Refresher Reading
Sources of Capital
2022 Curriculum CFA Program Level I Corporate Finance
Introduction
Raising capital is a fundamental business activity, and companies have multiple short-term and long-term financing choices. Short-term funds without explicit interest rates, such as accounts payable, are part of working capital management, which is the management of short-term assets and liabilities. Other debt and equity obligations used to finance the business longer term are considered part of the firm’s capital structure. The goal of effective working capital management is to ensure that a company has adequate, ready access to the funds necessary for day-to-day operations, while at the same time making sure that the company’s assets are invested in the most productive way. The goal of capital structure management is to balance the risks and costs of the firm’s long-term finances. In this reading, we examine a variety of debt and equity claims that companies rely on for their sources of capital. This reading also considers sources of liquidity and how to judge the liquidity positions of firms.
Learning Outcomes
The member should be able to:
- describe types of financing methods and considerations in their selection;
- describe primary and secondary sources of liquidity and factors that influence a company’s liquidity position;
- compare a company’s liquidity position with that of peer companies;
- evaluate choices of short-term funding.
In this reading, we considered key aspects of capital alternatives and short-term financial management: the financing choices available to a company and effective liquidity management. Both are critical in ensuring a company’s solvency and ability to remain in business. If done improperly, the results can be disastrous for the company.
This reading covered the following:
- Describing internal and external sources of capital and the considerations that lead to their selection
- Describing primary and secondary sources of liquidity and factors that can enhance a company’s liquidity position
- Understanding how to evaluate a company’s liquidity position and comparing it to peer companies
- Evaluating the short-term financing choices available to a company based on their characteristics and their effective costs.