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INDIAN INSTITUTE OF MANAGEMENT, KOZHIKODE

IIM Kozhikode Campus P.O. Kozhikode- 673 570

Course FM I
Term II of 2010-11
Credits 3
Instructor S S S Kumar

This is your gateway to the world of finance and this course aims to equip you with the basic
tools and techniques necessary to be a complete manager irrespective of which specialization
you opt for. In this course we focus mostly on the principles of valuation both financial as well
as real assets.

Objective
The objective of this course is to impart the skill-set required to do the first-cut valuation
exercises.

Course conduct
We will start off understanding the context - financial markets and then we will pick up the
necessary skills required to take up valuation exercises - the concept of time value of money in
detail. Then apply the principles to value (a) real investments (popularly known as capital
budgeting) and (b) financial investments (stocks and bonds). While analyzing the investments we
will use the economic profit concept in lieu of the accounting profits with which you were
familiar with. Since no financial decision-making is devoid of risk we will see the concept of
(beta) risk, and the relation between risk and return. The course will end with an introductory
treatment of derivatives and their application to real investments.

The tentative session plan:

Sl. Topic Likely Major readings
No no.
of
classes
1 Introduction 1 BMA 1, BMA 15 & 16; Handout
2 Time value concepts 3 BMA 3
3 Capital Budgeting techniques 3 BMA 2 and 6; Handout
4 Capital Budgeting - estimating 2 BMA 7
cashflows
5 Principles of valuation bond 2 BMA 4; Handout
valuation
6 Principles of valuation stock 2 BMA 5
valuation
7 Risk and return 3 BMA 8 & 9
8 Cost of capital 2 BMA 10
9 Risk analysis in capital budgeting 2 BMA 11
10 Introduction to derivatives and real 2 BMA 21 & 23
options
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The above number of classes works out to 22 classes each of 75 mts duration. The remaining
classes (around 2) will act as cushion against any spillovers that I certainly foresee to happen. The
pedagogy is a two-phase model concept discussion session followed by a session that makes
you put to use the concepts by working out exercises/caselets. Past students experience indicate
that doing problems soon after the material is covered in class is the best way to learn finance.
The problems and exercises that will be used in the class are graded according to level of
difficulty but are taken from the books mentioned in the references list.

Grading
We will follow relative grading. Based on the nature of the component I may award a letter grade
directly or first give marks and then convert in to letter grades if required. All tests and quizzes
will be closed book, unless announced otherwise. You are not allowed to use your
laptops/palmtops/or any electronic gadget except the calculator you normally use in the class.
The weightage for various components are as follows:

Assignments and Surprise Quizzes 25%

Class Tests 20%
Mid term Exam 20%
End Term Exam 35%

1. Assignments will be predominantly problem sets may be from your text book or other
sets distributed in the class. I expect you to work in groups of three according to your roll
numbers. I may not insist on submission every-time and mostly you will be evaluated
based on surprise a quiz in the class.
2. The class tests will be of 45mt to 60 mt duration. In the past the test contents varied from
MCQs to caselets and it will not be announced a priori as to what comprises the test.
Most probable time points for conducting the tests - at the end of topics 2, 6 and/or 8 and
you will be informed in advance as to when the test will be conducted.
3. All the evaluated exam papers, test papers, quiz papers and assignments that will be
distributed to you should be retained by you till the final grades are announced.

Attendance
Your attendance will be governed by the PGP rules. Retests or reexaminations etc., will be guided
by the relevant items from PGP Handbook that are in force.

Make sure you attend every class with a calculator.

Reference Books
1. Principles of Corporate Finance by Brealey, Myers & Allen 9/e
2. Corporate Finance by Ross, Westerfield and Jaffe
3. Corporate Finance by Aswath Damodaran
4. Financial Management by I M Pandey
5. Financial Management by Prasannachandra