INSTITUTE of BUSINESS MANAGEMENT

College of Business Management

Department of Accounting and Finance
Theory & Practice of Financial Management
FIN – 408

Overall aims of course

The objective of the course is to introduce fundamental concepts underlying financial
management. The main concepts examined include financial planning & forecasting
financial statements, time value of money, bond and stock valuation, cost of capital, and
capital budgeting. Students will be able to understand the specific techniques and decision
rules that are used to help maximize the value of the firm.

Intended learning outcomes of course (ILOs)

Knowledge and understanding:
Students should be able to:
 provide an overview of financial management
 understand the key issues in financial management
 interpret financial statements
 understand the financial planning process
 understand the time value of money and its impact on stock prices
 comprehend how timing of cash flows affects asset values and rates of return
 understand types of bonds
 highlight the types of risks to which both bond investors and issuers are exposed
 discuss procedures for determining the values of and rate of return on bonds
 demonstrate how the cost of capital is used to help make many important decisions,
especially the decision to invest or not invest in shares
 understand the basics of stock valuation
 determine the cost of debt and cost of equity capital using various methods
 comprehend capital budgeting techniques

Intellectual skills
Students should be able to
 forecast financial statements

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  quantify investment risk and returns
 calculate present and future value of annuities
 calculate value of bonds and stocks
 estimate cost of capital
 use various capital budgeting techniques to take financial decisions

Professional and practical skills

After completion of the course the students should be able to:
 analyze the financial strengths and weaknesses of any business entity
 take calculated investment decisions as financial managers of an organizations

General and transferable skills

Knowledge obtained in the course will:
 enhance understanding of key factors underlying financial management
 facilitate personal financial decision making
 be applied in professional life

Course Content

Session Topic

Class and course introductions.

1
General Introduction to Finance

Goals and Governance of the Firm

Financial Management revolves around making financing and investment

decisions. Financial managers together with other managers in the
organization identify business opportunity and decide whether to invest or
not; and if the answer is yes then how to finance it. Therefore we start this
course with differentiating between financing and investment decisions. We
1,2 also discuss the different forms of organizations focusing on corporations.
Then we will discuss the financial goals of the corporations; profit
maximization vs. shareholders’ wealth maximization. We also discuss agency
conflicts and how organizations attempt to resolve these conflicts.

Learning Outcomes:

1. Give examples of the investment and financing decisions that

financial managers make.

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 2. Distinguish between real and financial assets.
3. Cite some of the advantages and disadvantages of organizing a
business as a corporation.
4. Describe the responsibilities of the CFO, treasurer, and controller.
5. Explain why maximizing market value is the logical financial goal of
the corporation.
6. Explain why value maximization is not inconsistent with ethical
behavior.
7. Explain how corporations mitigate conflicts and encourage
cooperative behavior.

Pedagogy
1. Pre class independent study
2. Lecture discussion
3. Problem solving
4. Assignment

Financial Statements Analysis

Here we will look at the financial statements. It will be assumed that students
have taken the basic accounting course and are well aware of the four basic
financial statements, namely, income statement, balance sheet, statement of
retained earnings and the cash flow statement. We discuss the main items of
the statements and how the information contained within the statements
should be interpreted. We will discuss the important differences between
profits and cash flows and market and book values. In the following
discussions we will explain how the financial statements are used to evaluate
the performance of the business. For this, we will learn to calculate some
ratios and use them to comment on the company’s performance. We discuss
four broad categories of ratios: leverage, profitability, efficiency and liquidity.
3,4,5,6,7
Learning Outcomes

1. Interpret the information contained in the balance sheet, income

statement, and statement of cash flows.
2. Distinguish between market and book values.
3. Explain why income differs from cash flow.
4. Understand the essential features of the taxation of corporate and
personal income.
5. Calculate and interpret market value and market value added for a
public corporation.
6. Calculate and interpret some key measures of firm performance,
including economic value added, and the rates of return on equity,
assets, and capital.
7. Calculate and interpret measures of a firm's efficiency, leverage, and

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 liquidity.
8. Show how profitability depends on efficiency and profit margin.
9. Understand how a company's sustainable growth is related to its
payout policy and its return on equity.
10. Compare the company's financial standing with its main competitors
and with its own position in earlier years..

Pedagogy
1. Pre class independent study
2. Lecture discussion
3. Problem solving
4. Class activity on ratio analysis of any local listed company

Financial Planning

In initial chapters we discussed that the financial managers need to decide

between investment opportunities and plan how to raise finances for those
investments. The decision must add value to the whole organization and
increase shareholders wealth. Therefore these decisions are taken after
thorough discussions and planning. That’s why financial planning is required.
The financial plan allows managers to think about the implications of
alternative financial strategies and how to ease out any inconsistencies in the
firm’s goal. We will first of all discuss the components of a typical financial
plan and then the use of financial model and finally firm’s need for new
financing.
Long term financial planning leads to short term financial plans. Short term
financial decisions generally involve short lived assets and liabilities. Short
term financial planning is easier than long term financial but is equally
8,9,10,
important.
13
Learning Outcomes
1. Describe the contents and uses of a financial plan.
2. Construct a simple financial planning model.
3. Estimate the effect of growth on the need for external financing.
4. Understand why the firm needs to invest in net working capital.
5. Show how long-term financing policy affects short-term financing
requirements.
6. Trace a firm's sources and uses of cash and evaluate its need for short-
term borrowing.
7. Develop a short-term financing plan that meets the firm's need for
cash.
8. Evaluate the costs of various sources of short-term financing.

Pedagogy
1. Pre class independent study

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 2. Lecture discussion
3. Problem solving
4. Assignments

Time Value of Money

In this topic we will understand the relationship between the values of money
today and the value in the future. We start by looking at how funds invested at
a particular interest rate will grow over time. Then we will look at the amount
that we need to invest today in order to earn a specified amount in the future
and also adjust it for inflation.

Learning Objectives:
1. Calculate the future value to which money invested at a given interest
rate will grow.
2. Calculate the present value of a future payment.
14,15,16 3. Calculate present and future values of a series of cash payments.
4. Find the interest rate implied by present and future values.
5. Compare interest rates quoted over different time intervals—for
example, monthly versus annual rates.
6. Understand the difference between real and nominal cash flows and
between real and nominal interest rates.
7. Loan Amortization

Pedagogy:
1. Pre class independent study
2. Lecture discussion
3. Problem solving
4. Assignments

Working Capital Management

Working capital management involves management of the current assets and

current liabilities of the firm. This basically means how organizations ensure
that they have sufficient level of these assets and liabilities. The four main
types of current assets that will be discussed are accounts receivables,
17,18 inventory, cash and short term securities, but emphasis is on Accounts
receivable and inventory for practice. Different techniques are explained to
properly manage these components of working capital.

Learning Outcomes
1. Describe the usual steps in a firm's credit management policy.
2. Measure the implicit interest rate on credit sales.
3. Describe how firms assess the probability that a customer will pay its

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 bills.
4. Decide whether it makes sense to grant credit to customers.

Pedagogy
1. Pre class independent study
2. Lecture discussion
3. Problem solving
4. Assignments

19
Bond Valuation

If companies need money in the short term, they can borrow it form the bank.
However if they need money for long term investments, they generally issue
bonds, which can be termed as long term loans. Bond valuation involves
simple time value of money computations.

Intended Learning Outcomes

1. To understand key features of bonds and calculate bond value
2. Distinguish between bond’s coupon rate, current yield and yield to
maturity
3. Calculate the market price of the bond
4. Understand the relationship between bond prices and interest rates

Pedagogy:
1. Pre class independent study
2. Lecture discussion
3. Problem solving
4. Assignments

20 Stock Valuation

Corporations can raise money for investments by borrowing or by issuing

new shares. We will start by looking at how stocks are bought and sold; what
determines the stock prices and how stock valuation formulas can be used to
infer rates of returns that investors are expecting.

Intended Learning Outcomes

1. Understand difference between common and preferred equity.
2. Calculate the price of the stock given the future earnings and growth
rates
3. Use stock valuation to infer the expected rates of return on common
stock

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 Pedagogy:
1. Pre class independent study
2. Lecture discussion
3. Problem solving
4. Assignments

21,22 Cost of Capital

Chapter 11
Brigham and Ehrhardt

Most companies are financed by a mix of securities including common stock,

bonds, preferred stock and other securities. Each of these securities have
different risks and therefore investors in them look for different rates of
returns
Under this situation company’s cost of capital is no longer just the return on
common of stock but is a weighted average of cost of different securities that
the company is using for financing.

Intended Learning Outcomes

 Calculate firm’s capital structure
 To understand the cost of equity and debt securities
 Calculate WACC
 Understand why WACC is the appropriate discount rate for capital
budgeting

Pedagogy:
1. Pre class independent study
2. Lecture discussion
3. Problem solving
4. Assignments

Capital Budgeting Techniques

Investment decisions aka capital budgeting decisions are critical to any firm’s
success. These decisions may involves substantial cash flows and have long
term consequences. Company’s shareholders expect managers to only invest
24,25, in that project that adds value to the company and increases shareholders’
wealth. Therefore the managers must invest in projects whose costs are less
than their revenues. The difference between the project’s cost and revenues is
called net present value; which is one of the techniques of project appraisal.
NPV, with other techniques, helps the management to evaluate projects and
select the one that adds maximum value to the firm.
The techniques discussed are NPV, IRR and profitability index.

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 Learning Objectives
1. Calculate the net present value of an investment.
2. Calculate the internal rate of return of a project and know what to look
out for when using the internal rate of return rule.
3. Explain why the payback rule doesn't always make shareholders better
off.
4. Use the net present value rule to analyze three common problems that
involve competing projects: (a) when to postpone an investment
expenditure, (b) how to choose between projects with unequal lives,
and (c) when to replace equipment.
5. Calculate the profitability index and use it to choose between projects
when funds are limited.

Pedagogy
1. Pre class independent study
2. Lecture discussion
3. Problem Solving
4. Assignment

Operating and Financial Leverage

Leverage refers to use of fixed assets in order to increase or level up

profitability. In this topic we will discuss how managers achieve the balance
in operating and financial leverage.

Learning Outcomes
1. Use sensitivity, scenario, and break-even analyses to see how project
profitability would be affected by an error in your forecasts.
26 2. Understand why an overestimate of sales is more serious for projects
with high operating leverage.
3. Recognize the importance of managerial flexibility in capital
budgeting.

Pedagogy
1. Pre class independent study
2. Lecture discussion
3. Problem Solving
4. Assignments

Term Report Presentations (Example)

It will be in the form of book report and will be a group assignment. There
27,28
will be 6-7 members in a group given the strength of the class. Students may
make their own groups.

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 The report should have:
 1500 – 2000 words
 Font: Times New Roman, Font size 12. Heading should be font size
16 and subheadings should be font size 14.
 Left, right, top and bottom margins: 1inch
 Line spacing: 1.5 lines

In the book report students will compare three institutions in the same sector.
For example if a group has chosen banking sector than comparison can be
drawn between HBL, UBL and MCB. Two or more groups may choose the
same sector but different companies.

There will be following 4 components of the book report:

1. Executive Summary
2. General overview of the companies, industry, business environment,
recent changes in regulatory environment, and current trends in the
sector (like mergers of banks etc). Regulatory information can be
acquired from the following websites:
a. For corporate sector, non-banking finance sector, insurance,
professional service providers and capital market:
www.secp.gov.pk
b. For banks: www.sbp.org.pk
3. Analyze financial statements for 3 years by performing Ratio
Analysis, and commenting on the results. Financial Statements are
generally available on company’s’ website. Ratios calculated should
be industry specific e.g. for banks there are certain ratios which
State Bank of Pakistan has made compulsory.
4. All the calculations (ratio analysis) must be enclosed as appendices.

Teaching and learning methods

The course is interactive between the class and the instructor. Through power point lecture
presentations, problem solving, and specific class room activities, students will have the
opportunity to use the concepts, ideas, and strategies presented in class. Problem-solving
sessions occur in both individual (primarily) and team (occasionally) settings.

This introductory undergraduate course will incorporate a lecture and assignments-based

approach to the concepts of financial management. Students are encouraged to read the book
and chapters beforehand in order to develop a better understanding.

Lectures, class discussions, home exercises and quizzes, case studies, and presentations will
be conducted. The lectures are designed to reinforce and expand upon, not to substitute for,
what students learn from the assigned readings and study.

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Student assessment methods

Rubrics for Marking

Skills Advanced Proficient Basic Minimal

Comprehension Always Frequently Usually Unsatisfactory

and Analysis understands the understands the understands the knowledge of key
key issues in key issues in key issues in issues in financial
financial financial financial management.
management. management. management. Inadequate
Accurately Able to Familiar with understanding of
interprets interpret financial financial
financial financial statements but statements.
statements and statements and sometimes faces Generally
demonstrates demonstrates difficulty in unable to
excellent good analytical financial analyze
analytical skills skills analysis financial data
due to weak
concepts
Planning and Excellent Good Satisfactory Unsatisfactory
Forecasting understanding of understanding of understanding of understanding of
the financial the financial the financial the financial
planning planning planning process. planning process.
process. Able to process. Able to Occasionally Finds difficulty in
conduct conduct high faces difficulty in financial
financial level financial financial forecasting
forecasting forecasting forecasting
using various
techniques
Decision Always Frequently Usually Rarely
Making understands the understands the understands the understands the
techniques techniques techniques techniques
required to take required to take required to take required to take
calculated calculated calculated calculated
investment investment investment investment
decisions as decisions as decisions as decisions as
financial financial financial financial
managers of an managers of an managers of an managers of an
organization organization organization organization
Problem Always finds a Frequently Usually seeks Rarely seeks out
Solving number of ways seeks out other out other ways to other ways to
to solve the ways to solve solve the solve the problem

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 problem on own the problem, and problem, but and frequently
initiative rarely needs occasionally needs support
support or needs support and guidance
guidance or guidance
Personal Always Frequently Usually Rarely
Management demonstrates demonstrates demonstrates demonstrates
personal personal personal personal
management management management management
skills, and is skills skills skills
eager to learn
Team work Always Frequently Usually Rarely
demonstrates demonstrates demonstrates demonstrates
effective effective effective effective
teamwork skills teamwork skills teamwork skills, teamwork skills,
and often takes and rarely needs and occasionally and frequently
initiative in a support or needs support or needs support and
group setting guidance in guidance guidance. Often
that exceeds teamwork wants to work
required skills activities independently
Participation in Always Frequently Usually Rarely
projects and participates in participates in participates in participates in
tasks required projects required projects required projects required projects
and tasks. and tasks. and tasks. and tasks.
Completes all Completes most Completes some Completes few
assignments and assignments and assignments and assignments and
projects projects projects. projects

Weight
Assessment methods ….. to access Scheduled week
age
1 Quizzes Knowledge and understanding 3, 4, 5
10%
2 Assignments Knowledge and understanding 9 10%
Class participation and Intellectual and analytical
3 4 to 13 10%
others skills
4 1st Mid Term test Knowledge and understanding 6 15%

5 2nd Mid Term test Professional skills 11 15%

6 Final exam Professional skills 16 40%

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 Total 100%

Recommended Texts:

Textbook:
 Fundamentals of Corporate Finance - Richard A. Brealey, Stewart C. Myers & Alan J.
Marcus. Sixth Edition
 Financial Management. Theory & Practice, Eugene F. Brigham and Micheal C. Ehrhardt.
10th Edition

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