of security market indexes 12 Key Concepts LOS 45.a LOS 45.b LOS 45.c LOS 45.d LOS 45.e LOS 45.f LOS 45.g LOS 45.h LOS 45.i 10 LOS 45.j 11 LOS 45.k 13 Concept Checkers Answers – Concept Checkers 20 Market Efficiency LOS 46.a: Describe market efficiency and related concepts, including their importance to investment practitioners LOS 46.b: Distinguish between market value and intrinsic value LOS 46.c: Explain factors that affect a market's efficiency LOS 46.d: Contrast weak-form, semi-strong-form, and strong-form market efficiency LOS 46.e: Explain the implications of each form of market efficiency for ... 14 5 14 6 14 7 14 8 14 9 15 0 15 1 15 2 15 3 15 4 15 5 15 6 15 7 15 8 15 9 16 0 16 1 16 2 16 3 16 4 16 5 16 6 16 7 16 8 16 9 17 0 11 5 11 6 11 7 11 8 11 9 12 0 12 1 12 2 12 3 12 4 12 5 12 6 12 7 12 8 12 9 13 0 13 1 13 2 13 3 13 4 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