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IILM Institute for Higher Education

Module Manual: Sourcing and Managing Funds Academic Year: PGP 2011-2013

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1.Introduction to the Module and Module Objective The past two decades have witnessed a dramatic transformation of the Indian businesses and financial scene, thanks to liberalization, privatization, globalization, automation and ascendance of the services sector. In the wake of these developments, investment and financing avenues have expanded considerably, competition has intensified in all sectors, institutional investors have become a major force and corporates have grown in size and complexity. Sourcing & Managing Funds (SMF) is the core course that describes the perspective of groups within the firm asked to create firm value by a) deciding how much capital to raise and the best mix of different sources of capital, and b) managing those funds and generating relevant financial information, which includes describing future plans (budgets), evaluating new projects (capital budgeting), and evaluating performance of divisions, managers and products. Some of these functions are housed within the office of the Chief Financial Officer (CFO), split between the Treasurer and the Controller. But many other functions are spread across the organisation, principally in the hands of strategy groups and product managers. Through this course on SMF, students will get an insight into the issues involved in investment decision and financing of such decision. Therefore, the main focus will be on understanding the techniques of capital budgeting and capital structure decision.

2. Introduction to the Tutors

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2.1 Area Chair Name: Ms. Ranjani Matta Phone Number: 124-6675-622 Email ID: ranjani.matta@iilm.edu Cabin Location: 34, Gurgaon campus Website URL: http://www.iilm.edu/faculty/profiles/ranjani-matta.html 2.2 Module Leader Ms. Shegorika Lalchandani 2.3 Tutors Ms. Shegorika Lalchandani: Website URL: http://www.iilm.edu/faculty/profiles/shegorika-rajwani.html

Ms. Nisha Mary Thomas: Website URL: http://www.iilm.edu/faculty/profiles/nisha-mary-thomas.html Dr.Preeti Goyal: Website URL: No link

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3. Module Pre-Requisites Understanding of the preparation and analysis of financial statements like Income Statement, Profit and Loss Account and Balance Sheet. Knowledge on calculation and interpretation of Financial Ratios. All students would have gone through these concepts in the module Basics of Accounting in Term 2. 4. Module Overview Session 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Topic Title: Corporate Finance An overview Valuation of Bonds Valuation of Shares Concept of Risk and return Single asset Concept of Risk and return portfolio risk and return Capital Budgeting Techniques Discussion on NPV and IRR Discussion on other methods of selecting a plan, Terminal Values and Industry Multiples Capital Budgeting Techniques using spreadsheets Capital Budgeting Techniques using spreadsheets Develop Projections Develop project cash flows Develop project cash flows Develop Projections using financial modeling and spreadsheets Investor relations- case study Cost of Capital Cost of Capital- leverage Cost of Capital CAPM Capital Structure Capital Structure- MM Approach Capital Structure Decision Dividend Decision Working Capital Management Working Capital Management- Operating Cycle Working Capital Management Cash Management Model Working Capital Management Credit Policy Forecasting Working Capital requirements through spreadsheets

Lecture Lecture Lecture Lecture Lecture Lecture Lecture Lecture Seminar Lab Session Lecture Lecture Lecture seminar seminar Lecture Lecture lecture Lecture Lecture Lecture Lecture Lecture Lecture Lecture Lecture Lab Session

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5. Module Readings 5.1 Main Texts Coursepack 5.2 References Corporate Finance by Aswath Damodaran, Wiley, 2nd Edition. Corporate Finance by Ross, Westerfield, Jaffe and Kakani, Tata McGraw Hill, 8th Edition Financial Management by Prasanna Chandra, Tata McGraw Hill, 7th Edition. 5.3 Journals ICFAI Journal of Applied Finance International Journal Financial Mgt Journal of accounting and finance Dalal Street 5.4 Websites http://pages.stern.nyu.edu/~adamodar/ The following online article and research paper to be read by students from the on-line database Ebscohost. Article: Working Capital Management: Driving Additional Value within AP by Dennis Bauer Research Paper: Testing the Trade Off Theory of Capital Structure by John S Howe and Ravi Jain

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6.Detailed Session Plan

6.1 Session 1 Title: Corporate Finance An overview Session will include the overview of Corporate Finance including the Introduction, Scope of Financial Management, Key activities of the Financial Manager, Objectives of Financial Management, Profit maximization v/s Wealth maximization Criteria, Agency problem. Learning Outcome: To understand the basic concept of financial management, functions of financial management, objectives of a firm especially its financial objectives, agency cost and agency problem. Desired Reading: PC Chapter-1 (Page 4-9, Financial management: an overview)

6.2 Session 2 Title: Valuation of Bonds Session will introduce and discuss about the concept of Valuation, Valuation of Bond, Yield to maturity, Valuation of Preference shares. Learning Outcome: To understand the concept of valuation of bonds and preference shares and finding their value of a bond and preference share. Desired Reading: PC Chapter-7 (Page 167-174, Valuation of bonds and shares)

6.3 Session 3 Title: Valuation of Shares Session will cover approaches to equity valuation- Dividend discount model; P/E ratio approach. The relationship between earnings-price ratio and expected return and growth. Learning Outcome: To understand various models of valuation of shares and practice questions on them. Desired Reading: PC Chapter-7 (Page 174- 180, Valuation of bonds and shares)

6.4 Session 4 Title: Concept of Risk and return Single asset Session will introduce the concept of risk and return, risk and return of a single asset. Learning Outcome: To understand the concept of risk of an asset and the returns on it. The student will also

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know the types of risk faced by an investor.

Desired Reading: PC Chapter-7 (Page 198-199,205, 207, Valuation of bonds and shares) 6.5 Session 5 Title: Concept of Risk and return portfolio risk and return Session will cover risk and return of portfolio and Introduction to Beta. Learning Outcome: To understand the concept of risk and return to a portfolio and how risk is measured. Desired Readings: PC Chapter-7 (Page 206,208, 201, 211, 215, Valuation of bonds and shares)

6.6 Session 6 Title: Capital Budgeting Techniques Creating value, Capital budgeting process and Project classification. Learning Outcome: Student will understand the nature and types of investment decision and its role in creating long-term value for firm. Student will also learn about characteristics of a good investment decision. Desired Readings: PC Chapter-12 (Page 279-282, Techniques of Capital Budgeting) Damodaran Chapter-10 (Page 285-286, Investment Decision Rules)

6.7 Session 7 Title: Discussion on NPV and IRR Net Present Value and Internal Rate of Return methods of selecting a plan Learning Outcome: Net Present Value is the best and widely used method employed for evaluation and selection of project. Students will learn NPV and IRR capital budgeting besides understanding the role of NPV in value creation Required Readings: Net Present Value and Internal Rate of Return: Accounting for Time (Excerpted from Manager's Toolkit: The 13 Skills Managers Need to Succeed) HBS Press Desired Readings: PC Chapter-12 (Page 283-292, Techniques of Capital Budgeting) Ross, Westerfield, Jaffe, Kakani Chapter-6 (Page 203-205, Page 211-224, Net Present Value and Other Investment Rules) Damodaran Chapter-10 (Page 296-310, Investment Decision Rules)

6.8 Session 8 Title: Discussion on other methods of selecting a plan, Terminal Values and Industry Multiples Other methods of selecting plan like payback period, average accounting return; Projecting

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terminal values, Links among NPV, share price & value creation. Learning Outcome: The students will study about other methods of choosing the best plan like Payback Period and Average Accounting Return. They will also understand about forecasting of terminal values and about industry multiples Essential Readings: MIRR: A better measure by Herbert Kierulff, Kelley School of Business, Indiana University, HBSP Article Desired Readings: Ross, Westerfield, Jaffe, Kakani Chapter-6 (Page 205-211, Page 224-226, Net Present Value and Other Investment Rules) PC Chapter-12 (Page 293-298, Techniques of Capital Budgeting)

6.9 Session 9 Title: Capital Budgeting Techniques using spreadsheets Financial modelling using spread sheets. Learning Outcome: To explain the use of spread sheets for calculating financial viability of a project. Student will learn to create spreadsheet template for calculating present values of cash flows for a project where all calculations are automatically done when any input variable is changed.

6.10 Session 10 Title: Capital Budgeting Techniques using spreadsheets Financial modelling using spread sheets. Learning Outcome: To explain the use of spread sheets for calculating financial viability of a project. Student will learn to create spreadsheet template for calculating present values of cash flows for a project where all calculations are automatically done when any input variable is changed.

6.11 Session 11 Title: Develop Projections Sales forecast, Pro forma Profit & Loss account, Pro forma Balance Sheet Learning Outcome: To explain the method of financial planning and forecasting. Student will learn how to prepare pro forma or projected financial statements to anticipate financing needs of the firm and estimate the future free cash flows. Desired Reading: PC Chapter-5 (Page 107-112, Financial Planning & Forecasting); Illustration: Spaceage Electronics. Damodaran Chapter-9 (Page 256-261, Estimating revenues and expenses) 6.12 Session 12 Title: Develop project cash flows Elements of cash flow stream, Principles of cash flow estimation. Learning Outcome: Student will learn the components of cash flow i.e. initial investment, operating cash flows

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and terminal cash flows. The student will also learn about the basic principles that should be followed while estimating cash flows of a project. Desired Reading: Damodaran Chapter-9 (Page 263 279, Converting Operating Forecasts into Accounting Forecasts) PC Chapter-12 (Page 304-312, Estimation of Project Cash Flows)

6.13 Session 13 Title: Develop project cash flows Cash flow illustrations viz., Naveen Enterprises, India Pharma Ltd, Boeing Super Jumbo Jet Learning Outcome: Student will learn how to forecast cash flows of a project before applying project selection techniques. Three illustrations will be presented in the class to show how cash flows are determined.

Desired Reading: Damodaran Chapter-9 (Page 264 269, Page 275-276, Converting Operating Forecasts into Accounting Forecasts) PC Chapter-12 (Page 312-314, Estimation of Project Cash Flows)

6.14 Session 14 Title: Develop Projections using financial modeling and spreadsheets Financial modelling using spread sheets. Learning Outcome: To explain the use of spread sheet for financial planning. Student will learn to create spreadsheet template for financial statements where all calculations are automatically done when any input variable is changed. Desired Reading: PC Chapter-5 (Page 112-116, Financial Planning & Forecasting)

6.15 Session 15 Title: Investor relations Case Study Case 2: Sharks in the water (The group will submit a write up on the day as informed by the faculty and also make a presentation) HBS Case Study, page 4 Learning Outcome: Through the case study, student will learn how about application of decisions in financial management and capital budgeting.

6.16 Session 16 Title: Cost of Capital Estimating cost of debt, preference and equity Learning Outcome: To explain the method of calculating specific cost of capital. Student will learn calculation of cost of debt, cost of preference capital and cost of equity capital.

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Desired Readings: PC Chapter-14 (Page 367-375, The Cost of Capital) Damodaran Chapter-7 (Page 210- 218, Estimating Hurdle Rates for Firms)

6.17 Session 17 Title: Cost of Capital -leverage Project risk vs. asset risk vs. risk of debt & equity, Impact of leverage on risk of debt & equity, Weighted average and marginal cost of capital. Learning Outcome: To explain the method of calculating weighted average and marginal cost of capital and their role in evaluating a project. Student will understand the impact of leverage on the risk profile of the firm. Essential Readings: Business Valuation and the Cost of Capital by Timothy A Leuhrman, HBS background note Desired Readings: PC Chapter-14 (Page 375-379, The Cost of Capital) Ross, Westerfield, Jaffe, Kakani Chapter-12 (Page 417-420, Risk, Cost of Capital and Capital Budgeting)

6.18 Session 18 Title: Cost of Capital -CAPM Divisional and project cost of capital, Floatation cost, Applying Capital Asset Pricing Method (CAPM) to estimate a project's cost of capital, Misconceptions surrounding cost of capital. Learning Outcome: To explain importance of divisional and project cost of capital and misconceptions surrounding cost of capital. Student will learn about using Capital Asset Pricing Method to calculate cost of capital. Desired Readings: PC Chapter-14 (Page 379-386, The Cost of Capital) Ross, Westerfield, Jaffe, Kakani Chapter-10 (Page 365-369, Return and Risk)

6.19 Session 19 Title: Capital Structure Is there an optimal capital structure, NI & NOI approach. Learning Outcome: To explain capital structure theory which say that such decision affects firm value. Students will learn if a firm can ever have an optimal mix of debt and equity. Essential Readings: Note on Theory of Optimal Capital Structure by William E Fruhan, HBS background note Desired Reading: PC Chapter-19 (Page 476-482, Capital Structure and Firm Value) Stephen, Westerfield, Jaffe, Kakani Chapter-17 (Page 574-576, Valuation and Capital Budgeting for the Levered Firm)

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6.20 Session 20 Title: Capital Structure- MM approach Modigiliani-Miller position, Exception to the MM theorem. Learning Outcome: To explain the Irrelevance Capital Structure Theory which say that such decision do not affect share holder value. Desired Readings: Damodaran Chapter-18 (Page 554-558, The Financing Mix: Trade Offs and Theory) PC Chapter-19 (Page 483-491, Capital Structure and Firm Value)

6.21 Session 21 Title: Capital Structure Decision EBIT-EPS analysis, ROI-ROE analysis, Leverage analysis, Ratio & cash flow analysis. Learning Outcome: To explain different kinds of analyses helpful in choosing the capital structure. Student will learn on how to decide the right mix of debt and equity for a firm. Desired Readings: PC Chapter-20 (Page 510-523, Capital Structure and Firm Value)

6.22 Session 22 Title: Dividend Policy Meaning, Reasons for paying dividend and Factors affecting dividend policy. Learning Outcome: To help students understand the meaning and need for paying dividend. Desired Readings: PC Chapter-22 (Page 561-566, Dividend Decision)

6.23 Session 23 Title: Working Capital Management Factors influencing working capital requirements, Current assets and financing policy Learning Outcome: To explain the determinants of working capital and its financing policy. Decisions relating to short term financing is referred to as Working Capital Management. Students will learn about different factors that influence working capital requirements of a company and its impact on the working capital policy. Essential Readings: The magic of managing the balance sheet: How to manage working capital(Excerpted from Manager's Toolkit: The 13 Skills Managers Need to Succeed) HBS Press Desired Readings: PC Chapter-26 (Page 657-661, Working Capital Policy)

6.24 Session 24 Title: Working Capital Management-Operating Cycle Operating cycle and cash cycle, cash requirement for working capital. Learning Outcome: To explain methods of working capital determination like inventory period, accounts payable

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period, accounts receivable period and cash cycle. Desired Readings: Ross, Westerfield, Jaffe, Kakni Chapter-26 (Page 880-881, Short Term Finance & Planning) PC Chapter-26 (Page 657-665, Working Capital Policy)

6.25 Session 25 Title: Working Capital Management- cash management models Long-term cash forecasting, Optimal cash balance, Cash management models. Learning Outcome: To explain the management of cash. Students will learn forecasting of long term cash requirements, reasons to maintain optimal cash balance and different models for cash management. Essential Readings: Need Cash? Look inside your company by Kevin Kaiser and S. David Young, Harvard Business Review article Desired Readings: PC Chapter -27 (Page 675-689, Cash & Liquidity Management) 6.26 Session 26 Title: Working Capital Management- credit policy Credit policy variables, Credit evaluation and granting decision. Learning Outcome: To explain the management of account receivables. Students will learn about important dimensions of firm's credit policy, assessment of credit risks and factors that must be taken into account before credit is offered to the customer. Desired Readings: Ross, Westerfield, Jaffe, Kakni Chapter-26 (Page 947-952, Short Term Finance & Planning) PC Chapter -28 (Page 699-708, Credit Management). 6.27 Session 27 Title: Forecasting Working Capital requirements through spreadsheets Financial modelling using spread sheets. Learning Outcome: To explain the use of spread sheet for forecasting working capital requirements. Student will learn to create spreadsheet template for preparing working capital budget statements where all calculations are automatically done when any input variable is changed. 7. Assessment Plan

Assessment method 1 2 Excel based assessment- Individual Case Analysis and Group Presentation

Marks 5 5

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End Term Exam

20

Details of Assessment 7.1 Component 1: Excel based assessment- Individual (5 marks) Each student will be given numerical questions to be solved using excel. 7.2 Component 2: Case Analysis and Group Presentation (5 marks) Each group of students will prepare a write-up for the assigned case namely Sharks in the water. This write up should be in the form of a business report and the body of the memo should not exceed 3 pages. Any supporting analysis can be attached as appendices. Each group will make a presentation on the assigned cases as mentioned above. 7.3 Component 3: End term exam (20 marks) A two-hour, closed book end-term examination will be held at the conclusion of the course. The examination will test students' theoretical understanding through questions and their ability to apply theory to practice through numerical problems. Feedback on students' performance in the exam will be provided when answer scripts are shown to students. 8. Assessment 8.1 Assessment Map Assessment Map: Sourcing and Managing Funds Module SMF A1 * A2 * A3 * A4 * A5 *

Notes: A1: Individual test/ Assignment A2: Group Assignment/ Project / Business Plan A3: Open Book Examination/Case Study A4: Close Book Examination A5: Group Presentation 8.2 Teaching Map Module SMF T1 * T2 * T3 T4 * T5 * T6 *

Notes: T1: Lectures T2: Seminar/ Tutorials T3: Live Projects & Presentations T4: Case Discussion T5: Guest Lectures/ Industrial Visits T6: Lab Session

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8.3 Curriculum Map Module L1 * L2 * L3 * L4 * L5 * L6 * L7 L8 L9

Notes: L1: An understanding of organizations, their external context and their management. L2: An awareness of current issues in business & management which is informed by research & practice in the field. L3: An understanding of appropriate techniques sufficient to allow investigation into relevant business & management issues. L4: The ability to acquire & analyze data and information. L5: The ability to apply relevant knowledge to practical situation. L6: The ability to work & lead effectively in a team based environment. L7: An improvement in both oral & written communication skills. L8: Be cognizant of the impact of their individual & corporate actions on society and recognize ethical business practices. L9: Be sensitive to the social economic and environmental responsibilities of business.

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