Corporate Issuers

• Topic 01

  Corporate Structures and Ownership

  24 questions
• Topic 02

  Corporate Governance and ESG

  30 questions
• Topic 03

  Capital Investment Decisions

  24 questions
• Topic 04

  Working Capital Management

  24 questions
• Topic 05

  Capital Structure Theory

  25 questions
• Topic 06

  Cost of Capital

  21 questions
• Topic 07

  Dividends and Share Repurchases

  24 questions
• Topic 08

  Business Models and Value Creation

  42 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. A firm sells 500,000 of receivables to a factor at a 3% discount on a non-recourse basis. How does this transaction affect the firm's balance sheet and cash flow from operations?

   • A
     Receivables decrease by 500,000 and cash increases by 500,000 because the factor bears the full credit risk; the discount is not recorded as an expense in non-recourse factoring
   • B
     There is no effect on cash flow from operations; the 485,000 is classified as a financing inflow because factoring is a form of secured borrowing
   • C
     Receivables decrease by 485,000 (net proceeds) and the 15,000 discount is carried forward as deferred revenue to be recognised over the collection period
   • D
     Receivables decrease by 500,000 and cash increases by 485,000 (net of the 15,000 discount fee); the 15,000 discount is expensed as a financing cost; cash provided by operations increases by 485,000 if the receivables are derecognised
     Correct answer
   Explanation

   On a non-recourse basis, the risks and rewards of the receivables are transferred to the factor and the receivables are derecognised (removed from the balance sheet). Cash received = 500,000 × (1 – 0.03) = 485,000. The balance sheet effect: receivables –500,000, cash +485,000, with the 15,000 difference recognised as a financing expense (factoring fee / interest equivalent). Because trade receivables are an operating working capital item, their conversion to cash is classified within operating cash flows under both IFRS (IAS 7) and US GAAP; therefore, operating cash flow increases by 485,000. If the factoring were recourse (effectively a secured loan), it would be classified as a financing inflow instead.

2. A company's say-on-pay vote receives support from only 35% of shareholders. The chairman acknowledges the result but states the board is 'not obligated to change the compensation structure'. An analyst is assessing the governance implications. Which of the following is the MOST accurate characterisation?

   • A
     The statement is accurate; boards are required by law to acknowledge failed say-on-pay votes publicly but face no further obligation
   • B
     The statement is legally accurate in most jurisdictions (say-on-pay is advisory, not binding) but it is a significant governance red flag; institutional investors and proxy advisory firms may escalate by voting against director re-election
     Correct answer
   • C
     The statement is inaccurate; a 35% approval rate means the pay package has been rejected and must be withdrawn
   • D
     The statement is accurate in the US but incorrect in the UK, where say-on-pay votes are binding and the board must revise the package if it fails
   Explanation

   In the US (Dodd-Frank), say-on-pay votes are advisory — the board is not legally obligated to revise the pay package. In the UK (Companies Act 2006 as amended), the annual vote on the remuneration implementation report is also advisory; however, the triennial vote on the forward-looking remuneration policy is binding. Where only an advisory vote has been taken, the chairman's statement is legally accurate, but a result of only 35% support is a very significant governance failure in practice. The consequences are reputational and political rather than immediately legal: major institutional shareholders (BlackRock, Vanguard, State Street) and proxy advisory firms (ISS, Glass Lewis) will typically vote against director re-election at the following AGM if the board does not engage and respond meaningfully. This escalation threat gives the advisory vote real teeth. The CFA curriculum requires candidates to understand both the legal (advisory in most jurisdictions for implementation votes) and practical (reputational) dimensions.

3. Which of the following accurately describes a STOCK DIVIDEND?

   • A
     A dividend paid in shares of a subsidiary company that is being spun off to shareholders
   • B
     A dividend declared in the form of stock options granted to long-term shareholders
   • C
     A special one-time cash dividend equal in size to the annual earnings per share
   • D
     A distribution of additional shares to existing shareholders, proportional to their current holdings; it does not change the shareholder's proportional ownership or total wealth
     Correct answer
   Explanation

   A stock dividend distributes additional shares to existing shareholders proportional to their holdings (e.g., a 10% stock dividend gives 10 new shares per 100 shares held). It is a purely notational event: (1) the shareholder's proportional ownership is unchanged (everyone receives the same proportional increase); (2) the share price adjusts downward proportionally (more shares, same total value); (3) total wealth is unchanged. A 10% stock dividend increases shares by 10% and reduces price by approximately 10%, leaving total market value constant. This contrasts with a cash dividend, which transfers economic value out of the firm to shareholders.