FINANCIAL MANAGEMENT

BRIEF COURSE DESCRIPTION

Financial Management is the basic course of Finance in the BBA and MBA programs. Its purpose is to equip students with the basic tools and techniques necessary to be a successful financial manager or a non-financial manager with a good understanding of the basic principles of finance. The core objective is to give students a comprehensive overview of how valuation is done in finance. We will first discuss the concept of present value in detail, and then apply the principles of valuation to value (a) financial Assets (stocks and bonds) and (b) real projects (or what is commonly referred to as capital budgeting). Since financial decision-making virtually always involves risk and uncertainty, we will then introduce the concept of (beta) risk, and the relation between risk and return. We will integrate our knowledge of cash flows with our understanding of risk to optimize capital budgeting techniques.

COURSE OBJECTIVES

By the end of the course, students are expected to have a clear understanding of

  • How valuation is done in finance while appreciating the different value drivers
  • Develop awareness of the responsibilities of a financial manager while acquire the skills necessary to analyze typical business situations from a financial perspective
  • Understand finance as part of the overall strategy of the firm
  • Ability to value real projects and financial instruments like bonds and stocks.
  • Ability to assess drivers of corporate performance
  • Knowledge and understanding of shareholders value creation

PREREQUISITE(S): Any student admitted in the BBA or MBA program is eligible to take the course.

RECOMMENDED TEXT BOOKS AND ARTICLES:

S.No. Title Author(s) Assigned Code
1 Fundamentals of Financial Management, 10th Edition, South- Western.

 

Eugene F. Brigham

Joel F. Houston

Book 1
2 Principles of Corporate Finance, 7th Edition, Tata McGraw-Hill Richard A. Brealey

Stewart C. Myers

Book 2

 

1 Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of financial economics, 3 (1976) 305-360. Michael C. Jensen

William H. Meckling

Article 1
2 Agency problems and the theory of the firm, Journal of Political Economy, Vol. 88 No. 2 (1980) pp. 288-307. Eugene F. Fama Article 2
3 The Arithmetic of Capital Budgeting Decisions, Journal of Business, Vol. 29 No. 2 (1956) pp. 124-129. Erza Solomon Article 3
4 Three Problems in Rationing Capital, The Journal of Business, Vol. 28 No. 4 (1955) pp. 229-239. James H. Lorie

Leonard J. Savage

Article 4
5 The Rate of Interest , Fisher’s Rate of Return over Costs and Keynes Internal Rate of Return ,  American Economic Review, Vol. 45 No. 5 (1955) pp. 938-943 Armen A. Alchian Article 5

CONTENTS

Chapter No. TOPIC/CHAPTER TITLE TOPICS COVERED
 

Ch 6 (Book 1)

 

Time Value of Money

Interest rate and its determinants , Introduction  to valuation , Simple/compound interest, Present and future values,  Annuities and uneven cash flow streams, Semiannual and other compounding periods, Comparison of different types of interest rates, Amortized loans ,Time value of money applications, Exercise questions

 

 

Ch 7 (Book 1)

 

Bonds and their Valuation

Characteristics of bonds, Bond types , Bond yields, Bond valuation, Assessing the riskiness of bonds,  Exercise questions

 

 

Ch 8 (Book1)

 

Stocks and Their Valuation

Types and markets for common stock,  Common stock valuation, Expected rate of return on common stock, Zero growth and constant growth stocks , Supernormal growth stocks , Exercise questions
Ch 10 (Book 1)

Ch 5

(Book 2)

 

Articles 1-5

Basics of capital budgeting Project classifications and capital budgeting methods, Payback period and discounted payback period , Net present value, Internal rate of return and modified internal rate of return , Profitability index, Exercise questions

 

 

Ch 29 (Book1)

The Cost of Capital

 

The Logic of the Weighted Average Cost of Capital, Cost of Debt, Cost of Equity, Adjusting the Cost of Capital for Risk, Exercise Questions

 

Ch 11 (Book1) Cash Flow Estimation and Risk Analysis Estimating cash flows , Identifying the relevant cash flows, Evaluating Capital budgeting projects, Project risk analysis, Techniques for measuring stand-alone risk

 

Ch 9 (Book2) Capital Budgeting and Risk Company and the project cost of capital, Capital structure and the company cost of capital, Discount rates for international projects

 

Ch 10 (Book2) Practical Problems in Capital Budgeting

 

Sensitivity Analysis, Monte Carlo Simulation

RECOMMENDED PRACTICAL MATERIAL

1 Pakistan Economic Survey, Ministry of Finance Government of Pakistan (2008)
2 State Bank Annual Report, State Bank of Pakistan, Karachi Government of Pakistan (2008)
3 There are several web sites that have interesting economic/business information and analysis. These are some useful international and Pakistani web sites/links for your interest and research in the course.

www.finance.gov.pk (Finance Division)

www.sbp.org.pk (State Bank of Pakistan)

www.kse.com.pk (Karachi Stock Exchange)

www.pacra.com (Pakistan Credit Rating Agency Ltd)

www.brecorder.com (Business Recorder)

www.ft.com (Financial Times)

www.bloomberg.com (Bloomberg)

www.businessweek.com (Business Week)

www.reuters.com (Reuters)

 

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