Corporate Issuers

5-10%

Zion

高顿CFA研究院
Brief Introduction
Introduction of the course
Quantitative Methods 5-10%
Economics 5-10%
Financial Statement Analysis 10-15%
Corporate Issuers 5-10%
Equity Valuation 10-15%
Fixed Income 10-15%
Derivatives 5-10%
Alternative Investments 5-10%
Portfolio Management 10-15%
Ethics & Professional Standards 10-15%

2
Content:
 Study session 1: Corporate Issuers
 Module 1: Analysis of Dividends and Share Repurchases
(☆☆)
 Module 2: Environmental, Social, and Governance (ESG)
Considerations in Investment Analysis (☆)
 Module 3: Cost of Capital: Advanced Topics (☆☆☆)
 Module 4: Capital Restructuring (☆☆☆)

3
Brief Introduction
考纲对比:
 2023年的考纲与2022年相比，有三处显著变化：
 删除了Capital Budgeting, Capital Structure及Mergers
and Acquisitions章节;
 新增了Cost of Capital: Advanced Topics章节,考查融资成
本的计算与分析;
 新增了Corporate Restructuring章节,考查公司重组行为的
评估。

4
Concept of Dividends and Dividends Policies
Dividend policy and company value theory
Ø Dividend policy does not matter (MM)
Ø It does matter: bird-in-hand argument & tax argument
Ø Other theoretical issues
ü Information signaling
ü Agency costs
Dividends Payout Policies
Tax considerations
Ø Double taxation system
ü Dividend = EBT × (1 − Tc )(1 − Ti ) × Payout%
ü Effective tax rate = Tc + (1 − Tc )Ti
• Tc : corporate tax
• Ti : individual tax on dividend
Ø Dividend imputation tax system
ü Dividend = EBT × (1 − Ti ) × Payout%
ü Effective tax rate = Ti

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Dividends Payout Policies
Tax considerations (Cont’d)
Ø Split-rate tax system
ü Dividend = EBT × (1 − Tc )(1 − Ti ) × Payout%
ü Effective tax rate = Tc� + (1 − Tc� )Ti
•Tcd : corporate tax on dividend
•Ti : individual tax on dividend
Dividends Payout Policies
Types of dividend policies
Ø Stable Dividend Policy (most common)
ü Based on long-term forecast of sustainable earnings
ü Expected div = Previous div + (Expected earnings ×
Target payout ratio – Previous div) × Adjustment factor

Ø Constant Dividend Payout Ratio Policy

ü Infrequently used, fluctuate with short-term earnings

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Practice 1
Last year, Calfee Multimedia recently earned $4.00 per share and paid a dividend of
$0.30. The company expects to earn $5.20 per share next year and has a 30% target
payout ratio. What’s the expected dividends if the company will use 4-year period to
adjust the dividend?
A) $0.62 per share
B) $0.53 per share
C) $0.39 per share
Practice 1
Answer: A
Expected dividend = (previous dividend) + (Expected earnings × Target payout ratio –
Previous dividend) × Adjustment factor, where the adjustment factor is 1 / number of
years over which the adjustment will take place.
Expected dividend = $0.3 + ($5.2 ×30% - 0.3) ×1/4 = $0.62

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Effects of Share Repurchase
Share repurchase methods
Ø Buy in the open market
ü Flexibility in timing and amount.
Ø Tender offer
ü Fixed price tender offer: buy a fixed number of shares at a fixed price, typically at
a premium to market.
ü Dutch auction: use auction to determine the lowest price.
Ø Direct negotiation
ü Typically at a premium to market.
Effects of Share Repurchase
Effect on EPS
Ø Repurchased with excess cash (financed internally)
ü Asset (cash) and equity will decline;
ü leverage(debt ratio) will increase.
ü EPS will increase.

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Effects of Share Repurchase
Effect on EPS (Cont’d)
Ø Repurchased with debt (financed externally)
ü Debt increase and equity decline,
ü leverage (debt ratio) will increase (even more than repurchase by excess cash).
ü If earning yield > after-tax cost of debt, EPS will increase.
ü If earning yield < after-tax cost of debt, EPS will decrease.
Effects of Share Repurchase
Effect on BVPS
Ø Share repurchase will result book value per share (BVPS):
ü Decrease, if the repurchase price > the original BVPS.
ü Unchange, if the repurchase price = the original BVPS.
ü Increase, if the repurchase price < the original BVPS.

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Effects of Share Repurchase
Dividends vs. Share repurchase
Ø Assuming the tax treatment of these two methods is the same, share repurchase
has the same impact on shareholder wealth as a cash dividend payment of an equal
amount.
Analysis of Dividend Safety
Measures of dividend safety
Ø Dividend payout ratio = Div/NI
Ø Dividend coverage ratio = NI/Div
Ø FCFE coverage ratio = FCFE/(Div + Share repurchase)

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Practice 1
Dividend safety is most likely evidenced by:
A) Increase in div. and FCFE coverage ratios
B) Increase in div. coverage ratio but not FCFE coverage ratio.
C) Increase in FCFE coverage ratio but not be div. coverage ratio

Answer: A
Both div. and FCFE coverage ratios are indicators of dividend safety. FCFE coverage is
simply more comprehensive measure and takes into account all cash distributed to
shareholders.
Global Variations in Ownership Structures
Introductions to global variations
Ø Dispersed vs. concentrated ownership
Ø Horizontal ownership
Ø Vertical ownership
Ø Dual-class shares
Ø Types of influential shareholders
ü Families  Interlocking directorates
ü Listed SOEs

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Global Variations in Ownership Structures
Effects of ownership structure on corporate governance
Ø Director Independence
Ø Board structures
ü One tier board
ü Tow tier board
Ø Executive remuneration
ESG-Related Risks and Opportunities
Evaluating ESG-related risks and opportunities
Ø ESG integration
Ø The implementation of qualitative and quantitative ESG factors in traditional
security and industry analysis.

Equity Analysis Fixed-income Analysis

Both identify potential Focus on mitigating
opportunities and downside risk.
mitigate downside risk.

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ESG-Related Risks and Opportunities
Evaluating ESG-related risks and opportunities (Cont’d)
Ø Green bond
ü The bonds have environmental or climate benefits.
ü Green bonds ‘s credit rating are with the exception that the bond proceeds are
earmarked for green projects.
ü Some may have premium, tighter credit spread.
ü Greenwashing risk
ü Liquidity risk
Cost of Capital: Advanced Topics

Cost of Capital: Advanced Topics

Tasks:
 describe methods used to estimate the cost of debt, cost of
equity, and equity risk premium, including calculations and
implications.
 compare methods used to estimate the required return on
equity
 estimate the cost of capital for a public company and a private
company 36

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Cost of Capital: Advanced Topics
Top‐down external factors
Factors Cost of Capital
Greater capital availability Lower
Higher inflation rates Higher
Expansions Lower credit spread/ERPs
Lower interest volatility Lower
Lower exchange rate volatility Lower
Greater investor protections Lower credit spread/ERPs
Higher marginal income tax rate Lower after‐tax cost of debt

37
Cost of Capital: Advanced Topics
Bottom‐up company factors
Factors Cost of Capital
Higher sales stability/predictability Lower
Higher sales concentration Higher
Higher ESG risk Higher
Higher % of fungible, tangible and liquid assets Lower
Higher profitability and cash flow generation ability Lower
Higher liquidity and interest coverage ratio Lower
Higher leverage (operating/financial) Higher
Issuing callable debt Higher
Issuing puttable/convertible debt Lower
Issuing cumulative preferred shares Lower
Issuing common stock with inferior cash flow/voting right Higher
38

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Cost of Capital: Advanced Topics
Cost of debt estimation
 Cost of bond:
 For liquid bond: YTM
 For illiquid bond:
• Credit rating available: similar bond yield or similar maturities
Credit rating unavailable: synthetic credit ratings
 Cost of loans: the interest rate on recently new bank loan
 Cost of leases: rate implicit in the lease (RIIL)

39
Cost of Debt Estimation
Synthetic credit ratings example (cont.)
Rating class Interest Coverage Ratio D/E
AAA IC > 10 times D/E < 35%
AA 8 < IC < 10 35% < D/E < 40%
A 5 < IC < 8 40% < D/E < 42%
BBB 3 < IC < 5 42% < D/E < 44%
BB 2 < IC < 3 44% < D/E < 50%
B 1.4 < IC < 2 50% < D/E < 60%
CCC 1.0 < IC < 1.4 60% < D/E < 70%
CC 0.6 < IC < 1.0 70% < D/E < 80%
C 0.3 < IC < 0.6 80% < D/E < 100%
D IC < 0.3 D/E＞100%

40

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 Estimate (☆☆)

Cost of Debt Estimation

RIIL Example
 Golden Co. is considering to lease a new machine needed for
its business. The lease terms the company has negotiated are
for a 16‐year lease with annual payments (PMT) of EUR10
million at the end of each year. The leased asset has a fair
value (FV) of EUR120 million. The lessor would incur a cost of
€3 million at the time of the lease agreement. The residual
value of the leased asset to lessor at the end of 16 years is
EUR10 million. What is the rate implicit in the lease?

41
Cost of Capital: Advanced Topics
Cost of debt estimation ‐ RIIL example
 A lease has the following cash flows (in € million):
0 1 2 … 16
Lease PMT 10 10 10 10
Residual value 10
Fair Value - 120
Direct costs - 3
Net cash flows - 123 10 10 10 20

 Using a calculator,
 PMT = 10.0, PV = –123.0, N = 16, FV = 10.0, CPT I/Y = 3.88%

42

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Cost of Capital: Advanced Topics
Equity risk premium (ERP) estimation
 Historical approach – Proxy selection of r
Advantages Disadvantages
Longer
Volatility has less effect May not reflect current market
period
Shorter
Reflect current market May contain greater noise
period
Sensitive to extreme values and
Arithmetic
Easy to calculate may overestimates terminal
Mean
value of wealth

Geometric Good estimates of

/
Mean terminal value of wealth
43
Cost of Capital: Advanced Topics
Equity risk premium (ERP) estimation
 Historical approach – Proxy selection of r

Advantages Disadvantages
Not a completely risk‐free
Government More closely matches
return with unknown
bond YTM infinite equity duration
coupon reinvestment rates
Government Exact estimate of the Not closely matches infinite
bill rate risk‐free rate equity duration

44

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Cost of Capital: Advanced Topics
Equity risk premium (ERP) estimation
 Forward looking approach
 Survey‐based estimates
 Gordon growth model

• ERP E E g r

 Macroeconomic models（Grinold‐Kroner model）

• ERP DY Δ i g ΔS E r

• i YTM YTM
45
Cost of Capital: Advanced Topics
Limitations of the ERP estimation
Limitations

Historical ERPs can vary over time (data biases)

approach Survivorship bias

Sampling and response biases

Surveys
Behavioral biases
Forward
Assumptions of constant P/E is
looking DDM
unreasonable
approach
Macroeconomic Modeling errors
models Behavioral biases

46

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Cost of Capital: Advanced Topics
Cost of equity estimation
 DDM – Gordon growth model

r g

 Bond yield plus risk premium approach

r r Risk Premium

47
Cost of Capital: Advanced Topics
Cost of equity estimation
 Capital assets pricing model (CAPM)
r r β ERP
 Fama–French Models
r r β ERP β SMB β HML β RMW β CMA
 Expanded CAPM
r r β ERP SP IP SCRP
 Build‐up approach
r r ERP SP SCRP

48

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Cost of Capital: Advanced Topics
Equity risk premium (ERP) estimation
 ERP for an emerging market
 ERP ERP λ CRP

• CRP Sovereign yield spread

49
Practice 1
Riaz is an equity analyst at Saturn Investments. Recently he
estimates the required return for a company by using the Fama–
French models. He collected the following data

Assuming that the risk‐free rate is 4%, the cost of equity is:
A. 15.8%. B. 12.40%. C. 12.43%.
50

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Practice 1
Answer：A
本题考查了利用Fama–French五因子模型计算权益资本成本：
𝑟 𝑟 𝛽 ERP 𝛽 SMB 𝛽 HML 𝛽 RMW 𝛽 CMA
4% 1.2 7% 0.1 3% 0.3 2% 0.2 2.5%
0.4 5% 15.8%
因此，正确选项为A。

51
Practice 2
Which of the followings about the forward‐looking approach to
estimate an equity risk premium is least accurate?
A. The survey‐based approach can be easily trapped in recency
bias and confirmation bias.
B. The financial and economic model of macroeconomic models
can be subject to modeling errors.
C. Compared to the historical approach, the forward‐looking
approach is more easily affected by data biases.

52

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Practice 2
Answer：C
与历史估计法相比，预期估计法的优势是受到数据偏差（data
biases）影响更小。因此，选项C表述有误，为正确选项。
对于选项A，调查为基础的估计(survey based approach)的结果
会受到近期偏差（recency bias）和确认偏差（confirmation bias）
的影响。因此，选项A表述正确，为错误选项。
对于选项B，宏观经济模型（macroeconomic modeling）可能存
在建模错误（modelling errors）。因此，选项B表述正确，为错
误选项。

53
Summary
 Importance: ☆ ☆ ☆
 Content:
• Calculation of cost of debt
• Calculation of equity risk premium
• Different methods used to calculate return on equity
• Cost of capital for a public and non‐public company
 Exam tips:
• 常考点：自上而下和自下而上分析方法；债务成本、权益
成本和权益风险溢价的估算模型；估算上市公司和非上市
公司的资本成本的方法。

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Corporate Restructuring

Corporate Restructuring
Tasks:
 explain and evaluate types of corporate restructurings
 demonstrate valuation methods for, and interpret valuations of,
companies involved in corporate restructurings
 demonstrate the effect of corporate restructurings on financial
analysis
 evaluate corporate investment and divestment actions
 evaluate cost and balance sheet restructurings 55
 Corporate Actions and Motivations
Types of corporate restructuring
Investment Divestment Restructuring
(increase size) (decrease size) (improve)

Equity investment Costs

Sale

Types Joint venture Balance sheet

Spin off Alter the

Acquisition Reorganization business
model
Special case Leveraged buyout(LBO)

56

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Corporate Restructuring
Divestment
 Sales / Divestiture
 The seller sells a company, segment of a company, or group
of assets to relocate capital
 Spin off
 A company separates a distinct part of its business into a
new, independent company to increase management and
employee focus and remove incompatibilities

57
Corporate Restructuring
Restructuring
 Change business model: Franchising
 Cost restructuring: Reduce costs by improving operational
efficiency and profitability.
 Balance sheet restructuring: Shift the asset composition,
change the capital structure, or both.
 Sale leaseback
 Dividend recapitalization
 Reorganization: a court‐supervised restructuring process

58

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Corporate Restructuring
Motivations of corporate restructuring
Motivations
 Realize synergies
 Increase growth
Investment
 Improve capabilities or secure resources
 Acquire undervalued targets
 Focus operations and business lines
 Valuation : conglomerate discount
Divestment
 Liquidity needs
 Regulatory requirements
 Improve returns on capital
Restructuring
 Financial challenges
59
Corporate Restructuring
Valuating restructuring: Preliminary valuation
 Comparable company analysis: Use the valuation multiples of
similar listed companies to value a target company.
 Earning multiplies: Price/earnings
 Enterprise Multiples: EV/EBITDA or EV/sales
 Valuation multiples don’t include takeover premiums.

60

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Corporate Restructuring
Valuating restructuring: Preliminary valuation(cont.)
 Comparable transaction analysis: Uses valuation multiples
from historical acquisitions of similar companies to evaluate a
target’s value.
 Valuation multiples include takeover premiums.

 Takeover premium

PRM

61
Corporate Restructuring
Comparable company VS. Comparable transaction

Comparable company approach Comparable transaction approach

 Takeover premium is
 Reasonable approximation
embedded in multiples
Pros  Data can be easily derived
 Value estimates come from
from the market
actual transaction prices

 Difficult to find comparable  The market for corporate

companies control is illiquid
Cons  Market price mispricing  Transaction price mispricing
 Takeover premium is not  Adjustment required to reflect
included industrial condition changes

62

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Corporate Restructuring
Investment Case: Background
 Gordon Inc. operates hundreds of convenience stores across
America. David PLC., a Texas‐based gas‐station running
company, wants to sell its unprofitable gas‐station convenience
stores. By acquiring David’s gas‐station stores, Gordon will be
able to realize a significant amount of synergy, such as
potential sales growth and improved store operation efficiency.

63
Corporate Restructuring
Financial specifics
 Pre‐Acquisition data will be shown in tables
 Transaction consideration: $3,000 million
 $2,000 million cash, including $1,000 million new loan
 $1,000 million worth of Gordon’s shares (each share worth
$10)

64

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Corporate Restructuring
Restructuring assumption
 Synergy: $800 million in sales synergy, $100 million in cost
reduction
 Fair value amortization: $200 million extra depreciation
expense after the acquisition
 Cost of debt: 6% charged on the new $1,000 million debt
 Gordon’s stock price will keep constant.
 Gordon’s effective tax rate is 20%.

65
Corporate Restructuring
Selected financial data
Pre‐acquisition Post‐acquisition
Gordon David Adjustment Consolidated
($Mil) ($Mil) ($Mil) ($Mil)
Revenue 22,000 5,200 800 (Synergy) 28,000
Expense Excluding
20,000 5,100 100 (Synergy) 25,000
D&A
EBITDA 2,000 100 900 (Total synergy) 3,000
Depr & Amort 600 200 200 (FV amort) 1,000
Interest Expense 240 0 60 (New interest) 300
Income Tax Expense / / / 340
Net Income / / / 1,360

66

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Corporate Restructuring
Selected financial data(cont.)
Pre‐acquisition Adjustment Post‐Acquisition
Shares Outstanding 700 100 (New shares) 800
Total Debt ($Mil) 6,000 1000 (New debt) 7,000

 Diluted EPS = 1360/800 = 1.7

67
Practice 1
Golden Co. plans to outsource its manufacturing and call centers
of personal computers to Ali Ltd., to reduce headcounts and time
devoted by the management. The plan is best characterized as：
A. cost structuring
B. balance sheet structuring
C. reorganization

Answer: A

68

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Practice 2
Which of the following statements is least likely correct with the
comparable transaction analysis method?
A. Analysts use the valuation multiples from trading rather than
historical acquisitions of similar targets.
B. The takeover premiums are not necessary to be estimated
separately.
C. Analysts may use data from related industries in the valuation
when there are few or no comparable transactions.

69
Practice 2
Answer: A
可比交易法使用的是类似的被收购方历史并购数据，不是类
似公司的目前股票交易价格。该选项表述前后颠倒了。A选项
表述错误，符合题意，为正确选项。
对于选项B，收购溢价不需要单独估计，已经含在收购价中了。
该选项表述正确，不符合题意，为错误选项。
对于选项C，如果可比交易不多或不存在，分析师可以尝试使
用近似或相关行业的交易数据。该选项表述正确，不符合题
意，为错误选项。

70

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Summary
 Importance: ☆ ☆ ☆
 Content:
• Types of corporate restructuring
• Different corporate investment and divestment actions
• Effect of corporate restructurings on financial analysis
• Cost and balance sheet restructurings
 Exam tips:
• 常考点：公司重组的方式及其动机（原因）；常见的投资
和撤资方式；公司重组行为对常见财务指标的影响。
 三级见！

您 高分喷雾 Zion

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