BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, PILANI

INSTRUCTION DIVISION

FIRST SEMESTER 2017-2018

Course Handout - Part II
Date: 01/08/2017

Note: In addition to Part - I (General Handout for all courses appended to the timetable) Part - II of the handout
provides specific details regarding the course objectives, syllabus and evaluation components.

Course No: FIN F315 / ECON F315

Course Title: Financial Management
Instructor-in-charge: RAJAN PANDEY

1. Brief Course Description:

FIN F315 (ECON F315) - Financial Management - is a foundation course on Corporate Finance. The
course provides an in-depth coverage of array of decisions undertaken by the firm's Financial Manager
for achieving the objective of shareholder's wealth maximization principle.
In an increasingly competitive and globally integrated world, the roles and responsibilities of
financial manager have widened manifold in the past two decades. The fast-paced rise in a number of
stock market listing of Indian companies is a stark testimony to the tremendous amount of investments
infused by profit-seeking investors. The wide-range of investment avenues available to investors
explains the extent of innovations happening in financial markets worldwide. This explosive growth is
much attributable to the integration of world markets, the computational sophistication and the role
played by communications and information technology. However, with uncontrolled growth comes the
risk of an uncontrolled collapse and the financial crisis of 2008 is a classic case of presence of fault lines
in the financial markets.
To retain the confidence and faith of investors and forge robust and sustainable growth, the firms
must impress suppliers of capital (investors) with adequate rewards to compensate them for the risks
they undertake. In this pursuit of shareholder's wealth maximization, it is imperative that decisions taken
by firms related to investment in projects, raising money from public (financing) and shareholder
rewarding policy (dividend policy) deomonstrate management's competence and goodwill. The firm
must also protect rights of the stakeholders such as employees, suppliers, customers and the
environment etc.
The role of the financial manager - which is central to the decision-making concerning finances
(money, capital, investment etc.) – plays a crucial role in ensuring seamless day-to-day operations,
maintaining profitability, and sustaining reliable long-term performance along with the firm's adherence
to corporate social responsibility code.

2. Scope and Objectives of the Course:

This course aims at introducing students to the fundamental Corporate Finance concepts, theories, and
the process of financial decision-making. The structure of the course enables students to appreciate the

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 integration between financial markets, learn theories of investment and risk, knowledge of the business
environment and the role of the finance manager in firm's wealth maximization. The primary objective
of the course is to highlight the key decisions made by financial managers that helps firm maximize its
value. These include - financing decisions, investment in projects, shareholder rewarding policies, and
managing daily operations. This enables students to develop an appreciation of the interdependencies
between these decisions and their impact on the survivability of the firm. Refer to section 5 below for
details on broad objectives, the number of lectures planned and suggested readings from the textbook
and the reference book.
Prior knowledge: The course assumes students have done a basic course on accounting
(prerequisite), have familiarity with financial markets, financial securities, financial statements,
elementary statistics, and MS-Excel.

3. Text Book:
Lawrence J. Gitman, Principles of Managerial Finance, 11/e edition, 2008, Pearson Education
Publication.

4. Reference Books:

1. Richard A. Brealey, Stewart C. Myers, Franklin Allen, and Pitabas Mohanty, Principles of Corporate
Finance, 8/e, 2010, Tata McGraw-Hill Publishing Company Ltd.
2. Eugene F. Brigham and Michael C. Ehrhardt, Financial Management: Theory and Practice,
14/e, 2014, (South-Western) Cengage Learning.
3. Eugene F. Brigham and Louis C. Gapenski, Financial Management: Theory and Practice, 6/e,1991, The
Dryden Press.
4. Damodaran Aswath, Corporate Finance: Theory and Practice, 2/e, John Wiley & Sons, Inc.2001.
5. J.F. Weston and T.E. Copeland, Managerial Finance, 2/e,1990, Cassell Publisher.
6. Elton Gruber, John Wiley & Sons, Modern Portfolio: Theory and Investment Analysis, Inc.4/e, 1991,
Wiley.

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5. Contents: Imp Note - Relevant sections of the text book and reference books to be consulted as per
mentioned below (class notes to be clubbed with book chapters). This course relies heavily on three books, one
textbook, and two reference books. Refer to the topic-wise description to get details of chapters to be followed
from the text book and the reference book. To supplement the classroom discussion occasionally newspaper
articles, magazine articles and research papers shall be referred to. Students are advised to consult the
supplementary readings as and when announced.

Reference
to
Lecture Text Book
Contents Coverage
No. (TB) or
Ref. Book
(R #)
 Discussion on Hand-out
 Discuss the most important corporate finance decisions
undertaken by financial manager in order to maximize
shareholder's wealth
 Differentiate between shareholders and stakeholders
Ch. 1 (TB),
Introduction  Corporate structure of publicly owned corporations and
Ch. 1 (R1),
1-4 to Financial separation of ownership
& Ch. 1
Management  Value maximization principle
(R2)
 Discussion on financial markets and their relevance in
facilitating transactions
 Introduction to different types of markets and securities
 Discussion on the Principal-agent conflict and issues in
corporate governance

Part I - Preliminary Discussion

 Define and measure the return on an individual

investment
 Define and measure the riskiness of an individual
investment
 Measuring the portfolio risk Ch. 5 (TB),
Risks and Rates  How individual securities affect portfolio risk Ch. 7 & 8
5-8 of Return  Explain how diversifying investments affects the riskiness (R1), Ch. 6
and expected rate of return of a portfolio or combination & 7 (R2)
of assets
 Discussion on Markowitz and Portfolio theory
 Concept of Beta for assessing security & portfolio risk
 Role and relevance of Capital Asset Pricing Model and
other asset valuation theories e.g. arbitrage pricing theory
 Explain the mechanics of compounding: how money For Time
Time Value of
grows over time when invested Value of
Money, Bond
 Concept of future and present value: calculation and Money -
Valuation and
application in real life such as estimating EMI amount in a Ch. 4 (TB),
Discounted
loan Ch. 2 & 3
Cash Flow
9-12  Discuss the relationship between compounding (future (R1) & Ch.
Models of
value) and discounting (present value). Importance of 2 (R2) -
Stock
discounting in calculating value of an asset. Calculation of
Valuation and
the Net Present Value and its interpretation in ranking the For stock
Bond
value of an investment. and bond
Valuation
 Define an ordinary annuity and calculate its future value valuation -

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 and present value. Learn to manoeuvre annuities spread Ch. 6 & 7
across several periods and calculate the present value or (TB), Ch 4
future value to evaluate the investment proposal such as 23 & 25
retirement benefits plan or corporate project such a (R1), & Ch.
setting up a new production facility 5 & 8 (R2)
 Differentiate between an ordinary annuity and an annuity
due, and determine the future and present value of an
annuity due
 Discuss term structure of interest rates, the concept of
yield and yield to maturity. Highlight yield-price
relationship and role of term structure theories in pricing
short-term and long-term fixed income instruments
 Calculate the annual percentage yield or effective annual
rate of interest and then explain how it differs from the
nominal or stated interest rate. Discuss the relevance of
different measures of yield for comparing
 Importance of dividends in pricing a stock, dividend
discount models of stock valuation
 Valuation of stock using Free Cash Flow to Equity
approach
Ch. 2 & 3
Financial
 Analysis of Financial Statements (TB), Ch.
Statements
13-16  Ratio Analysis 29 (R1) &
and Cash
Ch. 3, 4 &
Flows
14 (R2)
Part II - Topics in Financial Management
 Understanding the application of cost of capital in
Ch. 11 (TB)
business decisions
& Ch. 19
 Describe the concepts underlying the firm's cost of capital
(R1) & Ch.
17-20 Cost of Capital i.e. its weighted average cost of capital and its calculation
10, 19, &
 Calculate the after-tax cost of debt, preferred stock,
21 (R2)
common equity, and retained earnings and the firm's after-
tax weighted average cost of capital

 Discuss different types and importance of capital

expenditure decisions
 Highlight the difference between investment and
expenditure and the way they are treated from accounting
perspective
 Discuss the concept of incremental cash flows for Ch. 8, 9 &
evaluating projects 10 (TB),
 Estimation of incremental cash flow Ch. 9, 10 &
Capital  Introduction to various project evaluation techniques such 11, 20, 21
21-29
Budgeting as Payback method, NPV, IRR & 22 (R1)
 Project selection criteria using NPV or IRR rule and & Ch. 9, 11,
decision making under conflicting scenarios 12 & 13
 Analyse and measure various risk involved in capital (R2)
expenditure – Scenarios Analysis, Sensitivity Analysis, and
Decision Trees Analysis and Monte Carlo simulation
approach for project selection under uncertainty
 Option theory and its application in calculating the value
of real options associated with the project under
uncertainty

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  Understand the difference between business risk and
financial risk
 Discuss Operating Leverage, Financial Leverage and Total
(combined) Leverage
 Calculate the firm's degree of operating leverage, financial
leverage, and combined leverage
 Establish relation between leverage and risk
 Explain why a firm with a high business risk exposure Ch. 12 &13
Leverage, might logically choose to employ a low degree of financial (TB), Ch.
Corporate leverage in its financial structure 13, 14, 15,
Financing,  Modes of financing – Debt financing vs. Equity financing 16, 17, 18
30-36 Capital  Debt financing and tax shield (R2) & Ch.
Structure and 16, 17, &
 Discussion on Theories of Capital Structure
Dividend 18 (R2)
 Understand the factors affecting capital structure
Policy
 An approach to setting the target (optimal) capital
structure
 Shareholder rewarding policy – Cash vs. Non-cash
rewards
 Dividend irrelevance theory – Dividend as compromise
on firm’s growth
 Dividend signaling theory
 Taxes and its impact on dividends

Ch. 14 &
 Objectives of Working Capital Management, Static and
Working 15 (TB),
Dynamic view of Working Capital
Capital Ch. 30 &
37-40  Factors Affecting Composition of Working Capital
Management 31 (R1), &
 Current Asset Management (receivables and inventory)
(WCM) Ch. 22 (R2)
 Short-term financing and current liability management

6. Evaluation Scheme: Total Marks 200

Component Date Duration Weight-age (%) Remarks

Mid-sem Test 12/10 9:00 - 10:30 AM 90 min. 30

Open Book
Quiz (3) 30 min 15 (best 2) Close Book (No make-up)
Assignment TBA 15 Take-Home
Comprehensive Exam. 8/12 FN 180 min. 40 Open Book

7. Contact:
Chamber (6165 - G) Economics and Finance Dept.
Chamber consultation hour : T Th – 4:00 PM to 6:00 PM and Saturday - Post Lunch
e-mail – rajanpandey@pilani.bits-pilani.ac.in

8. Notices:
Please refer to Economics & Finance Dept. Notice Board for notices. Students must check their
BITS e-mail accounts on regular basis for course related announcements.

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9. Make-Up Policy: Make-up exam for Mid-semester Test and the Comprehensive Exam will be granted in
only rare cases with prior written permission from the Instructor In-charge and hostel Warden. Prior written
permission is mandatory under all circumstances.

Instructor In-Charge
FIN F315 / ECON F315

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