Birla Institute of Technology & Science, Pilani

Work Integrated Learning Programmes Division

First Semester 2013-2014
Course Handout

Course No. : MM ZG521

Course Title : FINANCIAL MANAGEMENT

Instructor : SMITA KASHIRAMKA

Course Description

This course helps students to gain an introduction to the concepts of time value of money, risk and
rates of return, cost of capital, financial planning, capital investment decisions, capital
management, capital structure and rewarding policy (shareholders), cconcepts and techniques of
financial management decision; valuation of a firms stock, capital asset pricing model; risk
analysis; working capital management, management of cash, management of accounts receivable;
inventory management, short and intermediate term financing, long term financing tools of
financial analysis, financial ratio analysis, funds analysis and financial forecasting, operating and
financial leverages.

Course Objectives

The structure of the course will enable students to appreciate the integration between financial
markets, business environment and the role of finance manager in maximizing firm's and
shareholders' value.

This course helps students to gain an introduction to the principles of financial management,
shareholders wealth maximization vs. profit maximization, time value of money, risk and return
investors and companys perspectives, cost of capital, capital investment decisions, capital
management, capital structure and rewarding policy (shareholders) and corporate taxation.

Teaching Methodology:

All additional course materials will be upload in taxila. The course will utilize the activity based
learning methods such as project-based learning and problem-based learning in addition to the
effective utilization of the electronic resources. Periodically students will be given assignments to
apply/validate the concepts/theories discussed in the course in the context of an organization
preferably students own employer. Therefore, each student will choose his/her own organization
(employer), as a case study for all assignments, provided the same is listed in any stock exchange
and if is not listed then can choose another organization one in the same industry (sector).

Prescribed Text Book:

T1. Prasanna Chandra, Fundamentals of Financial Management, TMH, 5th 2010.

Reference Book

R1. Chandra Prasanna, Financial Management Theory and Practice, Tata McGraw-Hill, 8 th
Edition,

R2. Van Horne J.C., Financial Management and Policy, Pearson Education, 12th Edition, 2001.
MM ZG521 (Course Handout) First Semester 2013-2014 Page 2

Plan of Study
Reference
Week
Topics Learning Objectives to
No.
Textbook
1-2 Financial Describe what the subject of financial management is Ch.1 & 2
Management: about.
An Overview Interface between Finance and Other Functions.
Interface between goal of the firm, responsibility of
finance manager and financial system. [Profit
Maximization versus Shareholder Wealth Maximization].
Understanding 10 principles that form the basics of
financial management.
Understanding Indian financial system markets, features
and participants
Reference Reading:
Arvind Mahajan and Scott Lummer, Shareholder Wealth
Effect of Management Changes, Journal of Business and
Accounting.
Donald R. Chambers and Nelson J. Lacey, Shareholder
Wealth Maximization: Business Ethics and Social
Responsibility, Journal of Business Ethics
Thomas E. Copeland, Why Value Value, McKinsey
Quarterly.
3-4 Financial Understanding of various components of financial Ch 3, 4, 5
Statements statement Statement of Sources & Application of Funds, &6
Analysis and Statement of Income and Expenditure, and Statement of
Interpretation Funds Flow.
Financial Statement Analysis: Ration Analysis (Du Pont
Analysis) and Interpretation.
5 The Time Mechanics of compounding: how money grows over time Ch.8
Value of when it is invested.
Money Determine the future or present value of a sum when there
are non-annual compounding periods.
Discuss the relationship between compounding (future
value) and bringing money back to the present (present
value).
Define an ordinary annuity and calculate its compound or
future value.
Differentiate between an ordinary annuity and an annuity
due, and determine the future and present value of an
annuity due.
Calculate the annual percentage yield or effective annual
rate of interest and then explain how it differs from the
nominal or stated interest rate.
6-7 Risk and Describe the relationship between the average returns that Ch.8
Return investors have earned and riskiness of these returns.
Explain the effects of inflation on rates of return.
Describe term structure of interest rates.
Define and measure the expected rate of return of an
individual investment.
Define and measure the riskiness of an individual
investment.
Measure the market risk of an individual asset.
Reference Reading:
Robert F. Peterkort and James F. Nielsen, Is The Book-To-
Market Ratio a Measure of Risk? The Journal of Financial
Research
Taek Ho Kwon, Sung C. Bae and Jay M. Chung, Do
Foreign Investors Price Foreign Exchange Risk
 Differently? The Journal of Financial Research
Steven T Goldberg, 7 Sure Ways to Bigger Return
8-9 Analysis and Understand the difference between business risk and
Impact of financial risk.
Leverage Use the technique of break-even analysis in a variety of
(Business and analytical settings.
Financial Risk) Distinguish among the financial concepts of operating
leverage, financial leverage, and combined leverage.
Explain why a firm with a high business risk exposure
might logically choose to employ a low degree of financial
leverage in its financial structure.
Reference Reading:
Richard A Lord, The Impact of Operating and Financial
Leverage on Equity Risk
Brent A Gloy and Timothy G. Baker, The Impact of
Financial Leverage and Risk Aversion in Risk
Management Strategy Selection
Hossein Asgharian, Are highly leveraged firms more
sensitive to an economic downturn?
Richard A Lord, Interpreting and Measuring Operating
Leverage.
Robert J Long, A Different Perspective on Operating
Leverage: Comments.
Syllabus for Mid-Semester Test (Closed Book): Topics in Week No. 1 to 9
10-11 Cost of Capital Understanding the application of cost of capital in business Ch. 14
decisions.
Determine cost of various components of capital - cost of
debt, preferred stock, common stock and weighted average
cost of capital.
Impact of floatation cost on cost of capital
12-13 Techniques of Understanding different types and importance of capital Ch. 11, 12
Capital expenditure decisions on business sustainability. & 13
Budgeting Understanding various non-discounted and discounted
cash flow methods and their application in capital
expenditure decisions.
Understanding limitations of discounted and non-
discounted cash flow evaluation methods and exploring
best possible option.
Analysing and measuring various risk involved in capital
expenditure Scenarios Analysis, Sensitivity Analysis and
Decision Trees Analysis.
Reference Reading:
Thomas E. Copeland and Philip T. Keenan, How much is
the Flexibility Worth?
Jeremy Carter Menno van Dijk Ken Gibson, Capital
Investment: How not to build the Titanic.
Harol H. Koyama and Robert Van Tassel, How to Trim
Capital Spending by 25 percent?
Review Session
14-15 Working Objective of Working Capital Management, Static and Ch. 22 to
Capital Dynamic view of Working Capital 26
Management Factors Affecting Composition of Working Capital
Working Capital Determination Operating Cycle and
Simulation Approach..
Criteria for Evaluation of Working Capital Management.
Financing Current Assets:
a. Behaviour of Current Assets and Pattern of
Financing
b. Spontaneous Sources of Finance
c. Trade Credit, Short-term bank finance, PDs, CPs
and Factoring.
 Management of Current Assets
a. Inventories - Role of Inventories in Working
Capital, Cost of carrying inventories, Inventories
planning and management techniques.
b. Receivables Purpose and cost of Maintaining
Receivables, Impact of Credit Policy and Process
of Credit Evaluation, Decision Tree Approach and
Monitoring Receivables.
Management of Cash:
a. Difference between profits and cash, Factors
affecting cash management and Internal Treasury
Controls.
16-17 Capital Understanding Theories of Capital Structure (MM Ch.15 & 16
Structure and Theories).
Firm Value Asymmetric Information Theory Pecking Order Theory
Understanding financial distress and agency cost
Determinants of capital structure.
An approach to setting the target capital structure.

Reference Reading:
Saumitra N. Bhaduri, Determinants of Corporate
Borrowing: Some Evidence from the Indian Corporate
Structure.
Thomas W. Killian, Designing an Optimal Capital
Structure
Erik Lie, Do Firms Undertake Self-Tender Offers to
Optimize Capital Structure?
Linda, Thomas and Stephen, Debt vs. Equity and
Asymmetric Information
Chin-Bun Tse, Top Gearing.
18-19 Dividend Understanding dividend versus capital gains: What do Ch.17 & 18
Policy and investors prefer?
Firm Value Appreciating rationale behind stable dividend policy.
Understanding other means of rewarding to the
shareholders Bonus Share, Stock Options, Stock Split,
Share Buyback, etc.
Reference Reading:
Aswath Damodaran, Beyond Cash Dividends: Buybacks,
Spin Offs and Divestitures.
Aswath Damodaran, Returning Cash to the Owners.
Suzanne and Greg IP, Buybacks Aren't Always a Good
Sign for Investors.
20 Review Session
Syllabus for Comprehensive Exam (Open Book): All topics given in Plan of Self Study

Evaluation Scheme:

EC Evaluation Duration Weigh- Day, Date, Session,Time

No. Component & tage
Type of Examination
EC-1 Assignment/Quiz ** Details to be announced 15% ** Details to be announced
on LMS Taxila website by on LMS Taxila
Instructor website by
Instructor
EC-2 Mid-Semester Test 2 Hours 35% Sunday, 08/09/2013 (FN)*
(Closed Book)* 10 AM 12 Noon
EC-3 Comprehensive Exam 3 Hours 50% Sunday, 10/11/2013 (FN)*
(Open Book)* 9 AM 12 Noon

** Please check the details by 24th July, 2013 on LMS Taxila web site.
* Legend:
AN: AfterNoon Session; FN: ForeNoon Session

Closed Book Test: No reference material of any kind will be permitted inside the exam hall.
Open Book Exam: Use of any printed / written reference material (books and notebooks) will be permitted
inside the exam hall. Loose sheets of paper will not be permitted. Computers of any kind will not be allowed
inside the exam hall. Use of calculators will be allowed in all exams. No exchange of any material will be
allowed.

MM ZG521 (COURSE HANDOUT) FIRST SEMESTER 2013 2014 PAGE 4

Note:

It shall be the responsibility of the individual student to be regular in maintaining the self study schedule as
given in the course handout, attend the online/on demand lectures as per details that would be put up in the
BITS LMS Taxila website www.taxila.bits-pilani.ac.in and take all the prescribed components of the
evaluation such as Assignment (Course Page on LMS Taxila), Mid Semester Test and Comprehensive
Examination according to the Evaluation Scheme given in the respective Course Handout. If the student is
unable to appear for the Regular Test/Examination due to genuine exigencies, the student must refer to the
procedure for applying for Make-up Test/Examination, which will be available through the Important
Information link on the BITS WILP website on the date of the Regular Test/Examination. The Make-up
Tests/Exams will be conducted only at selected exam centres on the dates to be announced later.

Instructor-in-Charges