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FM I - P08
PGDM 2008-10 : TERM - II


INSTRUCTOR: PROF. BANIKANTA MISHRA

Course Outline

FINANCIAL MANAGEMENT – I


Course Content: The objective of the financial-manager of a firm is to create wealth for the firm’s stakeholders. S/he does so by identifying and investing in projects where the current worth of cash-flows exceeds the current cost of the required investments. This worth is measured by value.

This course revolves around the central theme of finance: valuation. It will start by introducing you to concepts of valuation and their measurements. You will then use this knowledge to value the two most basic securities: stock and bond. You would learn that value depends upon two variables: cash-flows and discount-rate.

This course will familiarize you with the nuances of determination of cash-flows for a project, in particular the effect of tax-shields, opportunity costs, externalities, and unequal lives. You would also get a glimpse of "real options", options that arise in capital-budgeting problems.

Discount-rate is typically the more difficult variable to tackle. When valuing stocks and bonds, you would have initially taken the discount-rate as given. But, later in the course, you will analyze how these discount-rates are determined. The first thing that you will learn in this regard is that risk of an instrument influences its discount-rate. Then, you will ferret out the different sources of risk for a bondholder. In this context, you will learn about the term-structure-of-interest-rates, which explains why riskless – and even similarly-risky - bonds of different maturities command different yields. You will go a step further thereafter and, in the spirit of understanding the global economy, would comprehend why interest-rates on riskless and similarly-risky bonds denominated in different currencies differ.

Determination of discount-rate for stocks is perforce a more complicated task. This will necessitate your understanding the risk-return framework in which individuals make their portfolio-selection choices. You will learn how risk is defined and measured for a stock. That will introduce you to the concept of “beta”, which measures a stock’s risk. Analyzing the factors that affect the beta, you will find that capital-structure, typically defined by the debt-equity ratio, plays a crucial role, as does operating-leverage. You will also find out that a firm’s dividend/pay-out policy may affect the discount-rate for the stock.

After having gone through the course, you should be able to understand how a financial-manager decides where and how much to invest as well as how to raise the capital for required investment. The "Concepts Covered" sheets tell you what are covered.

Course Materials: I do not refer to any specific book. Books by Bodie & Merton, Grinblatt & Titman, and Brealey & Myers are good ones (possibly in that order). But the Indicative Schedule at the end refers to the pages Principles of Corporate Finance by Richard Brealey and Stewart Myers (McGraw Hill, Sixth Edition). You may scan The Wall Street Journal Guide to Understanding Money and Investing by Kenneth Morrris and Allen Siegel (Lightbulb Press, 1993); Wall Street is the Dalal Street of USA and the Wall Street Journal its Economic Times. Five not-to-be--graded assignments are also enclosed in the course-pack.

Examinations: There will be two examinations, one mid-term (accounting for 45% of the course-grade) and one final (accounting for 50% of the course-grade). These closed-book examinations (you will be allowed to carry only the Formula Sheet provided by me) will typically have conceptual questions and numerical problems (short, medium, long). There will be no make-up examination except in exceptional circumstances.
Some Basic Examination Rules: You would be given either a question-cum-answer paper or a question paper with the answer-paper attached. In the former case, you would be given a specific amount of space following each question for writing your answer. In the latter, you would be given a specific total number of pages to write your answers; you should use both sides of each sheet and show your answers in ascending order (answer to Q.1 first, followed by answer to Q2 and so on), leaving half-inch gap between your answers. In all cases, leave half-inch margin on both left and right side. Read instructions, if any, on the question/question-cum-answer book; if an instruction therein conflicts with one given here, then it overrides the one given here. If not specifically asked to use a pen, you may use either pen or pencil. Write legibly; if I cannot read what you have written, I will not give you any points for the relevant portion. Unless merely asked to tick the right answer, explain clearly all your derivations and answers; if no explanation is given, no credit will be given for merely ticking or jotting down the correct answer. Be precise; clumsy writing and imprecise or unnecessarily lengthy answers will be penalized. You are not allowed to seek any clarifications from anyone (not even your instructor) during examinations; if a question is wrong or unclear, just state why the question is wrong/unclear and, if possible, make an assumption and answer the question. If you are found to be justified doing what you did, you will get full points; or else, you would receive less (even zero).

Assignments: The course-pack contains five assignments. You should not submit their solutions to me. I would hand you over the answers to the questions in an assignment only after all the topics relating to that assignment have been covered and you have had a few days to work the problems. Answers to cases, if any, would not be handed over, though they would be discussed in class. The COC (Group) Project is somewhat different and requires your group to determine and analyze the cost-of-capital of a company. Your group may be provided with the name of a company or asked to choose one for itself.

Grade: Your grade would depend on your performance in the mid-term examination (45%), final examination (50%), and your group-report (maximum 6 in a group) on the COC Project (5%). Unless there is an official grade distribution of the Institute, your QPI would be calculated as equal to (P-N)/10, where P is your overall percentage-score and N is between 0 and 10 (usually 10).

Class Participation: All students are expected to take an active part in class discussions. It is not enough for a student to do well in the above-cited examinations and assignments. Class participation is an integral component of the learning process. Therefore, I would urge you to come well-prepared to the class, to answer questions when called upon to do so, and to raise interesting issues for discussion. If I find that you are very inactive in class, I would be forced to pull your grade down to the next lower level. (I rarely get to do it; please don’t give me a chance.) Besides, you must attend every class. You are allowed to miss up to two classes only if you or someone in your family is seriously ill or there is a death in your family (God forbid!). If you miss any class in violation of this rule, 0.2 would be deducted from your QPI for every class thus missed.

Code of Ethics: You must abide yourself by the (unwritten) Code of Ethics for Students. For individual (group) assignments/examinations/projects, it is unethical to seek any direct help from others (other groups), whether or not you make use of the help. Besides, other forms of dishonesty (like plagiarism) would also invite severe punishment. Moreover, for a group assignment, all members of the group should contribute to the preparation of the report (no free-riders), and no direct help should be sought or taken from persons outside the group. Discussion among individual students and groups (except in the examination hall or class-room) is, of course, always encouraged. But, the final report or solution should be totally in your (your group’s) own style and language; any form of copying from another student (or group) or from any outside source is a serious offense. Moreover, you (or, wherever relevant, each member of your group) must fully and clearly understand every word and every step written in your (your group’s) report. Your basic purpose should be to learn, without resorting to any unfair means for getting a higher score/grade. If you resort to any unfair means, including, but not limited to, the ones mentioned above, you would receive an F in the course; I may also recommend to the Institute for your expulsion.
‘Hide Thy Name’ Policy: In all your solutions / reports / examinations, please mention only your Roll Number(s) on the last page. Never mention your name(s) anywhere, not even in the examination-answer-sheets. This ensures that the person grading your assignment/examination does not know your identity. If you mention your name, up to 40 points would be deducted from your assignment (examination / report / case solutions). If you are anywhere directed to write your name, it shall be deemed to be a mistake and to be overwritten by the ‘Hide Thy Name’ Policy mentioned here.

Contact Details: Though I am usually always available in my office (Room 227 Admin Block) between 11:00 a.m. and 6:00 p.m. (except lunch break) on weekdays (and at random hours on weekends), I may not always be free to talk to you. So, if you want a meeting, please get an appointment in advance. You can reach me in my office at extension 227 or at home (only between 10:00-1:00 and 5:00-9:00, please) at 264; in case my home extension does not work, you may call me in my direct number at 230-0820 during the same hours. My secretary, Mr. Bijay Raut, can be reached at extension 242. You can, of course, always reach me by e-mail at banikant@ximb.ac.in OR banikanta@hotmail.com (the former is preferred).

Feedback: Feedback is always useful, even for the most seasoned veteran. In that spirit (but, of course, without claiming to be either seasoned or a veteran), I would request you to give me continuous “informal” feedback. Toward this, the class may like to form a “focus group” that continuously interacts with the students and informs me about their problems, if any, with the course. I would also request you to submit the midterm-evaluation on the day/date mentioned at the top of the midterm-evaluation-form (included). The final evaluation-form, which is different from the "official" one you would receive from the Dean's Office, asks some specific questions regarding topics and cases (which are not touched upon by the official form). I would be thankful if you submit it to me on the day of the final examination (just after the exam).

Formula Sheet and PV-FV Tables: I have provided a 4-page Formula Sheet and 4-page PV-FV Tables. You must bring these to every class. You should bring these to all examinations also. No other sheet would be allowed or provided by me for the examinations.

Indicative Schedule: The Indicative Schedule on the next page gives you an idea about the chronological sequence of topics I plan to cover and the amount of time I plan to spend on each topic. It is by no means binding. I would try my best to ensure that you understand a topic well before moving on to the next topic. Based on my past experience, I, of course, believe that we shall be able to cover most, if not all, the topics mentioned in the Indicative Schedule.

I hope that I live up to your expectation (of teaching quality) and you up to mine (of sincerity).
I also hope that you enjoy the course and get the value of your time and money spent on it.


Created By: Lingaraj Pattanaik on 09/18/2008 at 02:29 PM
Category: PGP-I Doctype: Document

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