Corporate Issuers covers how companies raise capital, govern themselves, and return value to shareholders. The topic spans capital structure theory (Modigliani-Miller), cost of capital, dividend policy, and corporate governance frameworks including the principal-agent problem. It is a relatively lighter exam topic (6–9%) but questions are highly conceptual and reward candidates who understand the "why" behind financing decisions.
WACC as a hurdle rate: accept projects with IRR > WACC and NPV > 0. The WACC represents the minimum return that satisfies all capital providers.
Capital structure trade-offs: tax shield from debt increases firm value; financial distress costs and agency costs of debt reduce it. The static trade-off theory says optimal leverage balances these two forces.
Dividend irrelevance (MM with taxes): in a perfect market dividends don't matter because investors can create homemade dividends. In reality, signalling, clientele effects, and taxes make dividend policy relevant.
Corporate governance: the principal-agent problem arises when managers (agents) have incentives misaligned with shareholders (principals). Solutions include equity-based compensation, independent boards, and takeover threats.
Using book-value weights for WACC instead of market-value weights — book values reflect historical costs and may be very different from current market values.
Forgetting the tax shield adjustment for the cost of debt: after-tax cost = rd × (1 − tax rate). Preferred dividends have no tax shield.
Confusing MM Proposition I (capital structure is irrelevant in perfect markets → firm value is unchanged) with MM Proposition II (cost of equity rises with leverage to offset the benefit of cheap debt).
Greymont Prep’s diagnostic AI figures out exactly why you get Corporate Issuers questions wrong — not just which concept, but the specific reasoning error. Seven days free, no credit card.