CFAⅠCorporate Issuers

Capital investment

Basics of Capital Allocation

Types of capital investments 投资类型

1. Business maintenance维持业务
   • Going concern or maintenance持续经营项目：machine replacement, infrastructure improvement
   • Regulatory/compliance法律规定项目 (如给外卖员买保险、污水处理)
2. Business growth促进增长
   • Expansion扩张已有项目
   • Other开辟新项目

Typical steps in the capital allocation process 投资步骤

1. Generating ideas
2. Investment analysis
3. Capital allocation planning
   • The process used by a company's management to make capital investment decisions
4. Monitoring and post-audit (事后审计)

Principles of capital allocation 投资原则

1. Include需要考虑
   • Opportunity costs: the foregone return of the resource invests in the next-best project 考虑机会成本
   • After-tax incremental cash flows provide a sound basis for capital budgeting. It involves basic principles as follows 考虑税后增量现金流
   • Externalities: Synergy (positive effect) 正外部性，与原项目互补, Cannibalization (negative effect) 负外部性，与原项目互斥
   • Timing value of cash flows is crucial. 现金流所在时间
2. Exclude不需要考虑
   • Sunk costs: the cost has already been incurred 沉没成本
   • Financing costs: they are considered in discount rate (avoiding double counting problem) 融资成本，利息成本

Cash Flow Patterns 现金流的分类

1. Conventional CF: cash flows change signs once 投一次之后稳定收益
2. Nonconventional CF: cash flows change signs more than once 多次投资

Investment Decision Criteria

Valuation methods for single project 判断方式

1. Net present value (NPV)
2. Internal rate of return (IRR)

Net present value

1. Net present value（NPV） is the sum of the present value of all the after-tax incremental cash flows of the project, indicates the expected wealth changing for the firmNPV=CF_0+\frac{CF_1}{(1+r)^1}+\dots+\frac{CF_n}{(1+r)^n}
   • r= required rate of return for capital suppliers, cost of capital for capital receivers 投资回报率/融资资金成本
2. Investment decision criteria (for single/independent project 项目间互斥独立):
   • If NPV\gt 0, then accept/invest
   • If NPV\lt 0, then reject/not invest
3. Advantages
   • Directly reflects the expected wealth changing for the firm and its shareholders 直观
4. Disadvantages
   • Ignore the size of the project

Internal rate of return

1. Internal rate of return（IRR） is the discount rate that makes the total present value of all cash flows,the NPV, equal to zeroNPV=0=CF_0+\frac{CF_1}{(1+IRR)^1}+\dots+\frac{CF_n}{(1+IRR)^n}
   • IRR is the annualized expected return on the project
   • When applying the IRR approach, required rate of return is referred as hurdle rate
2. Investment decision criteria (for single/independent project):
   • If IRR\gt\text{cost of capital}, then accept/invest
   • If IRR\lt\text{cost of capital}, then reject/not invest
3. Advantages
   • It reflects the profitability
4. Disadvantages
   • No IRR (NPV无法等于0) or Multiple IRR (nonconventional cash flow 现金流变符号几次就最多有几解)
   • Impractical implicit assumption of reinvestment rate (IRR) 再投资回报率不一定也为IRR

Confilct

1. Choose the projects with higher NPV IRR大也要再算一遍NPV，NPV是最终依据
2. NPV and IRR project rankings may conflict due to:
   • Different sizes of CFs 现金流
   • Different timing of CFs 时间
3. Different reinvestment rate assumptions 再投资利率假设
   • IRR assumes CFs can reinvest at project's IRR
   • NPV assumes CFs can reinvest at the cost of capital (more conservative/realistic)

Project interaction

1. Independent projects (独立项目，无限资金)
   • projects are unrelated to each other The firm can raise the funds it wants for all profitable projects, requiring little management effort
   • Accept all projects with NPV\gt 0 (IRR\gt\text{cost of capital})
2. Mutually exclusive projects(互斥项目，无限资金)
   • projects compete directly with each other
   • Choose the one with highest NPV
3. limited funds(有限资金)
   • Resource scarce: firm has limited ability to take on additional projects (e.g., limited funds/skilled IT personnel)
   • Capital rationing: the firm has a fixed amount of funds to invest
   • Project sequencing: projects should be taken in time order

Corporate Use of Capital Allocation

Return on invested capital (ROIC)

1. Measure of the profitability of a company relative to the amount of capital invested by the equity and debtholders
   ROIC=\frac{\text{After tax operating profit}}{\text{Average book value of invested capital}}
   If ROIC\gt\text{cost of capital/WACC}, firm's value for shareholders increases
   If ROIC\lt\text{cost of capital/WACC}, firm's value for shareholders decreases

NPV and Stock prices NPV对股价的影响

1. Value of the company's shares will increase by the new investment's positive NPV. 计算每股的NPV，就是增加值
2. When an analyst learned news of a project 还受到预期的影响
   • If the project's profitability is less than expected, the stock price might drop.
   • If the project's profitability is more than expected, the stock price might increase.

Real Options 实物期权

Real options

1. Types of real options
   • Timing options (delay investment) 早晚都要投，但是可以改变投资时间
   • Sizing options (abandonment & growth option) 改变投资规模，可以不投或多投
   • Flexibility options (price setting & production-flexibility) 其它的灵活度，如改变价格或产量
   • Fundamental options (gold mine & oil well) 买卖标的资产的权利
2. Evaluate approaches
   • NPV(\text{with option})=NPV(\text{no option})+\text{Value of options}-\text{Cost of option}
   • 考虑期权后可能使得NPV大于0

Common Capital Allocation Pitfalls 错误

Common capital allocation pitfalls

1. Inertia(惯性) in capital investments through years
2. Source of capital bias by management
   • Internal funds as "free" 自有资金
   • External funds as "expensive" 外部资金，如债务
3. Failure to consider investment alternatives 没有考虑其它选项
4. Pushing "pet" projects 老板喜欢的项目
5. Basing investment decisions on EPS, net income, or ROE 不能基于净利润
6. Internal forecasting errors NPV的参数错误
   • Incorrect overhead costs
   • Incorrect discount rate
   • Incorrect treatment of opportunity costs and sunk costs
   • Failure to incorporate market responses

Working Capital and Liquidity

Financing Options融资渠道

Internal sources

1. After-tax operating cash flows税后经营现金流
2. Working capital efficiency
   • Account payable
   • Account receivable
   • Inventory存货
   • Marketable securities交易性金融资产

External sources

1. Financial intermediaries金融机构，一对一
   • Lines of credit信用贷款（uncommitted未承诺的, committed承诺的, revolving额度可循环的，还钱后可以继续借）
   • Secured loans抵押贷款（e.g.，assignment of accounts receivable抵押应收账款）
   • Factoring保付代理（卖掉应收账款）
   • Web-based lenders & non-banklenders网贷
2. Capital markets资本市场，一对多
   • Short-term commercial paper大公司发布的商票，一般无抵押
   • Long-term debt & equity债券、股票

Working Capital & Liquidity管理流动资本

Working capital management style

1. Conservative保守: holding larger amount of cash, receivables and inventories for more financial flexibility
2. Aggressive激进: holding less amount of cash, receivables and inventories for higher equity returns
3. Moderate: between the two approaches above
   • Liability-matching approach负债匹配，匹配期限
     variable current assets可变流动资产（不是一直保持的） ← short-term financing
     permanent current assets永久流动资产（如办公用品） ← long-term financing

Liquidity management变现资产

1. Liquidity: company's ability to meet its short-term obligations using cash or assets can be converted into cash quickly快速
2. Liquidity management: company's ability to generate cash when needed, at the lowest possible cost折损小

Sources of liquidity流动性的来源

1. Primary source of liquidity: cash from day-to-day operations.不影响经营
   • Free cash flow
   • Ready cash balances
   • Short-term funds: trade credit, bank lines of credit, short-
   • term investment portfolio
   • Cash management
2. Secondary sources of liquidity: using a secondary source may deteriorate the company's financial and operating positions损害经营能力
   • Negotiating debt contract债务重组，和债券人求情
   • Liquidating assets变卖资产
   • Filing for bankruptcy protection and reorganization破产保护、破产重组

Drags and pulls on liquidity

1. Drags收钱慢 on liquidity: delay, reduce cash inflows, or increase borrowing cost
   • Uncollected receivables；obsolete inventory； tight credit
2. Pulls付钱快 on liquidity: accelerate cash outflows
   • Making payment early；reduced trade credit limits or short-term lines of credit

Measuring Liquidity衡量流动性

Liquidity ratios短期偿债能力

Generally, the greater the liquidity ratios, the higher a company's liquidity
\begin{aligned} & \text { Current ratio流动比率 }=\frac{\text { Current assets }}{\text { Current liabilities }} \\ & \text { Quick ratio速动比率 }=\frac{\text { Cash }+ \text { Short-term securities }+ \text { Receivables }}{\text { Current liabilities }} \\ & \text { Cash ratio现金比率 }=\frac{\text { Cash }+ \text { Short-term securities }}{\text { Current liabilities }} \end{aligned}

Turnover ratios

Generally, the higher of receivables/inventory turnover, the better working capital is managed. However, the lower of payables turnover, the better working capital is managed
\begin{aligned} & \text { Receivables turnover应收账款周转率（要快） }=\frac{\text { Credit sales }}{\text { Average receivables }} \\ & \text { Inventory turnover存货周转率（要快） }=\frac{\text { Cost of goods sold }}{\text { Average inventory }} \\ & \text { Payables turnover应付账款周转率（要慢） }=\frac{\text { Credit purchases }}{\text { Average trade payables }} \end{aligned}

Number of days

Generally, the lower #days of receivables/inventory,the better working capital is managed. However, the higher #days of payable, the better working capital is managed
\begin{aligned} & \text{Number of days of receivables应收账款周转天数（要小）} =\frac{365}{\text { Receivables turnover }}\\ & \text{Number of days of inventory存货周转天数（要小）} =\frac{365}{\text { Inventory turnover }}\\ & \text{Number of days of payables应付账款周转天数（要大）} =\frac{365}{\text { Payables turnover }} \end{aligned}

Cycles

1. Operating cycle经营周期
   • A measure of the time needed to convert raw materials into cash from a sale
     Operating cycle = Number of days of receivable + Number of days of inventory
     卖出货物的天数+收到钱的天数
   • The shorter the operating cycle, the more effective a company manage its working capital
2. Cash conversion cycle （Net operating cycle）现金支出天数
   • A measure of the time from paying suppliers for materials to collecting cash from the subsequent sale of goods
     Cash conversion cycle = Number of days of receivable + Number of days of inventory - Number of days of payable
     考虑赊购原材料
   • The shorter the cash conversion cycle, the more effective a company manage its working capital

Evaluating Short-Term Financing Choices短期融资的评估

Major objectives of short-term borrowing目标

• Ensure sufficient capacity exists to handle peak cash needs满足突发需求
• Maintain sufficient sources of credit to be able to fund ongoing cash needs满足持续需求
• Ensure that rates obtained are cost-effective and do not substantially exceed market averages成本不能大大超过市场平均
• Ensure both implicit（如可转债） and explicit（如利息） financing costs are considered要考虑到隐性与显性成本

Factors influence short-term borrowing strategy

• Company size and creditworthiness规模与信誉
• Asset nature for secured loans资产量
• Legal and regulatory constraints监管限制
• Flexibility of financing options灵活性

Passive & active borrowing strategies

1. Passive strategies: tend to be passive in response to urgent needs for liquidity, characterized by a steady, regular rollover of the same amount of money each time
2. Active strategies: usually more flexible and can reflect plans, reliable forecasts, and comparative pricing

Cost of Capital-Foundational Topics

Weighted Average Cost of Capital

Cost of Capital

1. Cost of capital资本成本
   • The required rate of return for capital suppliers要求回报率
   • The opportunity cost of funds for capital suppliers Alternative to raise capital机会成本
2. A company can raise capital from：
   • Debt债权人
   • Preferred stock优先股股东
   • Common equity普通股股东
3. Cost of capital of a company
   • The required rate of return that investors demand for the average-risk investment of a company
   • The most common way to estimate the cost of capital of a company is weighted average cost of capital （加权平均资本成本WACC）， which is to calculate the margin costs of each sources of capital and then calculate a weighted average of these costs. WACC also refers to marginal cost of capital （MCC）

Weighted average cost of capital （WACC）

1. 公司的资本成本，可以用来折现公司未来的现金流
   \text { WACC }=w_d \times r_d \times(1-t)+w_p \times r_p+w_e \times r_e
   • \mathrm{w}= company's target capital structure,not the current capital structure
   • r_d= the before-tax marginal cost of debt债权人要求的回报率
   • r_p= the marginal cost of preferred stock普通股股东要求的回报率
   • \mathrm{r}_{\mathrm{e}}= the marginal cost of common equity优先股股东要求的回报率
   • \mathrm{t}= the company's marginal多借一块钱收的税 tax rate税盾
   • 使用market value
2. r_d\lt r_p\lt r_e

Weights in WACC

1. Use this target capital structure if it is available
2. If target capital structure is not available, estimate weights using one of the several approaches：
   • The company's current capital structure
   • Infer the target capital structure by trends in the company's capital structure or statements by management
   • Use averages of comparable companies'capital structures

Cost of the Various Sources of Capital

Cost of debt

1. YTM approach根据债券的公允市场价格反推YTM
   • Yield to maturity （YTM） is the annual return that an investor earns on a bond if the investor purchases the bond today and holds it until maturity
     \mathrm{P}_0=\frac{\mathrm{PMT}}{(1+\mathrm{YTM})^1}+\frac{\mathrm{PMT}}{(1+\mathrm{YTM})^2}+\cdots+\frac{\mathrm{PMT}+\mathrm{FV}}{(1+\mathrm{YTM})^{\mathrm{n}}}
   • After-tax cost is the true effective cost of debt to the company since interest payments are generally tax-deductible
   • After tax cost of debt =YTM × (1-tax rate)
2. Debt-rating approach用类似公司的债券的YTM代替
   • When a reliable current market price for a company's debt is not available, the debt-rating approach can be used to estimate the before-tax cost of debt
   • Using the yield（r_d）on comparably rated评级 bonds for maturities期限 that closely match that of the company's existing debt相似的评级和期限
   • After tax cost of debt =r_d × (1-tax rate)

Cost of preferred stoek

1. For nonconvertible, non-callable preferred stockthat has a fixed dividend rate and no maturity date, we can use the formula for the cost of a preferred stock：
   \mathrm{P}_{\mathrm{p}}=\frac{\mathrm{D}_{\mathrm{p}}}{\mathrm{r}_{\mathrm{p}}} \longrightarrow \mathrm{r}_{\mathrm{p}}=\frac{\mathrm{D}_{\mathrm{p}}}{\mathrm{P}_{\mathrm{p}}}
   D_p=the preferred stock dividend per share优先股股利
   P_p=the current preferred stock price per share优先股股价

Cost of common equity

1. CAPM approach
   \begin{aligned} & \qquad r_e=R_f+\beta\left[E\left(R_m\right)-R_f\right] \\ & R_f=\text { risk-free rate } \\ & \beta=\text { beta (systematic risk) of firm's stock } \\ & E\left(R_m\right)=\text { expected market return } \\ & E\left(R_m\right)-R_f=\text { expected market risk premium } \end{aligned}
   • 无风险收益率优先选择长期国债
2. DDM approach
   \begin{aligned} & \qquad P_0=\frac{D_1}{r_e-g} \longrightarrow r_e=\frac{D_1}{P_0}+g \\ & D_1=D_0\times(1+g)=\text { the expected dividends next period } \\ & P_0=\text { current stock price } \\ & g=\text { firm's expected constant growth rate }=（1-\text {payout ratio}）\times ROE \end{aligned}
3. Bond yield plus risk premium approach
   \begin{align} &r_e = r_d +\text { risk premium} \\ & r_d = \text {before-tax cost of debt} \\ & \text {risk premium} = \text {historical spread between stock return and debt return} \end{align}
   • Risk premium is the compensation return for the additional risk of equity compared with debt In developed country, risk premium ranges from 3% to 5%

Issues in Cost of Capital

Cost of capital for a public company上市公司的\beta

1. When estimating the cost of equity with CAPM approach,equity beta must be estimate
2. For publicly traded company, an unadjusted or “raw” historial beta can be estimated by an ordinary least square regression
   • A future beta tends to regress to the mean value of 1
   • Adjusted beta =(2/3)(Unadjusted beta)+(1/3)(1.0)

Cost of capital for a nonpublic company非上市公司的\beta

1. For a thinly traded or non-publicly traded company,estimation of the equity beta is challenging用类似公司的\beta来估计
   • using a publicly traded comparable company's equity beta（g） and adjusting it for financial leverage differences
   • Comparable company:a company with similar business risk经营风险一样，财务风险可以不一样
2. Pure-play method: un-lever & re-lever
   • Un-lever：去除财务风险
     \beta_A=\beta_E \times\left[\frac{1}{1+(1-\mathrm{t}) \times\frac{\mathrm{D}}{\mathrm{E}}}\right]
   • Re-lever：调整为自己的财务风险
     \beta_E^{\prime}=\beta_A \times\left[1+\left(1-\mathrm{t}^{\prime}\right) \times \frac{\mathrm{D}^{\prime}}{\mathrm{E}^{\prime}}\right]
     D/E: debt-to-equity ratio
3. higher leverage and lower liquidity contribute to higher β

Flotation Cost存在发行成本时

1. Flotation cost is relatively high in stock issuance
2. There are two ways to incorporate the flotation cost
   • Incorporate into the cost of capital （DDM）
   • Incorporate into the cash flows in NPV computation（Preferred）
3. Incorporate flotation cost
   Incorporate into the cost of capital （DDM）
   r_e=\frac{D_1}{P_0-F}+g \quad \text { or } \quad r_e=\frac{D_1}{P_0(1-f)}+g
   \mathrm{f}=flotation cost in percentage amount
   F=flotation cost in monetary amount
4. Incorporate into the cash flows in NPV computation
   NPV(\text{witout flotation cost})-F=NPV(\text{with floation cost})
   F=after-tax flotation cost in monetary amount

Capital Structure资本结构

Factors Affecting Capital Structure Decision

Internal factors

1. Business model characteristics商业模式
   • revenue, earnings, and cash flow sensitivity业务稳定性
   • asset type有形资产、无形资产
   • asset ownership所有权，如外包资产
2. Existing leverage杠杆高，再融资成本高
3. Corporate tax rate
4. Capital structure policies, guidelines
5. Third-party debt rating

External factors

1. Market conditions/business cycle
2. Regulatory constraints
3. Industry/peer firm leverage

Capital Structure and Company Life Cycle

Unique situations

1. Capital intensive businesses with marketable assets
   • Real estate, utilities, shipping, and airlines
   • tend to have higher leverage
2. Capital-light businesses
   • Software-based technology businesses
   • tend to have lower leverage

Modigliani-Miller Propositions

Modiglianjand-Miller assumption

1. Homogeneous expected cash flows同质化预期
2. Perfect capital markets完美资本市场
   • no transactions costs
   • no taxes
   • no bankruptcy costs
   • and symmetric information
3. Investors can borrow and lend at the risk-free rate无风险利率借贷
4. No agency costs没有代理成本
5. Independent financing decision & investment decision投融资决策互不干扰

Modigliani and Miller Theory（without taxes）

1. MM Proposition I：
2. Capital structure irrelevance资本结构无所谓
   V_{Levered} = V_{Unlevered}
3. MM Proposition II：
   r_e=r_0+(r_0-r_d)\times\frac{D}{E}
   • r_0=cost of capital for all-equity company
   • The cost of equity is a linear function of the company's debt/equity ratio
   • WACC不随权重改变，恒为r_0

Modigliani and Miller Theory（with taxes）

1. MM Proposition I：
   V_{Levered} = V_{Unlevered} + t\times Debt
   • t=marginal tax rate, t\times Debt=debt tax shield
   • A firm's optimal capital structure is all debt最优资本结构是全负债（因为税盾）
2. MM Proposition II：
   r_e=r_0+(r_0-r_d)(1-t)\times\frac{D}{E}
   • r_{WACC}\lt r_0
   • WACC for the company with debt must be lower than that for the all-equity company

Other Factors Affecting Capital Structure Decision

Costs of financial distress负债高的坏处

1. Direct costs: actual cash expenses associated with the bankruptcy process
   • legal and administrative fees
2. Indirect costs
   • forgone失去 investment opportunities, impaired ability to conduct business, etc.
3. Leverage increases → Probability of bankruptcy increases

Optimal capital structure

1. Static trade-off theory of capital structure
   \mathrm{V}_{\mathrm{L}}=\mathrm{V}_{\mathrm{U}}+\mathrm{t} \times \mathrm{Debt}-\mathrm{PV}\text{(costs of financial distress)}
   • Debt can be a significant portion because of tax-deductibility
     

Information asymmetric信息不对称成本

1. The higher information asymmetric信息不对称, the higher returns demanded by both debt and equity capital suppliers信息不对称使得要求回报率高
2. Pecking order theory(signaling model)
   • Internal capital> Debt > External equity

Agency costs代理成本

1. Agency theory predicts that an increase in use of debt results in a reduction in agency costs
   • Monitoring costs are the costs borne by owners to monitor the management of the company监控代理人的成本
   • Bonding costs are the costs borne by owners to assure that managements are working in the owner's best interest绑定利益的成本
2. Michael Jensen's free cash flow hypothesis
   • Higher debt levels discipline managers by reducing the company's free cash flow and thus management's opportunities to misuse cash

Leverage

Definition of Leverage

1. A given change in one variable leads to a greater change in other variable because of fixed cost
   • Operating leverage: created by fixed operating cost(e.g.depreciation and rent)
   • Financial leverage: created by fixed financial cost(e.g. interest)

2. Leverage increases the volatility of a company's earnings and cash flows (both up and down), as well as increases the risk of creditors or shareholders of a company.
   • 股利不会带来杠杆

Measures of Leverage

Risk decomposition

1. Business risk: the risk associated with operating earning, and is the combination of sales risk and operating risk
   • Sales risk: uncertainty with respect to the price and quantity of goods and services
   • Operating risk: risk attributed to the use of fixed cost in operation(e.g. rent, depreciation)
2. Financial risk: the risk associated with how a company finances its operations

Degree of operating leverage (DOL 经营杠杆)

1. DOL is a quantitative measure of the sensitivity of operating income to changes in revenues
   \begin{aligned} & \mathrm{DOL}=\frac{\text { Percentage change in EBIT }}{\text { Percentage change in sales }}=\frac{\frac{\Delta \mathrm{EBIT}}{\mathrm{EBIT}}}{\frac{\Delta \mathrm{Q}}{\mathrm{Q}}} \\ & \mathrm{DOL}=\frac{\mathrm{Q}(\mathrm{P}-\mathrm{V})}{\mathrm{Q}(\mathrm{P}-\mathrm{V})-\mathrm{F}}=\frac{\text { Contribution margin }}{\text { Contribution margin }-\mathrm{F}}=\frac{\mathrm{EBIT}+\mathrm{F}}{\mathrm{EBIT}} \end{aligned}
   • If EBlT is positive and fixed operating cost is greater than 0,DOL is greater than 1

Degree of financial leverage（DFL 财务杠杆）

1. DFL is a quantitative measure of the sensitivity of net income to changes in operating income.
   \mathrm{DFL}=\frac{\text { Percentage change in NI }}{\text { Percentage change in EBIT }}=\frac{\frac{\Delta \mathrm{NI}}{\mathrm{NI}}}{\frac{\Delta \mathrm{EBIT}}{\text { EBIT }}}=\frac{\mathrm{EBIT}}{\text { EBIT }- \text { Int. }}
   • If interest is greater than 0, DFL is greater than 1.
   • DFL is no affected by the tax rate because tax is not fixed cost.

Degree of total leverage （DTL）

1. Measure of the sensitivity of net income to changes in the number of units produced and sold
2. A combination of DOL and DFL
   \begin{aligned} & \text { DTL }=\frac{\frac{\Delta \mathrm{NI}}{\mathrm{NI}}}{\frac{\Delta \text { Sales }}{\text { Sales }}}=\frac{\frac{\Delta \mathrm{EBIT}}{\text { EBIT }}}{\frac{\Delta \text { Sales }}{\text { Sales }}} \times \frac{\frac{\Delta \mathrm{NI}}{\mathrm{NI}}}{\frac{\Delta \mathrm{EBIT}}{\text { EBIT }}}=\mathrm{DOL} \times \mathrm{DFL} \\ & \mathrm{DTL}=\frac{\mathrm{Q}(\mathrm{P}-\mathrm{V})}{\mathrm{Q}(\mathrm{P}-\mathrm{V})-\mathrm{F}-\mathrm{Int} .}=\frac{\mathrm{EBIT}+\mathrm{F}}{\text { EBIT }- \text { Int. }} \end{aligned}

Breakeven point

1. Breakeven point （Q_{BE}）：quantity of sales at which the company's net income is zero
   \mathrm{Q}_{\mathrm{BE}}=\frac{\text { Fixed cost }}{\text { Unit contribution margin }}=\frac{\mathrm{F}+\text { Int. }}{\mathrm{P}-\mathrm{V}}
2. Operating breakeven point （Q_{OBE}）：quantity of sales at which the company's operating income is zero
   \mathrm{Q}_{\mathrm{OBE}}=\frac{\text { Fixed operating cost }}{\text { Unit contribution margin }}=\frac{\mathrm{F}}{\mathrm{P}-\mathrm{V}}

Corporate Structures and Ownership & Business Models

Corporate Structures商业结构 and Owners所有人

Classification of business structure

企业大于公司

• 独资企业
• 普通合伙企业（只有一种合伙人GP出资）
• 有限合伙企业（还有有限合伙人LP出资）
• 有限责任公司

Classification of corporation

1. Nonprofits非营利性公司: might generate profits, but profits cannot be paid out as dividends没有股东，利润免税，只能再投资
2. For-Profits: profit seeking business entity
   • Private非上市
   • Public上市: exchange listed company,or the number of its shareholder is greater than certain amount

Difference between private and public company

1. Exchange listing and share ownership transfer
   • Private: not trade on exchange, difficult to transfer shares
   • Public: trade on exchange, easy to transfer shares
2. Registration and disclosure requirements
   • Private: meets registration requirements
   • Public: meets registration, mandated disclosure and exchange listing requirements
3. Share issuance
   • Private: issue shares through private placement私下配售 with a legal document “Private Placement Memorandum（PPM 私下配售备忘录）" to accredited investors合格投资者
   • Public: issue shares in the capital market公开增发 with much larger size capital raised

Public and private company conversion

1. Private to Public
   • Initial Public Offering （IPO首次公开募股发行）
   • Direct Listing （DL直接上市）：
     No investment bank involved不需要投行，速度快成本低
     No new capital is raised没有发行新股
   • Acquisition并购
     Acquired by a public company 被已上市公司并购
     Special Purpose Acquisition Company （SPAC）
2. Public to Private私有化
   • Leveraged Buyout （LBO杠杆收购）
   • Management Buyout （MBO管理层收购）

Trends in public and private companies

1. Emerging markets: number of public companies increases
2. Developed markets: number of public companies declines
   • Mergers and acquisitions
   • LBOs and MBOs
   • Private companies remain private
     Easy to access capital in private markets
     Avoid the regulatory burdens
     Avoid public investors' short-term focus
     Greater decision-making flexibility

Differences between lenders and owners

1. Lenders （debtholders） have
   • Priority claims over principal and interest
   • No voting power
   • Legal standing to force bankruptcy and liquidation
     破产保护，期间债权人必须等着
     破产清算，砸锅卖铁还债
     破产重组，原股东扫地出门，债权人变成新股东
2. Owners （shareholders） have
   • Residual claims over net asset and dividend
   • Voting power

Business Models & Risks

Business Model Features

1. Value proposition价值主张
   • Customers客户与市场（who）
   • Firm offering企业提供的产品和服务（what）
   • Channels渠道（where）
     Direct sales strategy直销: disintermediate没有中间商,cost-effective
     Agency代销: drop shipping
     Omnichannel strategy全渠道，线上+线下
   • Pricing定价（how much）
     Premium, parity, discount
     Price setter价格制定者, price taker
     A company with little differentiation in products and high price sensitivity is a price taker and it's not appropriate to take premium pricing.
2. Value chain价值链条: 单个企业本身如何为客户创造价值
   • Supply chain供应链: 企业内外部生产产品或提供服务的整个过程。在外部，可能涉及多个企业
3. 盈利水平（profitability）
   • 利润率（profit margin）
   • 单位收益与单位成本（unit economics）
   • 盈亏平衡点（break-even points）

Pricing定价策略

1. Pricing and revenue models定价模型
   • Value-based pricing基于客户获得的价值进行定价
   • Cost-based pricing基于发生的成本进行定价
2. Price discrimination价格歧视
   • Auction/reverse auction models根据人
   • Tiered pricing分级定价。如批发
   • Dynamic pricing动态定价。根据时间
   • Auction/Reverse auction models拍卖/逆向拍卖
3. Pricing for multiple products多产品定价
   • Bundling捆绑销售
   • Razors-and-blades pricing“剃刀-刀片"定价。本体便宜而配套消耗品高定价
   • Optional product pricing可选商品定价。加购同类或配套产品有优惠
4. Pricing for rapid growth追求高速增长的定价
   • Penetration pricing渗透定价。低价抢占份额
   • Freemium pricing免费模式。提供免费版和付费版，如游戏氪金
   • Hidden revenue business models隐性收入模式。表面免费，如微信抖音等传媒业
5. Alternatives to ownership购买的替代
   • Recurring revenue/subscription pricing订阅。如会员模式
   • Fractionalization分解。碎片化出租服务，空间上（如写字楼）和时间上（如共享单车）
   • Leasing租赁
   • Licensing授权。无形资产提供，如版权专利
   • Franchising特许经营。比授权更全面，不仅包括无形资产

Profitability and unit economics

1. Operating profit/margin经营利润率
2. Unit economics
   • Revenues and costs in per-unit basis
3. Break-even point盈亏平衡销量

Business Model Types

1. Business model variations商业模式的变动
   • Private label or “contract” manufacturers自有品牌
   • Licensing arrangements贴牌加工
   • Value added resellers增值销售。提供附加服务，如4s店
   • Franchise models特许经营
2. E-Commerce business models电子商务的商业模式
   • Affiliate marketing: performance marketing联盟营销。如微信选择优质伙伴，提供流量然后收取利益
   • Marketplace businesses: without ownership of products交易平台。如淘宝，不参与经营
   • Aggregators: re-markets products and services聚合模式。交易平台的升级，有自有品牌，如京东自营，参与经营
3. Network effects网络效应 and platform business models
   • increasing value of a network to its users as more users join.具有正外部性
   • One-sided同质如微信 network effects
   • Two-sided异质如淘宝 or multi-sided network effects
4. Crowdsourcing business models众包业务模式。买方参与卖方的产品通过，如UGC
5. Hybrid business models混合模式

Financial lmplication影响融资

1. External factors
   • Economic conditions宏观环境
   • Demographic trends人口趋势
   • Sector demand characteristics vary by industry行业需求特征，如刚需
   • Industry cost characteristics行业成本，资本密集型或轻资产
   • Political, legal, and regulatory environment法律监管因素
   • Social and political trends社会趋势
2. Firm-specific factors
   • Stage of development of the business所处阶段，如初创
   • Competitive position竞争地位，如品牌优势
   • Business model商业模式
     Asset-light business models轻资产
     Lean startups精益创业，外包一切
     Pay-in-advance预收款，下游预售+上游赊购

Risks

1. Marco risk宏观风险

   • Impact all businesses
   • Industries that are more sensitive to economic activities have a higher level of macro risk.

2. Business risk业务风险

   • Industry risks行业风险
     Cyclicality行业周期
     Industry structure行业结构
     Competitive intensity行业集中度
     Competitive dynamics within the value chain波特五力
     Long-term growth and demand outlook前景
   • Company-specific risks公司风险
     Execution risk: management执行风险
     Capital investment risk：sub-optimal investment投资不有效
     ESG risk: governance risk环保社会公司治理
     Operating leverage经营杠杆
     Product market risk产品上市风险
     Competitive risk竞争风险

     Cost advantages规模效应
     Product or service differentiation差异化
     Network effects正反馈
     Switching barriers转化障碍

3. Financial risk财务风险

   • Financial leverage
   • Total leverage

Corporate Govenance and ESG

Stakeholder Groups

Definition of corporate governance

1. Corporate governance is the system of internal controls and procedures by which individual companies are managed
   • Shareholder theory takes the view that the most important responsibility of a company's managers is to maximize shareholder's profits
   • Stakeholder theory focuses on the interest of all stakeholder groups, and try to minimize and manage the conflicting interests between stakeholders

Stakeholder groups

1. Shareholders
2. Board of directors
   • Some companies have staggered boards交错改选，每次只允许更换一部分董事
3. Managers and employees
4. Creditors
5. Suppliers
6. Customers
7. Government

Corporate governance theories

1. Shareholder theory: the most important responsibility of a company's managers to maximize shareholder value
2. Stakeholder theory: consider the interests of not only its shareholders, but also its customers, suppliers, employees,and others who have an interest in the company

Relationships Between Stakeholders

Principal-agent relationship委托代理关系

1. Shareholder vs. Management/Board of directors
   • Conflicts of interest
     Entrenchment极度的保守
     Excessive risk taking激进 （if giving management too many stock grants and options）
     Empire building盲目扩张
   • Agency costs

Other relationships

1. Controlling控股股东 vs. Minority shareholder少数股东
   • Voting rights（e.g.， takeover transactions收购交易）
2. Manager vs. Board
   • Information asymmetries信息不透明
3. Shareholders vs.Creditor（Debtholder）
   • Different structure of risks and returns风险承受能力不同

Stakeholder Management

Stakeholder management

1. Involves identifying, understanding, and prioritizing the interests of stakeholder groups, then managing the company's relationships with these groups
   • Need to reflect legal, contractual, organizational, and governmental infrastructure that defines the rights,responsibilities, and powers of each group

Mechanisms of stakeholder management

• Shareholder mechanisms
• Board of director and management mechanisms
• Employee mechanisms
• Creditor mechanisms
• Customer and supplier mechanisms
• Government mechanisms

Shareholder mechanisms

1. Shareholder meetings股东大会
   • Annual general meeting（AGM，年度股东大会）
   • Extraordinary general meeting（EGM，临时股东大会）
     公司章程修订、兼并收购、变卖重大资产业务
     需要更多投票
   • Proxy voting: authorize another to vote代理投票
   • Voting process：Straight voting vs. Cumulative voting利于中小股东
   • Unequal voting rights: Dual-share classes同股不同权
2. Corporate reporting and transparency披露财报
3. Shareholder activism （e.g.， hedge funds）股东参与管理
4. Shareholder derivative lawsuits股东诉讼
5. Corporate takeovers企业收购
   • Tender offers要约收购
   • Proxy fight代理权争夺战
   • Hostile takeover恶意收购 & anti-takeover measures反收购

Board of director mechanisms - committees

1. Audit committee审计委员会: oversee the audit and control systems at the company and ensure their effectiveness. Supervising the internal audit function, recommending external auditors.
   • Composed of independent directors only.
2. Remuneration/Compensation committee薪酬委员会: develops and proposes remuneration policies for the directors and key executives, with shareholders' say on pay股东对高管薪酬有话语权.
   • Majority of members should be independent.
3. Governance committee治理委员会: ensure that the company adopts good corporate governance practices.
4. Nomination committee提名委员会: nominate candidates as directors and senior executives, for election by shareholders.
5. Risk committee风险管理委员会: assists the board in determining the risk policy, profile, and appetite of the company.
6. Investment committee投资委员会: reviews material investment opportunities and considers their viability

Creditor mechanisms

1. Bond indenture（e.g.， covenants条款, collaterals抵押品）
2. Corporate reporting and transparency
3. Creditor committees

Government Mechanisms

1. Laws & regulations
   • Common law（better protection for equity & debtholders）
   • Civil law
2. Corporate governance codes as guiding principles

Corporate Governance Risks & Benefits

Other ESG Considerations

ESG integration/ESG investing

1. The practice of considering environmental, social, and governance factors in the investment process
2. Also referred to as：
   • Sustainable Investing （SI）
   • Responsible Investing（RI）
   • Social Responsible Investing（SRI）

ESG implementation methods

1. Negative screening: exclude certain sectors companies that violate accepted standards in ESG concerns不投黑名单
2. Positive screening/best-in-class approaches: focus on investments with favorable ESG aspects, aims to identify companies that embrace solid ESG-related principles in their operations and strategies投白名单
3. Full integration into individual stock valuation is the explicit inclusion of ESG factors into traditional financial analysis of individual stocks （e.g.， as inputs into cash flow forecasts and/or cost-of-capital estimates）将ESG融入投资决策中
4. Thematic investing主题投资:is investment in themes or assets specifically related to ESG factors, such as clean energy, green technology, or sustainable agriculture围绕符合ESG主题的公司投资
5. Engagement/active ownership: Uses shareholder power to influence corporate behavior收购股份然后要求公司做ESG
6. Impact investing影响投资: Seeks to achieve targeted social or environmental objectives along with measurable financial returns投资需要达到自己设定的ESG目的