So as always lets start with a macro view of what Corporate Finance is all about and then later deep-dive into the specifics of this module in CFA Level 1.
In any company, once you reach certain senior position, you are to display your entrepreneurship skills by undertaking an independent project and being able to generate profits from the same. Only after successful execution of one or some of these projects are you considered for next leadership role in the organisation. In this pursuit of reaching the next level in the leadership hierarchy these senior managers keep pitching the CFO with their ideas, business plan and proposals. The CFO simply orders/sort these proposals in certain logical order and then approves or disapproves these projects for funding. Corporate Finance my dear friends is primarily built around the concept of understanding this ordering mechanism.
The methodology by which projects are prioritized for execution in any corporate is what Corporate Finance encompasses.
There are several parameters which are used to order these projects – Net present value (NPV), Internal Rate of Return (IRR), Payback Period, Profitability Index (PI) etc. Corporate Finance primarily deals with the concepts of these parameters and expects the candidate to be able to step into the shoes of the CFO and assist him with the selection process. An easy to grasp section which is easy to relate with the real world. My only suggestion for the candidates would be to consider themselves as a CFO of a conglomerate (say Tata or Reliance) and then try and visualize his role in the capital budgeting process. For each of these conglomerates there are several projects which are lined up and needs to be prioritized for capital budgeting (remember cash is limited for any firm). This process is what is called Corporate Finance 🙂
In summary, Corporate Finance is one of the easier sections to crack in CFA Level 1. With ~8% weightage one can expect to have close to 25 odd questions in this section – most of which are easy to crack 🙂
That’s it in Corporate Finance. In our next blog I would walk you through the Basics of Portfolio Management and give you insights around how to prepare the same 🙂