Course Outline:

PRINCIPLES OF FINANCE

Dr Shahab Q Khokhar

© 2003 Dr S Q Khokhar

Aims & Objectives

• The course aims to provide a pedagogical introduction to the area of financial

management

• The level of difficulty of the course material is elementary to medium

• The core (focus) areas to be covered in the course are: financial statement
analysis, valuation, working capital management and financial markets

• The course will provide theoretical knowledge, while consistently linking the
theoretical issues to the “real-world” (i.e. practical) cases

• The objective of the course is to enable students to develop clear

understanding of the (corporate) financial issues

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 Course Information

• Instructor: Dr Shahab Q Khokhar

• Email: skhokhar@lums.edu

• Recommended course prior to “Principles of Finance”: Financial Accounting-I

• Sessions: 20 (interactive) sessions of 100 minutes each

• Class Timings: Mondays and Wednesdays, 11.45am to 1.25pm

• Venue: TBC

• Start Date: September 1, 2003

• End Date: November 5, 2003

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Course Information

• The course is divided into four modules

– Introduction to Financial Management
– Valuation
– Financing
– Financial Markets

• Grading
– Class Contribution 5%
– Quizzes and Problem Solving Exercises 15%
o 4 quizzes and 6 problem solving exercises (in Microsoft Excel, where applicable)
– Project 20%
o The project will provide a chance for students to work (in teams) on “real-world” financial
problems
o Submission of an executive summary of the proposed project is mandatory
– Mid-term Examination (85 min) 20%
– Final Examination (175 min) 40%

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 Reading Material

• Textbook
– Block, S. B. and G. A. Hirt, Foundations of Financial Management, Ninth Edition,
McGraw-Hill Irwin. (B&H)

• Other Books
– Ross, S. A., R. W. Westerfield and B. D. Jordan, Fundamentals of Corporate
Finance, Second Edition, Irwin. (RWJ)
– Weston, J. S., S. Besley and E. F. Brigham, Essentials of Financial Management,
Eleventh Edition, The Dryden Press – Harcourt Brace College Publishers. (WBB)

• Financial Newspapers
– Business Recorder
– Financial Times (FT.com) – paper copy is available in the library
– The Wall Street Journal (WSJ.com) – paper copy is available in the library

™ Further supplementary material (such as, book chapters, newspaper / journal / magazine
articles, etc.) may be assigned as additional readings during the period of the course

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Sessions 1 & 2
• Session 1: The Framework of Financial Management
– In this session we will discuss the process of financial management. We will also
examine the financial managers’ activities, as well as distribution of their time
spent on each activity. Other topics, such as agency problem, business ethics, stock
price/value maximization, signalling theory, will also be considered.
– Readings: B&H, Chapter 1; WBB Chapter 1 (optional)
– Article: Millman, G. J., CFOs in Tune With the Times, Financial Executive,
July/August 2000

• Session 2: Understanding of Financial Statements and Reports

– For a financial manager it is absolutely essential to have full command over the
understanding of financial statements – the balance sheet, the income statement and
the cash flow statement. Note that “Notes” in the financial reports are also an
integral part of financial statements and must be scrutinized carefully. During this
session a review of financial statements will be presented.
– Readings: B&H, Chapter 2; RWJ Chapters 2 and 3 (optional)
– Article: Tergesen, A., The Ins and Outs of Cash Flow, Business Week, January 22,
2001

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 Sessions 3 & 4
• Session 3: Financial Analysis
– Financial analysis is vital to financial managers. The scope of financial analysis
depends on its purpose, which may range from a total analysis of a firm’s strengths
and weaknesses to a relatively simple analysis of its short-term liquidity. In this
session we will concentrate on ways of “reading between the financial statements”.
– Readings: B&H, Chapter 3; Same as Session 2 (optional)
– Article: Miller, P. B. W., Will You Adopt Quality Financial Reporting?, Strategic
Finance, January 2001

• Session 4: Financial Forecasting

– In this session we will look into developing pro forma financial statements. These
refer to forecasted financial statements, which are essential for corporate (future)
planning and for securing finances required to successfully operate the business.
We will discuss various methods for forecasting sales, cost of goods sold (COGS)
and other variables.
– Readings: B&H, Chapter 4

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Sessions 5, 6 & 7
• Sessions 5–6: Short Term Financing
– In this session we will discuss working capital policy and its management. This
involves financing decision relating to current assets and effectively managing
current liabilities. We will also examine how to evaluate a firm’s liquidity
management. Liquidity management involves the planned acquisition and use of
liquid resources over time to meet cash obligation as they become due. The sources
of short-term financing will also be identified
– Readings: B&H, Chapters 6-8; WBB Chapters 8-12 (optional)
– Articles: Myers, R., Cash Crop: The 2000 Working Capital Survey, CFO, August
2000; Leibs, S., Internet Explorers, e-CFO, April 2000

• Session 7: Risk and Return

– A financial manager acting for a firm’s shareholders should not make an
investment decision solely on the basis of expected return. Financial managers
must also assess the riskiness of an investment. Hence, risk and return analysis is
an important area for a financial manager. In this session we will examine topics
like probability distributions and measures of risk. Here we will also discuss one of
the pillars of modern finance, namely capital market efficiency
– Readings: WBB, Chapter 5 and B&H, Chapter 14 (pages 420-422)
– Article: Barton, T. L., W. G. Shenkir, and P. L. Walker, Managing Risk: An
Enterprise-Wide Approach, Financial Executive, March/April 2001

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 Sessions 8, 9 & 10

• Sessions 8–9: Time Value of Money

– During this session we will get acquainted with the processes of discounting and
compounding. We will briefly touch upon the problem of determining the “right”
discount rate, but will go into greater details during the next session.
– Readings: B&H, Chapter 9; Other hand outs to be given

• Session 10: Cost of Capital / Financing Cost

– In this session we will examine costs attached to various types of financing. In
developing the firm’s overall cost of capital, we first identify and then determine
the cost of each component, and then we combine the components costs to obtain
the total cost of capital known as Weighted Average Cost of Capital (WACC).
Mainly we will discuss cost of equity capital and cost of debt financing
– Readings: B&H, Chapter 11; WBB Chapter 15 (optional)

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Sessions 11 & 12

• Session 11: “Business Leader Series”: Talk by Mr. Zaffar A. Khan, President
& Chief Executive Engro Chemical Pakistan Ltd.

• Session 12: Stock & Bond Valuation

– In this session we will examine various models for valuing common stocks. We
will look into valuing dividend and non-dividend paying stocks. Here we will again
deal with the “correct” cost of equity to be used in the valuation. In this session two
main approaches – full valuation approach and duration / convexity approach – of
valuing bonds will also be covered. We will concentrate on the full valuation
approach, which is a relatively straightforward method for valuing bonds. The
duration/convexity approach will be examined more carefully in the next course.
– Readings: B&H Chapter 10; RWJ Chapter 6 (optional)
– Article: Valance, N., Bright Minds, Big Theories, CFO, January 2001

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 Sessions 13, 14 and 15
• Session 13: Capital Budgeting
– This session will utilize the knowledge gained in sessions 7-10 to enable us to
evaluate various projects. We will discuss various capital budgeting techniques,
such as Net Present Value, Internal Rate of Return, Pay Back Period among others.
We will also discuss risk analysis in capital budgeting, as well as the characteristic
of the optimal capital budget
– Readings: B&H Chapter 12; RWJ Chapters 7–9 (optional)
– Article: Migliore, R. H. and D. E. McCracken, Tie Your Capital Budget to Your
Strategic Plan, Strategic Finance, June 2001

• Session 14: Mid-term Examination

• Session 15: Capital Structure Policy

– One of the perplexing questions facing financial managers is, how much debt
financing, as opposed to equity financing should a firm use? We will discuss some
theoretical issues attached to the capital structure of a firm. The Modigliani-Miller
models will be briefly introduced, but will be discussed in greater details in the next
course
– Readings: RWJ Chapter 15; WBB Chapter 16 (optional)

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Sessions 16 & 17
• Session 16: Dividend Policy
– In this session, we will discuss the dividend policy, which is the decision to payout
earnings or to retain and reinvest them in the firm. We will discuss whether
shareholders prefer cash dividends or capital gains. We will examine three well
known theories of investor preference: i) The dividend irrelevance theory ii) The
“bird-in-the-hand” theory iii) The tax differential theory
– Readings: B&H Chapter 18; WBB Chapter 17

• Session 17: Financing through Common and Preferred Stocks

– When a firm’s requirements for additional equity cannot be met by retained
earnings, the company must sell new stock. In this session we will examine: the
market for common stock, the decision to list a stock on an exchange and
procedures for selling new stock. We will also discuss the characteristic of
preferred stock
– Readings: B&H Chapter 17; WBB Chapters 18 (pages 673 – 680) & 20 (pages 726
– 729) and RWJ Chapter 13 (optional)
– Article: Gregory. N., and S. Tenev, The Financing of Private Enterprise in China,
Finance & Development, March 2001

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 Sessions 18 & 19

• Session 18: Long term Debt and Other Related Instruments

– In this session we will discuss various issues linked to long-term debt financing.
We will examine the implications of bond rating, as well as the role of rating
agencies. Other instruments, such as, leases and hybrid debt will also be covered. A
brief introduction to financial distress / bankruptcy and liquidation / reorganization
will also be presented
– Readings: B&H, Chapter 16; WBB Chapters 19 and 20 (optional)

• Session 19: Investment Banks and Other Financial Institutions

– In this session we will discuss the role of various financial institutions. In
particular, we will discuss the role and activities of Investment banks. Investment
banks are financial advisors to the corporate world and governments to raise
finance in the capital markets. Investment banks also advise corporations in
mergers, de-mergers, management buyouts and leverage buyouts
– Readings: B&H, Chapters 14 (pages 407 – 419) and 15
– Article: Myers, R., A Case for Conglomerates, CFO, March 2001

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Session 20

• Session 20: Corporate Control and Governance

– Here we will discuss the implications of corporate control and the hot topic of
“Corporate Governance”. Under the umbrella of corporate control we will examine
mergers and acquisitions, leverage and management buyouts. Corporate
governance has received much needed publicity in the wake of “Enron Saga”. We
will also discuss the characteristics of effective corporate governance systems
– Readings: B&H Chapter 20; Other hand outs to be given
– Article: Desai, R. and I. Goldberg, Stakeholders, Governance, and the Russian
Enterprise Dilemma, Finance & Development, June 2000

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