What CFA Level 1 Corporate Issuers actually tests
Corporate Issuers is 6-9% of the Level 1 exam:
| Area | What it covers |
|---|---|
| Business Models & Stakeholders | Agency problem, ESG, board structures |
| Capital Investment Analysis | NPV, IRR, payback, WACC, project evaluation |
| Working Capital Management | Cash conversion cycle, receivables, payables, inventory management |
| Capital Structure | Modigliani-Miller propositions, trade-off theory, pecking order |
| Dividends & Share Repurchases | Dividend irrelevance, clientele effect, signalling, payout methods |
| Leverage | Operating leverage, financial leverage, DOL, DFL, DTL, breakeven analysis |
Why WACC is the connective tissue of this topic
Almost every sub-area of Corporate Issuers eventually points back to WACC: it's the hurdle rate in capital investment decisions, it changes as capital structure shifts, and it's the lens through which leverage's effect on shareholder value gets evaluated. Getting comfortable with the weighted-average mechanic pays off across the whole topic, not just one sub-area.
Sample question: WACC
Corporate Issuers · Medium difficulty
A company's capital structure is 40% debt and 60% equity. Its after-tax cost of debt is 5%, and its cost of equity is 12%. What is the company's WACC?
A. 8.0%
B. 8.5%
C. 9.2%
D. 10.0%
The correct answer is C — 9.2%.
WACC = (weight of debt × after-tax cost of debt) + (weight of equity × cost of equity) = (0.40 × 5%) + (0.60 × 12%) = 2.0% + 7.2% = 9.2%. Note the cost of debt used here is already after-tax — a common trap is applying the pre-tax rate directly, which overstates WACC since debt's tax shield is meant to be captured in this step, not applied twice.
WACC = (weight of debt × after-tax cost of debt) + (weight of equity × cost of equity) = (0.40 × 5%) + (0.60 × 12%) = 2.0% + 7.2% = 9.2%. Note the cost of debt used here is already after-tax — a common trap is applying the pre-tax rate directly, which overstates WACC since debt's tax shield is meant to be captured in this step, not applied twice.