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cfa prepadvanced45 min
CFA Level I: Corporate Finance Overview
A comprehensive review of the corporate finance topics tested on CFA Level I, organized by reading.
What You'll Learn
- ✓Review all testable corporate finance topics
- ✓Understand the CFA approach to problem solving
- ✓Identify high-yield areas for exam day
1. Capital Budgeting
NPV, IRR, payback, and PI. CFA emphasizes NPV as the correct rule. Know how to handle sunk costs, opportunity costs, and externalities.
Key Points
- •NPV is the primary rule
- •Mutually exclusive: use NPV
- •Capital rationing: use PI
2. Cost of Capital
WACC with CAPM for equity, YTM for debt. CFA tests market-weight calculations and knows when to adjust.
Key Points
- •Market weights, not book
- •Tax-adjust debt only
- •Country risk premium for emerging markets
3. Leverage and Capital Structure
DOL, DFL, DTL formulas. MM propositions with and without taxes. Trade-off vs pecking order.
Key Points
- •DOL = % change in EBIT / % change in sales
- •With taxes, debt adds value via tax shield
- •Pecking order: internal > debt > equity
4. Dividends and Share Repurchases
Dividend theories, payout policy, and the information content of dividends.
Key Points
- •Bird-in-hand vs tax preference vs irrelevance
- •Share repurchase equivalent to dividend if no taxes
- •Signaling effect of dividend changes
Key Takeaways
- ★CFA loves NPV vs IRR conflict questions
- ★Know the MM propositions cold
- ★DOL, DFL, DTL formulas appear frequently
- ★Working capital changes are tested in capital budgeting
Practice Questions
1. Firm has DOL=2.0 and DFL=1.5. What is DTL?
DTL = DOL × DFL = 2.0 × 1.5 = 3.0.
2. Under MM with taxes, how does debt affect firm value?
Firm value increases by T × D (the present value of the tax shield).
FAQs
Common questions about this topic
Corporate finance is about 8-12% of the Level I exam, typically 18-22 questions.