Estimating hurdle rates, To familiarize participants with Chapter 8&9 Lecture

Earnings and cashflows - The sources of equity risk in a project and its analysis (Prescribed Textbook)
on Projects - Computation of COE, COD & COC for a project
- The choices for adjusting project risk
- Process of converting operating information into
accounting earnings & accounting earnings into
project cashflows & project cashflows into
incremental cashflows & incremental cashflows into
time weighted cashflows

Investment Decision To encourage the participants in understanding Chapter 10 (Prescribed Case:

Rules - Conditions for a decision rule Textbook) “Investment Analysis Exercises”
- Categories of decision rules (Accounting based,
Cashflow based and DCF based decision rules)

Conflicts in the rankings To enable the participants in understanding Chapter 10 (Prescribed Case:
of projects under - How to identify mutually exclusive projects? Textbook) “The Investment Detective “
different methods & - How to assign ranks to projects based on different
projects with differences methods?
in lives - NPV vs IRR
- NPV vs Payback
- NPV vs Average ROI
- How to address the differences in the lives of
projects?
Cost minimizing projects, To facilitate the participants in Chapter 10 (Prescribed Case:
projects with perpetual - Comparing projects having perpetual CF with Textbook) “Investment Analysis & Lockheed Tri
cashflows, Effect of new projects having CF for a finite period
projects on shareholder - Selecting the cost minimizing alternative
value and accounting vs - Computing the no. of shares to be issued to mobilize
economic breakeven the required capital
- Measuring the impact of new projects on the
shareholder value
- Understanding the difference between accounting
and economic breakeven

Project Interactions, Side To familiarize the participants on Chapter 12 (Prescribed Case:

Benefits and Side Costs
- Capital Rationing Textbook) “Hansson Private Lable,Inc: Evaluati
- How to deal with capital rationing constraints Investment in Expansion”
- Side costs and side benefits of projects
- How to carryout NPV, EVA, Asset Efficiency and Cost
Analysis under different growth assumptions
- Modified IRR

Part A: Basic Details

Name of Course Financial Management-II

Dr.N.Sivasankaran
Course Instructor(s)
ns@xlri.ac.in
(please provide email id)
Ms.Ruchika R.Michael
Academic Associate(s)
ruchika@xlri.ac.in
(please provide email id)

Page 1 of 12
 Area Finance

Program Business Management

Term Three

Type of Course
Core
(Core/Elective/Workshop)

Number of Credits Three

Number of Classroom Contact

Thirty
Hours
Course Pre-requisites (if any,
including cut-off grades in No Pre-requisites
specific core courses)
Corporate Finance-Theory and Practice- Aswath Damodaran-
Course Textbook
Wiley-Second Edition
Course Handout to be Provided
Yes
(Yes/No)
No. of Sessions to be taken by
-
Guest Faculty
Name of Guest Faculty (if
-
identified)

Part B: About the Course

Course Description Managers need to take decisions with the objective of maximizing the vale
of their respective firms. In this context, this three-credit core course on
FM-II aims to address the following decision dilemmas of the managers
- Cash vs Non-Cash Working Capital
- Cash flow vs Liquidity risk of working capital
- Higher vs lower investment in inventories
- Liberal vs Tight credit policy
- Avail vs skip trade discount from suppliers
- Discount rate for firm vs Discount rate for comparable firms vs

Page 2 of 12
 Discount rate for projects
- Whether to modify Discount Rate or Cash Flow for adjusting for
risk
- Accounting earnings vs cash flow
- Cash flow to the firm vs cash flow to equity
- Incremental vs non-incremental cash flows
- Whether to consider the Timing of cashflow or not
- Accounting income vs cash flow vs Discounted cashflow based
decision rules
- NPV vs IRR vs MIRR
- Project replication vs Equivalent Annuities in dealing with projects
of different lives
- Capital Rationing: Theory vs Practice
- Whether to consider opportunity and product cannibalization
costs or not
- Lease vs Borrow and Buy option
- Whether Debt is Relevant or Irrelevant
- Which approach to use in deciding on the optimal financing mix?
- Dividend Relevance vs Dividend Irrelevance
- Low vs High Dividend Payout when the firm has good projects
- Low vs High Dividend Payout when the firm has bad projects
- Whether to consider the clientele effect or not
- Whether to consider the signaling effect or not
- Call vs put options
Course Objectives 1. To offer a thorough understanding of the significance of non-
cash working capital in the process of value creation by
managers by
- Enabling the participants in computing the optimal Net Trade
Cycle for a firm
- Facilitating the participants in taking sound decisions on offering
credit to customers, availing cash discount from suppliers and
optimal investment in inventory for a firm
2. To encourage the participants in understanding the process of
evaluating long term projects by helping them in
- Estimating hurdle rates for projects
- Forecasting earnings and cashflows on projects
- Knowing the various investment decision rules and techniques in
the investment evaluation context
- Appreciating project interactions, side benefits and side costs
3. To offer a thorough understanding of the financing choices for a
firm by enabling them in
- Appreciating the overview of the financing choices
- Deciding between the Lease vs Buy Decision alternatives
- Comparing the benefits of debt with the costs of debt and
understanding the application of the relevance and irrelevance of
debt theorems
- Knowing the application of operating income, cost of capital,
return differential, Adjusted Present Value and Industry average
approaches in deciding the optimal capital structure for a firm
4. To enable the participants in understanding
- Application of Dividend Irrelevance, Dividends are Good and

Page 3 of 12
 Dividends are Bad theorems
- Whether to pay higher or lower dividend when the firm has good
projects
- Whether to pay higher or lower dividend when the firm has bad
projects
- The clientele effect and the signaling effect of paying dividends
5. To facilitate the participants in understanding
- Forwards and Futures
- Call and Put Option
- Payoff to option buyers & sellers
- Put-call parity
- Factors influencing option premium
- Intrinsic and time value component of option pricing
- Black Scholes option pricing model
- Estimation of volatility
- Implied volatility
Who is the course -
suitable for? (for
electives only)

Part C: AOL Mapping

Learning Objective Relevance for Course (put a tick)

Decision Making ∕

Quest for Excellence

Sustainability

Global Mindset

Please indicate the rationale for choosing the Response:

specific learning goal(s) for this course
This course offers tools and techniques which
shall enable the managers in taking the right
decision on
-The optimal level of aggregate and individual
components of working capital
- The value maximizing long term investment
options (projects)
- The optimal capital structure
- Whether to pay dividend or not
and hence, the course maps with the “Decision
Making “PLO.

Page 4 of 12
 Session Plan*

Chapters from Course Textbook Pedagogy (Case

Session and Reading Material other Studies/in-class
Session Topic Learning Objectives
No(s) than Case Studies exercise/questionn
aire/presentations)
1 Working Capital To offer the ability to take decisions on Chapter 13 (Prescribed Lecture
- Cash vs Non-Cash Working Capital Textbook)
- Cash flow vs Liquidity risk of working
capital
- Higher vs lower investment in
inventories
- Liberal vs Tight credit policy
- Avail vs skip trade discount from
suppliers

2 Working capital requirement To enable participants in Chapter 13 (Prescribed Case:

analysis - WCR analysis Textbook) “Great Eastern Toys
- Cash flow analysis (A)”
- Sustainability analysis
- Value creation analysis
- Benchmarking
3 Financial Forecasting and To facilitate participants in Chapter 13 (Prescribed Case:
Issues in working capital - Financial forecasting Textbook) “Guna Fibres, Ltd”
management - Understanding the Cash Cycle & issues
in WCM
- Appreciating the Impact of trade credit
policy, inventory policy, production
policy and expense management on
financing needs of firms
4 Trade Discount, Line of Credit To encourage participants in answering Chapter 13 (Prescribed Case:
and constraints of debt or - Why does a profitable firm borrow Textbook) “Jones Electrical
equity financing more from a bank? Distribution”

Page 5 of 12
 - How attractive is the trade credit
option?
- Comparison of the impact of “Take
discount” vs “Skip discount” on the
financials of a firm
- What are the constraints of outside
debt or equity?
- When will a firm be able to repay the
line of credit?

5 Working capital benchmarks, To offer the ability in Chapter 13 (Prescribed Case:

Cash Credit and Letter of - Assessing the liquidity position of firms Textbook) “Coromandel:
Credit- The banker’s from the bankers’ perspective Enhancement of
perspective - The evaluation of WCR with respect to Short-term finance”
cash credit, letter of credit limits
- Understanding the working capital
evaluation benchmarks followed by a
banker
6 Estimating hurdle rates, To familiarize participants with Chapter 8&9 (Prescribed Lecture
Earnings and cashflows on - The sources of equity risk in a project Textbook)
Projects and its analysis
- Computation of COE, COD & COC for a
project
- The choices for adjusting project risk
- Process of converting operating
information into accounting earnings &
accounting earnings into project
cashflows & project cashflows into
incremental cashflows & incremental
cashflows into time weighted cashflows

7 Investment Decision Rules To encourage the participants in understanding Chapter 10 (Prescribed Case:
- Conditions for a decision rule Textbook) “Investment

Page 6 of 12
 - Categories of decision rules (Accounting Analysis Exercises”
based, Cashflow based and DCF based
decision rules)

8 Conflicts in the rankings of To enable the participants in understanding Chapter 10 (Prescribed Case:
projects under different - How to identify mutually exclusive Textbook) “The Investment
methods & projects with projects? Detective “
differences in lives - How to assign ranks to projects based
on different methods?
- NPV vs IRR
- NPV vs Payback
- NPV vs Average ROI
- How to address the differences in the
lives of projects?
9 Cost minimizing projects, To facilitate the participants in Chapter 10 (Prescribed Case:
projects with perpetual - Comparing projects having perpetual CF Textbook) “Investment
cashflows, Effect of new with projects having CF for a finite Analysis & Lockheed
projects on shareholder value period Tri Star”
and accounting vs economic - Selecting the cost minimizing alternative
breakeven - Computing the no.of shares to be issued
to mobilize the required capital
- Measuring the impact of new projects
on the shareholder value
- Understanding the difference between
accounting and economic breakeven

10 Project Interactions, Side To familiarize the participants on Chapter 12 (Prescribed Case:

Benefits and Side Costs - Capital Rationing Textbook) “Hansson Private
- How to deal with capital rationing Lable,Inc: Evaluating
constraints an Investment in

Page 7 of 12
 - Side costs and side benefits of projects Expansion”
- How to carryout NPV, EVA, Asset
Efficiency and Cost Analysis under
different growth assumptions
- Modified IRR
11 Leasing vs Buying To motivate the participants in understanding Chapter 16 (Prescribed Case:
- The computation of the after-tax CF of Textbook) “Burlington
leasing Northern Railroad
- The choice of the hurdle rate to be used Company:
for evaluating the leasing option Equipment Leasing”
- The significance of the residual value in
leasing
- The computation of the NPV of the
leasing option
- The process of deciding between the
buying and leasing decision
12 The Financing Mix: Tradeoffs To enable the participants in appreciating the Chapter 18 (Prescribed Lecture & case
and Theory - Benefits of debt Textbook) discussion:
- Costs of debt “M&M Pizza”
- Capital structure theorems
- Approaches to design the capital
structure (Life cycle approach,
comparable firms’ approach and
financing hierarchy approach)

13 The Optimal Financing Mix To facilitate the participants in understanding Chapter 19 (Prescribed Lecture
- The Operating Income Approach Textbook)
- The Cost of Capital Approach
- The Return Differential Approach
- The APV Approach
- The Industry Average Approach
14 Methods to increase debt To encourage the participants in understanding Chapter 18&19 (Prescribed Case:

Page 8 of 12
 and decrease equity - The application of optimal capital Textbook) ” Hill Country Snack
(Aggressive Capital Structure) structure theorems Foods Co.”
& Reaction of Financial - The reaction of the markets for
Markets for increase in increasing the financial leverage
Financial Leverage - Methods for implementing an
aggressive capital structure
15 Application of APV analysis in To familiarize the participants on Chapter 18&19 (Prescribed Case:
capital structure analysis - How to estimate changes in value from Textbook) “The WM.Wrigley
relevering a firm using APV analysis Jr.Company: Capital
- How to measure the impact of change Structure,Valuation
in capital structure on WACC, EPS, & Cost of Capital”
Credit rating & Voting control of the
promoters
16 Dividend Policy To facilitate the participants in understanding Chapter 21 (Prescribed Lecture
- The background of dividend policy Textbook)
- The dividend irrelevance theorem
- “Dividends are bad” school
- “Dividends are good” school

17 Application of Dividend Policy To encourage the participants in understanding Chapter 21 (Prescribed Case:
-Types of Dividend Policy Textbook) “Berkshire
- Dividend vs Share buyback decision alternative Hathaway: Dividend
-Homemade Dividend Policy Paradigm”
-Factors determining dividend payout decision
- whether a firm should pay dividend?

18 Analyzing cash returned to To enable the participants in understanding Chapter 22 (Prescribed Lecture &
stockholders, Impact of - The cash flow approach to analyzing Textbook) Case discussion:
dividend on financing needs , dividend policy “Rockboro Machine
clientele and signaling - The comparable approach to analyzing Tools Corporation”
considerations dividend policy
- How to manage changes in dividend
policy

Page 9 of 12
 -The impact of dividend on financing
needs
- The reaction of shareholders and
creditors for dividend and share
buyback
- Clientele and signaling considerations
- Sensitivity of D/E ratio to variations in
dividend payout ratio
19 Introduction to Derivatives To facilitate the participants in understanding Ivey Note on “Introduction to Lecture &
- Forwards and Futures Derivatives” Case discussion:
- Call and Put Option “ITO’s Delight”
- Payoff to option buyers & sellers
- Put-Call Parity
- Factors influencing option premium
- Other derivative instruments
- Intrinsic and Time value components of
option pricing
- Option premium analysis
20 Black Scholes Option Pricing To motivate the participants in understanding Ivey Note on “Introduction to Case:
Model & Concluding remarks - The Black Scholes Option Pricing Model Derivatives” “ITO’s Dilemma”
- How to estimate volatility
- Implied Volatility

Note: - The course instructor may modify the sequence of topics or coverage based on initial experience and the mid-course review.

For Attendance Norms please refer to section 10 of the Student’s Manual.

For Evaluation and Grading Norms refer to sections 20, 21 and 22 of the Student’s Manual.

For Disciplinary Action refer to sections 26 and 27 of the Student’s Manual.

Page 10 of 12
Page 11 of 12
Evaluation Module Yes/No Weightage for the Course Learning Objectives PLO sub-dimension Average Number of Hours of
Evaluation measured Work Outside Classroom2
Component1
Mid-Term No -

End-Term yes 40 CLO 1-5 Decision Making 40

+Visualization
+ Analysis
+Optimal Solution to
Problems
Quizzes yes 25 CLO1-4 Decision Making 20
+Visualization
+ Analysis
+Optimal Solution to
Problems
Assignments yes 15 CLO 1-5 30

Class Participation yes 10 CLO 1-5 -

Case Write up yes 10 CLO 1-5 10

Details of Evaluation Components

Page 12 of 12