Course Manual on Sourcing and Managing Funds (1)

7/30/2019 Course Manual on Sourcing and Managing Funds (1)

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Module Manual: Sourcing & Managing Funds (SMF)

Academic Year: PGDM/FS/MM/IB 2012-2013


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Introduction to the Module and Module Objective

The past two decades have witnessed a dramatic transformation of the Indian business and

financial scene, thanks to liberalization, privatization, globalization, automation, and the

ascendance of the services sector. In the wake of these developments, investment and

financing avenues have expanded considerably, competition has intensified in all sectors,

institutional investors have become a major force, and corporate have grown in size andcomplexity.

Sourcing & Managing Funds (SMF) is the core Module that describes the perspective of

groups within the firm tasked to create firm value by a) deciding how much capital to raise

and the best mix of different sources of capital, and b) managing those funds and generating

relevant financial information, which includes describing future plans (budgets), evaluating

new projects (capital budgeting), and evaluating the performance of divisions, managers

and products. Some of these functions are housed within the office of the Chief Financial

Officer (CFO), split between the Treasurer and the Controller. But many other functions are

spread across the organisation, principally in the hands of strategy groups and productmanagers.

Through this Module on SMF, students will get an insight into the issues involved in

investment decision and financing of such decision. Therefore, the main focus will on

understanding the techniques of capital budgeting and capital structure decision.

INTRODUCTION TO THE TUTORS

Name: Dr Anubha Gupta

Phone Number: 0120-6670698Email ID: [email protected]

Cabin Location: 318

Name: Ms. Arpita Mehrotra

Phone Number: -

Email ID: [email protected]

Cabin Location: -

MODULE OVERVIEW

Topic 1 Introduction & Develop Projections

It describes how to develop free cash flow forecast by projecting future income statement

and balance sheet with respect to capital expenditure decisions.

Topic 2 Which Plans Should we Pursue?

This includes an understanding of different financial techniques for evaluation and selection

of long-term projects.

Topic 3

Economic Income & Accounting RatiosIt describes the difference between accounting and economic income while throwing some

light on key profitability ratios.


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Topic 4 Cost of Capital

It includes the calculation of component and project cost of capital.

Topic 5 Capital Structure

It includes an understanding of optimum capital structure for financing capital investments.

Topic 6

Control IssuesIt includes decentralisation, transfer pricing, and performance evaluation.

Topic 7 Investor Relations & Communications

It deals with managing expectations and grievances of the provider of capital.

MODULE LEARNING OUTCOMES

Learning outcomes state what you should be able to do if you pass the module. By the end

of this module you should be able to:

forecast and develop financial projections understand method of evaluating long-term investment projects calculate cost of capital for financing projects understand the mix of debt and equity in financing decision understand decision making levels and their performance evaluation identify issues involved in managing relations with the provider of funds. understand management of short term assets and funds.

MODULE READINGS

The students are expected to read the articles uploaded on Moodle, prescribed books which

will provide a good theoretical construct to the subject. Besides this reading of journals and

web resources will help understand this subject in practice.

Required Readings

Articles/Cases uploaded on Moodle

Reference Books

Financial Management by Prasanna Chandra, TATA McGRAW HILL, 7th Edition. Principles of Corporate Finance by Richard A Breyley, Stewart C. Meyers, Franklin

Allen, Pitbas Mohanty, Tata Mc Graw Hill, 8 ed.

Corporate Finance by Aswath Damodaran, Wiley, 3rd edition. Corporate Finance by Ross, Westerfield, Jaffe and Kakni, Tata McGraw Hill, 8 th

edition

Financial Management by I.M.Pandey, Vikas Publishing House Pvt. Ltd, 9th Edition Cost Accounting - A Managerial Emphasis by Charles T Horngren, Srikant M. Datar

and George Foster, Pearson Education, 13

th

Edition

Journals


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Indian Journal of Finance Journal of Finance and Management Financial Management Journal of Accounting and Finance

Website =http://pages.stern.nyu.edu/~adamodar
http://pages.stern.nyu.edu/~adamodar/http://pages.stern.nyu.edu/~adamodar/http://pages.stern.nyu.edu/~adamodar/http://pages.stern.nyu.edu/~adamodar/


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Module Overview:

Session Topic

1 Introduction and Develop Projections Lecture

2 Project Future Balance Sheet Lecture

3 Develop and Project Cash Flows Seminar

4 Discounting Cash Flows Seminar

5 Which Plans should we pursue? Projecting terminal values, Links

among NPV, share price & value creation.

Lecture

6 Terminal Values and Industry Multiples Lecture

7 Economic Income Lecture

8 Economic Income and Accounting Ratios Lecture

9 Review of Phuket Beach Hotel: Valuing Mutually Exclusive

Projects case and understanding cost

Seminar

10 Cost and Leverage - Estimating cost of capital with debt, project

risk vs asset risk vs risk of debt & equity

Seminar

11 Cost of Capital - Estimating cost of debt, creating value by

introducing debt, Impact of leverage on risk of debt & equity,

Weighted average and marginal cost of capital.

Lecture

12 Cost of Capital - Estimating cost of preference, equity,

Divisional and project cost of capital, Floatation cost, Applying

the CAPM to estimate a project's cost of capital, Misconceptions

surrounding cost of capital.

Lecture

13 Review of Marriott Corporation: Cost of Capital Seminar

14 Divisional Cost of Capital Seminar

15 Excel Based Assessment

16 Optimal capital structure, NI & NOI approach. Lecture

17 Capital Structure - Modigiliani-Miller position & exception Lecture

18 Working Capital Management Lecture

19 Working Capital Management - Continued Lecture

20 Decentralisation & methods of transfer pricing and Performance

evaluation

Lecture

21 Control Issues: Performance Evaluation Lecture

22 Review of CUC International Case Lecture

23 Investor Relations and Communication Lecture

24 Overview of Main Issues raised in the Module Lecture


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SESSION PLAN

Session 1: Introduction & Develop Projections

Overview of Module, and Prepare project future Income Statement. The Income Statement

measures the performance over a specific period, calculation of Earnings Before Interest

and Tax(EBIT), Which represents the earnings before taxes and financing costs.

Required Reading: PC Chapter-5 (Page 107-116, Financial Planning & Forecasting)Illustration: Space age Electronics.

Learning Outcome: To explain the method of financial planning and forecasting.

Session 2: Project future Balance Sheet

Project future Balance sheet. The Balance Sheet is an Accountants snapshot of a firms

accounting value on a particular date, as though the firm stood monetarily still. This session

also includes projecting of and preparing future balance sheet for Space age Electronics.

Required Reading: PC Chapter-5 (Page 107-116, Financial Planning & Forecasting)

Illustration: Space age Electronics.Learning Outcome: To explain the method of financial planning and forecasting.

Session 3: Develop project cash flows

Perhaps the most important item that can be extracted from financial statements is the

actual cash flow of the firm. Thus this session covers a study of the various elements of cash

flow stream, Principles of cash flow estimation, Cash flow illustrations, Projection of future

cash flows for Space age Electronics.

Required Readings: PC Chapter-12 (Page 304-314, Estimation of Project Cash Flows)

Learning Outcome: The student should learn how to forecast cash flows of a project before

applying project selection techniques.

Session 4: Discounting cash flows

Creating value, NPV and other methods of selecting plan. Capital Budgeting Decisions are a

way of investing capital in profitable projects. These are long term and once taken, it is

difficult to reverse them as it may involve huge costs. Thus this session covers the various

techniques of evaluation capital budgeting projects such as, Net Present Value, Accounting

Rate of Return, Payback period Method, etc.

Required Readings: PC Chapter-12 (Page 279-298, Techniques of Capital Budgeting)

MIRR-A better measure, Herbert Kieruff, 9 pages, HBSP-BH-285

Learning Outcome: Net Present Value is the best and widely used method employed for the

evaluation and selection of project. Students would learn NPV and other methods of capital

budgeting besides understanding the role of NPV in value creation

Session 5: Which plan should we pursue?

Projecting terminal values, Links among NPV, share price & value creation. This session

covers projecting of terminal values of a project and linking Net Present Value with Share

price and their contribution to a firms value creation.


NPV and IRR, Accounting for time Excerpted from Manager's Tool Kit. 18 pages, HBSP -

5245 BC


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Session 6: Terminal values & Industry multiples

Projecting terminal values, using terminal growth rate valuation using industry multiples.The terminal value calculation is used to determine the value of the firm for all years beyond

which one can reliably project cash flow using the discounted cash flows and industry

multiples such as Economic Value and EBITDA.





Session 7: Economic IncomeEconomic Income and way for companies to account for changes in the value of a given

asset in the market. Economic income is the way for companies to account for changes in

the value of a given asset in the market. Economic income generally recognises unrealised

gains, in addition to recognising realised gains.

Required Readings/Video: Video on Economic Profit V/S Accounting Profit ; Khan Academy

Learning Outcome: The student will understand the concept of economic income

Session 8: Economic Income & Accounting Ratios

Economic Income vs NPV & ROI vs IRR, Key ratios, Zero NPV growth, Spreadsheet mechanics

(Phuket Beach Hotel: Valuing Mutually Exclusive Projects). Accounting income or loss

recognizes realized gains and losses, and does not recognize unrealized gains and losses.

Economic income or loss recognizes all gains and losses, whether realized or unrealized.

Case: Phuket Beach Hotel: Valuing Mutually Exclusive Projects case and understanding cost

Learning Outcome: The student will understand the difference between accounting and

economic income while appreciating key profitability and growth ratio.

Session 9: Review of Phuket Beach Hotel: Valuing Mutually Exclusive Projects case and

understanding cost

Top level analysis of Mutually Exclusive Projects, Basis on which the projects are called as

mutually exclusive, WACC and Incremental Costs.

Case: Phuket Beach Hotel: Valuing Mutually Exclusive Projects case and understanding cost

Learning Outcome: The student will understand the difference between two projects on the

basis of their duration and capital required and provide their judgement on the most

profitable project.

Session 10: Cost & Leverages

Estimating cost of capital with debt, project risk vs asset risk vs risk of debt & equity. This

session covers detailed study of how to choose the discount rate when a project is all equity

financed and when a project is both equity and debt financed.

Required Readings: PC Chapter-14 (Page 367-386, The Cost of Capital)


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Learning Outcome: To explain the method of calculating cost of capital and its role in

evaluating a project.

Session 11: Cost of Capital

Estimating cost of debt, creating value by introducing debt, Impact of leverage on risk of

debt & equity, weighted average and marginal cost of capital. Understanding the effect offinancial leverage on cash flows and the cost of capital.




Session 12: Cost of Capital - continued

Estimating cost of preference, equity, Divisional and project cost of capital, Floatation cost,

Applying the CAPM to estimate a project's cost of capital, Misconceptions surrounding cost

of capital. Understanding the calculation of cost of debt., equity, preference share capital;the capital asset pricing model (CAPM) and its use to determine a theoretically appropriate

required rate of return of an asset, if that asset is to be added to an already well-

diversified portfolio, given that asset's non-diversifiable risk.

Required Readings: PC Chapter-14 (Page 367-386, The Cost of Capital), Chapter 9 (Page 237)

Business Evaluation and Cost of Capital (11pages), Timothy A Luchermaan, Hbsp 9-210-037.



Session 13: Review of Marriott Corporation: Cost of Capital

Top level analysis of Cost of Capital and implementation of the same at Divisional level. Also,

the importance of cost of capital in evaluating a project.

Required Readings/Case: Marriott Corporation: Cost of Capital,

Learning Outcome: The student will understand the method of calculating cost of capital

and its role in evaluating a project.

Session 14: Estimating divisional cost of capital

Implementation of cost of capital calculation of the same at the divisional level. Also,

understanding the importance of cost of capital in evaluating a project.




Session 15 Excel based assessment

Session 16: Capital Structure

Is there an optimal capital structure, NI & NOI approach? Capital structure refers to the

way a corporation finances its assets through some combination of equity, debt, or hybrid

securities. A firm's capital structure is then the composition or 'structure' of its liabilities.

Required Readings: PC Chapter-19 (Page 476-499, Capital Structure and Firm Value),


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Chapter 20 (Page 511-536, Capital Structure Decision)

Note on theory of Capital Structure, 7 pages; HBSP-9-279-069

Learning Outcome: To explain whether capital structure decision has an impact on share

holder value.

Session 17: Capital Structure - ContinuedModigiliani-Miller position, Exception to the MM theory taxes, financial distress,

information asymmetric, conflict of interest. The ModiglianiMiller theorem forms the basis

for modern thinking on capital structure. The basic theorem states that, under a certain

market price process, in the absence of taxes, bankruptcy costs, agency costs,

and asymmetric information, and in an efficient market, the value of a firm is unaffected by

how that firm is financed.

Required Readings: PC Chapter-19 (Page 476-499, Capital Structure and Firm Value),

Chapter 20 (Page 511-536, Capital Structure Decision)

Learning Outcome: To explain whether capital structure decision has an impact on share

holder value.

Session 18: Working Capital Management

This session covers Objectives of Net working capital, factors affecting the net working

capital, Constituents of current assets and current liabilities, level of Current Assets and

Current Assets financing policy and Computation of Net working Capital.

Learning Outcomes:

At the end of this session the students will know that

Investment in current assets represents a substantial portion of total investment Factors to be considered while planning optimal working capital or the firm

Session 19: Working Capital Management - Continued

This session covers Computation of Operating Cycle and Cash Cycle, Estimating cash

required for working capital and concept of zero working capital. Working Capital

Management involves managing the relationship between a firm's short-term assets and its

short-term liabilities. In the context of long term, capital investment decisions, firm value is

enhanced through appropriately selecting and funding NPV positive investments.

Required Readings: Magic of Managing Balance sheet Karen Berman, Joe Knight

HBSP:4978 BC, 7 pages.

Learning Outcomes:

At the end of this session the students will know the following:

Working capital is influenced by various events of operating cycle of a firm i.e. frompurchase of raw materials to collection of cash for sales

Shorter the operating cycle, lesser the working capital requirements of the firm Procedure for estimating the cash requirement for working capital

Session 20: Control Issues

Decentralisation & Methods of Transfer Pricing and Performance Evaluation.

Decentralisation ensures correct controls are in place, will be the bottom-to-top flow of

information, allowing decisions by officials of the organization to be well informed about

lower tier operations.


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Required Readings: Course Pack

Learning Outcome: The student should learn mechanism of pricing inter-departmental

transfer of goods, where each department has separate entity and head and how to

evaluate the performance of each departmental head.

Session 21: Control Issues

Performance evaluationPerformance evaluation. Understanding the Mechanism of pricing inter-departmental




Learning Outcome: The student should learn mechanism of pricing inter-departmental



Session 22: Review of CUC International CaseTop level analysis of the role of financial reporting and corporate finance policies as vehicles

for communication between managers and outside investors.


Case: Marriott Corporation: Cost of Capital

Learning Outcome: The student will understand the management's concern that the

company's stock is undervalued because analysts viewed the company's accounting as

aggressive. Students are asked to advise CUC's management on ways to improve investor

confidence.

Session 23: Investor Relations & Communications

When investors can't see what management can see or disagree with management's

expectations, Managing investor expectations, Different channels of communication with

investors, regulatory aspects of public investor base.


Case: CUC International (The group will submit a write up on the day as told by the faculty

and also make a presentation)

Learning Outcome: To learn how to manage investor relations and their expectations.

Session 24: Overview of main issues raised in Module

ASSESSMENT PLAN

S.

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Assessment Method Marks

1 Excel based assessment 5

2 Case Analysis 5

3 End- Term 20


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DETAILS OF ASSESSMENT

Component 1: Excel based assessment (5 marks)

Concepts covered till session 14 will be assessed.

Component 2: Case Analysis (5 marks)

Each group of six students will prepare a write-up for the assigned case. This write-upshould be in the form of a business report not exceed 3 pages. Any supporting analysis can

be attached as appendices. Each group will make a presentation on the three assigned cases

as mentioned above.

Component 3: End-Term Exam (5marks)

A three-hour, closed book end-term examination will be held at the conclusion of the

Module. The examination will test students' theoretical understanding through questions

and their ability to apply theory to practice through case-lets.

Feedback on students' performance in the exam will be provided when answer scripts areshown to students after a month of the exam.

CURRICULUM MAP

Programme Learning Outcomes

This table shows in which modules the main learning outcomes are developed and/or

assessed:

Module L1 L2 L3 L4 L5 L6 L7 L8 L9

Sourcing & Managing

Funds

* * * * *

L-1: An understanding of organizations, their external context and their management.

L-2: An awareness of current issues in business and management which is informed about

research and practice in the field.

L-3: An understanding of appropriate techniques sufficient to allow investigation into

relevant business and management issues.

L-4: The ability to acquire and analyse data and information.L-5: The ability to apply relevant knowledge to practical situations.

L-6: The ability to work and lead effectively in a team based environment.

L-7: An improvement in both oral and written communication skills

L-8: Be cognizant of the impact of their individual & corporate actions on society and

recognize ethical business practices.

L-9: Be sensitive to the social, economic and environmental responsibilities of business.

TEACHING MAPThis table shows the main delivery methods which are used across modules and stages:

Module T1 T2 T3 T4 T5 T6


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Sourcing &

Managing Funds

* * * *

Notes:

Delivery Methods:

T1: Lectures

T2: Seminars/tutorials

T3: Live Projects and PresentationsT4: Case Study

T5: Guest Lectures

T6: Lab Sessions

ASSESSMENT MAP

This table shows the main assessment methods which are used across modules and stages:

Module A1 A2 A3 A4 A5

Sourcing & Managing

Funds

* * *

Notes:

A1: Individual assignment/case study

A2: Group assignment/project/business plan

A3: Open book examination/case study

A4: Closed book examination

A5: Group presentation

Documents

Course Manual on Sourcing and Managing Funds (1)