Birla Institute of Technology & Science, PilaniWork –Integrated Learning Programmes Division

Second Semester 2013-2014Course Handout

Course No. : MM ZG521

Course Title : FINANCIAL MANAGEMENT

Instructor : NIRANJAN SWAIN

Course Description

This course helps students to gain an introduction to the concepts of time value of money, risk and rates of return, cost of capital, financial planning, capital investment decisions, capital management, capital structure and rewarding policy (shareholders), cconcepts and techniques of financial management decision; valuation of a firm’s stock, capital asset pricing model; risk analysis; working capital management, management of cash, management of accounts receivable; inventory management, short and intermediate term financing, long term financing tools of financial analysis, financial ratio analysis, funds analysis and financial forecasting, operating and financial leverages.

Course Objectives

The structure of the course will enable students to appreciate the integration between financial markets, business environment and the role of finance manager in maximizing firm's and shareholders' value.

This course helps students to gain an introduction to the principles of financial management, shareholders wealth maximization vs. profit maximization, time value of money, risk and return – investors’ and company’s perspectives, cost of capital, capital investment decisions, capital management, capital structure and rewarding policy (shareholders) and corporate taxation.

Teaching Methodology:

All additional course materials will be upload in taxila. The course will utilize the activity based learning methods such as project-based learning and problem-based learning in addition to the effective utilization of the electronic resources. Periodically students will be given assignments to apply/validate the concepts/theories discussed in the course in the context of an organization preferably student’s own employer. Therefore, each student will choose his/her own organization (employer), as a case study for all assignments, provided the same is listed in any stock exchange and if is not listed then can choose another organization one in the same industry (sector).

Prescribed Text Book:

T1. Prasanna Chandra, “Fundamentals of Financial Management, TMH, 5th 2010.

Reference Book

R1. Chandra Prasanna, Financial Management Theory and Practice, Tata McGraw-Hill, 8 th

Edition,

R2. Van Horne J.C., Financial Management and Policy, Pearson Education, 12th Edition, 2001.

MM ZG521 (Course Handout) Second Semester 2013-2014 Page 2

Plan of Study

S.No. Topics Learning ObjectivesReference

to Textbook

1-2 Financial Management: An Overview

Describe what the subject of financial management is about.

Interface between Finance and Other Functions. Interface between goal of the firm, responsibility of

finance manager and financial system. [Profit Maximization versus Shareholder Wealth Maximization].

Understanding 10 principles that form the basics of financial management.

Understanding Indian financial system – markets, features and participants

Reference Reading: Arvind Mahajan and Scott Lummer, Shareholder Wealth

Effect of Management Changes, Journal of Business and Accounting.

Donald R. Chambers and Nelson J. Lacey, Shareholder Wealth Maximization: Business Ethics and Social Responsibility, Journal of Business Ethics

Thomas E. Copeland, Why Value Value, McKinsey Quarterly.

Ch.1 & 2

3-6 Financial Statements Analysis and Interpretation

Understanding of various components of financial statement – Statement of Sources & Application of Funds, Statement of Income and Expenditure, and Statement of Funds Flow.

Financial Statement Analysis: Ration Analysis (Du Pont Analysis) and Interpretation.

Ch 3, 4, 5 & 6

7 The Time Value of Money

Mechanics of compounding: how money grows over time when it is invested.

Determine the future or present value of a sum when there are non-annual compounding periods.

Discuss the relationship between compounding (future value) and bringing money back to the present (present value).

Define an ordinary annuity and calculate its compound or future value.

Differentiate between an ordinary annuity and an annuity due, and determine the future and present value of an annuity due.

Calculate the annual percentage yield or effective annual rate of interest and then explain how it differs from the nominal or stated interest rate.

Ch.8

8-9 Risk and Return

Describe the relationship between the average returns that investors have earned and riskiness of these returns.

Explain the effects of inflation on rates of return. Describe term structure of interest rates. Define and measure the expected rate of return of an

individual investment. Define and measure the riskiness of an individual

investment. Measure the market risk of an individual asset.

Reference Reading: Robert F. Peterkort and James F. Nielsen, Is The Book-To-

Market Ratio a Measure of Risk? The Journal of Financial Research

Taek Ho Kwon, Sung C. Bae and Jay M. Chung, Do Foreign Investors Price Foreign Exchange Risk Differently? The Journal of Financial Research

Steven T Goldberg, 7 Sure Ways to Bigger Return

Ch.8

10-11 Analysis and Impact of Leverage (Business and Financial Risk)

Understand the difference between business risk and financial risk.

Use the technique of break-even analysis in a variety of analytical settings.

Distinguish among the financial concepts of operating leverage, financial leverage, and combined leverage.

Explain why a firm with a high business risk exposure might logically choose to employ a low degree of financial leverage in its financial structure.

Reference Reading: Richard A Lord, The Impact of Operating and Financial

Leverage on Equity Risk Brent A Gloy and Timothy G. Baker, The Impact of

Financial Leverage and Risk Aversion in Risk Management Strategy Selection

Hossein Asgharian, Are highly leveraged firms more sensitive to an economic downturn?

Richard A Lord, Interpreting and Measuring Operating Leverage.

Robert J Long, A Different Perspective on Operating Leverage: Comments.

Syllabus for Mid-Semester Test (Closed Book): Topics in S. No. 1 to 1112-13 Cost of Capital Understanding the application of cost of capital in business

decisions. Determine cost of various components of capital - cost of

debt, preferred stock, common stock and weighted average cost of capital.

Impact of floatation cost on cost of capital

Ch. 14

14-15 Techniques of Capital Budgeting

Understanding different types and importance of capital expenditure decisions on business sustainability.

Understanding various non-discounted and discounted cash flow methods and their application in capital expenditure decisions.

Understanding limitations of discounted and non-discounted cash flow evaluation methods and exploring best possible option.

Analysing and measuring various risk involved in capital expenditure – Scenarios Analysis, Sensitivity Analysis and Decision Trees Analysis.

Reference Reading: Thomas E. Copeland and Philip T. Keenan, How much is

the Flexibility Worth? Jeremy Carter ¥ Menno van Dijk ¥ Ken Gibson, Capital

Investment: How not to build the Titanic. Harol H. Koyama and Robert Van Tassel, How to Trim

Capital Spending by 25 percent?

Ch. 11, 12 & 13

Review Session 16-17 Working

Capital Management

Objective of Working Capital Management, Static and Dynamic view of Working Capital

Factors Affecting Composition of Working Capital Working Capital Determination – Operating Cycle and

Simulation Approach.. Criteria for Evaluation of Working Capital Management. Financing Current Assets:

a. Behaviour of Current Assets and Pattern of Financing

b. Spontaneous Sources of Financec. Trade Credit, Short-term bank finance, PDs, CPs

and Factoring. Management of Current Assets

a. Inventories - Role of Inventories in Working Capital, Cost of carrying inventories, Inventories planning and management techniques.

b. Receivables – Purpose and cost of Maintaining

Ch. 22 to 26

Receivables, Impact of Credit Policy and Process of Credit Evaluation, Decision Tree Approach and Monitoring Receivables.

Management of Cash:a. Difference between profits and cash, Factors

affecting cash management and Internal Treasury Controls.

18-19 Capital Structure and Firm Value

Understanding Theories of Capital Structure (MM Theories).

Asymmetric Information Theory – Pecking Order Theory Understanding financial distress and agency cost Determinants of capital structure. An approach to setting the target capital structure.

Reference Reading: Saumitra N. Bhaduri, Determinants of Corporate

Borrowing: Some Evidence from the Indian Corporate Structure.

Thomas W. Killian, Designing an Optimal Capital Structure

Erik Lie, Do Firms Undertake Self-Tender Offers to Optimize Capital Structure?

Linda, Thomas and Stephen, Debt vs. Equity and Asymmetric Information

Chin-Bun Tse, Top Gearing.

Ch.15 & 16

20-21 Dividend Policy and Firm Value

Understanding dividend versus capital gains: What do investors prefer?

Appreciating rationale behind stable dividend policy. Understanding other means of rewarding to the

shareholders – Bonus Share, Stock Options, Stock Split, Share Buyback, etc.

Reference Reading: Aswath Damodaran, Beyond Cash Dividends: Buybacks,

Spin Offs and Divestitures. Aswath Damodaran, Returning Cash to the Owners. Suzanne and Greg IP, Buybacks Aren't Always a Good

Sign for Investors.

Ch.17 & 18

22 Review SessionSyllabus for Comprehensive Exam (Open Book): All topics given in Plan of Self Study

Evaluation Scheme:

EC No.

Evaluation Component & Type of Examination

Duration Weigh-tage

Day, Date, Session,Time

EC-1 Assignments 1 week each 15% Details given belowEC-2 Mid-Semester Test

(Closed Book)*2 Hours 35% Sunday, 16/02/2014 (AN)*

2 PM – 4 PM EC-3 Comprehensive Exam

(Open Book)*3 Hours 50% Sunday, 06/04/2014 (AN)*

2 PM – 5 PM

AN: AfterNoon Session; FN: ForeNoon Session Closed Book Test: No reference material of any kind will be permitted inside the exam hall.Open Book Exam: Use of any printed / written reference material (books and notebooks) will be permitted inside the exam hall. Loose sheets of paper will not be permitted. Computers of any kind will not be allowed inside the exam hall. Use of calculators will be allowed in all exams. No exchange of any material will be allowed.

MM ZG521 (Course Handout) Second Semester 2013-2014 Page 5

Assignment Plan

There will be 9 assignments as per schedule given below, carrying 5 marks each. Best six Assignment Marks will be considered for grading (15% Weightage). Please refer to the Teaching Methodology given in the first page of the course handout for more information. These assignments should be uploaded on the respective links provided in the course web page on LMS Taxila.

Assignment No.

Assignment Assignment Start and Submission dates

Assignment-1 Calculate MVA (Market Value Added) an index of shareholders wealth maximization and using multiple regression, check how is it dependent on other financial variables viz. Sales, Earnings Before Interest & Tax (EBIT), Profit After Tax (PAT), Economic Value Added (EVA), Return on Investment (ROI), Investment in R&D, Earning Per Share, etc.

To be announced

Assignment-2 Analyse and interpret financial health of your company using various financial and non-financial ratios.

To be announced

Assignment-3 Measure and analyse the degree of systematic risk (Beta Coefficient - relationship between market return and stock return) of your company.

To be announced

Assignment-4 Determine and analyse business risk (Degree of Operating Leverage), financial risk (Degree of Financial leverage ) and Total Risk (Degree of Total Leverage ) of your company. Find out the impact of fixed cost (operating and financial) on business risk.

To be announced

Assignment-5 Estimate and analyse cost of various components of capital and weighted average cost of capital of your company.

To be announced

Assignment-6 Analyse economic viability of any expansion or replacement project of your company.

To be announced

Assignment-7 Analyse working capital management position (inventories and accounts receivable) and its impact on liquidity and profitability position of your company.

To be announced

Assignment-8 Using multiple regression, identify and analyse major determinants of capital structure of your company.

To be announced

Assignment-9 Using multiple regression, identify and analyse major factor affecting dividend policy of your company.

To be announced

Note: It shall be the responsibility of the individual student to be regular in maintaining the self study schedule as given in the course handout, attend the online/on demand lectures as per details that would be put up in the BITS LMS Taxila website www.taxila.bits-pilani.ac.in and take all the prescribed components of the evaluation such as Assignment (Course Page on LMS Taxila), Mid Semester Test and Comprehensive Examination according to the Evaluation Scheme given in the respective Course Handout. If the student is unable to appear for the Regular Test/Examination due to genuine exigencies, the student must refer to the procedure for applying for Make-up Test/Examination, which will be available through the Important Information link on the BITS LMS Taxila website www.taxila.bits-pilani.ac.in on the date of the Regular Test/Examination. The Make-up Tests/Exams will be conducted only at selected exam centres on the dates to be announced later.

Instructor-in-Charge