School of Management and Entrepreneurship (SNU)

MBA
ACADEMIC YEAR 2017-2018

SEM-1, QUARTER-2

Subject Title Financial Management 1

Subject Code FINM505
Credit Value 2
Levels Post-Graduate
Total Teaching Contact 30
Hours
Prerequisites None
Introduction Financial Economics is the study of market for real and financial assets. The
past two decades have witnessed unprecedented series of theoretical and
empirical advances in our understanding of these markets, with major
breakthroughs in capital asset pricing under uncertainty, portfolio theory,
valuation of options, response of security prices to new information and
corporate financial behavior. The practical implications of these
breakthroughs, commonly known as modern finance theory, are widely
accepted and implemented by finance practitioners around the world.
Financial Management is concerned with the manner in which individuals
and firms allocate resources across assets and over time. How does a
company ensure that it has enough money to operate and grow? How do
managers make good investment decisions? This course examines the role
of finance in supporting other functional areas of the firm while fostering
an understanding of how financial decisions can create value. The central
theme of the course is value based management which assumes that value
creation should be the key factor in making financial, strategic and
operating decisions.

Objective The course provides an overview of financial management and provides

Subject Learning Outcomes
tools needed to be able to make appropriate financial decisions. By the
end of this course, students should be able evaluate the various available
investment choices and choose ones that can be value enhancing.
(a) Understand time value of money
(b) Be able to estimate beta for individual and portfolios of stocks
(c) Be able to calculate cost of capital for firms
(d) Perform discounted cash flow analysis to make investment decisions
(e) Be able to identify real options

Subject Synopsis/ Indicative The course provides an introduction to the topics of time value of money,
Syllabus risk and return, discounted cash flow valuation, and investment decisions.
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Teaching/ Learning Lectures, Cases and Discussions

Methodologies
Assessment Specific assessment methods/tasks weightage planned
Case Submissions 30%
Project 10%
Mid-term examination 20%
End-Term examination 40%
Total 100%
Reading Lists and reference Text book:
books/ materials etc  Brealey, R.A., S.C. Myers, F. Allen and P. Mohanty (2013) Principles
of Corporate Finance, 10th Edition, McGraw Hill, New Delhi.
Reference books:
 Ross, Westerfield, Jaffe, and Jordan, Corporate Finance, 11th edition,
McGraw Hill
 School of Management and Entrepreneurship (SNU)

Session plan

Module 1: Valuation

Module objective: This module introduces the basic financial tools to value simple securities, the time
value of money is explained. A number of basic cash flow structures are studied and their present value
and future value are derived. These principles are used in the valuation of bonds and stocks. The final
session discusses various investment criteria used in financial decision making.

Session 1 Introduction – Goals and Functions of Finance

Session objective: This introductory session gives an overview of financial management problem. It
introduces the goal of maximizing shareholder value.
Readings: BMAM: Chapter 1: Goals and Governance of the Firm

Session 2: Time Value of Money

Session objective: This session covers the basic mathematics need to evaluate and compare cash flows at
different points in time. At the end of the session the student will be able to calculate the Present Value
of a variety of common cash flow structures.
Reading: BMAM: Chapter 2: How to Calculate Present Value

Sessions 3 Time Value of Money continued

Session objective: Introduce annuities, perpetuities, growing annuities and growing perpetuities
Reading: BMAM: Chapter 2: How to Calculate Present Value, handout

Session 4 Case: Liza Mathew’s Investment Opportunities

Session objective: Reinforce topics taught in earlier sessions

Case Liza Mathew’s Investment Opportunities

Session 5 Investment Criteria

Session objective: This session introduces Net Present Value and Internal Rate of Return as criteria used
in evaluating financial projects.
Reading: (1) BMAM: Chapter 5: Net Present Value and Other Investment Criteria
(2) BMAM: Chapter 6: Making Investment Decisions with the Net Present Value Rule

Session 6 and 7 Financial Forecasting, Investment Criteria Case Study

Session objective: This session will be a review of the module and make use of the tools and techniques
learnt to study a case from HBS.
Case 4212: New Heritage Doll Company
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Module 2: Risk and Return

Module objective: This module will examine the importance of risk in the financial evaluation process.
Different measures of risk are introduced and the models that relate risk to return. These concepts are
needed to determine company specific cost of capital.
Session 8 Basics of Risk and Return
Session objective: This session introduces the concepts of portfolio risk and returns, investigate the
differences between systematic and unsystematic risk and examine the rationale behind diversification.
Reading: BMAM: Chapter 7: Introduction to Risk and Return

Session 9 Portfolio Theory

Session objective: This session explains the investment approach introduced by Markowitz, and the
concept of the efficient frontier and the selection of an optimal portfolio.
Reading: BMAM: Chapter 8: Portfolio Theory and the Capital Asset Pricing Model

Session 10 Capital Asset Pricing Model

Session objective: This session introduces the Beta of a stock as a measure of its risk. The CAPM then
specifies the relationship between the Beta and the expected return.
Reading: BMAM: Chapter 8: Portfolio Theory and the Capital Asset Pricing Model

Session 11 Case: Reliance Capital

Session Objective: To discuss risk and return in the context of a mutual fund
Case Reliance Capital

Session 12 Risk and Cost of Capital

Session objective: This session examines the techniques needed to estimate Beta, explain the difference
between company specific and the industry wide Beta and how the Beta is used to calculate the Cost of
Capital.
Reading: BMAM: Chapter 9: Risk and the Cost of Capital

Session 13 Risk/Cost of Capital Case Study

Session objective: This session will be a review of the module and will make use of HBS Case 4129
Case 4129: Midland Energy Resources Inc.: Cost of Capital

Session 14 Case: Indian Premier League

Session objective: Review estimation of cash flows, DCF valuation, and estimation of cost of capital
 School of Management and Entrepreneurship (SNU)

Module 3: Options and their applications in corporate finance

Module objective: Financial Derivatives are important as they can be used to guard (hedge) against
financial risks. However if these derivatives are used in a speculative manner they can increase the risk.
This module will provide an introduction to financial derivatives (options), their valuation and their role in
risk management.

Session 15 Options
Session objective: This session provides an introduction to Options, it will cover different Option types
and how they are traded. The no-arbitrage principle is used to determine valuation inequalities relating
the option price to the price of the underlying asset.
Reading: BMAM: Chapter 20: Understanding Options

Session 16 Option Pricing and Payoff profiles

Session objective: This session examines a simple model for the underlying asset and introduces
replication as a means to obtaining the price of an option.
Reading: BMAM: Chapter 21: Valuing Options
Case 295096: Keller's Fund Option Investment Strategies

Session 17 and 18 Real Options

Session objective: This session is devoted to the application of option pricing theory to project valuation
Reading: BNAM: Chapter 22: Real Options

Session 19 Case: Arundel Partners

Session Objective: Real options and option pricing

Session 20 Course Review

Session objective: This session will be a review of the complete course including the module on financial
risk management.