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Financial Management
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BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
1
Session 1:
Introduction: Financial Economics
The Finance of Business,
The Business of Finance
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
2
Zero Tolerance
Cheating, Plagiarism
‘F’ Grade in the component, however minor the
transgression
Absence without prior (5pm of earlier day) notice
-5 marks from the in-class quiz component
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
3
FM II….
Relevance ….
Why FMII?
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
4
Or more generally…
Why Finance?
Or even, why MBA?
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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Why?
‘The Ascent of Money’ by Niall Ferguson …. though in a
different context!
“Bread, cash, dough, loot, lucre, moolah, readies, the
where-withal: call it what you like, money matters” The
very first sentence!
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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But….
Is it just money that matters, that entices?
Or is there more to life? More to a MBA?
Uday Damodaran XLRI Jamshedpur
7
BM 15-17: FM II
Session 1
A Whole Lot of Student-Friends Too!
Join, if you wish to
Uday Damodaran XLRI Jamshedpur
8
Travel!
www.facebook.com/garlandingindia
BM 15-17: FM II
Session 1
Franchise? Help?
Uday Damodaran XLRI Jamshedpur
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Or More Than Money in a MBA?
Now let us look at it from more of a MBA perspective?
Which would be a ‘dream’ placement company?
Forbes list of America’s Best Employers 2015
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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Forbes List of Best Employers: Revenues, Employees
# 1Google $66 billion (2014) 59,976 (2015)
# 7 BMW 80 billion euro (2014) 116324 (2014)
# 10 Harley Davidson $5.25 billion (2013), 5900 (2014)
#15 Facebook $12.466 billion (2014), 11996 (2015)
# 55 Apple $233 billion (2015) 115000 (2015)
BM 15-17: FM II
Session 1
Which would be the ‘best’? Using
what metric?
Uday Damodaran XLRI Jamshedpur
11
Forbes List of Best Employers: Revenues, Employees
# 1Google $66 billion (2014) 59,976 (2015)
# 7 BMW 80 billion euro (2014) 116324 (2014)
# 10 Harley Davidson $5.25 billion (2013), 5900 (2014)
#15 Facebook $12.466 billion (2014), 11996 (2015)
# 55 Apple $233 billion (2015) 115000 (2015)
And then of the course the really big ones!
Walmart $485 billion, with 2,200,000 employees!
Just a bit higher than Sweden’s (#24 in GDP rankings)
GDP of $484 billion; 9,838,480 population
Bangladesh 2013 GDP $150 billion, population 156.6
million
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
12
MBA, Finance-MBA….
You are in essence running a super-efficient mini country!
Max-ing productivity!
And, imagine……if you were the creator, the entrepreneur!
And thus, your first group assignment
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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Money versus Happiness
Final Clinching Proof?
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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Group Project
Starting your own enterprise
One big challenge?
And whom do you turn to?
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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FMI, FMII
FM I: Asset side decisions
Who takes these decisions? Who is responsible?
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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FMI, FMII
FM II: Liability side decisions
Who takes these decisions? Who is responsible?
But things have changed! With so much of start-up
activity, financing decisions have become an integral part
of over-all management
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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What would be the ‘financial system’?
BM 15-17: FM II
Session 1
Dot-Com Case?
Uday Damodaran XLRI Jamshedpur
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The Financial System
Transfers funds from economic entities that are surplus in
funds to economic entities that are deficient in funds
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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And who are the economic entities?
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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Economic entities in the system
On the Supply side
Households
On the Demand side
Government
Firms
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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Efficiency of the system
An efficient financial system transfers funds from the supply
side to the demand side with:
Minimal Cost
Minimal Time
Minimal Risk
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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Channels for flow of funds
SUPPLY SIDE DEMAND SIDE
FINANCIAL
INTERMEDIARY:
Banks/ FIs/ Mutual
Funds
CAPITAL MARKETS (PRIMARY)
CAPITAL MARKETS (PRIMARY)
The
firm
Funds Funds
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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And a system for flow of information
SUPPLY SIDE DEMAND SIDE
Financial Intermediaries
CAPITAL MARKETS (PRIMARY)
CAPITAL MARKETS (PRIMARY)
The
firm
Funds Funds
Information Intermediaries
Info Info
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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A ‘true’ financial system…
A perfect financial system will play ‘God’ – it will not only be
efficient it will be ‘effective’; it will transfer funds from the
supply side to the most efficient units on the demand side and
will do so at:
Minimal Cost
Minimal Time
Minimal Risk
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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System Risks
SUPPLY SIDE DEMAND SIDE Intermediaries
CAPITAL MARKETS (PRIMARY)
CAPITAL MARKETS (PRIMARY)
The
firm
Funds Funds
Info Info
1. Do they add value?
2. Do they fail?
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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The Dot Com Boom and Bust
Who are the various intermediaries? And what are their roles?
Venture Capitalists
Investment Banks
Sell Side Analysts
Buy Side Analysts
Portfolio Managers
Auditors
Did they fail in
discharging their
responsibilities?
Why?
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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Read, not compulsory….
Capital Market Myopia
Class Reps, send in list of those who want copies to
Ruchika ([email protected]) by 430pm tomorrow, 8th
January, 2016
Or a Google Doc/ Sheet
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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Read, not compulsory….
Capital Market Myopia
Class Reps, send in list of those who want copies to
Ruchika ([email protected]) by 430pm tomorrow, 8th
January, 2016
If whole class requests it we will make it compulsory
reading!
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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Reading, compulsory….
For in-class short quiz, read
Bladelogic (A)
Collect from Priti, at my office
BM 15-17: FM II
Session 1
Uday Damodaran XLRI Jamshedpur
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For in-class quiz, next session…
Bladelogic
Is there a structure, a method, a strategy in the way
Bladelogic went about financing itself?
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Session 1
Uday Damodaran XLRI Jamshedpur
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Group Assignment
After reading the case would you want to re-work the
financing plan for your business plan? Why?
If you do choose (not a ‘must’) to re-work your financing plan
send it to Ruchika by midnight of Monday, January 11, 2016
File name: Name your submission file name as
Submission1a_SectionX_GroupYY where X= A,B or C and YY
= Your Group Number
BM 15-17: FM II
Session 1