Birla Institute of Technology & Science, Pilani

Work Integrated Learning Programmes Division

Second Semester 2024-2025
Digital Learning Handout
Part A: Content Design
Course Title Financial Management
Course No(s) BA ZG521/ MBA ZG521/POM ZG513/PDFT ZG521/PDFI ZG521
Credit Units 4
Credit Model 1-1-2
(XX Hours of Class-room Instruction + XX Hours of Case-studies/Tutorials/Laboratories +
Student Preparation)
Instructors NIRANJAN SWAIN (LEAD), AJAY KUMAR PATEL, BALASUBRAMANIYAM K, SPR
VITTAL, Sarveswar Inani

Version No:
Date: 07/01/2025

Course Description:
Concepts and techniques of financial management decision; concepts in valuation – time value
of money; valuation of a firm’s stock, capital asset pricing model; investment in assets and
required returns; risk analysis; financing and dividend policies, capital structure decision;
working capital management, management of cash, management of accounts receivable;
inventory management, short and intermediate term financing, long term financial tools of
financial analysis, financial ratio analysis, funds analysis and financial forecasting, operating and
financial leverages.

Course Objectives
No Course Objective
CO1 Gain basic understanding of the underlying concepts and building blocks related to
financial management. Develop understanding of the tools relevant to financial
management including time value of money and financial statements analysis.
CO2 Understand business risk, financial risk, break even analysis, and impact of leverage on
risk. Understand the relationship between risk and return and the drivers of risk.
CO3 Understand the application of cost of capital and do the necessary calculations of the
components of cost of capital and WACC; Basic principles of capital budgeting,
categories of capital budgeting projects, discounted and non-discounted cash flow
evaluation methods and their limitations, analysis of risks involved in capital budgeting
projects.

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CO4 Understand the concept of working capital; Composition and determination of working
capital; Financing and management of current assets; Cash management.
CO5 Understand the major theories of capital structure and their implications; How to set
target capital structure; Dividend policy and its impact on participant’s / selected
organizations’ value.

Text Book(s):
T1 Applied Corporate Finance, 3ed (Old Edition) by Aswath Damodaran, Wiley Publication

T2
Reference Book(s) & other resources:
R1 Fundamentals of Financial Management, 6th Edition (2014), by Prasanna Chandra,
published by McGraw Hill Education (India) Private Limited

R2 Fundamentals of Financial Management, 12th Edition (2012), by Brigham and Houston,

published by Cengage India
R3 Financial Management and Policy, 13th Edition (2009), by Van Horne J.C., published by
PHI Learning

Learning Outcomes: Students will be able to

LO1 Understand conceptual differences between accounting balance sheet and
financial balance sheet and its significance; interpret financial accounting numbers
based on GAAP from financial decision making perspectives;
LO2 Understand the difference between business risk and financial risk;
appreciate importance of break-even analysis of analytical settings;
distinguish among the financial concepts of operating leverage, financial
leverage, and combined leverage; calculate the firm's degree of operating
leverage, financial leverage, and combined leverage; and explain why a
firm with a high business risk exposure might logically choose to employ a
low degree of financial leverage in its financial structure.
LO3 Understand Interface between goal of the firm, responsibility of finance
manager and financial system; Themes / principles of Financial Management;
and Business objectives (Share Price Maximization versus Business Value
Maximization), understand how goal of an organization is aligned with its
financial performance and external environment; define objectives (Reality
and Reaction) integrating business with shareholders, lenders, financial
market players and society (share price maximization versus organization’s
value maximization); and understand principles from organization’s objective
perspective.

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LO4 Understand rationale behind expected return based on risk (Risks and Rates of
Return); and understand concept of risk which is a central measure in any
financial decision.; understand conventional definitions of risk and how
financial theories (CAPM, APM, Multi-Factors Models and Proxy Models)
measure risk; and set up estimation questions that will come up in next
sessions.

Understand concept and significance of Risk Free Rate (Rf) which is central
input in everything in finance, characteristics that can make an asset
(investment) as risk free; validate measurement issues that could be
experienced while estimating Rf; and know as to how to arrive at an
appropriate Risk Free Rate (what to measure).

Understand concept of ERP (what an investor can demand on an average risk

investment relative to the risk free rate ); to measure (survey- reactive way,
historical way – looking backward and forward looking / dynamic
approaches) to come up to that number; understand relationship between
ERP and profile of investor (level of risk aversion) and investment;
understand how much of an expected return would an investor demand to shift
his/her money from the riskless asset to the risky asset i.e. why there is one
wrong figure without having any specific right/correct number?; understand
how and why ERP should be dynamic/forward looking (understand how
forward looking dynamic way of estimating ERP that reflects what is going
on around is more dependable than looking backward); understand Equity
Risk Premiums (ERP): Determinants, Estimation and Implications;
understand methodology in estimating Implied ERP (IERP) and how
country risk premium can be adjusted with ERP using CDS / rating given
by various rating agencies / bond yield.

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Understand conventional way of estimating beta (regression of stock
return against market index return) and why that beta might not be the best
beta to use either for financial management or business valuation
(understanding limitations i.e. noise and bias of regression beta); appreciate
the intercept [Rf (1-b)] and stock’s performance; understand what portion of
risk of stock is explained by market and company specific risk – understand
where risk is coming from; understand and measure how well or badly
stock did perform after adjusting from risk and market performance (Jensen
Alpha); understand the significance of dividends on stock’s return; understand
how to choose market index and do judgmental analysis of Jensen
Alpha; and understand significance of standard error and arriving at
range of beta [Recognize limitations of regression beta].

Learn the better way of estimating beta i.e Fundamental Beta which
depends on choices that business make - what kind of business is to pursue
(determinants of beta) and how business is run – cost structure (fixed cost),
and how much business borrows.

Learn pragmatic steps towards estimating beta by bypassing regression beta

(top-down beta); and understand how value of business / revenue and debt to
equity can determine beta (weighted averages of beta of investments).

Learn three characteristics (contractual payment, tax deductible expense

and loss of control) of debt; calculate cost of debt (with and without
secondary debt market by converting book value of debt into market value);
learn why non-interest bearing debt should not be considered as debt.

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LO5 Understand the underlying concepts of cost of capital; understand the
rationale behind estimating after-tax cost of debt; calculate a firm's
weighted average cost of capital (WACC); understand why WACC based on
market value is more relevant than book value; understand ways and
means of reducing WACC; and understand the application of cost of capital
in business decisions.
LO6 Understand the mechanics of compounding: how money grows over time
when it is invested; determine the future or present value of a sum when
there are non-annual compounding periods; understand the
relationship between compounding (future value) and bringing money back to
the present (present value); define an ordinary annuity and calculate its
compound or future value; differentiate between an ordinary annuity and an
annuity due, and determine the future and present value of an annuity due;
calculate the annual percentage yield or effective annual rate of interest and
then explain how it differs from the nominal or stated interest rate.

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LO7 Calculate the yearly cash flows of expansion and replacement capital
projects and evaluate how the choice of depreciation method affects those
cash flows; explain how inflation affects capital budgeting analysis; evaluate
capital projects and determine the optimal capital project in situation of 1)
mutually exclusive projects with unequal lives, using either the least common
multiple of lives approach or the equivalent annual annuity approach, and
2) capital rationing; explain how sensitive analysis, scenario analysis and
decision tree analysis can be used to assess the stand-alone risk of a capital
project; explain and calculate an appropriate discount rate (project versus
company discount rate, static versus dynamic discount rate), based on market
risk methods to use in evaluating a capital project; describe types of real
options and evaluate a capital project using real options; describe common
capital budgeting pitfalls; calculate and interpret accounting income and
economic income in the context of capital budgeting; distinguish among
the economic profit, residual income, and claim valuation models for
capital budgeting and evaluate a capital project using each; and measure and
manage capex risk (scenario analysis, sensitivity analysis and decision tree
analysis. How to trim capex amount?)
LO8 Estimate working capital requirement using Operating Cycle and Simulation
Approach; understand how operating cycle and cost structure can affect
working capital requirement; understand sources and cost of working
capital financing; estimate cost of carrying inventories and its impact on
profits and liquidity position of the company; and evaluate to whom and for
how long credit should be given.

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LO9 Understand Modigliani-Miller propositions on capital structure, including the
effects of leverage, taxes, financial distress, agency cost, and symmetric
information on a company’s cost of equity, cost of capital, and optimal
capital structure; describe target capital structure and explain why a
company’s actual capital structure may fluctuate around its target; describe
the role of debt ratings in capital structure policy; explain factors an analyst
should consider in evaluating the effect of capital structure policy on
valuation; and describe international differences in the use of financial
leverage, factors that explain these differences, and implications of these
differences for investment analysis.
LO10 Enable to compare theories of dividend policy and explain implications of each
for share value given a description of a corporate dividend action; describe
types of information (signals) that dividend initiations, increases,
decreases, and omission may convey; explain how clientele effects and
agency issues may affect a company’s dividend pay-out policy; explain factors
that affect dividend policy; calculate and interpret the effective tax rate on a
given currency unit of corporate earnings under double taxation, dividend
imputation, and split-rate tax systems; compare stable dividend, constant
dividend payout ratio, and residual dividend payout policies, and calculate
the dividend under each policy; explain the choice between paying cash
dividends and repurchasing shares; describe broad trends in corporate
dividend policies; calculate and interpret dividend coverage ratio based on
net income and free cash flow; and identify characteristics of companies that
may not be able to sustain their cash dividend.

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 Part B: Learning Plan
Number List of Topic Title Sub-Topics Reference
of
Contact
Session
Relationship between financial accounting and
financial management; Describe what the TI: Chapter
subject of financial management is about; 1 &2 and
Introduction and
1 Interface between Finance and Other Functions; Reading
Business Objectives
Financial statement analysis and Material
interpretation; Financial statement analysis and
interpretation.
Cost components and significance, BEP –
Estimation and
How much to produce, Estimation and
Analysis of Business
Analysis of Business Risk –Degree of
1 Risk (Leverage) –
Operating Leverage and Degree of
Analysis of Cost
Financial Leverage.
Structure
Interface between goal of the firm,
responsibility of finance manager and
financial system; Themes / principles of
Financial Management; and Business
objectives (Share Price Maximization
versus Business Value Maximization),
Level of Significance
understand how goal of an organization
of Financial
is aligned with its financial performance
1 Management
and external environment; define
Decisions and
objectives (Reality and Reaction)
Business Objectives
integrating business with shareholders,
lenders, financial market players and
society (share price maximization versus
organization’s value maximization); and
understand principles from organization’s
objective perspective.
3 Risk and Return: Hurdle Rate: Define & Measure Risk;
Hurdle Rate The Risk Free Rate; Equity Risk T1: Chapter
Premium (ERP); Country Risk Premium; 3 & 4.
Regression Beta; Fundamental Beta;
Bottom-up Beta; and Debt – Measures and
Cost;

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 Cost of various components of capital –
Cost of Capital -
Equity Share, Preference Share, Calculation
1 Estimation and
of Weighted Average Cost of Capital
Analysis
(WACC) and Factors determine WACC
Time Value of Money – Discounting and Reading
Time Value of Money Compounding, Annuity – Annuity Due and Material
1 – Effect of Inflation on Ordinary Annuity, and Loan Amortization
Business (Application of Annuity)

Introduction - Types and importance of

capital expenditure (Project) decisions on T1: Chapter
business sustainability; 5
Capital budgeting processes and
principles; Investment criteria; Cash flow
Capital Budgeting
3 projections;
Decision
Project analysis and evaluation - non-
discounted and discounted cash flow
methods; and Measuring and analysing
risk of capital expenditure decisions.

Introduction and Objective of Working Capital Reading

Management: Static and Dynamic view of Material
Working Capital; Factors Affecting
Composition of Working Capital; and Working
Capital Estimation;

Financing Current Assets: Behavior and

pattern of financing, Spontaneous sources of
financing (Trade credit), Short-term bank
finance, CPs and Factoring;
Working Capital
3
Management Management of Current Assets: Inventories -
Role of Inventories in Working Capital, Cost of
carrying inventories, Inventories planning and
management techniques;
Receivables – Purpose and cost of maintaining
receivables; and Impact of credit policy and
process of credit evaluation, Monitoring
Receivables; and Management of Cash:
Difference between profits and cash, and factors
affecting cash management and Internal
Treasury Controls.

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 Capital structure decision – Proposition I T1: Chapter
(Without Taxes: Capital Structure Irrelevance) 7, 8 &9
and
Proposition – II (Without Taxes: Higher
Financial Leverage Raises the Cost of
Capital Structure –
2 equity), With Taxes, the Cost of Capital,
How Much Debt as
and Value of the Company; Cost of
Opposed to Equity?
Financial Distress; Agency Costs; Costs of
Asymmetric Information; The Optimal
Capital Structure According to the Static
Trade-off Theory; and Practical Issues in
Capital Structure Policy.
Dividend Policy and Company Value-
Theory - Dividend Policy Does not T1: Chapter
Matter, Dividend Policy Matters – The 10 & 11
Bird in the Hand Argument, The Tax
Argument and Other Theoretical Issues;
Factors Affecting Dividend Policy –
Investment Opportunities, Expected
Rewarding Policy –
2 Volatility of Future Earnings, Financial
Dividend Policy
Flexibility, Tax Considerations, Floatation
Costs, Contractual and Legal Restrictions;
and Pay-out Policies – Types of Dividend
Policies, Dividend versus other ways and
means of rewarding shareholders; and
Analysis of Dividend Safety.

Experiential Learning Components:

Describe objective, outcome of Experiential Learning Component and the lab infrastructure
needed (virtual, remote, open source etc..) number of lab exercises needed, etc.
1. Lab work:
2. Project work:
3. Case Study:
4. Simulation:
5. Work Integrated Learning Assignment:7

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 6. Design work/ Field work:

Objective of Experiential Learning Component:

 Analyze and interpret financial health and risk profile of participants’ organization(s)
Scope of Experiential Learning Component:
 Analyze and interpret financial performance of ganization(s) from stakeholders’
perspective using various financial and non-financial ratios through time series,
comparative and industry analysis.
 Measuring and analysing unsystematic risk of selected organization(s) (Understanding
dynamics and impacts of cost structure of an organization
 Understand and analyze how cost structures, both operating and financial, of an
organization impact business risk and need for cost management.

Objective of Experiential Learning Component:

 Assess importance of financial management decisions on participants’ organization(s).
 Analyze small shareholders’ wealth protection / maximization in selected organization(s).
Scope of Experiential Learning Component:
 In the context of organization’s product/market profile and its business
environment / life cycle, assess level of importance of financial management
decisions.
 Assess to what extent selected organization(s) can take care of small shareholders’
interest / wealth maximization.

Objective of Experiential Learning Component:

 Estimation and Analysis Systematic Risk
 Estimation and analysis of Weighted Average Cost of Capital (WACC) of participants’
organization(s)
Scope of Experiential Learning Component:
 Estimate and analyze the of amount of systematic risk that organization’s return is
exposed to which will have impact on return to shareholders and financing mix
of an organization.
 Estimate and critically analyze overall cost of capital (WACC) of participants’
organization(s)

Objective of Experiential Learning Component:

 Evaluate and analyse economic feasibility of capital expenditure project
Scope of Experiential Learning Component:
 Estimate and analyze cash flow of expansion / replacement capex.
 Application of various economic evaluation methods both non-discounted and
discounted.

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  Estimate and analyse riskiness of capex and how does delay in project execution can
lead to cost overrun.

Objective of Experiential Learning Component:

 Understand the importance of working capital management .
Scope of Experiential Learning Component:
 Learn how gross operating cycle (R+W+F+D) can determine working capital
requirement and its impact on liquidity and profitability position of the companies.

Objective of Experiential Learning Component:

 Empirical study of determinants of capital structure.
Scope of Experiential Learning Component:
 Learn to identify the most important determinants of capital structure of selected
companies.
 Understand the impact of composition of capital structure on organization’s value.

Objective of Experiential Learning Component:

 Relationship between dividend announcement and stock price response (Event Study).
Scope of Experiential Learning Component:
 Examine the impact of dividend announcement on stock price of selected /
participant’s organization(s)

Lab Infrastructure:

List of Experiments: None

Exp Experiment Title Reference to handout module/section

No.

1.

2.

3.

4.

5.

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Evaluation Scheme:

Legend: EC = Evaluation Component; AN = After Noon Session; FN = Fore Noon Session

Evaluation Name Type (Open Weight Duration Day, Date,
Componen book, Session, Time
t (Quiz, Lab, Project, Mid-
Closed
term exam, End semester
exam, etc.) book,
Online, etc.)
Quiz Online 10% 1 week February 17-27,
EC – 1* 2025
Assignment/Lab Online 20 % 10 days April 1-10, 2025
Assignment / Lab Exams
Mid-Semester Test Closed 30% 2 hours 23/03/2025
EC - 2
Book (AN)
Comprehensive Exam Open Book 40% 2½ 25/05/2025
EC - 3 Hours (AN)

EC1* (20% - 30%): Quiz (optional): 5-10 %, Lab Assignment/Assignment: 20% - 30%
Syllabus for Mid-Semester Test (Closed Book): Topics in Contact session: 1 to 8
Syllabus for Comprehensive Exam (Open Book): All topics

Important Links and Information:

eLearn Portal: https://elearn.bits-pilani.ac.in
Students must visit the eLearn portal regularly and stay updated with the latest announcements
and deadlines.
Contact Sessions: Students should attend the online lectures as per the schedule provided on the
eLearn portal.
Evaluation Guidelines:
1. EC-1 consists of either two Assignments or three Quizzes. Students will attempt them
through the course pages on the eLearn portal. Announcements will be made on the
portal in a timely manner.
2. For Closed Book tests: No books or reference material of any kind will be permitted.
3. For Open Book exams: “open book” means text/ reference books (publisher copy only)
and does not include any other learning material. No other learning material will be
permitted during the open book examinations. For Detailed Guidelines refer to the
attached document.
EC3 Guidelines
4. If a student is unable to appear for the Regular Test/Exam due to genuine exigencies, the
student should follow the procedure to apply for the Make-Up Test/Exam, which will be

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 made available on the eLearn portal. The Make-Up Test/Exam will be conducted only at
selected exam centres on the dates to be announced later.
It shall be the responsibility of the individual student to be regular in maintaining the self-study
schedule as given in the course handout, attend the online lectures, and take all the prescribed
evaluation components such as Assignments/Quizzes, Mid-Semester Tests and Comprehensive
Exams according to the evaluation scheme provided in the handout.

********************

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