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Course Objectives
Financial Management course is designed to achieve the following objectives. These are to
- explain the term “finance” and its scope in business management;
- describe various sources of funds with their costs;
- explain various methods of evaluating investment projects;
- explain capital structure theories;
- describe various dividend polices and their relative importance; and
- explain various specific issues like working capital management, base financing and recondition of organization.
A. Introduction-Weight-10%
304.01 Perspective of Finance :
Meaning of finance, Managerial functions and classification of finance, Principles of finance, Alternative goals of a firm: Profit maximization, Wealth maximization, Cost minimization, Risk minimization, Maximizing EPS, Maximizing Sales, Stakeholders Wealth Maximization. Goals of finance, Finance & other management functions, Business Ethics & social responsibilities, Agency Problem & its resolution, Finance in the organizational structure, Financial Staffs responsibilities, Career in Finance.
304.02 Time Value of Money :
Time preference for money, reasons for time preference of money (the problem of this ideology), preference rate and required rate, implications of time value of money (importance), Techniques of calculation – compounding & discounting (simple & compounding- simple, continuous), periodical compounding & discounting, compounding & discounting-linking to PV & FV. PV and FV of lump sum amount, annuity-simple, annuity due (advance) and perpetuity. Graphical presentation of PV, FV & the relationship between FVIF & FVIF. Rule 72, Rule 69. Loan amortization schedule, deposit and accumulated future sum, comparison of different types of interest rate, Solving for interest rate and period. Different types of valuation techniques, valuation of bond, preferred stock, common stocks, yield calculation, Yield to maturity (TEM), YTC, behavior of bond prices. DDM, Derivation of V=D1/(Ke-g).
B. Sources of Finance-Weight-15%
304.03 Sources of Finance :
Fund – conceptual meaning, Sources of fund-a balance sheet approach, external, internal – institutional, non-institutional sources, sources in terms of timing, Factors affecting size of internal and external sources, Retained earning Preferability of sources.
304.04 Short Term Financing :
Nature, traits, importance, merits and demerits of STF, Types of STF, Trade credit, Money market securities, commercial papers, banker’s acceptance, line of credit, secured and unsecured short-term bank loan, revolving letter of credits and others. Issues in management of short term financing.
304.05 Term & Long Term Financing :
Nature, importance, and sources of ITF. Cost of ITF or term financing, Payment structure of ITF. Conceptual meaning of long term financing, Nature, importance, merits, demerits and External & Internal sources of LTF. Instruments of LTF, Common and
C. Cost of Capital and Capital Structure-Weight-20%
304.06 Preferred Stocks :
Features, rights and obligations of holders, Share underwriting Process, Voting Process,
Debt capital-Long term bank loan, Bond-traits, types, Debenture, Bond refunding, Bond Indenture, Hybrid securities, Bonus share, right share & its valuation.
304.07 Cost of Capital :
Concept of cost of capital, Sources of capital, Cost of these sources: Before tax & after tax cost of debt, cost of preferred stock, cost of common stock or new issue, cost of retained earning. WACC, MWACC, Investment opportunity schedule (IOS), MCC & IOS. Factors affecting WACC, Floatation cost, size of the issues and cost of capital. Adjustment of cost of capital for risk, estimating project’s risk using CAPM, Risk adjusted cost of capital, making finance/investment decision, relationship between firm’s long term value and cost of capital.
304.08 Leverage and Capital Structure :
Leverage meaning and traits, leverage in business, Operating and financial leverage, Degree of operating leverage, Degree of financial leverage, Break-even analysis, Impact of Leverage on EPS, Impact of leverage on firms cost of capital and value of a firm. Meaning of capital structure, Components of capital structure, Optimum capital structure, Optimum capital structure vs. financial capital structure, EPS-EBIT analysis, Maximizing value vs. Maximizing EPS, Effect of capital structure on stock price & cost of capital, Capital structure theories, MM model, Hamada model, Miller Model, Pie model, Trade off model, signaling model, variation in capital structure, Factors affecting optimum capital structure, Lessons from real world about optimum capital structure, Optimum capital structure-a dynamic to be achieve.
D. Budgeting Fixed and Working Capital – Weight-35%
304.09 Capital Budgeting :
Managerial perspective of long term value creation, How firm strives to strive in long run, Preliminary concepts – opportunity cost, cost of capital. Capital budgeting- meaning, and importance, applications of capital budgeting, types of investment decisions, Steps in capital budgeting, Types of capital budgeting projects, Independent vs. mutually exclusive project, Convention project vs. non-conventional project, Basic characteristics of cash flows, relevant cash flows, Measurement of relevant cash flows: Initial cash flows, Operating cash flows, Terminal cash flows. Problems related to measurement of cash flows. Investment evaluation criterion or project selection techniques: Discounted and non-discounted criteria. NPV, IRR, Pay back period, ARR, AARR, Profitability index- meaning, calculation process, acceptance or rejection rule in each criterion, NPV vs. IRR. Special problems related to application of capital budgeting criterion (ranking problems), MIRR. Risk in capital budgeting: Sensitivity analysis, Decision tree, scenario analysis, simulation, certainty equivalents (CE), Risk adjusted discount rates (RADR). CE vs. RADR.
304.10 Dividend Policy :
Dividend fundamentals, types of dividend: stock dividend, cash dividend, stock repurchase, stock split, dividend vs. capital gain, process of cash dividend payment, types of dividend policy, factors affecting dividend policy, The dividend relevance policy, Dividend irrelevance policy, poor projects and lower payout, good projects and low payouts, poor project and high payout & good project and high payouts, Some dubious reasons for paying dividend, Dividend payments-Linter model, Controversy about dividend policy.
304.11 Lease Financing - Basics :
Jargons (terms), Terms of contact, Types of lease contact, Method of lease financing, Factors affecting lease decisions, Cash flow consequences of leasing, Accounting treatment of leasing, NPV analysis of lease decision, Sources of value in leasing, Some questions often remains unanswered.
304.12 Working Capital Management :
Approaches of working capital management. Theories of working capital, planning of working capital, Financing working capital, Management of cash & marketable securities, Receivables Management, Inventory management, Some recommendations for financial manager to manage working capital.
304.13 Analysis of Financial Statement :
Statement of changes in financial position: Income statement, Balance sheet, Cash flow statement, Owners equity statements & their components, Financial statement analysis, Budgeting & profit planning.
E. Corporate Governance-weight-10%
304.14 Corporate Restructuring of Governance :
Conceptual framework for financial restructuring, Need for corporate restructuring, Types of restructuring arrangements: amalgamation, acquisition, Merger, takeover etc. Techniques to avoid takeover & acquisition, Legal process of corporate restructuring, Issues related to corporate restructuring. Need for corporate governance, issues and arrears of corporate governance, Management style and corporate governance, Code of conduct for corporate governance, Corporate wealth maximization, value creation & corporate governance.
F. International Finance-Weight-10%
304.15 International Finance :
Foreign Exchange markets and dealings, Determinants and theories of exchange rates, Foreign exchange exposure and risk management for international corporations, Issues in multination financing. International Financial Institutions.
304.16 Foreign Exchange Regulations :
Foreign Exchange Regulation Act 1947 (updated)
Text Books
1. Financial Management : Theory and Practice. 10th Edition - Brigham, E. F and M. C. Her Rardt (South Western).
2. Principles of Corporate Finance, 7th Edition - Brealey, R. A. and S. C. Myers. 2003 (Tata Mc Graw. Hill Publishing Company).
Reference Books
1. Corporate Finance : Theory and Practice. - Damsdaran, A. 2000 (John Wiley & Sons, Inc.).
2. Financial Management, 8th Edition - Pandey, I. M. 2001 (Vikas Publishing House Pvt. Ltd.).
3. Financial Management and Policy - J. C. Van Horn
4. Financial management - Khan & Jain
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