Corporate Finance

Technical Foundations

Effective from 11 April 2023

© Chartered Institute for Securities & Investment
2 © Chartered Institute for Securities & Investment Version 18
 Corporate Finance Technical Foundations

Objective of the examination

The objective of the examination is to ensure that candidates have a basic knowledge of
the technical aspects of carrying out corporate finance business, including preparing
and analysing financial statements, the methodology of raising capital, business
valuation techniques and a range of corporate transactions.

The examination will test candidates’ knowledge and understanding of the following
elements:

• Quantitative Methods for Corporate Finance

• Financial Statements Analysis
• Capital Structure
• Introduction to Business Valuations
• Corporate Transactions
• Corporate Finance Documentation

Candidates should ensure that they have sufficient understanding of the use of a
calculator to undertake the calculations required in this syllabus.

Version 18 © Chartered Institute for Securities & Investment 1

 Corporate Finance Technical Foundations

Syllabus structure

The unit is divided into elements. These are broken down into a series of learning
objectives.

Each learning objective begins with one of the following prefixes: know, understand or
be able to calculate. These words indicate the different levels of skill to be tested.

• know requires the candidate to recall information such as facts, rules and
principles

• understand requires the candidate to demonstrate comprehension of an issue,

fact, rule or principle

• be able to calculate requires the candidate to be able to use formulae to

perform calculations

Candidate Update

Candidates are reminded to check the ‘Candidate Update’ area of the Institute’s website
(cisi.org/candidateupdate) on a regular basis for updates that could affect their
examination as a result of industry change.

2 © Chartered Institute for Securities & Investment Version 18

 Corporate Finance Technical Foundations

Examination Specification

Each examination paper is constructed from a specification that determines the

weightings that will be given to each element. The specification is given below.

It is important to note that the numbers quoted may vary slightly from examination to
examination as there is some flexibility to ensure that each examination has a consistent
level of difficulty. However, the number of questions tested in each element should not
change by more than two.

Examination specification
50 multiple-choice questions
Element
Element Questions
number
1 Quantitative Methods for Corporate Finance 7
2 Financial Statements Analysis 9
3 Capital Structure 8
4 Introduction to Business Valuations 9
5 Corporate Transactions 10
6 Corporate Finance Documentation 7
Total 50

Assessment Structure

Assessment is a one hour examination of 50 multiple choice questions.

Candidates sitting the exam by Computer Based Testing may have, in addition, up to
10% additional questions as trial questions that will not be separately identified and do
not contribute to the result. Candidates will be given proportionately more time to
complete the test.

Version 18 © Chartered Institute for Securities & Investment 3

 Corporate Finance Technical Foundations

Summary Syllabus

Element 1 Quantitative Methods for Corporate Finance

1.1 Financial mathematics
1.2 Discounted cash flows
Element 2 Financial Statements Analysis
2.1 Basic principles
2.2 Statement of financial position/balance sheet
2.3 Statement of Comprehensive Income
2.4 Statement of Cash flows
2.5 Financial statements analysis
Element 3 Capital Structure
3.1 Components of capital structure
3.2 Equity capital
3.3 Debt capital
3.4 The cost of capital
Element 4 Introduction to Business Valuations
4.1 Equity value and enterprise value
4.2 Stock market, transaction and break-up values
4.3 Asset-based valuations
4.4 Dividend-based valuations
4.5 Earnings-based valuations
4.6 Cash-based valuations
Element 5 Corporate Transactions
5.1 Acquisitions and disposals
5.2 Private equity and debt-financed transactions
5.3 Quoted equity transactions
Element 6 Corporate Finance Documentation
6.1 For General purposes
6.2 Buying and selling
6.3 Loan and security
6.4 Public companies

4 © Chartered Institute for Securities & Investment Version 18

 Corporate Finance Technical Foundations

Element 1 Quantitative Methods for Corporate Finance

1.1 Financial mathematics

On completion, the candidate should:

understand how to measure the risk and return of investments

be able to calculate the expected and average return on

investments

be able to calculate the degree of variability of investments using

the variance and standard deviation of returns

be able to calculate the covariance of investments

understand the concept of the correlation of investment returns

Understand the correlation co-efficient of investments

1.2 Discounted cash flows

On completion the candidate should:

be able to calculate the present value (PV) and net present value
(NPV) of future multiple cash flows using the discounting formula

understand the internal rate of return (IRR) for a series of multiple

cash flows

Element 2 Financial Statements Analysis

2.1 Basic principles

On completion the candidate should:

understand the purposes of financial statements and their limitations

understand the requirements for companies and groups to prepare

accounts in accordance with applicable accounting standards
including IFRS and US GAAP

know the purpose of IFRS and the objective of harmonisation of

accounting standards

Version 18 © Chartered Institute for Securities & Investment 5

 Corporate Finance Technical Foundations

understand the differences between group accounts and company

accounts and why companies are required to prepare group
accounts

understand the concepts of goodwill and minority interests and their

significance for a company’s financial position

know the additional narrative reporting requirements of companies

and what these must include

2.2 Statement of financial position/balance sheet

On completion the candidate should:

know the purposes of the statement of financial position, its format

and main contents

understand the concepts of depreciation and amortisation

understand the differences between authorised and issued share

capital, capital reserves and retained earnings

know how loans and indebtedness are included within a statement

of financial position

2.3 Statement of Comprehensive Income

On completion the candidate should:

know the purposes of the statement of comprehensive income, its

format and main contents

understand the differences between income from ordinary activities

and other items included in comprehensive income

understand the differences between capital and revenue

expenditure

2.4 Statement of Cash flows

On completion the candidate should:

know the purposes of the statement of cash flows and its format as
set out in International Accounting Standard 7 (IAS7)

6 © Chartered Institute for Securities & Investment Version 18

 Corporate Finance Technical Foundations

understand the differences between profit and cash flow and their
separate implications for a business

understand the concepts of free cash flow, earnings before interest,

tax, depreciation, and amortisation (EBITDA) and net operating
profit after tax (NOPAT)

understand the difference between enterprise cash flow and equity

cash flow including the concept of cash flow available for debt
service (CFADS)

2.5 Financial statements analysis

On completion the candidate should:

understand the following key ratios:

• profitability ratios (gross profit and operating profit margins)

• return on capital employed

• return on equity

• liquidity (including quick ratio and current ratio)

be able to calculate the following key ratios:

• gross profit margin

• operating profit margin

• return on capital employed

• return on equity

• liquidity (including quick ratio and current ratio)

understand the following financial gearing ratios:

• debt to equity ratio

• net debt to equity ratio

• net debt to EBITDA

• interest cover

be able to calculate the following financial gearing ratios:

• debt to equity ratio

Version 18 © Chartered Institute for Securities & Investment 7

 Corporate Finance Technical Foundations

• net debt to equity ratio

• net debt to EBITDA

• interest cover

understand the following investors’ ratios:

• earnings per share

• diluted earnings per share

• price earnings ratio (both historic and prospective)

• enterprise value to EBIT

• enterprise value to EBITDA

• dividend yield

• dividend cover

• price to book

be able to calculate the following investors’ ratios:

• earnings per share

• diluted earnings per share

• price earnings ratio (both historic and prospective)

• enterprise value to EBIT

• enterprise value to EBITDA

• dividend yield

• dividend cover

• price to book

Element 3 Capital Structure

3.1 Components of capital structure

On completion the candidate should:

understand the elements of capital structure and the seniority

ranking of equity and debt instruments

8 © Chartered Institute for Securities & Investment Version 18

 Corporate Finance Technical Foundations

3.2 Equity capital

On completion, the candidate should:

know the typical characteristics of ordinary shares including:

• voting rights

• rights to dividends

• rights to participate in a surplus on winding up

know the typical characteristics of preference shares including:

• redeemable preference shares

• cumulative preference shares

• convertible preference shares

understand the meaning of the terms “listed” and “quoted” in relation

to a company's shares

3.3 Debt capital

On completion, the candidate should:

know the typical characteristics of and differences between the main

types of debt including:

• bank overdrafts and revolving credit facilities

• loans

• bonds

• convertibles

• zero coupon bonds

• contingent convertible bonds

know the typical characteristics of the following alternative ways of

debt financing:

• invoice factoring

• asset-based lending

• finance leasing

Version 18 © Chartered Institute for Securities & Investment 9

 Corporate Finance Technical Foundations

• sale and leaseback agreements

know the difference between fixed-rate and floating-rate interest

understand the difference between a fixed and a floating charge

understand the difference between senior and subordinated debt

understand the difference between par and premium redemption

understand the yield to maturity of bonds

understand the tax treatment of interest for the issuer of debt

understand that debt can be quoted or unquoted

understand the key factors in the pricing of debt

3.4 The cost of capital

On completion, the candidate should:

understand the meaning of the weighted average cost of capital

be able to calculate the weighted average cost of capital

know that the cost of equity is equal to the expected rate of total
return on shares

understand what beta measures in relation to equities

know that the expected rate of total return on shares can be

estimated using the capital asset pricing model (CAPM)

be able to calculate the expected return using the CAPM formula

be able to calculate the present value of a bond (three-year)

Element 4 Introduction to Business Valuations

4.1 Equity value and enterprise value

On completion the candidate should:

understand the distinction between equity value and enterprise

value

understand the use, advantages and disadvantages of enterprise

value
10 © Chartered Institute for Securities & Investment Version 18
 Corporate Finance Technical Foundations

know the differences between public and private companies with

respect to the availability and reliability of company information,
including the typical sources of such information

know the various responsibilities of public and private companies to

make information available or respond to information requests

4.2 Stock market, transaction and break-up values

On completion the candidate should:

understand the distinction between market, transaction and break-

up (liquidation) values of a business

know how to calculate the market value of a quoted company

4.3 Asset-based valuations

On completion the candidate should:

understand the use of asset-based valuations

know the limitations of asset-based valuations

4.4 Dividend-based valuations

On completion the candidate should:

understand the use of dividend-based valuations

be able to calculate a valuation of a business using dividend

valuation models

understand the limitations of dividend-based valuations

4.5 Earnings-based valuations

On completion the candidate should:

understand the use of an earnings-based valuation

be able to calculate the equity value of a business using the P/E

ratio

Version 18 © Chartered Institute for Securities & Investment 11

 Corporate Finance Technical Foundations

be able to calculate the enterprise value of a business using EBIT

and EBITDA comparative multiples

understand the limitations of earnings-based valuations

understand how to compare the market values of companies in

similar sectors by use of measures such as price / earnings (P/E)
ratios, EBIT and EBITDA multiples

4.6 Cash flow-based valuations

On completion the candidate should:

understand the use of cash flow-based valuations

understand the limitations of internal rate of return (IRR) and

discounted cash flow (DCF)

know how to calculate

• enterprise free cash flow

• NOPAT

• EBITDA

understand the key elements that need to be addressed in a cash

flow-based valuation

• historical analysis

• forecasting

• calculating a terminal value

• identifying an appropriate discount rate using the weighted

average cost of capital

be able to calculate a simple cash flow-based valuation

Element 5 Corporate Transactions

5.1 Acquisitions and disposals

On completion the candidate should:

know the key types of acquisition or disposal and their motivations

12 © Chartered Institute for Securities & Investment Version 18

 Corporate Finance Technical Foundations

• listed or private

• hostile or recommended

• owner / manager exit

• existing / continuing / new management participation

understand how acquisitions are typically financed and by whom

know the key features of and differences between a trade sale and
a spin-off

be able to calculate proceeds to holders of ordinary shares in a

trade sale or corporate exit

know the difference between an asset sale and share sale

5.2 Private equity and debt-financed transactions

On completion the candidate should:

know the definition of private equity

know the key features of and differences between:

• a management buy-out (MBO)

• a management buy-in (MBI)

• a leveraged buy-out (LBO)

• a leveraged buy-in (LBI)

• a buy-in management buy-out (BIMBO)

• an institutional buy-out (IBO)

• a public to private (PTP)

understand the key terms and phrases typically used in private

equity and debt transactions:

• debt / equity ratio

• gearing / leverage ratios

• capital structure i.e. types of shares and their rights (e.g.

dividend, liquidation preference, redemption conversion, anti-
dilution, pre-emption, voting)

Version 18 © Chartered Institute for Securities & Investment 13

 Corporate Finance Technical Foundations

• ratchets

• investment hurdles

• drag and tag provisions

• good leaver / bad leaver

• 'pay to play'

• bridge finance

• burn rate

• capitalise

• carried interest

• co-investment

• mezzanine debt

• down / follow-on round

• founder shares

understand the types of investment and the funding components of

a typical:

• trade sale

• MBO / MBI

• PTP

understand the principles applied in determining the levels / ratios of

equity and debt that may be available in such transactions

5.3 Quoted equity transactions

On completion the candidate should:

know the main types of investor and their mandate to invest in either
or both of quoted and unquoted shares:

• pension funds

• insurance companies

14 © Chartered Institute for Securities & Investment Version 18

 Corporate Finance Technical Foundations

• collective investment schemes (including open-ended funds and

closed-ended funds)

• venture capital investors (including Venture Capital Trusts in the

UK)

• directors / employees

• private individuals

• family offices

• hedge funds

understand the roles of the professional advisors in an IPO

• reporting accountants

• sponsors

• nominated advisers (NOMADs)

• underwriters

• lawyers

• PR consultants

• independent experts

understand why a company may choose to raise additional capital

via:

• a rights issue

• a placing

• a placing and open offer

understand the basic mechanics (including the options available to

a shareholder and role of any underwriters) of:

• a rights issue

• a placing

• a placing and open offer

understand the pricing of secondary issues

be able to calculate the theoretical ex-rights price and nil paid rights
price

Version 18 © Chartered Institute for Securities & Investment 15

 Corporate Finance Technical Foundations

understand the effect of clawback by qualifying shareholders under

a placing and an open offer

understand how the book-building and pricing process works

understand secondary market liquidity and its importance

understand the consequences of equity issuance on corporate

control

Element 6 Corporate Finance Documentation

6.1 For General purposes

On completion the candidate should:

understand the purpose and scope of a non-disclosure agreement

(NDA)

understand the purpose and scope of an engagement letter

understand the meaning, purpose and scope of representations,

warranties and indemnities

understand the purpose of a disclosure letter

understand the use of vendor protection clauses

understand the purpose and scope of a shareholders’ agreement

6.2 Buying and selling

On completion the candidate should:

understand the purpose and key contents of an information

memorandum

understand the purpose of a letter of intent and heads of agreement

understand the purpose of an exclusivity agreement

understand the purpose of comfort letters and side letters

understand the purpose of hold harmless letters

understand the purpose and scope of a sale and purchase

agreement

16 © Chartered Institute for Securities & Investment Version 18

 Corporate Finance Technical Foundations

6.3 Loan and security

On completion the candidate should:

understand the concept of taking security

understand the purpose and scope of a term sheet

understand the purpose and scope of a loan agreement and

conditions precedent

understand what guarantees, indemnities and covenants are in the

context of a debt transaction

understand the purpose, scope and limitations of loan

representations and warranties

understand the purpose of an inter-creditor agreement

6.4 Public companies

On completion the candidate should:

understand the purpose and scope of subscription / placing

agreements

understand the purpose and scope of underwriting agreements

understand the purpose of verification notes

understand the purpose and scope of a prospectus or admission

document

understand the purpose and scope of financial due diligence and

accountants’ reports

understand the purpose and scope of a legal due diligence report

understand the purpose and scope of a competent person’s or

independent expert’s report

understand the purpose and scope of a public takeover offer

document

understand the purpose and scope of a shareholder circular

Version 18 © Chartered Institute for Securities & Investment 17