CFA Level I study sheet · Topic 6

Equities

Chartered Financial Analyst (CFA®) Program Level I exam

11-14% of the exam · 12 learning modules · 2027 curriculum

Equities covers what shares are and how they trade, how shareholders earn returns, and how analysts value a company with present value models, multiples and forecast models built on industry and company analysis. Level I questions mix definitions and structure with short valuation calculations: dividend discount models, preferred shares, multiples, enterprise value, float, total return and the CAPM.

You should be able to: You should be able to describe share types, markets and returns, value a share with dividend, preferred and multiples models, and estimate a required return with the CAPM.

Every learning module: the key point and the trap

1. EQ.1 Shares: types and core features

   Common shares carry the residual claim: they are paid last in liquidation but keep all value above other claims, and usually carry the votes.

   Trap: Cumulative, participating and convertible are different features: only cumulative creates dividend arrears.

2. EQ.2 Share classes, votes and proxy advice

   Jurisdictions differ in shareholder rights: how directors are elected, which decisions need a shareholder vote, and how easily minorities can challenge the board.

   Trap: Extra votes do not mean extra dividends or priority in liquidation; the classes usually share the same economic claim.

3. EQ.3 Equity markets, trading venues and indexes

   The primary market is where issuers sell new shares (an IPO, a seasoned offering, a private placement); the secondary market is where investors trade existing shares.

   Trap: Float excludes every closely held block, not only insiders' shares: strategic and government stakes count too.

4. EQ.4 Dividends, buybacks, splits and share returns

   Returns come from price change and distributions: total return = (P1 - P0 + D) / P0; price return leaves out the dividend.

   Trap: The ex-dividend date, not the record date, decides who gets the dividend when buying in the market.

5. EQ.5 Price, value and families of valuation models

   Price is what the market charges; intrinsic value is the analyst's estimate of what the share is worth. Value above price suggests undervaluation, below price overvaluation.

   Trap: Cash is subtracted, not added, when moving from market capitalization to enterprise value.

6. EQ.6 Present value models for shares

   Dividend discount model: value = present value of expected dividends at the required return on equity. FCFE is discounted at the cost of equity and gives equity value directly; FCFF is discounted at the WACC and gives firm value, from which debt is subtracted.

   Trap: The terminal value at year n uses the dividend of year n + 1 and is discounted n years, not n + 1.

7. EQ.7 Valuing shares with price and EV multiples

   Method of comparables: apply a benchmark multiple (often a peer median) to the company's own fundamental, assuming peers are fairly priced.

   Trap: Dividing EBITDA into market capitalization instead of enterprise value mixes equity and firm measures.

8. EQ.8 Building forecast models to value equity

   A forecast model projects the income statement, balance sheet and cash flow statement together, starting from revenue.

   Trap: Forecasting costs or capital spending without linking them to revenue gives a model whose cash flow ignores its own growth.

9. EQ.9 Analysing industries and competitive forces

   Industry analysis: define the industry, measure its size, growth and profitability, assess its structure and external influences, then position the company.

   Trap: A tax or regulation change is political or legal, a change in tastes is social: classify the factor by its source.

10. EQ.10 Company strategy, drivers and capital needs

    Competitive strategy: cost leadership, differentiation or a focus on a niche; position shows in margins and returns relative to peers.

    Trap: A margin rise from spreading fixed costs over more volume is operating leverage, not pricing power.

11. EQ.11 Writing and reading equity research

    A full company report covers the investment thesis, the business and industry, financial analysis and forecasts, valuation, risks, and a recommendation or target price.

    Trap: Wide distribution and public ratings belong to sell-side research, not buy-side.

12. EQ.12 CAPM and factor models for required return

    CAPM: required return = rf + beta x (E(Rm) - rf), where E(Rm) - rf is the market (equity) risk premium.

    Trap: Multiply beta by the risk premium, not by the market return, unless the risk-free rate is subtracted first.

Key terms

Float:

Shares available to trade: shares outstanding less closely held and restricted shares.

Ex-dividend date:

The first day a share trades without the right to the declared dividend.

Enterprise value:

Market capitalization plus debt, preferred and minority interest, less cash.

Intrinsic value:

An analyst's estimate of a share's worth from its expected cash flows and risk.

Gordon growth model:

Value equals next year's dividend divided by the required return less a constant growth rate.

Justified multiple:

A multiple derived from fundamentals such as payout, required return and growth.

Five forces:

Entry, suppliers, buyers, substitutes and rivalry, which together shape industry profitability.

Cash conversion cycle:

Days of inventory plus days of receivables less days of payables.

Beta:

A share's sensitivity to market returns, the slope of the market model.

Arbitrage pricing theory:

A no-arbitrage model pricing several systematic risk factors.

ExamDragon, examdragon.com/cfa. Independent exam preparation, not affiliated with or endorsed by CFA Institute; written in our own words from the 2027 Level I curriculum topics. CFA® and Chartered Financial Analyst® are trademarks of CFA Institute.