PES INSTITUTE OF TECHNOLOGY BANGALORE SOUTH CAMPUS Dept. of MBA

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1 PES INSTITUTE OF TECHNOLOGY BANGALORE SOUTH CAMPUS Dept. of MBA Lesson Plan Semester II Subject Code : 16MBA22 Total no of Lectures: 56 Subject Title : Financial Management IA Marks: 20 Type : Core Credits: 4 Faculty Name : Dr. R. Duraipandian Exam Hours: 03 No of Lecture Hours / Week : 03 Exam Marks: 80 Practical Component Hour : 02 Ratio of theory to problems: 60 : 40 Pre-Requisite: Course Delivery As the subject is of practical utility and significance, the course would be conducted in an interactive manner. To stimulate the thought process the participants are requested to read any financial newspaper daily and present/seek views on the subject/article of their interest. Conceptual framework of the subject shall be covered adequately through lectures/power point presentations. Course Objectives: 1. To familiarize the students with basic concepts of financial management. 2. To understand time value of money and cost of capital. 3. To analyze capital structure, capital budgeting and dividend decision. 4. To understand the short term and long term financing and working capital management. Course Outcomes: At the end of the course students will be able to: Understand the basic financial concepts, Apply time value of money, Evaluate the investment decisions, Analyze the capital structure and dividend decisions, Estimate working capital requirements.

2 Module No Session No. Student Learning Evaluation Technique Cumulative Coverage Table - 1 Session Plan Contents Pedagogical Tools Presentation Assignments / additional work I 1 Course Outline: Introduction to Financial Management, objectives of financial management DLP & Chalk Board Refer the Table 2 Refer the Table 3 # Class Discussion # Test I # Case Presentation To explain meaning and objectives of financial management students should be able to understand the meaning of financial management 2 Course Outline: Profit maximization & Wealth maximization 07% 18% To understand the goal of the firm students should be able to understand the how financial goals related to the firms mission and objectives 3 Course Outline: Changing role of finance managers

3 To review the changing role of finance manager and his position in the management hierarchy students should be able to analyze the changing role of finance managers 4 Course Outline: Interface of Financial management with other functional areas. To explain the nature of finance and its interaction with other management functions students should be able to understand organization of financial function 5 Course Outline: Sources of financing: Shares, debentures, Term loans, Hybrid financing To know how to raise the funds students should be able to understand why and how do firms raise funds 6 Course Outline: Venture capital, angel investing and

4 private equity To know how to raise the funds students should be able to understand why and how do firms raise funds 7 Course Outline: Warrants & Convertibles To know how to raise the funds students should be able to understand why and how do firms raise funds 8 Course Outline: Emerging Issues: Risk management, Behavioral finance and Financial engineering. To understand how to manage the financial risk and its emerging issues students should be able to understand what are the elements of company s financial risk management strategy and modern concepts

5 II 9 Course Outline: Time Value of Money: Future value of single cash flow To explain time value of money and the various valuation concepts students should be able to understand the different valuation models concerned with different securities 10 Course Outline: Future value of single cash flow & annuity To explain time value of money and the various valuation concepts students should be able to understand the different valuation models concerned with different securities 11 Course Outline: Present value of single cash flow To explain time value of money and the various valuation concepts students should be able to understand the different valuation models concerned with different

6 securities 12 Course Outline: Present value of single cash flow and annuity To explain time value of money and the various valuation concepts students should be able to understand the different valuation models concerned with different securities 13 Course Outline: Present value of single cash flow, annuity & perpetuity To explain time value of money and the various valuation concepts students should be able to understand the different valuation models concerned with different securities 14 Course Outline: Problems on time value of money To calculate time value of money and the various valuation concepts compute

7 the various values based on different valuation concepts 15 Course Outline: Problems on time value of money To calculate time value of money and the various valuation concepts compute the various values based on different valuation concepts 16 Course Outline: Problems on Simple interest To calculate time value of money and the various valuation concepts students should be able to compute the various values based on different valuation concepts 17 Course Outline: Problems on Compound interest To calculate time value of money and the various valuation concepts students should be able to compute the various values based on different valuation concepts. 18 Course Outline: Capital recovery & Loan amortization 36%

8 To know the concept of Capital recovery & Loan amortization understand the concept of Capital recovery & Loan amortization III 19 Course Outline: Cost of capital : Cost of capital basic concepts To explain the general concept of the opportunity cost of capital students should be able to understand the why the cost of capital important 20 Course Outline: Cost of debenture capital To determine the cost of debenture capital understand how the cost of debenture capital calculated 21 Course Outline: Cost of preference capital

9 To calculate cost of preference capital understand how the cost of preference capital calculated 22 Course Outline: Cost of term loans, Cost of equity capital 50% To compute the cost of term loans & equity understand how the cost of debt and equity calculated 23 Course Outline: Dividend Discounting & CAPM model To understand the concept of Dividend Discounting & CAPM Model understand how the cost of equity calculated using CAPM and its logic 24 Course Outline: Cost of retained earnings To calculate the cost of retained earnings

10 understand the opportunities are available to creditors with regard to invest ment and its return Students related activity Students are asked to collect the financial statement of various companies (groups will be made among students) and will be asked to calculate the various cost of funds for each sources of capital used by the companies Students participation Laptop and DLP Compute cost of various sources of funds and can also concentrate on computing cost for assets also. Activity Grades will be given based on innovation techniques. 27 Course Outline: Determination of Weighted average cost of capital(wacc) 1 hr. problem solving Refer case study Group C Refer Table 3 Class Discussion Case presentation Assignments To learn the component of cost of capital and the WACC understand how to determine the weighted average cost of capital 28 Course Outline: Determination of Marginal Cost of Capital 1 hr. problem solving Refer case study Group C Refer Table 3 Class Discussion Case presentation Assignments To learn about marginal cost of capital

11 students should be able to understand how to determine the marginal cost of capital IV 29 Course Outline: Investment Decisions: Investment evaluation techniques Net Present Value.5 hr lecture.5 hr solving problem Refer case study Class Discussion Case presentation Assignments To understand the nature and importance of investment decisions Refer the Table 3 understand how to determine the NPV 30 Course Outline: Internal Rate of Returns (IRR) To explain the methods of calculating IRR DLP & Chalk Board Refer the Table 2 Refer the Table 3 # Class Discussion # Test II # Case Presentation 68% students should be able to understand the implications of NPV & IRR 31 Course Outline: Internal Rate of Returns (IRR), Modified Internal Rate of Return (MIRR) To explain the methods of

12 calculating MIRR understand the implications of NPV & MIRR 32 Course Outline: Profitability index (PI) To explain the methods of calculating PI understand the implications of NPV, MIRR & PI 33 Course Outline: Problems on IRR To compute IRR and its implications compare and contrast NPV & IRR and emphasize the superiority of NPV. 34 Course Outline: Problems on MIRR & PI To describe the MIRR and PI understand how is MIRR calculated for even and uneven cash flows.

13 35 Course Outline: Pay Back Period (PBP) To describe the non- DCF criteria: PBP DLP & Chalk Board Refer the Table 2 Refer the Table 3 # Class Discussion # Test III 16# Case Presentation understand what is payback and how is it calculated. 36 Course Outline: Discounted Pay Back Period (DPBP) To describe the DCF criteria: DPBP understand how discounted payback calculated? Is it an improvement over simple payback? 37 Course Outline: Problems on PBP & DPBP To describe the PBP & DPBP understand how is PBP & DPBP calculated for even and uneven cash flows. 38 Course Outline: Accounting Rate of Return (ARR)

14 To describe the ARR understand how is ARR calculated for even and uneven cash flows. 39 Course Outline: Problems on ARR To describe the ARR understand how is ARR calculated for even and uneven cash flows. 40 Students related activity Here based on the above techniques students are asked to select any new projects undertaken by any companies and will be asked to justify their answers V 41 Course Outline: Working capital management : Factors influencing working capital requirements Laptop & DLP More Weightage will be given for international projects Students will select newer projects of thecompanies and will use various techniques to determine the feasibility of the newer project. Refer Table 3 Activity Grades will be given based on innovation techniques. To explain the factors that should be

15 considered while estimating working capital understand the meaning, definition, concepts and kinds of working capital and its factors. 42 Course Outline: Current asset policy & current assets finance policy 78% To analyze the current asset policy & current assets finance policy understand the concept of Current asset policy & current assets finance policy 43 Course Outline: Determination of operating cycle and cash cycle To explain the operation cycle and cash cycle understand the determination of operating cycle and cash cycle 44 Course Outline: Estimation of working capital requirements of a firm

16 To determine the working capital required understand how to estimate the working capital requirements of a firm Course Outline: Problems on Working capital management To estimate the requirement of WC understand how is WC calculated and based on its requirement 48 Students related activity Students are asked to collect the final accounts of various companies and are asked to find out the working capital statement of the companies, students are open to come out with newer ideas about working capital management which can be used as an alternative mode for working capital. VI 49 Course Outline: Capital Structure: Planning the capital structure (No capital structure theories to be covered) Laptop and DLP 1 hr. presentation Refer Table 3 Activity Grades will be given based on innovation techniques.

17 To know the relationship between capital structure and value of the firm understand the relationship between capital structure and value of the firm and its planning 50 Course Outline: Leverages Determination of operating leverage, financial leverage & total leverage To describe the computation of operating and financial leverage understand the practical considerations in determining the firm s capital structure 51 Students related activity Method to be adopted will be decided during the class progress and students knowledge in the above topic Students are open to come out with newer concepts of planning capital structure away form traditional Collection of capital structure of companies and analyzing whether the capital structure adopted by the companies Activity Grades will be given based on innovation techniques. 92%

18 techniques. is feasible. Also can concentrate on dividend payment strategies of various companies. 52 Course Outline: Dividend Policy factors affecting the dividend policy. Stable dividend, stable payout (No dividend theories to be covered) 1 hr lecture Refer case study Refer Table 3 Class Discussion Case presentation Assignments To explain the meaning of dividend policy of management of profits and its factors understand the meaning of dividend policy of management of profits and understand the factors that influence a firm s dividend payment 53 Course Outline: Problems on Capital structure 1 hr. problem solving

19 54 Course Outline: Problems on Capital structure To estimate the capital structure 1 hr. problem solving Refer Table 3 Class Discussions Assignments understand how to determine the optimum capital structure for the firm 55 Case study discussion. 1hr Lab 56 Course Outline: Problems on Capital structure To estimate the capital structure 1 hr. problem solving understand how to determine the optimum capital structure for the firm Lab Sessions Every fifth hour will be handled lab sessions which will focus the practical aspect of the syllabus content. A complete revision through the presentation by the students based on the presentation topics will be covered during this slot. Table 2 Presentation Topics S.No. Mod. No. Presentation Topics 1-30 I to VII Case study and assignment topics will be considered as presentation topics, Presentation only after T3 during review period.

20 Table 3 Assignments & Additional Work S.No. Mod. No. Assignment Topic 1 to 30 I to VII Each students will be given one question each from Question Bank from the following manner ( 1-3 marks question, 1-7 marks question and 1-10 marks question) Question Bank contents will be divided as an assignment topics to the students Table 4 Case Study Topics S.No. Mod. No. Particulars 1 30 I VII Case study will be given to the students for presentation based on previous year question papers problems and case let from text books 1 Question Paper, VTU, June-July 2011, & 14 2 Question Paper, VTU, June-July 2009 & 10 3 Question Paper, VTU, December Question Paper, VTU, July Question Paper, VTU, December 2006 / January Question Paper, VTU, July Question Paper, VTU, December 2005 / January Question Paper, VTU, January / February Question Paper, VTU, June / July 2004

21 10 Question Paper, VTU, January / February Question Paper, VTU, June / July Question Paper, VTU, January / February Question Paper, VTU, July / August 2002 Table 5 References & Additional Readings S.No. Mod. No. Particulars 1 I VII Financial Management Prasanna Chandra, 8/e, TMH, Financial Management, Shashi K Gupta and R.K. Sharma, 8th Revised Edition, Kalyani Publishers, Financial Management, M.Y. Khan, & P.K. Jain, 6/e,TMH, Financial Management, Rajiv Srivastava and Anil Misra, Second Edition, Oxford University Press, Financial Management I.M. Pandey, 10 th Edition, Vikas Publishing House, 2014

22 6 Financial Management & Policy, Vanhorns & James C, 12/e, Pearson, Financial Management V.K. Bhalla 8 Fundamentals of Financial Management Brigham & Houston 9 Corporate Finance Damodaran 10 Financial Management Shah 11 Fundamentals of Financial Management Sheeba Kapil, Pearson, Financial Management, Sumit Gulati & Y.P. Singh Table 6 IA Pattern Test Marks Presentations Assignments For Internal Evaluation T1 marks and the best out of remaining two will be considered. 1 st Test is mandatory. Question Bank 16MBA22: FINANCIAL MANAGEMENT 2 Marks Questions: 1. Define financial management. 2. What is operating leverage? 3. What are the objectives of financial management? 4. What is combined leverage?

23 5. What are financing decisions? 6. What do you mean by dividend policy? 7. Give four important financial decisions? 8. What is bond or scrap dividend? 9. What is Financial System? 10. What is property dividend? 11. What are Financial Institutions? 12. Define Stock Dividend? 13. What is profit maximization? 14. State the different practices of dividend? 15. State the importance of a financial manager? 16. Define ESOP? 17. What is the time value of money? 18. What do you mean by a share? 19. Define Cost of capital. 20. What do you mean by Equity Shares? 21. Define a debenture? 22. What are deferred share? 23. What is redeemable debenture? 24. What are preference share? 25. What is irredeemable debenture? 26. Mention the types of preference share. 27. What are preference shares? 28. What are cumulative preference shares? 29. What are equity shares? 30. What are non-cumulative preference shares? 31. What is Bond? 32. What are participating preference shares? 33. What are term loans? 34. What are non-participating preference shares? 35. What are redeemable preference shares? 36. What is CAPM? 37. What is retained earnings?

24 38. What are irredeemable preference shares? 39. What is weighted average cost of capital (WACC)? 40. What are convertible preference shares? 41. What non-convertible preference shares? 42. AB Ltd. issues Rs.1, 00,000 9% debentures at a premium of 10%. The cost of floatation is Rs The tax rate applicable is 50%. Compute cost of debt-capital. 43. The market price of the equity of a Ltd. Co. is Rs.160. The dividend expected after a year is Rs.12 per share. The dividend is expected to grow at a constant rate of 4 percent per annum. Find the rate of return required by shareholders. 44. What do you understand by debentures? 45. What is the net benefit cost ratio when benefit cost ratio is 1.40:1? 46. What are guaranteed preference shares? 47. The market price of a share is Rs.255. A company anticipated earnings of Rs.3,00,000 to be distributed among 30,000 share holders. The tax rate is 30%. Find out the cost of internally generated retained earnings. 48. What are registered debentures? 49. What do you mean by bearer / unregistered debenture? 50. The shares of a leather company are selling at 60% shares. The firm has paid dividend at the rate of Rs.3 per share. The growth rate is 9%. Compute cost of equity capital of the company yrs 20% Debentures of a firm are sold at a rate of Rs.180. The face value of the debenture is 200/-, 50% tax is assumed. Find the cost of debt. 52. What do your understand by unsecured debentures? 53. A company has the following capital structure find out weighted average cost of capital Securities Book values After tax Equity % Retained earnings % Preference capital % Debentures %

25 What are mortgage debentures? 55. What is Redeemable Debenture? 56. What do you mean by investment decision? 57. What is capital budgeting? 58. What are irredeemable debentures? 6 Marks Questions: 1. What are the functions of a finance manager? 2. State and explain in brief the different goals of financial management? 3. Explain the functions of financial management. 4. Describe the activities of financial management? 5. State the advantages of Wealth Maximization. 6. Explain the Constituents of Financial System? 7. How will you compute the cost of equity capital? 8. Write a note on cost of retained earnings? 9. How will you compute marginal cost of capital? 10. Distinguish between Internal and External Equity. How can these equities be estimated? 11. Explain what is CAPM and its assumptions 12. Explain what is WACC? 13. Mr.Kiran is considering to purchase 20% Rs.2, 000 preference share redeemable after 6 years at par. What should be willing to pay now to purchase the share assuming that the required rate of return is 14%? 14. What are the Advantages and disadvantages of Net Present Value (NPV) method? 15. Explain payback period method for evaluating investment proposals. 16. Mention advantages and disadvantages of pay back period? 17. What are the advantages and disadvantages of rate of return method? 18. Explain the Internal Rate of Return method (IRR). 19. Differentiate NPV and IRR methods. 20. Explain average rate of return. 21. What is discounted payback period and why is it better than payback period method? 22. Explain the different principles of working capital?

26 23. Explain the process of estimating cash flow for the new project. 24. What is capital rationing? 25. What are the different motives of holding cash? Explain Cash Management? 26. From the following information compute the Working Capital requirement for a company a. annual sales 2,00,000 units b. selling price Rs.8 per unit c. percentage net profit on sales 25% d. average credit period allowed to customers 8weeks e. average credit period allowed to suppliers 4weeks f. average stock holding in terms of sales requirement 12weeks g. allow 10% for contingencies 27. Calculate the working capital requirement from the following information. You are given the following estimates and are instructed to add 20% as contingencies. Particulars amt 1) Amount blocked up in stock Stock of finished goods Stock of stores, materials ) Average credit sales Inland sales 8 weeks credit Export sales 2 weeks credit ) lagging payment of wages and outgoings Wages 2 weeks Stock of materials 2 months Rent, royalties 6 months Clerical staffs 1 month Miscellaneous expenses 2 months ) payment advances Sundry expenses paid quarterly As a financial consultant prepare cash budget for the firm whom advice on the amount of overdraft they will require during with August, September details.

27 A. 50% of the credit sales are realized in the months following the sales and remaining sales 2 nd month. Creditors are paid in the month following purchase. Cash in Bank OD August is 50,000 Month Sales Purchase Wages June 3, 60,000 2, 24,000 24,000 July 2, 84,000 2, 88,000 28,000 August 2, 16,000 4, 86,000 22,000 September 3, 48,000 4, 92,000 20, What is the difference between capital structure and financial structure? 8 Marks Questions: 1. Explain the scope of financial management? 2. What are the objectives of financial management? 3. Evaluate wealth maximization and profit maximization as primary objectives of a concept? Or Profit maximizatio n approach is not operationally feasible. Substantiate the statement. 4. Explain the constituents of the financial system and the role of importance of financial system? 5. Discuss about the emerging trends in the Indian financial system. 6. Explain the different types of Costs? 7. Explain the methods of valuation of shares? 8. Explain different methods for evaluating investment proposals? 9. Explain the inter-relationship between the three financial functions. 10. Explain the Capital Budgeting Process. 11. What are the factors influencing capital expenditure decision?

28 12. You are a financial analyst for XYZ Co. Ltd. The director of capital budgeting has asked to analyze two proposed capital investment. Project P and Q. Each project has a cost of Rs.10, 00,000 are the cost of capital for each project is 12%. The projects expected net cash flows are as follows: Expected Net Cash Flows Year Project P Project Q 0 (10,00,000) (10,00,000) 1 6,50,000 3,50, ,00,000 3,50, ,00,000 3,50, ,00,000 3,50,000 Required: a) Calculate each projects payback period. NPV and IRR. b) Which project or project should be accepted, if they are independent? c) Which project should be accepted if they are mutually exclusive? d) How might a change in the cost of capital (k) produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if K were 5%? 13. An enterprise can make either of two investments at the beginning of Assuming that the required rate of return is 10% p.a. evaluates the investment proposals as under. a) Pay back method b) Return on investment c) Profitability index Particulars Project A Project B Cost of investment R.40,000 Rs.56,000 Life 4 years 5 years Scrap value Nil Nil

29 Net income (After Depreciation and Tax) End of ,000 - End of ,000 6,800 End of ,000 6,800 End of ,000 6,800 End of ,800 It is estimated that each of the alternative projects will require an additional working capital of Rs.4, 000 which will be received back in full after the expiry of project life. Depreciation is charge under straight line method. The present value of Re.1 to be received at the end of each at 10% p.a. is given below: Year P.V Keerthi ltd is considering the purchase of machinery. Two machinery S and T each costing Rs are available. Cash inflows are expected to be as under. Calculate a) Pay back period b) Post pay back period method. Year machine S machine T

30 15. From the following information calculate the NPV of the two projects and suggest which of the two projects should be accepted assuming discount rate at 10%. Particulars project x project y Initial investment 40,000 60,000 Estimated life 5 yrs 5 yrs Scrap value The profits before depreciation and after taxes are as follows Year project x project y 1 10,000 40, ,000 20, ,000 10, ,000 6, ,000 4, Explain the factors influencing the working capital? 17. Briefly explain the necessity of investment in working capital and the factors affecting the level of such investments? 18. Explain the different sources of finance for funding working capital or short-term finance requirements. 19. What are the factors that influence credit policy of the firm? 20. A proforma a cost sheet of a company provides the following particulars. Elements of cost Amount per Unit Materials 50% Direct labour 15% Overheads 15% The following further particulars are available: a) It is proposed to maintain a level of activity of 6,00,000 units b) Selling price is 20 per unit

31 c) Raw materials are expected to be in stores for an average of 2 months d) Materials will be in process, an average of one month e) Finished goods are required to be in stock an average of 2 months f) Credit allowed to debtors is three months g) Credit allowed to supplier is two months. 21. A cost sheet of a company provides you the following information. Elements of cost Amount per Unit Materials 80 Direct labor 30 Overheads 60 Total cost 170 Profit 30 Selling price 200 The following further particulars are available. Raw materials are in stock for one month (avg) Raw materials are in process on an average for half a month. Finished goods are in stock on an average for one month. Credit allowed by supplier one month. Lag in payment of overheads is one month 1/4 th output is sold against cash. Cash in hand and at bank is expected to be Rs.1, 25,000. Credit allowed to customers 2 months. You are required to prepare a statement showing the working capital needed to finance level of activity of 2,08,000 units of production. 22. Explain the factors determining capital structure? 23. Foods Ltd., is presently operating 60% level producing 36,000 packets of snack Foods and proposes to increase the capacity utilization in the coming year by 33 1/3% over the existing level of production. The following data has been supplied. i. Unit cost structure of the product at current level:

32 Raw material 40 Wages 20 Variable overheads 20 Fixed overheads 10 Profit 30 Selling price 120 ii. Raw materials will remain in stores for one month before being issued for production. Material will remain in process for further one month. Suppliers grant 3 months credit to the company. iii. Finished goods remain in godown for one month iv. Debtors are allowed credit for 2 months. v. Lag in wages and overhead payment is one month Prepare a projected profitability statement and the working capital requirement at the new level, assuming that a minimum cash balance of Rs.19, 500 has to be maintained. 24. What is a bonus issue or stock dividend? What are its advantages and disadvantages? 25. What is bonus issue or stock dividend? What are its advantages and disadvantages? 26. Determine the earnings per share of a company which has operating profit of Rs.4,80,000. Its capital structure consists of the following securities. Securities Amount 10% debentures 15,00,000 12% preference shares 3,00,000 Equity shares of Rs.100 each 12,00,000 The company is in the 55% tax bracket. 1. Determine the company s EPS. 2. Determine the percentage change in EPS; associated with 30% increase and 30% decrease in EBIT. 3. Determine the degree of financial leverage.

33 27. A company needs Rs for construction of a new plant, the following 3 financial plan are feasible. a) the company may issue 1 lakh ordinary rs 10 per share b) the company may issue ordinary rs 10 per share and 5000 rs 100 denomination bearing 8% rate of interest c) the company may issue ordinary rs 10 per share and 5000 preference rs 100 per share bearing a 8% rate of dividend If the companies EBIT are rs 20000, 40000, 80000, and What are the EPS under each of the 3 financial plans? Which alternatives would be recommended and why? Assume corporate 50% 28. Following information of business concern is available who chose book of A/c deemed 31/ of ever year. Calculate EPS and return on equity capital A. 10,000 Equity shares Rs.10 earn and Rs.8 paid up of Rs.80, 000. B. 10% 12,000 preference cash of Rs.10 and Rs.1, 20,000. C. Profit before tax Rs.80, 000. D. Rate of Tax applicable 50%. 29. The balance sheet of ABC Company Ltd as on gives the following details. Liabilities Balance Sheet Assets Equity capital 30,00,000 Fixed Assets 40,00,000 Preference capital (5%) 6,00,000 Current Assets 10,00,000 10% Debentures 4,00,000 Reserve and Surplus Profit and Loss a/c 4,00,000 General reserve 2,00,000 Current liabilities 4,00,000

34 Total 50,00,000 50,00,000 The net profit before interest and tax amount to Rs.2, 50,000 firm has the tax liability of 50%. Calculate return on capital employed and return on net worth ratio