Test

GREAT LAKES INSTITUTE OF MANAGEMENT
Chennai, India
FM I
July/August 2009

COURSE FACILITATOR: Dr. Narendar V. Rao, MBA, Ph.D., CFM, CMA, CBM
Professor of Finance, Northeastern Illinois University, Chicago, Illinois, USA
CLASS MEETS: July 9, 10, 11, 13, 15, 17, 19, 30, August 1, 8
OFFICE HOURS: One-on-one meetings by appointment only
PHONE NUMBER: 97909 06510
E-MAIL: nvrao13@gmail.com


OBJECTIVES
The main objective of any business activity is to create value to its stake holders. Therefore, creating value is the central task of any manager, but it requires a strong understanding of financial management. You need to understand the strategic factors that build value and those that erode it. Every strategic decision you make has implications for value creation. But to understand these strategic implications, you need to gain a deeper understanding of finance.

This course provides a broad exposure to the principles and techniques of Financial Management. This course is designed for business professionals without prior academic exposure to Financial Management. It examines the responsibilities of the corporate financial manager, and the nature of financial decision making in the context of a public corporation. This course will address the three fundamental decisions that corporate financial mangers make: the investment decision, and the financing decision, and the payout decision.

The course consists of eight modules. The first module starts with an introduction including a discussion of the importance of shareholder value creation. The second module discusses the core time value of money concepts, the third module focuses on the process of diagnosing the profitability, risk, and growth of a company, the fourth module focuses on Cost of Capital, the fifth on Capital Structure, the sixth module discusses Payout Policy, the seventh provides an overview of Capital Budgeting Techniques, while the eighth addresses Market Efficiency.

Module 1: Creating Value for Shareholders
Module 2: Time Value of Money
Module 3: Ratio Analysis and the Diagnosis of Profitability, Risk, and Growth
Module 4: Cost of Capital
Module 5: Capital Structure
Module 6: Payout Policy
Module 7: Overview of Capital Budgeting Techniques
Module 8: Market Efficiency (Optional)




IMPORTANT
Participants on this course have a wide range of backgrounds and skills. Most of you will find the material new and occasionally difficult to master, while some will already be familiar with corporate finance or financial markets. The instructor will attempt to make the course as inclusive as possible, consistent with the presumption that an introductory course such as this one should be aimed primarily at the neophytes. Some further reading for those of you who want to look at more advanced material is indicated below. If you feel yourself excluded, let the instructor know and he will try to point you in a suitable direction.

TEXTBOOK: Corporate Finance: A Focused Approach, by Ehrhardt and Brigham, Second Edition, Cengage Learning

LEARNING OUTCOMES
By the end of the semester, students should be able to:
1. Understand and apply the time value of money concepts
2. Understand and apply the process of financial analysis
3. Analyze the financial health of a company with emphasis on profitability
4. Compute the Cost of Capital
5. Evaluate financing choices
6. Understand the choices with respect to payout policy
7. Gain a good understanding the different capital budgeting techniques
8. Understand the concept of market efficiency


PEDAGOGY
It is my firm conviction that communication skills and interpersonal skills are important determinants of the future success of students. In keeping with this belief, the pedagogical approach used in this class has been structured toward developing these skills. Specifically, this course involves a fairly substantial amount of writing (case solutions and research report), teamwork (cases and research project), and classroom presentation.

My teaching philosophy emphasizes the presentation of materials related to the subject discipline in a clear, precise, and a concise manner, as well as the development of skills necessary to function effectively in the business world.

ASSIGNED QUESTIONS
After the discussion of a topic in class, homework questions may be assigned. To get the most out of the class, you must read your class notes and try to answer the questions before the next class session. The answers will not be collected and graded. You will be provided the solutions during the next class session. Due to paucity of time, the answers to these questions will not usually be discussed in class. Occasionally, the solution to one or more of the problems may be covered in the lecture. Also, since the exams will stress conceptual understanding as well as problem solving, it is very important that you keep up to speed on the assigned questions and problems.




CASE ANALYSIS
Students are required to submit comprehensive written reports with respect to any case that may be assigned by the Instructor. These reports should be typed and it should be double-spaced. These reports are to be done on an individual basis.

FINANCIAL ANALYSIS ASSIGNMENT
This is a group assignment. Each group will select three companies in the same industry. All three companies must be based in the same country. A comprehensive financial analysis of all the three companies must be conducted. This should include ratio analysis, analysis of common-size financial statements, computation of the self-sustainable growth rate as well as the Altman bankruptcy prediction model’s Z score. Since the three companies are from the same industry and are based in the same country, they are exposed to same industry factors such as global competition, fluctuations in cost of raw materials/inputs, regulation, etc. The objective of this investigative analysis is to ascertain the possible reasons for differences in their financial performance over the past five years. This assignment will provide acute insight into the reasons for the differences in financial success. A PowerPoint presentation in class of the research findings is required. A properly structured report on the research findings is to be turned in after the presentation.

ASSESSMENT METHOD/GRADING
Final Examination 30%
Quizzes 30%
Case Analysis 10%
Financial Analysis
Project 25%
Class presentation 05%

HONOR CODE
In every aspect of the course, students are required to adhere to the standards of conduct as stated in the Great Lakes Honor Code. Note that some of course materials used in this class may have been used before at Great Lakes or other institutions. Students may not consult with students previously enrolled in similar classes, their class notes, or other materials that were otherwise provided in the past. Moreover, students may not use material or solutions from other institutions (e.g. posted on the Internet), unless otherwise instructed in class for a particular assignment.
USE OF LAPTOPS
Laptops may be used in class only when required for the class session. When not in direct use, the screen should be closed. Checking email or surfing the Internet during class is unacceptable, and will be considered a serious violation of Great Lakes Honor Code.
MOBILE PHONE USAGE
The usage of mobile phones in any manner in the classroom is strictly prohibited.
SUGGESTED
ADDITIONAL
READINGS: Financial Times newspaper and the Economist
The World is Flat (Updated and Expanded): A Brief History of the Twenty-First Century, Thomas L. Friedman, Farrar, Straus and Giroux, April 2006
Good to Great, Jim Collins, Harper Business, 2001
The Fortune at the Bottom of the Pyramid, C. K. Prahalad, Wharton School Publishing, 2005
Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround, Louis V. Gerstner, Jr.
EVA: The Real Key to Creating Wealth, Al Ehrbar, John Wiley & Sons, Inc., 1998
The New Finance: Overreaction, Complexity, and Uniqueness, Third Edition, Robert A. Haugen, Prentice Hall, 2004
Corporate Financial Analysis in a Global Environment, 6th Edition, Diana R. Harrington, Southwestern College Publishing, 2001
Harvard Business Review on Strategies for Growth, Harvard Business School Press, 1998
Harvard Business Review on Mergers and Acquisitions, Harvard Business School Press, 2001
Harvard Business Review on Strategic Alliances, Harvard Business School Press, 2002
A Random Walk Down Wall Street, Burton G. Malkiel, W.W.
Norton and Company, Inc., 1990
Techniques of Financial Analysis, Eleventh Edition, Erich A. Helfert, McGraw-Hill/Irwin, 2003

CALCULATOR
In order to carry out quickly the complex calculations often done in finance, each student is advised to have a financial calculator. The TI BAII Plus or the HP 10BII are recommended. They can be ordered online or be found in most office supply or general electronics store. While it is possible to do financial calculation without a financial calculator, these require substantially more key stroking (with the resulting greater possibilities for errors) and students with such calculators may be at a significant disadvantage on the exams.
TI BAII Plus Page (http://education.ti.com/us/product/tech/baii/features/features.html)
HP 10BII Page (http://www.hp.com/calculators/financial/10bII/ )

SOME FINANCE INFO WEBSITES
http://www.ibm.com/investor/tools/financials.phtml IBM Guide to Understanding Financials

http://www.corporateinformation.com/ Information on corporations worldwide

www.finpipe.com a Canadian site with good info on stock and bonds.
www.invest-faq.com - storehouse of basic articles on all types of financial questions.
www.fool.com - practical advice on finance and markets as well as material on personal financial decisions.
www.financewise.com - a more advanced site dealing with popular current issues in finance.
http://www.ameritrade.com/educationv2/ameritrade_framed.html - Ameritrade Education Center
http://www.investorwords.com/ - huge on-line financial glossary for all those strange terms
http://www.investopedia.com/university/ - a great educational site on finance topics with self tests
http://www.pbs.org/nbr/ Breaking business news
http://money.cnn.com/magazines/fortune/ a great online business news source
http://money.cnn.com/magazines/fortune/india/index.html FORTUNE magazine’s India page
http://www.businessweek.com/ another great source of business news
http://www.reportgallery.com/ annual reports on thousands of companies
http://www.livemint.com excellent source for the latest Indian business news

OPERATING POLICIES

1. The nature of the course makes your individual effort and preparation outside class very important. Review of class notes after each class session is recommended.
2. Absence from final examination without prior approval of the instructor will result in an automatic "F" grade for that examination and the course.
4. Attendance is mandatory. Students are expected to inform the course facilitator if they are unable to come to class.
5. The final examination will be held during the designated exam period and will be administered by the GLIM staff. It will a closed book/notes/laptop examination.
6. Students are expected to read business publications such as Economist, Business Today, Business India, Fortune, Business Week, The Financial Times, Economic Times and The Asian Wall Street Journal to keep themselves abreast of the happenings in the business world and to see the real-world applications of the concepts learned in class.
9. The course facilitator reserves the right to modify this syllabus.






















A PARTIAL LIST OF RATIO FORMULAE


Current ratio = current assets / current liabilities
Quick ratio = (current assets – inventory) / current liabilities
Debt ratio = total liabilities / total assets
Debt to equity ratio = total liabilities / equity
Times interest earned = EBIT / interest
Total asset turnover = sales / average total assets
Fixed asset turnover = sales / fixed assets
Inventory turnover = sales / average inventory
Capital Turnover = Sales / Total Capital)
Days-sales-outstanding = accounts receivable / (sales/365)
Basic earnings power = EBIT/total assets
Profit margin = net income / sales
Return on assets = net income / average total assets
Return on equity = net income / equity
Return on Invested Capital = EBIT / Invested Capital
Return on Invested Capital = (EBIT / Sales) x (Sales/Invested Capital)
Financial Cost Ratio = EBT / EBIT
Financial Structure ratio or Equity Multiplier = (Invested Capital or Net assets) / Owners’ Equity
Tax Effect ratio = Earnings after Tax / Earnings before Tax or (1-Effective Tax Rate)
ROE = (EBIT / Sales) x (Sales / Invested Capital) x (EBT / EBIT) x (Invested Capital/Owners’ Equity) x (EAT/EBT)
Invested Capital = Net Assets
PE ratio = stock price / earnings per share
Market to book ratio = price per share / book value per share
Book value per share = shareholder’s equity / shares outstanding
Cash Flow per share = (Net Income + Depreciation)/Shares Outstanding
Earnings per Share = Net Income / Shares Outstanding
Return on assets = (profit margin)*(total asset turnover)
Return on equity = (profit margin)*(total asset turnover)*(equity multiplier)
Equity multiplier = total assets / equity
Cash flow from assets = (Operating cash flow) – (net capital spending) – (change in net working capital)
Cash flow from assets = cash flow to share holders + cash flow to debt holders
Net working capital = current assets – current liabilities
Operating cash flow = EBIT + depreciation - taxes
Net capital spending = ending net fixed assets – beginning net fixed assets + depreciation