Corporate Issuers - Exam Ready Notes

1. Organizational Forms, Corporate Issuer Features, and Ownership

Business Structure Comparison

Public vs. Private Companies

• Public: Shares traded on stock exchange, subject to regulatory disclosure, can raise large amounts of capital.
• Private: Fewer shareholders, less regulatory burden, limited access to capital markets.

  Lifecycle Stages:

  • Startup → Growth → Maturity → Decline

2. Investors and Other Stakeholders

Stakeholder Groups

• Lenders: Provide debt, seek interest/principal, priority in claims.
• Shareholders: Provide equity, seek dividends/capital gains, residual claim.
• Employees: Seek job security, compensation, benefits.
• Suppliers/Customers: Seek stable relationships, product quality, timely payments.

                 Stakeholder Map

ESG Considerations

• • Environmental: Resource use, pollution, climate impact.
  • Social: Employee relations, diversity, community impact.
  • Governance: Board structure, executive compensation, shareholder rights.

3. Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

Principal-Agent Conflicts

• Managers (Agents) may pursue personal goals over shareholder interests.
• Mechanisms to Align Interests:
  • Board oversight
  • Executive compensation linked to performance
  • Shareholder voting rights

Agency Conflict

Risks and Benefits

• Risks: Fraud, mismanagement, value destruction.
• Benefits: Efficient capital allocation, risk management, value creation.

4. Working Capital and Liquidity

Key Ratios

Cash Conversion Cycle

5. Capital Investments and Capital Allocation

       Capital Budgeting Techniques

• Net Present Value (NPV):
• Internal Rate of Return (IRR):
  Discount rate that makes NPV = 0.

NPV vs. IRR Decision

Capital Allocation Pitfalls

• Over-optimism in forecasts
• Ignoring risk
• Poor post-investment review

6. Capital Structure

Cost of Capital Components

Capital Structure Pie Chart

Theories

• Modigliani–Miller: Capital structure irrelevant in perfect markets.
• Pecking Order: Firms prefer internal financing > debt > equity.
• Trade-off Theory: Balance tax shield of debt vs. bankruptcy risk.

7. Business Models

Types

• Product-based: Sell goods (e.g., manufacturing)
• Service-based: Sell services (e.g., consulting)
• Platform: Connect buyers and sellers (e.g., e-commerce)
• Subscription: Recurring revenue (e.g., SaaS)

Business Model Canvas (Simplified)

Tips:

• Focus on understanding the rationale behind formulas and corporate decisions, not just memorization.
• Practice interpreting ratios and capital budgeting results in real scenarios.
• Use diagrams to visualize business relationships and flows.