You are on page 1of 6

Birla Institute of Technology & Science, Pilani

Work Integrated Learning Programmes Division


Second Semester 2013-2014
Course 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 firms 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 companys 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 students 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

1-2

Financial
Management:
An Overview

3-6

Financial
Statements
Analysis and
Interpretation

The Time
Value of
Money

8-9

Risk and
Return

Learning Objectives
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.
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.
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.
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-ToMarket 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

Reference
to
Textbook
Ch.1 & 2

Ch 3, 4, 5
&6

Ch.8

Ch.8

10-11

12-13

14-15

16-17

Differently? The Journal of Financial Research


Steven T Goldberg, 7 Sure Ways to Bigger Return
Analysis and
Understand the difference between business risk and
Impact of
financial risk.
Leverage
Use the technique of break-even analysis in a variety of
(Business and
analytical settings.
Financial Risk)
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 11
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
Techniques of
Understanding different types and importance of capital
Capital
expenditure decisions on business sustainability.
Budgeting
Understanding various non-discounted and discounted
cash flow methods and their application in capital
expenditure decisions.
Understanding limitations of discounted and nondiscounted 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?
Review Session
Working
Objective of Working Capital Management, Static and
Capital
Dynamic view of Working Capital
Management
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 Finance
c. Trade Credit, Short-term bank finance, PDs, CPs
and Factoring.

Ch. 14

Ch. 11, 12
& 13

Ch. 22 to
26

18-19

20-21

22

Capital
Structure and
Firm Value

Dividend
Policy and
Firm Value

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
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.
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.
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.15 & 16

Ch.17 & 18

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

Evaluation Scheme:
EC
No.
EC-1
EC-2
EC-3

Evaluation
Component &
Type of Examination
Assignments
Mid-Semester Test
(Closed Book)*
Comprehensive Exam
(Open Book)*

Duration

Weightage

1 week each
2 Hours

15%
35%

3 Hours

50%

Day, Date, Session,Time


Details given below
Sunday, 16/02/2014 (AN)*
2 PM 4 PM
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-1

Assignment-2
Assignment-3
Assignment-4

Assignment-5
Assignment-6
Assignment-7
Assignment-8
Assignment-9

Assignment
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.
Analyse and interpret financial health of your company
using various financial and non-financial ratios.
Measure and analyse the degree of systematic risk (Beta
Coefficient - relationship between market return and stock
return) of your company.
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.
Estimate and analyse cost of various components of capital
and weighted average cost of capital of your company.
Analyse economic viability of any expansion or
replacement project of your company.
Analyse working capital management position (inventories
and accounts receivable) and its impact on liquidity and
profitability position of your company.
Using multiple regression, identify and analyse major
determinants of capital structure of your company.
Using multiple regression, identify and analyse major
factor affecting dividend policy of your company.

Assignment Start and


Submission dates
To be announced

To be announced
To be announced
To be announced

To be announced
To be announced
To be announced
To be announced
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