Course Manual of SMF

8/3/2019 Course Manual of SMF

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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 andfinancial scene, thanks to liberalization, privatization, globalization, automation andascendance of the services sector. In the wake of these developments, investment andfinancing avenues have expanded considerably, competition has intensified in all sectors,institutional investors have become a major force and corporates have grown in size andcomplexity.

Sourcing & Managing Funds (SMF) is the core course that describes the perspective of groupswithin the firm asked to create firm value by a) deciding how much capital to raise and thebest mix of different sources of capital, and b) managing those funds and generating relevantfinancial information, which includes describing future plans (budgets), evaluating newprojects (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), splitbetween the Treasurer and the Controller. But many other functions are spread across theorganisation, 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 investmentdecision and financing of such decision. Therefore, the main focus will be on understandingthe techniques of capital budgeting and capital structure decision.

2. Introduction to the Tutors



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2.1 Area ChairName: Ms. Ranjani Matta

Phone Number: 124-6675-622Email ID: [email protected] Location: 34, Gurgaon campus

Website URL: http://www.iilm.edu/faculty/profiles/ranjani-matta.html

2.2 Module LeaderMs. 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 inTerm 2.

4. Module Overview

Session Topic

1 Title: Corporate Finance – An overview Lecture

2 Valuation of Bonds Lecture

3 Valuation of Shares Lecture

4 Concept of Risk and return – Single asset Lecture

5 Concept of Risk and return – portfolio risk and return Lecture

6 Capital Budgeting Techniques Lecture

7 Discussion on NPV and IRR Lecture

8 Discussion on other methods of selecting a plan, TerminalValues and Industry Multiples

Lecture

9 Capital Budgeting Techniques using spreadsheets Seminar

10 Capital Budgeting Techniques using spreadsheets Lab Session

11 Develop Projections Lecture

12Develop project cash flows

Lecture13 Develop project cash flows Lecture

14 Develop Projections using financial modeling andspreadsheets

seminar

15 Investor relations- case study seminar

16 Cost of Capital Lecture

17 Cost of Capital- leverage Lecture

18 Cost of Capital – CAPM lecture

19 Capital Structure Lecture

20 Capital Structure- MM Approach Lecture

21 Capital Structure Decision Lecture22 Dividend Decision Lecture

23 Working Capital Management Lecture

24 Working Capital Management- Operating Cycle Lecture

25 Working Capital Management – Cash Management Model Lecture

26 Working Capital Management – Credit Policy Lecture

27 Forecasting Working Capital requirements throughspreadsheets

Lab Session



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5. Module Readings

5.1 Main TextsCoursepack

5.2 References Corporate Finance by Aswath Damodaran, Wiley, 2nd Edition. Corporate Finance by Ross, Westerfield, Jaffe and Kakani, Tata McGraw Hill, 8 th 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 Websiteshttp://pages.stern.nyu.edu/~adamodar/

The following online article and research paper to be read by students from the on-linedatabase 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 1Title: Corporate Finance – An overviewSession will include the overview of Corporate Finance including the Introduction, Scope of Financial Management, Key activities of the Financial Manager, Objectives of FinancialManagement, Profit maximization v/s Wealth maximization Criteria, Agency problem.

Learning Outcome: To understand the basic concept of financial management, functions of financialmanagement, objectives of a firm especially its financial objectives, agency cost and agencyproblem.

Desired Reading: PC Chapter-1 (Page 4-9, Financial management: an overview)

6.2 Session 2Title: Valuation of BondsSession will introduce and discuss about the concept of Valuation, Valuation of Bond, Yield tomaturity, 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 3Title: Valuation of SharesSession will cover approaches to equity valuation- Dividend discount model; P/E ratioapproach. 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 4Title: Concept of Risk and return – Single assetSession 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 5Title: Concept of Risk and return – portfolio risk and returnSession 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 6Title: 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 creatinglong-term value for firm. Student will also learn about characteristics of a good investmentdecision.Desired Readings: PC Chapter-12 (Page 279-282, Techniques of Capital Budgeting) Damodaran Chapter-10 (Page 285-286, Investment Decision Rules)

6.7 Session 7Title: Discussion on NPV and IRR Net Present Value and Internal Rate of Return methods of selecting a planLearning Outcome:Net Present Value is the best and widely used method employed for evaluation and selectionof project. Students will learn NPV and IRR capital budgeting besides understanding the roleof NPV in value creationRequired 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 8Title: Discussion on other methods of selecting a plan, Terminal Values and IndustryMultiplesOther 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 Periodand Average Accounting Return. They will also understand about forecasting of terminalvalues and about industry multiplesEssential Readings: “MIRR: A better measure” by Herbert Kierulff, Kelley School of Business, Indiana

University, HBSP ArticleDesired 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 9Title: 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. Studentwill learn to create spreadsheet template for calculating present values of cash flows for aproject 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. Studentwill learn to create spreadsheet template for calculating present values of cash flows for aproject where all calculations are automatically done when any input variable is changed.

6.11 Session 11Title: Develop ProjectionsSales forecast, Pro forma Profit & Loss account, Pro forma Balance SheetLearning 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 thefirm 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 12Title: Develop project cash flowsElements 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 shouldbe 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 13Title: Develop project cash flowsCash flow illustrations viz., Naveen Enterprises, India Pharma Ltd, Boeing Super Jumbo JetLearning 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 aredetermined.

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 14Title: 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 createspreadsheet template for financial statements where all calculations are automatically donewhen any input variable is changed.Desired Reading: PC Chapter-5 (Page 112-116, Financial Planning & Forecasting)

6.15 Session 15Title: Investor relations – Case StudyCase 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 4Learning Outcome:Through the case study, student will learn how about application of decisions in financialmanagement and capital budgeting.

6.16 Session 16Title: Cost of CapitalEstimating cost of debt, preference and equityLearning Outcome:To explain the method of calculating specific cost of capital. Student will learn calculationof 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 17Title: Cost of Capital -leverageProject 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 andtheir role in evaluating a project. Student will understand the impact of leverage on the riskprofile of the firm.Essential Readings:

“Business Valuation and the Cost of Capital” by Timothy A Leuhrman, HBS backgroundnote

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 18Title: Cost of Capital -CAPMDivisional 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 misconceptionssurrounding cost of capital. Student will learn about using Capital Asset Pricing Method tocalculate 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 19Title: Capital StructureIs there an optimal capital structure, NI & NOI approach.

Learning Outcome:To explain capital structure theory which say that such decision affects firm value. Studentswill 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

noteDesired 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 20Title: 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 notaffect 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 21Title: Capital Structure DecisionEBIT-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 willlearn 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 22Title: Dividend PolicyMeaning, 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 23Title: Working Capital ManagementFactors influencing working capital requirements, Current assets and financing policyLearning Outcome:To explain the determinants of working capital and its financing policy. Decisions relating toshort term financing is referred to as Working Capital Management. Students will learn aboutdifferent factors that influence working capital requirements of a company and its impacton 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 PressDesired Readings: PC Chapter-26 (Page 657-661, Working Capital Policy)

6.24 Session 24Title: Working Capital Management-Operating CycleOperating 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 25Title: Working Capital Management- cash management modelsLong-term cash forecasting, Optimal cash balance, Cash management models.Learning Outcome:To explain the management of cash. Students will learn forecasting of long term cashrequirements, reasons to maintain optimal cash balance and different models for cashmanagement.

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 26Title: Working Capital Management- credit policyCredit 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 takeninto 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 statementswhere all calculations are automatically done when any input variable is changed.

7. Assessment Plan

Assessment method Marks

1 Excel based assessment- Individual 5

2 Case Analysis and Group Presentation 5



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3 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 thewater’. This write up should be in the form of a business report and the body of the memoshould not exceed 3 pages. Any supporting analysis can be attached as appendices. Eachgroup 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 theirability to apply theory to practice through numerical problems.

Feedback on students' performance in the exam will be provided when answer scripts areshown to students.

8. Assessment

8.1 Assessment Map

Assessment Map: Sourcing and Managing Funds

Module A1 A2 A3 A4 A5SMF * * * * *

Notes:A1: Individual test/ AssignmentA2: Group Assignment/ Project / Business PlanA3: Open Book Examination/Case StudyA4: Close Book Examination

A5: Group Presentation

8.2 Teaching Map

Module T1 T2 T3 T4 T5 T6SMF * * * * *

Notes:T1: LecturesT2: Seminar/ TutorialsT3: Live Projects & PresentationsT4: Case DiscussionT5: Guest Lectures/ Industrial VisitsT6: 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 intorelevant 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 andrecognize ethical business practices.L9: Be sensitive to the social economic and environmental responsibilities of business.

Documents

Course Manual of SMF