Post-Graduate Diploma in Management

Corporate Finance

Instructor

Dr. NL Ahuja, Dr. Ajay Chauhan, Prof. P.

Aggarwal, Dr. V. Dawar, Dr. D. Maitra

Institute of Management Technology Ghaziabad

CORPORATE FINANCE
PGDM-1, Term-III

Course Background and Objectives:

The importance of an effective corporate financial management cannot be overemphasized in the
emerging competitive business environment, characterized by spate of financial crises and
corporate failures. This course focuses on financial decision making in the modern corporations.
Beginning with the premise that the financial objective of a business organization is to increase
the value of the firm, the course will deal with the key issues that contribute to shareholder value,
including capital budgeting or investment decision, capital structure and sources of funding,
dividend policy, working capital management and financial risk management. The investment
side will include financial appraisal of investment proposals and time value of money. The
financing side comprises decisions about capital structure - how much debt, relative to equity,
would be optimal for a particular firm - as well as decisions about what kind of debt, and what
kind of equity, would be right for the firm. The course would also cover how companies can
return value to shareholders via the dividend and other "payback" strategies. Using real-world
examples, the course will introduce the key principles of selecting investments, financing them,
extracting value and managing financial risk. The course would also cover issues concerning
efficient management and financing of working capital in modern corporations. The concepts
developed in the finance core courses of the previous terms will be heavily utilized.

This course would help develop an in-depth understanding of the financial issues faced by
companies and equip students with knowledge and skills to evaluate alternative financial
strategies with the objective of creating value for the shareholders and other stakeholders.

Learning Outcomes
On successful completion of the course, students should be able to:
i.
ii.

Discuss the objectives of corporate finance and the key drivers of shareholders value.
Critically analyze the risk and cost implications of alternative sources of funding for
capital structure decision as well as for more effective negotiation with suppliers of
capital.

iii.
iv.
v.
vi.
vii.

Perform financial appraisal of investment proposals using relevant data and modern
techniques.
Calculate the operating cycle period for efficient management of working capital.
Evaluate alternative dividend payout strategies in view of future plans and sustainability
of the firm.
Understand SEBI guidelines concerning investor protection.
Demonstrate techno-savvy capabilities to make effective presentations of your financial
analysis.

Alignment of Learning Outcomes: The course will aim at achieving the above learning
outcomes in alignment with the objectives of the PGDM program at IMT, especially the
following objectives:
a. Critically analyze situations for forward thinking through innovation. (Programme objective
3.1)
b. The Enhance negotiation skills to reach mutually acceptable solutions to a problems
common in business, government, legal and personal relationships. (Programme objective
1.1)
c. Demonstrate ethics and value orientation in a business and societal context. (Programme
objective 2.3)
d. Develop smart presentation skills for persuasive communication across stakeholder
relationships (Programme objective 1.4)
e. Demonstrate techno-savvy capabilities to manage integrated environments. (Programme
objective 3.2).
Course Format
The lectures will focus on the major points introduced in the textbook, and will draw on related
academic research and books and articles by successful practitioners to illustrate concepts. Prior
to each class, students are expected to read the relevant textbook chapter and any additional
assigned readings. You are encouraged to ask questions and to be an active participant in class.
You are expected to attend class regularly and to come to class on time.

Evaluation
Assessment Method

Weight

Class participation/case analysis

10%

Mid Term/Quiz

15%

Group Project/assignment

15%

Simulation Game

10%

End Term Examination

50%

Alignment of evaluation process with Learning Outcomes: The course will aim at achieving
the above learning outcomes in alignment with the objectives of the PGDM program at IMT,
especially the following objectives:
Specific
Method

Assessment

Mid Term/Quiz
AACSB purpose)

Weight
(foR 15%

End Term Examination

Intended learning objectives to be assessed

a
B
c
d
e

50%

Group Project
15%
/assignment
Class participation/case 10%
analysis
Simulation Game
10%

Guidelines on case analysis:

A number of cases will be used in this course. Cases are a great educational experience but to
derive maximum learning value from them, you must be fully prepared with your analysis and
come to the class ready to discuss the issues taken up in the case.
For each case, you should:
a. Identify the major problem,
b. Give your recommendation to resolve this problem (both short and long term), and when
appropriate
c. Provide supporting analysis (both qualitative and quantitative) for your recommendations.
d. Answer other questions provided for each case.
The class will be divided into a number of groups. For assigned cases, each group will submit
the case analysis report and power point presentation one day before scheduled class.
Guidelines on Quizes and Exams:
The examination format might be a combination of work out problems, case-analysis, MCQs and
essay-type questions. These questions will be designed to test your skills to critically analyze
issues under consideration and your ability to solve problems using conceptual knowledge and

innovative ideas. Due weightage will be given to quality of organization and presentation of
answers in exams. The examination will be on topics covered prior to the examination date. The
end-term exam will not have MCQs.
All tests and exams will be closed-book. You may use a simple non-programmable financial
calculator. Notebook computers, electronic dictionaries, cell phones and other personal
communications devices are prohibited. Borrowing/lending of any item in the exam is strictly
prohibited.
Guidelines for Group Project
The group project will be an important and crucial part of your learning experience. The group
projects provide an opportunity to research and in-depth study of the selected topics as well as
investigate how the concepts learned in the course are applied in the real corporate world. They
also promote team-work and help in transforming students into effective managers. The
following rules will be applicable to group projects:

Group formation: as per institute norms.

Choice of a topic/company: Your group is expected to choose a firm/company/industry

and then zero-in on a live problem related to corporate finance. Some ideas for group
projects may include: [i] IPO Equity issue of XYZ company; [ii] Dividend policy in the
IT industry; [iii] Financial evaluation of an investment project: A case study of a steel
company; [iv] Comparative analysis of capital structure of ABC Company vs. DEF
Company, or [v] Applying CAPM model to estimate cost of capital: case of XYZ
Company; [vi] Debt management in MNO company. These are only indicative topics and
you are welcome to add some innovative topics to the list.

Primary and secondary sources: The firm you choose for your project could be small or
large. As far as possible, try to choose a company where you could approach a
manager/owner for some information or a personal interview/discussion. This will help
you tap primary sources of information and add lots of value to your project. Secondary
data may be available from the company annual reports and other sources.

As a part of the project, your group would be expected to:

a. Read at least one paper/article published in domestic/international journals on the topic of your
project and present a review/summary of the paper/article in your own words under literature
review [see below]. The review/summary should include the main issues covered, findings and
conclusions of the paper/article. The list of journals and websites included in the course outline
would be helpful for this step. Newspaper articles would not be normally accepted for this.

b. Analyze the performance of the firm (selected for your project) in relevant areas, study trends,
investigate issues and problems facing the company, measures taken by the company and also try
to suggest how the company could improve its future performance.
Final Report Format: The project report should not exceed 20 pages. It should include following:

The Executive Summary

Introduction/Background of the study
The conceptual framework.
Literature review: review/summary of a research paper
Objective(s) of the study
Scope and Methodology.
Data collection
Data analysis
Conclusions and recommendation.
References.

The above format may be modified as necessary. Final project report must be submitted latest by deadline
announced by the APO.

Caution: Please note that plagiarism or cut-paste from available reports will be
penalized heavily. It might even lead to rejection of the report. Grading of the report
will be done on the strength of the analysis and explanation therein, as well as quality
of primary & secondary sources tapped. All group members must contribute to the
project work; piggyback riders shall be penalized.

Calculator and Tables:

The nature of the subject matter requires significant amount of numerical computations. Students
are expected to bring a simple non-programmable calculator to every class session and to all
examinations. The students are also expected to bring the interest factor tables (both future value
and present value) to every class session. The use of cell-phone/laptops/other electronic devices
in the classroom is not allowed except when specifically permitted for class presentations.
Teaching Pedagogy
The pedagogy will be a mix of lectures, case discussion, assignments and field/library based
research projects.
Course Pre-requisites
Prerequisite to this course is the learning derived from the core courses on Financial Reporting
and Analysis and Managerial Accounting. Students are expected to have a working knowledge
of a spreadsheet language, preferably Excel, as well as some fluency in statistics.

Guidelines on students workload: This course requires an estimated 100 hours of student
effort, including the time for class participation, reading of the text and other suggested
materials, work-out problems and cases, preparing for quizzes and exams, assignments and
projects.
Recommended Texts
Brigham and Ehrhardt, Financial Management: Theory and Practice, Cengage Learning.
Corporate Finance: Ross, Westerfield, Jaffe, Kakani . Tata Mcgraw-Hill.
The selected text is good, but corporate finance is tough and you are recommended to read at
least one of the texts below. They provide additional examples, motivation and a different slant
on most of the topics. Since this area of finance changes very rapidly, be careful of the
publication date of any outside texts.
Suggested References
1. Van Horne, James C. Financial Management & Policy, 2005 (Twelth Edition), Prentice
Hall of India (Referred as Van Horne)
2. Principles of Corporate Finance - Brealey, Richard A. Myers, Stewart C. Allen Frank,
Mohanty Pitabas -, 2007 (8th Edition), Tata McGraw Hill.
3. Damodaran, Aswath :Corporate Finance Theory & Practice, John Wiley &Sons.
4. Lawrence J Gitman Principles of Managerial Finance, 11e, Pearson
5. Financial Management, I.M. Pandey, Ninth Edition, Vikas Publishing House.
6. Corporate Finance: Ross, Westerfield, Jaffe, Kakani . Tata Mcgraw-Hill.
7. Financial Management: Khan & Jain, Tata Mcgraw-Hill
8. Financial Management Presanna Chandra, Tata Mcgraw-Hill
9. Brigham Eugene F., Houston Joel F., Fundamentals of Financial Management, Cengage
Learning.
10. Levy, H & Sarnat M: Capital Investment and Financial Decisions, Prentice Hall.
11. Berk J, DeMarzo P, Thampy A- Financial management, Pearson.
12. Parrino & Kidwell: Fundamentals Corporate Finance, Wiley.
The texts will be supplemented by readings from a collection drawn from internationally reputed
journals and occasional items from the business press.
Journals:
Journal of Finance
Managerial Finance
Accounting Research Journal
Journal of Corporate Finance
Journal of Financial Markets

Journal of Empirical Finance

Journal of Banking and Finance
Journal of Emerging Market Finance
Review of Accounting and Finance
Journal of Empirical Finance
Journal of Accounting and Economics
International Review of Financial Analysis
Journal of Financial Intermediation
The European Journal of Finance

In addition to above mentioned journals, please keep track of other journals, websites, published
articles and papers on corporate finance.
Websites
Useful websites to be visited for the course
Useful website of the stock exchange, commodity exchange and regulators.
www.rbi.org.in
www.fimmda.org
www.ccilindia.com
www.besindia.com
www.nseindia.com
www.sebi.gov.in
www.clb.nic.in
www.fmc.gov.in
www.indiastat.com
Useful websites for company and industry data
www.icicidirect.com
www.valuenotes.com
www.sebiedifar.nic.in
www.in.finance.yahoo.com
www.equitymaster.com
www.myiris.com
www.sify.com
Detail Session Plan:
Session 1 Introduction to Corporate Finance
Corporate financial objectives: Wealth maximization, time value of money and risk considerations.
Role of finance manager, interface with other areas and agency problem.

Learning Outcomes: Discuss the objectives of corporate finance and the key drivers of
shareholders value.
Reading: Chapter 1 of the Text Book
Sessions 2-3
Investment decision -1: The importance of investment decision and capital budgeting process.
Financial evaluation of investment proposals: Main principles of investment decision and information
required. Non-DCF Methods for evaluation: Accounting rate of return and payback period methods.
Learning Outcomes:
i. Identify the information relevant to investment decisions.
ii.
Perform financial appraisal of investment proposals using non-DCF methods.
Reading: Chapter 2 & 11 of the Text Book
Sessions 4-5
Investment decision -2: The time value of money, Future value and Present value concept. Present
value of a single cash flow, annuities and perpetuities. DCF methods: NPV, IRR and Profitability
Index and Discounted Payback Method. Introduction to evaluation of investment proposals in
conditions of uncertainty: sensitivity analysis and simulation.
Learning Outcomes:
i.
Understand the time value of money.
ii.
Perform financial appraisal of investment proposals using DCF methods.
Reading: Chapter 2 & 11 of the Text Book
Major case: Global Synfuels: Financial Evaluation of The Coal to Liquid Project, case by
Ahuja and Agarwal.
Case Questions:
1. According to you, what are the main opportunities, strengths, weaknesses and threats
related to the project?
2. Briefly outline the relevant information that is normally required for the financial
evaluation of investment proposals, and discuss how the same would be determined for
the CTL project under consideration.
3. Using relevant data for the CTL project:
a. Calculate the annual net cash flows over the life of the project;
b. Determine a Weighted Average Cost of Capital (WACC);
c. Calculate the NPV and IRR for the project.

4. [Advanced question-optional] Carry out single variable Monte Carlo simulation to analyze
the impact of variability in price premium on NPV by using data table function of excel.
Generate 1000 iterations for price premium assuming a mean value of 10%, a normal
distribution and a standard deviation of 1%.

5. [Advanced question-optional] Carry out multiple variable Monte Carlo simulation or

analysis on NPV by using data table function of excel. Generate 1000 iterations for the
price premium, annual operating cost escalation and plant efficiency. Assume mean
values to be 10%, 2% and 90% for price premium, annual operating cost escalation and
plant efficiency.
6. [Advanced question-optional] Carry out the Scenario Analysis for the project by recalculating the NPV under different set of changed assumptions:
Session 6-7: Financial Valuation of Bonds and Cost of Debt Financing
Learning outcomes
i.
Understand why companies use debt
ii.
Identify differences between zero-coupon, redeemable and perpetual bonds.
iii.
Calculation of value of bond, and yield to maturity.
iv. Before-tax and after-tax cost of debt.
Reading: Chapter 5 of the text book
Session 8-9: Financial Valuation of Shares and Cost of Equity Financing
Learning objectives:
i.
Understand why companies need equity capital.
ii.
How equity valuation is different from bond valuation
iii.
How to use Dividend valuation and P/E models to value a stock
iv. Estimation of cost of equity capital using dividend valuation and P/E models
v. How to calculate value of preferred stock and cost of preference share capital.
Reading: Chapter 8 & 10 of the text book
Session 10: CAPM model: Relationship between Risk & Expected Returns
Learning objectives:
i.
Understanding concept of holding period return and its calculation
ii.
Understanding relationship between Risk & Expected Returns
iii.
Measuring risk and concept of standard deviation of returns
iv. Understanding role of diversification in reducing risk
v. Concept, calculation and application of beta for the firm.
vi.
Using CAPM [Capital asset pricing model] to calculate cost of equity capital.
Reading: Chapter 6, 7 & 10 of the text book

Session 11: The Weighted Average Cost of Capital

Learning objectives:
i.
Calculating the overall or weighted average cost of capital [WACC] for a firm?
ii.
Book-value and market-values weights for calculating WACC.
iii.
Integration of investment decision and cost of capital.
Reading: Chapter 10 of the text book
Session 12: Issuing securities to the public
Learning objectives:
i.
What is red-herring prospectus
ii.
Pricing of equity issues and the book building process.
iii.
Offer-for-sale method of issuing shares.
iv. Need for investor protection and role of market regulator SEBI.
Reading: Chapter 19 of the Text Book
Session 13-14: Capital Structure Decision
Learning outcomes:
i.
Distinguishing between the traditional and Modigliani-Miller approaches to capital
structure
ii.
Discuss the main assumptions of MM theory and how the arbitrage process works.
iii.
The Trade-off and Peaking-order theory of capital structure
iv. Carry out an EBIT-EPS analysis
v. Calculate the operating and financial leverage and analyze it impact.
vi.
Identify other practical considerations for the capital structure decision.
vii.
Introduction to EVA
Reading: Chapter 16 & 17 of the text book.
Session 15-16: Payout Policy
Learning Outcome;
i.
Different payout approaches to reward shareholders
ii.
Difference between rights issues, bonus issue and stock splits.
iii.
The payout controversy does dividend policy impact shareholder wealth?
iv. Objectives and practical consideration for choosing payout policies.
v. Buyback of shares: how firms calculate the repurchase price.
Reading: Chapter 18 of the Text Book

Session 17-18: Management of working capital

Learning outcomes:
i.
Identify the stages of the operating cycle of working capital.
ii.
Operating cycle period and working capital components.
iii.
Brief introduction to sources of working capital finance.
Reading: Chapter 22 of the Text Book
19-20 Project presentation and revision