Instructional Development Unit
Quality and Efficiency
Revsion Date: 15/04/08
Revision No: 0
COURSE COMPONENTS
Course Description**
MENG 6502: Financial Management
This course is designed to familiarize students with the major decision areas in Corporate
Financial Management and the analytical approaches and techniques used to support decision
making in those areas.
The students must meet the entry requirements for the MSc Programmes in the Department
Optional
Y2 S2
3 Credits
Two hours per week
This course provides an introduction to Corporate Financial Management emphasizing its major
decision areas
This course forms part of the MSc Programmes designed to meet the University’s Strategic Plan
and the Department’s mission to provide Industry with trained personnel in the area of
engineering management to support their growth and competiveness
Purpose of the Course**
This course exists as a part of the MSc Programmes in the Department
It provides an introduction to the principles and practices of Corporate Financial Management
to engineering managers.
It is designed for engineering and science graduates.
The student who understands the basic techniques and practices of Financial Management
would be able to make better managerial decisions and thereby be more effective in his/her
organizational role.
Instructor information**
Nagamuttu S. Arumugadasan
Room # 234, Block I, Faculty of Engineering
[email protected]
Letter to the student
I extend a warm welcome to each and every one of you and wish you a productive learning
experience.
Every decision a manager makes is ultimately evaluated in terms of its effect on the finances of
the company. Therefore the manager who understands the basic principles, techniques, and
practices of Corporate Finance would make better decisions and thereby be more effective in
his/her role.
This course is designed to familiarize students with the major decision areas in Corporate
Financial Management and the analytical approaches and techniques used to support decision
making in those areas.
I have taught this course for more than 20 years. I hope that I will be able to convey my interest
**This section must be completed
Instructional Development Unit
Quality and Efficiency
in the subject matter and my firm conviction of their value to managers at all levels.
As we begin our journey together on this course, my sincere wish is that, at the end of the
course, the knowledge and skills you acquire will enable you to make significant contributions
to the success and profitability of the organizations you serve.
Content**
Unit 1:Financial Analysis and Planning
The Finance Function. Goal for the Firm. Financial Statements. Financial Ratio Analysis.
Statement of Cash Flows. Financial Planning. Cash Budgets. Pro Forma Statements.
Unit 2:Risk, Return and Valuation
Time Value of Money. Discounting and Compounding. Annuities. Loan Amortization.
Risk and Returns. Portfolio Risk. Capital Asset Pricing Model. Corporate Bonds. Valuation
Model. Bond Valuation. Preferred and Common Stock. Valuation of Preferred and Common
Stock. Free Cash Flow Valuation Model.
Unit 3:Investment Decisions
Capital Budgeting. Relevant Cash Flows. Initial Investment, Operating Cash Flows. Terminal
cash Flows. Payback, Net Present Value. Internal Rate of Return.
Risks in Capital Budgeting. Risk-Adjusted Discount Rates. Annualized Net Present Value.
Capital Rationing.
Unit 4:Long Term Financing Decisions
Cost of Capital Weighted Average Cost of Capital. Weighted Marginal Cost of Capital
Operating and Financial Leverage. Firm’s Capital Structure. EBIT-EPS Approach.
Cash Dividends. Dividend Policies.
Unit 5: Short Term Financing Decisions
Net Working Capital. Cash Conversion Cycle. Accounts Receivables. Leasing
Goals/Aims**
Aims are broad general statements about what you would like to see achieved. They often refer to
outcomes, which are not likely to be achieved in just one semester, and are almost philosophical
statements of what you would ideally like to see achieved in the course.
The students will be able to utilize their knowledge and skills in Finance to develop policies
and strategies in their area of responsibility for the competitive success of the organization in
the marketplace
**This section must be completed
2
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General Objectives**
Unit 1: Financial Analysis and Planning
To outline legal forms of business
To describe the role of the finance manager
To explain the goal of the firm
To review the preparation of Financial Statements for companies
To discuss the assessment of company performance using financial ratios
To illustrate the compilation of the Statement of Cash Flows
To demonstrate the composition of Cash Budgets
To elucidate the construction of Pro Forma Financial Statements
Unit 2: Risk, Return and Valuation
To explain the determination of present and future values of cash flows
To illustrate the preparation of loan amortization schedules
To describe the concepts of risk, return and preferences
To review the assessment of the risk of individual and portfolio of assets
To discuss the CAPM and the assumptions underlying it
To demonstrate the computation of the required rates of return using CAPM
To detail the characteristics of bonds, preferred stock, and common stock
To outline the valuation of bonds, preferred stock, and common stock
To summarize company valuation using the Free Cash Flow Valuation Model
Unit 3: Investment Decisions
To describe the determination of relevant cash flows for capital budgeting
To discuss the use of Payback, NPV, and IRR for project selection
To outline the application of techniques to deal with project cash flow risks
To explain the ranking of mutually exclusive projects with unequal lives
To review the choice of the best set among projects with capital rationing
Unit 4: Long Term Financing Decisions
To appraise the cost of long-term debt, preferred stock, and common stock.
To explain the use of WACC and WMCC in project selection
To review the concepts of leverage, capital structure, and breakeven analysis
To demonstrate the computation of DOL, DFL, and DCL
To summarize the concept of optimal capital structure
To illustrate the selection of the optimal capital structure using EBIT-EPS analysis
To detail the key considerations in establishing a cash dividend policy
To outline the estimation of cash dividends under different dividend policies
To elucidate the distinction among stock dividends, stock splits, and stock repurchase
Unit 5: Short Term Financing Decisions
To review the tradeoff between profitability and risk in short term financing
To describe the cash conversion cycle and the considerations in managing it
To illustrate the selection of optimal cash discounts, credit terms, and credit standards
To demonstrate the choice of the optimal decision in lease versus purchase options
**This section must be completed
3
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Topic or Unit Objectives**
Unit 1: Financial Analysis and Planning
At the end of this Unit, students should be able to
Identify legal forms of business
Describe the role of the finance manager
Explain the goal of the firm
Prepare Financial Statements for companies
Assess company performance using financial ratios
Compile Statement of Cash Flows
Compose Cash Budgets
Construct Pro Forma Financial Statements
Unit 2: Risk, Return and Valuation
At the end of this Unit, students should be able to
Determine present and future values of cash flows
Prepare loan amortization schedules
Describe the concepts of risk, return and preferences
Assess the risk of individual and portfolio of assets
Explain CAPM and the assumptions underlying it
Compute required rates of return using CAPM
Discuss the characteristics of bonds, preferred stock, and common stock
Apply the valuation model to bonds, preferred stock, and common stock
Evaluate company value using the Free Cash Flow Valuation Model
Unit 3: Investment Decisions
At the end of this Unit, students should be able to
Determine relevant cash flows for capital budgeting
Compute and interpret Payback, NPV, and IRR for project selection
Utilize techniques to deal with project cash flow risks
Rank mutually exclusive projects with unequal lives
Choose the best set among projects with capital rationing
Unit 4: Long Term Financing Decisions
At the end of this Unit, students should be able to
Determine the cost of long-term debt, preferred stock, and common stock.
Calculate WACC and WMCC and explain their use in project selection
Explain the concepts of leverage, capital structure and breakeven analysis
Compute DOL, DFL, and DCL
Review the concept of optimal capital structure
Select the optimal capital structure using EBIT-EPS analysis
Discuss the key considerations in establishing a cash dividend policy
Estimate the cash dividends under different dividend policies
Distinguish stock dividends, stock splits, and stock repurchase
**This section must be completed
4
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Quality and Efficiency
Unit 5: Short Term Financing Decisions
At the end of this Unit, students should be able to
Explain the tradeoff between profitability and risk in short term financing
Describe the cash conversion cycle and the considerations in managing it
Choose optimal cash discounts, credit terms, and credit standards
Determine the optimal decision in lease versus purchase options
Assignment
The assignments consist of written solutions to the following Integrative Cases in the essential
text carrying a total coursework mark of 25% of the course marks.
Assignment
Title
Pages
Marks
Allocated
Due date
1
Track Software Inc.
154-157
5/25
2/26/09
2
Encore International
374-375
5/25
3/12/09
3
Lasting Impressions
499-500
10/25
3/26/09
4
O’Grady Apparel Company 632-634
5/25
4/16/09
Late submissions will be penalized by a deduction of 1 mark for each day late from the
marks allocated
Course Assessment**
To assess the level of knowledge and skills attained by the student.
Written assignments carrying 25% of the marks and a two-hour final examination carrying
75% of the marks
Evaluation
Informal feedback during contact with students will be used to improve students’ experiences.
Formal feedback at the end of the course will be used in the end of semester review to enhance
students’ experiences.
Teaching Strategies**
Course instructions will be through lectures and discussion of assigned material: texts, journal
articles, cases and class exercises.
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Resources**
Essential Text
Gitman, L. J. Principles of Managerial Finance. 12th edition. Addison – Wesley, 2008
Additional Resources are found at the Companion Website to the text
Readings
Unit 1:Financial Analysis and Planning
Chapters: 1, 2, 3
Unit 2:Risk, Return and Valuation
Chapters: 4, 5, 6, 7
Unit 3:Investment Decisions
Chapters: 8, 9 10
Unit 4:Long Term Financing Decisions
Chapters: 11, 12, 13
Unit 5: Short Term Financing Decisions
Chapters: 14, 15, 16.2
Course Calendar**
Session Topic
Readings
Unit 1: Financial Analysis and Planning
1&2
Introduction to Financial
Management
Financial Statements Analysis
Problem Sets
1.1 – 1.3
2
P2 – 3,5.6.10,23
3
P3 – 6,11,15,17,19
( Time Value of Money * )
4
Risk and Return
5
(P4 - 4,11,18,19,25,30,35,
40,47,49,56,58)
P5 – 2,4,11,14,18,23,27,
29
3
Cash Flow and Financial
Planning
Unit 2:Valuation of Financial Assets
4
Bond Valuation
Stock Valuation
Unit 3:Investment Decisions
P6 – 11,13,16,24
P7 – 6,8,9,12,16,22
5
6
7
6
Capital Budgeting Cash Flows 8
Capital Budgeting Techniques 9
P8 – 4,15,17,21,23,24,26
P9 – 2,7,10,13,14,21,24
7
Risk in Capital Budgeting
P10 – 3.5.8.11.12.14.18
**This section must be completed
10
6
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Quality and Efficiency
Unit 4:Long Term Financing Decision
8
Cost of Capital
11
P11 – 5,7,10,11,14,17,20
9
Capital Structure
12
P12 – 7,9,12,20,23,24
10
Dividend Policy
13
Unit 5: Short Term Financing Decisions
P13 – 3,6,9,15,17
11
Working Capital and Current
Assets
14.1,14.2,
14.4
P14 – 1,4,9,10
12
Current Liabilities
Management
Leasing
15.1,15.2
16.2
P15 – 3,6,13,14
P16 – 3.4.5
Additional Information
University Policy requires a minimum attendance of 75% of the scheduled classes.
How to study for this Course
Students are advised to read the assigned text material before attending a session and be
prepared to contribute to class discussions
Grading System
Passing Grade
A
: 70 – 100 %
B + : 60 – 69 %
B
: 50 – 59 %
Failing Grade
F
: 0 49 %
**This section must be completed
7